UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




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




For the
quarterly period ended September 30, 2009




OR




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




For the
transition period from 
to




Commission
file number 0-23016




MEDIFAST,
INC.


(Exact
name of registrant as specified in its charter)




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





11445
Cronhill Drive


Owings
Mills, MD 21117


Telephone
Number (410) 581-8042




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




Yes  x    No  o




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




Large
accelerated filer
           Accelerated
filer              Non-accelerated
filer   x




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




Yes      No  x




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




Class
              
              Outstanding at
                November 6, 2009Common
      stock, $.001 par value per share
              
              15,383,941
      shares







Index





Item
      I - Financial Information:Condensed
      Consolidated Financial Statements (unaudited)Condensed
      Consolidated Balance Sheets – September 30, 2009 and December 31,
      2008
                  
                  
                  3Condensed
      Consolidated Statements of Income – Three and Nine Months Ended September
      30, 2009 and 2008
                  
                  
                  4Condensed
      Consolidated Statements of Cash Flows – Nine Months Ended September 30,
      2009 and 2008
                  
                  
                  5Notes
      to Condensed Consolidated Financial Statements
                  
                  
                  6Management
      Discussion and Analysis of Financial Condition And Results of
      Operations
                  
                  
                  13





Item
II





Exhibits
                  
                  
                  20EX
      31.1EX
      31.2EX
      32.1


2





MEDIFAST,
INC AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)





September 30, 2009
                  
                  
                  December 31, 2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  16,347,000
                  
                  
                  $
                  1,841,000Accounts
      receivable-net of allowance for doubtful accounts of
    $100,000
                  
                  
                  697,000
                  
                  
                  
                  448,000Inventory
                  
                  
                  10,759,000
                  
                  
                  
                  13,856,000Investment
      securities
                  
                  
                  1,476,000
                  
                  
                  
                  1,099,000Deferred
      compensation
                  
                  
                  629,000
                  
                  
                  
                  531,000Prepaid
      expenses and other current assets
                  
                  
                  2,142,000
                  
                  
                  
                  2,034,000Prepaid
      income tax
                  
                  
                  1,293,000
                  
                  
                  
                  1,131,000Note
      receivable - current
                  
                  
                  93,000
                  
                  
                  
                  180,000Deferred
      tax asset
                  
                  
                  100,000
                  
                  
                  
                  100,000Total
      Current Assets
                  
                  
                  33,536,000
                  
                  
                  
                  21,220,000Property,
      plant and equipment - net
                  
                  
                  22,305,000
                  
                  
                  
                  21,709,000Trademarks
      and intangibles - net
                  
                  
                  4,277,000
                  
                  
                  
                  5,547,000Deferred
      tax asset, net of current portion
                  
                  
                  1,461,000
                  
                  
                  
                  1,131,000Note
      receivable, net of current portion
                  
                  
                  143,000
                  
                  
                  
                  1,080,000Other
      assets
                  
                  
                  365,000
                  
                  
                  
                  350,000TOTAL
      ASSETS
                  
                  $
                  62,087,000
                  
                  
                  $
                  51,037,000LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
                  
                  $
                  7,213,000
                  
                  
                  $
                  5,130,000Line
      of credit
                  
                  
                  -
                  
                  
                  
                  3,164,000Current
      maturities of long-term debt
                  
                  
                  796,000
                  
                  
                  
                  257,000Total
      Current liabilities
                  
                  
                  8,009,000
                  
                  
                  
                  8,551,000Long-term
      debt, net of current liabilities
                  
                  
                  5,643,000
                  
                  
                  
                  4,313,000Total
      liabilities
                  
                  
                  13,652,000
                  
                  
                  
                  12,864,000Stockholders'
      equity:Common
      stock; par value $.001 per share; 20,000,000 authorized;  15,383,941
      and 14,585,960 shares issued and outstanding, respectively
                  
                  
                  15,000
                  
                  
                  
                  15,000Additional
      paid-in capital
                  
                  
                  35,178,000
                  
                  
                  
                  30,787,000Accumulated
      other comprehensive (loss)
                  
                  
                  113,000
                  
                  
                  
                  (389,000
                  )Retained
      earnings
                  
                  
                  24,171,000
                  
                  
                  
                  15,253,00059,477,000
                  
                  
                  
                  45,666,000Less:  cost
      of 367,838 and 272,192 shares of common stock in treasury,
      respectively
                  
                  
                  (3,320,000
                  )
                  
                  
                  (1,956,000
                  )Less:
      unearned stock compensation
                  
                  
                  (7,722,000
                  )
                  
                  
                  (5,537,000
                  )Total
      Stockholders' Equity
                  
                  
                  48,435,000
                  
                  
                  
                  38,173,000TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                  
                  $
                  62,087,000
                  
                  
                  $
                  51,037,000





See
accompanying notes to condensed consolidated financial
statements.


3





MEDIFAST,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(UNAUDITED)





Three Months Ended September 30,
                  
                  
                  Nine Months Ended September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenue
                  
                  $
                  45,006,000
                  
                  
                  $
                  27,281,000
                  
                  
                  $
                  119,398,000
                  
                  
                  $
                  79,987,000Cost
      of sales
                  
                  
                  10,771,000
                  
                  
                  
                  6,522,000
                  
                  
                  
                  28,576,000
                  
                  
                  
                  19,299,000Gross
      Profit
                  
                  
                  34,235,000
                  
                  
                  
                  20,759,000
                  
                  
                  
                  90,822,000
                  
                  
                  
                  60,688,000Selling,
      general, and administration
                  
                  
                  28,672,000
                  
                  
                  
                  18,363,000
                  
                  
                  
                  76,456,000
                  
                  
                  
                  53,820,000Income
      from operations
                  
                  
                  5,563,000
                  
                  
                  
                  2,396,000
                  
                  
                  
                  14,366,000
                  
                  
                  
                  6,868,000Other
      income/(expense)Interest
      (expense)
                  
                  
                  (40,000
                  )
                  
                  
                  (50,000
                  )
                  
                  
                  (114,000
                  )
                  
                  
                  (159,000
                  )Interest
      income
                  
                  
                  38,000
                  
                  
                  
                  -
                  
                  
                  
                  111,000
                  
                  
                  
                  -Other
      income/(expense)
                  
                  
                  (15,000
                  )
                  
                  
                  5,000
                  
                  
                  
                  (82,000
                  )
                  
                  
                  (1,000
                  )(17,000
                  )
                  
                  
                  (45,000
                  )
                  
                  
                  (85,000
                  )
                  
                  
                  (160,000
                  )Income
      before provision for income taxes
                  
                  
                  5,546,000
                  
                  
                  
                  2,351,000
                  
                  
                  
                  14,281,000
                  
                  
                  
                  6,708,000Provision
      for income tax (expense)
                  
                  
                  (2,112,000
                  )
                  
                  
                  (802,000
                  )
                  
                  
                  (5,363,000
                  )
                  
                  
                  (2,222,000
                  )Net
      income
                  
                  $
                  3,434,000
                  
                  
                  $
                  1,549,000
                  
                  
                  $
                  8,918,000
                  
                  
                  $
                  4,486,000Basic
      earnings per share
                  
                  $
                  0.25
                  
                  
                  $
                  0.12
                  
                  
                  $
                  0.66
                  
                  
                  $
                  0.34Diluted
      earnings per share
                  
                  $
                  0.23
                  
                  
                  $
                  0.11
                  
                  
                  $
                  0.60
                  
                  
                  $
                  0.32Weighted
      average shares outstanding -Basic
                  
                  
                  13,584,600
                  
                  
                  
                  13,179,527
                  
                  
                  
                  13,429,060
                  
                  
                  
                  13,139,520Diluted
                  
                  
                  14,918,563
                  
                  
                  
                  14,178,031
                  
                  
                  
                  14,763,023
                  
                  
                  
                  14,138,024





See
accompanying notes to condensed consolidated financial
statements.


4





MEDIFAST,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)





Nine Months Ended September 30,2009
                    
                    
                    2008Cash
      flows from operating activities:Net
      income
                    
                    $
                    8,918,000
                    
                    
                    $
                    4,486,000Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
      and amortization
                    
                    
                    3,832,000
                    
                    
                    
                    3,417,000Realized
      loss on investment securities
                    
                    
                    83,000
                    
                    
                    
                    307,000Common
      stock issued for services
                    
                    
                    155,000
                    
                    
                    
                    116,000Stock
      options cancelled during period
                    
                    
                    -
                    
                    
                    
                    (77,000
                    )Vesting
      of unearned compensation
                    
                    
                    1,577,000
                    
                    
                    
                    574,000Net
      change in other comprehensive gain (loss)
                    
                    
                    502,000
                    
                    
                    
                    (530,000
                    )Deferred
      income taxes
                    
                    
                    (329,000
                    )
                    
                    
                    --Changes
      in assets and liabilities:Decrease
      (Increase) in accounts receivable
                    
                    
                    (249,000
                    )
                    
                    
                    8,000Decrease
      (Increase) in inventory
                    
                    
                    3,097,000
                    
                    
                    
                    (2,574,000
                    )(Increase)
      in prepaid expenses & other current assets
                    
                    
                    (108,000
                    )
                    
                    
                    (157,000
                    )Decrease
      (Increase) in deferred compensation
                    
                    
                    (98,000
                    )
                    
                    
                    126,000(Increase)
      in prepaid taxes
                    
                    
                    (162,000
                    )
                    
                    
                    (757,000
                    )(Increase)  in
      other assets
                    
                    
                    (15,000
                    )
                    
                    
                    (251,000
                    )Increase
      in accounts payable and accrued expenses
                    
                    
                    2,084,000
                    
                    
                    
                    313,000(Decrease)
      in income taxes payable
                    
                    
                    -
                    
                    
                    
                    (592,000
                    )Net
      cash provided by operating activities
                    
                    
                    19,287,000
                    
                    
                    
                    4,409,000Cash
      Flow from Investing Activities:(Purchase)
      of investment securities, net
                    
                    
                    (459,000
                    )
                    
                    
                    (4,000
                    )(Purchase)
      of property and equipment
                    
                    
                    (3,159,000
                    )
                    
                    
                    (5,970,000
                    )Net
      cash (used in) investing activities
                    
                    
                    (3,618,000
                    )
                    
                    
                    (5,974,000
                    )Cash
      Flow from Financing Activities:Issuance
      of common stock, options and warrants
                    
                    
                    142,000
                    
                    
                    
                    30,000Increase
      (Repayment) of long-term debt, net
                    
                    
                    1,869,000
                    
                    
                    
                    (200,000
                    )Increase
      (Decrease) in line of credit, net
                    
                    
                    (3,163,000
                    )
                    
                    
                    1,532,000Decrease
      in note receivable
                    
                    
                    91,000
                    
                    
                    
                    99,000(Purchase)
      of treasury stock
                    
                    
                    (102,000
                    )
                    
                    
                    -Net
      cash provided by (used in) financing activities
                    
                    
                    (1,163,000
                    )
                    
                    
                    1,461,000NET
      INCREASE (DECREASE) IN CASH ANDCASH
      EQUIVALENTS
                    
                    
                    14,506,000
                    
                    
                    
                    (104,000
                    )Cash
      and cash equivalents - beginning of the period
                    
                    
                    1,841,000
                    
                    
                    
                    2,195,000Cash
      and cash equivalents - end of period
                    
                    $
                    16,347,000
                    
                    
                    $
                    2,091,000Supplemental
      disclosure of cash flow information:Interest
      paid
                    
                    $
                    114,000
                    
                    
                    $
                    159,000Income
      taxes
                    
                    $
                    5,841,000
                    
                    
                    $
                    3,661,000Supplemental
      disclosure of non cash activity:Common
      stock issued to Executives  and Directors over 2-6 year vesting
      periods
                    
                    $
                    1,577,000
                    
                    
                    $
                    574,000Common
      shares issued for options or warrants
                    
                    $
                    -
                    
                    
                    $
                    42,000Options
      cancelled during period
                    
                    $
                    -
                    
                    
                    $
                    (77,000
                    )Common
      stock issued for services
                    
                    $
                    155,000
                    
                    
                    $
                    116,000Treasury
      stock received in payment of note receivable
                    
                    $
                    931,500
                    
                    
                    $
                    -





See
accompanying notes to condensed consolidated financial
statements.


5


Notes
to Condensed Consolidated Financial Statements




General





1.
            Basis
      of Presentation





The
condensed unaudited interim consolidated financial statements included herein
have been prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The condensed consolidated financial
statements and notes are presented as permitted on Form 10-Q and do not
contain information included in the Company’s annual statements and notes.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested that
these condensed consolidated financial statements be read in conjunction with
the December 31, 2008 audited consolidated financial statements and the
accompanying notes thereto. While management believes the procedures followed in
preparing these condensed consolidated financial statements are reasonable, the
accuracy of the amounts are in some respects dependent upon the facts that will
exist, and procedures that will be accomplished by the Company later in the
year.





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





2.
            Presentation
      of Financial Statements





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





3.           Recent
Accounting Pronouncements





In
February 2008, the FASB issued an accounting standard update that delayed the
effective date of fair value measurements accounting for all non-financial
assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), until the beginning of the first quarter of fiscal 2009. These
include goodwill and other non-amortizable intangible assets. The Company
adopted this accounting standard update effective January 1, 2009. The
adoption of this update to non-financial assets and liabilities, as codified in
ASC 820-10 (formerly FSP 157-2, “Effective Date of FASB Statement
No. 157”), did not have any impact on the Company’s condensed consolidated
financial statements.





Effective
January 1, 2009, the Company adopted a new accounting standard update
regarding business combinations. As codified under ASC 805 (formerly SFAS
No. 141 revised 2007, “Business Combinations”), this update requires an
entity to recognize the assets acquired, liabilities assumed, contractual
contingencies, and contingent consideration at their fair value on the
acquisition date. It further requires that acquisition-related costs be
recognized separately from the acquisition and expensed as incurred; that
restructuring costs generally be expensed in periods subsequent to the
acquisition date; and that changes in accounting for deferred tax asset
valuation allowances and acquired income tax uncertainties after the measurement
period be recognized as a component of provision for taxes. In addition,
acquired in-process research and development is capitalized as an intangible
asset and amortized over its estimated useful life. With the adoption of this
accounting standard update, any tax related adjustments associated with
acquisitions that closed prior to January 1, 2009 will be recorded through
income tax expense, whereas the previous accounting treatment would require any
adjustment to be recognized through the purchase price.  This
accounting standard update applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The adoption of these
accounting updates did not have any impact on the Company’s condensed
consolidated financial statements.





Effective
January 1, 2009, the Company adopted an accounting standard which establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary, as codified in ASC
810-10 (formerly SFAS No. 160, Accounting and Reporting on Non-controlling
Interest in Consolidated Financial Statements, an Amendment of ARB 51”). This
accounting standard states that accounting and reporting for minority interests
are to be recharacterized as noncontrolling interests and classified as a
component of equity. The calculation of earnings per share continues to be based
on income amounts attributable to the parent.  The adoption of these
accounting updates did not have any impact on the Company’s condensed
consolidated financial statements.





Effective
January 1, 2009, the Company adopted an accounting standard update
regarding the determination of the useful life of intangible assets. As codified
in ASC 350-30-35 (formerly FSP No. 142-3, “Determination of the Useful Life
of Intangible Assets”), this update amends the factors considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under intangibles accounting. It also requires a
consistent approach between the useful life of a recognized intangible asset
under prior business combination accounting and the period of expected cash
flows used to measure the fair value of an asset under the new business
combinations accounting (as currently codified under ASC 850). The update also
requires enhanced disclosures when an intangible asset’s expected future cash
flows are affected by an entity’s intent and/or ability to renew or extend the
arrangement. The adoption of these accounting updates did not have any impact on
the Company’s condensed consolidated financial statements.


6


Effective
January 1, 2009, the Company adopted a new accounting standard update from
the Emerging Issues Task Force (“EITF”) consensus regarding the accounting of
defensive intangible assets. This update, as codified in ASC 350-30 (formerly
EITF No. 08-7, “Accounting for Defensive Intangible Assets”), clarifies
accounting for defensive intangible assets subsequent to initial measurement. It
applies to acquired intangible assets which an entity has no intention of
actively using, or intends to discontinue use of, the intangible asset but holds
it to prevent others from obtaining access to it (i.e., a defensive intangible
asset). Under this update, a consensus was reached that an acquired defensive
asset should be accounted for as a separate unit of accounting (i.e., an asset
separate from other assets of the acquirer); and the useful life assigned to an
acquired defensive asset should be based on the period during which the asset
would diminish in value. The adoption of these accounting updates did not have
any impact on the Company’s condensed consolidated financial
statements.




Effective
April 1, 2009, the Company adopted a new accounting standard for subsequent
events, as codified in ASC 855-10 (formerly SFAS No. 165, Subsequent
Events). The update modifies the names of the two types of subsequent events
either as recognized subsequent events (previously referred to in practice as
Type I subsequent events) or non-recognized subsequent events (previously
referred to in practice as Type II subsequent events). In addition, the standard
modifies the definition of subsequent events to refer to events or transactions
that occur after the balance sheet date, but before the financial statements are
issued (for public entities) or available to be issued (for nonpublic entities).
It also requires the disclosure of the date through which subsequent events have
been evaluated. The update did not result in significant changes in the practice
of subsequent event disclosures, and therefore the adoption did not have any
impact on the Company’s consolidated financial statements.





Effective
April 1, 2009, the Company adopted three accounting standard updates which
were intended to provide additional application guidance and enhanced
disclosures regarding fair value measurements and impairments of securities.
They also provide additional guidelines for estimating fair value in accordance
with fair value accounting. The first update, as codified in ASC 820-10-65
(formerly FASB Staff Positions (“FSP”) No. 157-4, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly),
provides additional guidelines for estimating fair value in accordance with fair
value accounting. The second accounting update, as codified in ASC 320-10-65
(formerly FSP No. 115-2, Recognition and Presentation of
Other-Than-Temporary Impairments), changes accounting requirements for
other-than-temporary-impairment (OTTI) for debt securities by replacing the
current requirement that a holder have the positive intent and ability to hold
an impaired security to recovery in order to conclude an impairment was
temporary with a requirement that an entity conclude it does not intend to sell
an impaired security and it will not be required to sell the security before the
recovery of its amortized cost basis. The third accounting update, as codified
in ASC 825-10-65 (formerly Accounting Principles Board (“APB”) Opinion
No. 28-1, Interim Disclosures about Fair Value of Financial Instruments),
increases the frequency of fair value disclosures. These updates were effective
for fiscal years and interim periods ended after June 15, 2009. The
adoption of these accounting updates did not have any impact on the Company’s
condensed consolidated financial statements.





Effective
July 1, 2009, the Company adopted The “FASB Accounting Standards
Codification” and the Hierarchy of Generally Accepted Accounting Principles (ASC
105), (formerly SFAS No. 168, The “FASB Accounting Standards Codification”
and the Hierarchy of Generally Accepted Accounting Principles). This standard
establishes only two levels of U.S. generally accepted accounting principles
(“GAAP”), authoritative and nonauthoritative. The Financial Accounting Standard
Board (“FASB”) Accounting Standards Codification (the “Codification”) became the
source of authoritative, nongovernmental GAAP, except for rules and
interpretive releases of the SEC, which are sources of authoritative GAAP for
SEC registrants. All other non-grandfathered, non-SEC accounting literature not
included in the Codification became nonauthoritative. Beginning with this interim
report for the third quarter of 2009, references to prior standards have been
updated to reflect the new referencing system.. As the Codification was
not intended to change or alter existing GAAP, it did not have any impact on the
Company’s condensed consolidated financial statements




4.           Revenue
Recognition





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


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.  Inventories are valued at cost determined using the
first-in, first-out (FIFO) method.




6.           Goodwill
and Other 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 are amortized over 5 and 7
years based on their estimated useful life, while trademarks representing brands
with an infinite life, and are carried at cost and tested annually for
impairment as outlined below.  Goodwill and other intangible assets
are tested annually for impairment in the fourth quarter, and are tested for
impairment more frequently if events and circumstances indicate that the asset
might be impaired. An impairment loss is recognized to the extent that the
carrying amount exceeds the asset’s fair value.  The Company assesses
the recoverability of its goodwill and other intangible assets by comparing the
projected undiscounted net cash flows associated with the related asset, over
their remaining lives, in comparison to their respective carrying
amounts.  Impairment, if any, is based on the excess of the carrying
amount over the fair value of those assets.





As of September 30, 2009
                      
                      
                      As of December 31, 2008Gross Carrying
                      
                      
                      Accumulated
                      
                      
                      Gross Carrying
                      
                      
                      AccumulatedAmount
                      
                      
                      Amortization
                      
                      
                      Amount
                      
                      
                      AmortizationCustomer
      lists
                      
                      $
                      8,332,000
                      
                      
                      $
                      5,738,000
                      
                      
                      $
                      8,332,000
                      
                      
                      $
                      4,649,000Trademarks,
      patents, and copyrightsfinite
      life
                      
                      
                      1,640,000
                      
                      
                      
                      866,000
                      
                      
                      
                      1,640,000
                      
                      
                      
                      685,000infinite
      life
                      
                      
                      909,000
                      
                      
                      
                      -
                      
                      
                      
                      909,000
                      
                      
                      
                      -Total
                      
                      $
                      10,881,000
                      
                      
                      $
                      6,604,000
                      
                      
                      $
                      10,881,000
                      
                      
                      $
                      5,334,000





Amortization
expense for the nine months ended September 30, 2009 and 2008 was as
follows:





2009
                    
                    
                    2008Customer
      lists
                    
                    $
                    1,089,000
                    
                    
                    $
                    1,207,000Trademarks
      and patents
                    
                    
                    181,000
                    
                    
                    
                    179,000Total
      Trademarks and Intangibles
                    
                    $
                    1,270,000
                    
                    
                    $
                    1,386,000





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





7.           Fixed
Assets





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


8





8. Note
Receivable





Medifast realized a $1,503,000 note
receivable as a result of the sale of Consumer Choice Systems on January 17,
2006 to a former board member.  The note has a 10-year term with
imputed interest of 4% and was collateralized by 50,000 shares of Medifast stock
and all the assets of Consumer Choice Systems.  On August 27, 2009,
Medifast, Inc. accepted an offer by a former board member to pay down a large
portion of the note using the 50,000 shares of Medifast, Inc. stock held as
collateral. Medifast, Inc. obtained 50,000 shares of Medifast common stock and
placed in treasury stock on August 27, 2009 at the closing price of
$18.63.  This resulted in a $931,500 reduction in the note receivable
balance due.  The restructured note has a remaining principal balance
of $236,000 and will be paid over the remaining 82-month term.




9. Income
Per Common Share





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




10. 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.




11. Deferred
Compensation Plans





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





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





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




12. 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:




9





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 identicalor
      similar instruments that are not active, and model-based valuation
      techniques for which all significantassumptions
      are observable in the market.




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




The
following table represents the fair value hierarchy for those financial assets
and liabilities measured at fair value on a recurring basis as of September 30,
2009.




Fair
Value Measurements on a Recurring Basis as of September 30, 2009





Assets
                    
                    Level
      I
                    
                    
                    Level II
                    
                    
                    Level III
                    
                    
                    TotalInvestment
      securities
                    
                    $
                    1,476,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    1,476,000Cash
      equivalents
                    
                    
                    16,347,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    16,347,000Total
      Assets
                    
                    $
                    17,823,000
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    17,823,000Liabilities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      Liabilities
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -




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. In addition, we may
have additional disclosure requirements in the event we complete an acquisition
or incur impairment of our assets in future periods.





13. Share
Based Payments





Stock-Based Compensation





Unearned
compensation represents shares issued to executives and Board members that will
be vested over a 2-6 year period.  These shares will be amortized over
the vesting period in accordance with FASB 123(R).  The expense
related to the vesting of unearned compensation was $1,577,000 and $574,000 at
September 30, 2009 September 30, 2008, respectively.   There was
no expense related to vesting of options under FASB 123R at September 30, 2009
and 2008.





The
Medifast Board of Directors on May 7, 2009 approved restricted common stock
grants to key executives and Board members with a 5 year vesting period,
beginning on the grant date.  Key executives were granted 460,000
shares of restricted common stock to retain their services over the next five
years and recognize continued sales and profit growth in accordance with targets
set by the Board of Directors.  The Board of Directors received a
total of 71,000 shares with a two year vesting period, beginning on the grant
date for their active participation in the strategic planning process and
guidance as it relates to Medifast’s strong performance and growth.





The
Compensation Committee of Medifast, Inc. has utilized vested stock grants as a
major source of compensation for its senior executive team so that their
interests are aligned with Shareholders by building value in the Medifast Brand
and increasing shareholder value. The Senior Executive Team continues to earn
stock grants over the next five years and must pay an increasingly higher tax
rate on their illiquid restricted stock grants.  Therefore, over the next
12 months, the CEO, President and the VP of Finance plan on selling shares
of Medifast Common Stock up to approximately 200,000 shares for tax and estate
purposes in accordance with the Medifast, Inc. Insider Trading Policy as
outlined below in “Item 5 – Other Information.”  In addition, over the next
18 months Shirley Mac Donald, the wife of the Chairman of the Board, may sell up
to approximately 100,000 additional shares of Medifast, Inc. common stock for
estate planning and retirement purposes going forward into 2009/2010.  The
Chairman of the Board, Bradley T. Mac Donald may donate 75,000 shares to the
MacDonald Charitable Remainder Trust and/or the Mac Donald Family
foundation in 2009 and 2010 to support the Company's and the family’s charitable
giving program. The Mac Donald Family will retain control over the voting rights
of approximately 800,000 shares of Medifast Common Stock after these
transactions.


10





The
following summarizes the stock option activity for the Nine Months ended
September 30, 2009:





Shares
                      
                      
                      Weighted
                        Average
                        ExercisePrice
                      
                      
                      Weighted
                        Average
                        Contractual
                        Term(Years)Outstanding,
      December 31, 2008
                      
                      
                      143,334
                      
                      
                      
                      3.00Options
      grantedOptions
      reinstatedOptions
      exercised
                      
                      
                      (133,334
                      )
                      
                      
                      2.94Options
      forfeited or expiredOutstanding
      September 30, 2009
                      
                      
                      10,000
                      
                      
                      
                      3.83
                      
                      
                      
                      1.08Options
      exercisable, September 30, 2009
                      
                      
                      10,000
                      
                      
                      
                      3.83
                      
                      
                      
                      1.08Options
      available for grant at September 30, 2009
                      
                      
                      1,212,500





14.           Reclassifications





Certain
amounts for the quarter ended September 30, 2008 have been reclassified to
conform to the presentation of the September 30, 2009 amounts.  The
reclassifications have no effect on net income for the quarters ended September
30, 2009 and 2008.





15.           Business
Segments





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




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




11




The
following tables present segment information for the three and nine months
September 30, 2009 and 2008:





Three
      Months Ended September 30,
2009Medifast
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        All
      Other
                                                                                                                                                                        
                                                                                                                                                                        Eliminations
                                                                                                                                                                        
                                                                                                                                                                        ConsolidatedRevenues,
      net
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        40,670,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        4,336,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        45,006,000Cost
      of Sales
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        9,912,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        859,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        10,771,000Selling,
      General and Adminstrative Expenses
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        24,104,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        3,273,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        27,377,000Depreciation
      and Amortization
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,038,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        257,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,295,000Interest
      (net) and Other
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        9,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        8,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        17,000Provision
      for income taxes
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        2,108,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        4,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        2,112,000Net
      income (loss)
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        3,499,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        (65,000
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        3,434,000Segment
      Assets
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        40,999,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        21,088,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        62,087,000Three
      Months Ended September 30,
2008Medifast
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        All
      Other
                                                                                                                                                                        
                                                                                                                                                                        Eliminations
                                                                                                                                                                        
                                                                                                                                                                        ConsolidatedRevenues,
      net
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        24,945,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        2,336,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        27,281,000Cost
      of Sales
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        6,031,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        491,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        6,522,000Selling,
      General and Adminstrative Expenses
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        15,090,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        2,097,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        17,187,000Depreciation
      and Amortization
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        927,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        249,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,176,000Interest
      (net) and Other
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        9,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        36,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        45,000Provision
      for income taxes
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        802,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        802,000Net
      income (loss)
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        2,086,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        (537,000
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        1,549,000Segment
      Assets
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        33,498,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        15,879,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        49,377,000Nine
      Months Ended September 30,
2009Medifast
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        All
      Other
                                                                                                                                                                        
                                                                                                                                                                        Eliminations
                                                                                                                                                                        
                                                                                                                                                                        ConsolidatedRevenues,
      net
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        108,159,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        11,239,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        119,398,000Cost
      of Sales
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        26,219,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        2,357,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        28,576,000Selling,
      General and Adminstrative Expenses
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        63,565,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        9,059,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        72,624,000Depreciation
      and Amortization
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        3,081,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        751,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        3,832,000Interest
      (net) and Other
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        5,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        80,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        85,000Provision
      for income taxes
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        5,359,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        4,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        5,363,000Net
      income (loss)
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        9,930,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        (1,012,000
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        8,918,000Segment
      Assets
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        40,999,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        21,088,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        62,087,000Nine
      Months Ended September 30,
2008Medifast
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        All
      Other
                                                                                                                                                                        
                                                                                                                                                                        Eliminations
                                                                                                                                                                        
                                                                                                                                                                        ConsolidatedRevenues,
      net
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        73,928,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        6,059,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        79,987,000Cost
      of Sales
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        18,055,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,244,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        19,299,000Selling,
      General and Adminstrative Expenses
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        44,852,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        5,551,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        50,403,000Depreciation
      and Amortization
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        2,684,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        733,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        3,417,000Interest
      (net) and Other
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        22,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        138,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        160,000Provision
      for income taxes
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        2,222,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        2,222,000Net
      income (loss)
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        6,093,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        (1,607,000
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        4,486,000Segment
      Assets
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        33,498,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        15,879,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        49,377,000




12





Management
Discussion and Analysis of


Financial
Condition and Results of Operations





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





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 of our annual 10-K
as of December 31, 2008.





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





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





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




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




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




13


General




Nine
Months Ended September 30, 2009 and September 30, 2008





Revenue:  Revenue
increased to $119.4 million for the first nine months of 2009 compared to $80
million for the first nine months of 2008, an increase of $39.4 million or
49%.  The Take Shape for Life sales channel accounted for 59% of total
revenue; direct marketing channel accounted for 30%, 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
99% compared to the first nine months of 2008. As compared to the first nine
months of 2008, the direct marketing sales channel, which is fueled primarily by
consumer advertising, decreased revenues by approximately 1% year-over year. The
advertising dollars spent were 10% less than the first nine months of 2008 as
the Company continues to focus on more effective advertising
spend.  The Medifast Weight Control Centers increased sales by 98% due
to the opening of new corporate and franchise locations and improvement in same
store sales.





Take
Shape for Life revenue increased 99% to $70.8 million compared with $35.6
million in the first nine months of 2008.   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 third quarter increased to approximately 5,800 compared with
3,200 during the period a year ago, an increase of 81% and up from 4,650 at the
close of the second quarter of 2009.  We continue to see the benefits
of a physician-lead network of coaches that are able to support their clients in
their weight-loss efforts.   In today’s environment where trust
and personal recommendations are becoming a more important component in consumer
purchasing decisions, the Take Shape for Life model of 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 the car
payment 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 more importantly the ability to help
others regain their health through the use of clinically proven Medifast
products.





The
Medifast Weight Control Centers, which represent approximately 10% of the
Company’s overall revenues, are currently operating in twenty four corporate
locations in Austin, Dallas, Houston, and Orlando, and twelve franchise
locations.  In the first nine months of 2009, the Company experienced
revenue growth of 98% versus the same time period last year.





Overall,
selling, general and administrative expenses increased by $22.6 million as
compared to the first nine months of 2008.  As a percentage of sales,
selling, general and administrative expenses decreased to 64% versus 67.3% in
the first nine months of 2008, which lead to an 88% increase in diluted earnings
per share in the first nine months of 2009 versus prior
year.   Take Shape for Life commission expense, which is
completely variable based upon product revenue, increased by approximately $15.6
million as the Company showed sales growth of 99% as compared to the first nine
months of 2008.  Salaries and benefits increased by approximately
$2.95 million in the first nine months of 2009 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 2008 which have greatly impacted revenue growth in
2009.   In addition, the opening of new corporately owned clinics
in the Houston, Dallas, and Austin, TX market also required the hiring of
additional center managers and support staff.  Areas that also
experienced additional staffing due to the 49% sales growth in the first nine
months of 2009 include manufacturing, distribution, call center, and
IT.  Advertising expense for the first nine months of 2009 was
approximately $13.3 million compared to approximately $14.7 million for the same
period last year, a decrease of $1.4 million or 10%.  Communication
expense increased by $250,000 and other expenses increased by $1.95 million
which included items such as depreciation, amortization, credit card processing
fees, charitable contributions, and property taxes.  Operating
expenses increased by $1.4 million 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 $1 million as
additional restricted shares were issued to key executives and Board members in
the third andfourth
quarters of 2008, as well as the second and third quarters of 2009 which will be
vesting over a five year term.





Costs and
Expenses:  Cost of revenue increased $9.3 million to $28.6 million for
the first nine months of 2009 from $19.3 million for the first nine months of
2008.  As a percentage of sales, gross margin increased to 76.1% from
75.9% in the nine months of 2008.  The margin improved slightly due to
the addition of efficient new machinery and process improvements achieved in our
vertically integrated business model.





Income
taxes:In the first nine months
of 2009, the Company recorded $5,363,000 in income tax expense, which represents
an annual effective rate of 37.6%.  The tax rate increased due to an
increase in the Maryland state income tax rate as well as timing differences on
amortization expense on our intangible assets between book and tax financials
that increased our tax expense in 2009.    For the first
nine months of 2008, we recorded income tax expense of $2.2 million which
reflected an estimated annual effective tax rate of 33.1%.  The
Company anticipates a tax rate of approximately 36-38% in 2009.


14





Net
income: Net income was approximately $8.9 million for the first nine months of
2009 as compared to approximately $4.5 million for the first nine months of
2008, an increase of 98%.  Pre-tax profit as a percent of sales
increased to 12% in the first nine months of 2009 as compared to 8.4% in 2008.
The improved profitability in the first nine months of 2009 is due to sales
growth in the Take Shape for Life division and Medifast Weight Control Centers
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.





Three
Months Ended September 30, 2009 and September 30, 2008





Revenue:  Revenue
increased to $45 million in the third quarter of 2009 compared to $27.3 million
in the third quarter of 2008, an increase of $17.7 million or 65%. The Take
Shape for Life sales channel accounted for 62% of total revenue; direct
marketing channel accounted for 27%, 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 105%
compared to the third quarter of 2008. As compared to the third quarter of 2008,
the direct marketing sales channel, which is fueled primarily by consumer
advertising, increased revenues by 14% year-over year, the advertising dollars
spent were 5% more than the third quarter of 2008 as the Company continues to
focus on more effective advertising spend.  The Medifast Weight
Control Centers increased sales by 106% due to the opening of new corporate and
franchise locations and improvement in same store sales.





Take
Shape for Life revenue increased 105% to $27.9 million compared with $13.6
million in the comparable quarter of 2008.   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 second quarter increased to approximately 5,800 compared with
3,200 during the period a year ago, an increase of 81% and up from 4,650 at the
close of the second quarter of 2009.  We continue to see the benefits
of a physician-lead network of coaches that are able to support their clients in
their weight-loss efforts.   In today’s environment where trust
and personal recommendations are becoming a more important component in consumer
purchasing decisions, the Take Shape for Life model of 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 the car
payment 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 more importantly the ability to help
others regain their health through the use of clinically proven Medifast
products.





The
Medifast Weight Control Centers, which represent approximately 10% of the
Company’s overall revenues, are currently operating in twenty four corporate
locations in Austin, Dallas, Houston, and Orlando, and twelve franchise centers.
In the third quarter of 2009, the Company experienced revenue growth of 106%
versus the same time period last year.  Same-store sales increased 20%
for the quarter for clinics open greater than one year due to more effective
advertising and improved closing rates in the clinics.





Overall,
selling, general and administrative expenses increased by $10.3 million as
compared to the third quarter of 2008.  As a percentage of sales,
selling, general and administrative expenses decreased to 63.7% versus 67% in
the third quarter of 2008, which lead to a 109% increase in diluted earnings per
share in the third quarter of 2009 versus prior year.   Take
Shape for Life commission expense, which is completely variable based upon
revenue, increased by approximately $6.7 million as the Company showed sales
growth of 105% as compared to the third quarter of 2008.  Salaries and
benefits increased by approximately $1.3 million in the third quarter of 2009 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 2009.   In addition, the opening of new corporately
owned clinics in the Houston, Dallas, and Austin, TX market also required the
hiring of additional center managers and support staff. Areas that also
experienced additional staffing due to the 65% sales growth in the third quarter
of 2009 include manufacturing, distribution, call center, and
IT.  Advertising expense for the third quarter of 2009 was
approximately $4.5 million compared to approximately $4.3 million for the same
period last year, an increase of $200,000. Communication expense increased by
$100,000 and other expenses increased by $750,000 which included items such as
depreciation, amortization, credit card processing fees, charitable
contributions, and property taxes.  Operating expenses increased by
$650,000 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 $400,000 and
stock compensation expense increased by $221,000 as additional restricted shares
were issued to key executives and Board members in the third andfourth
quarters of 2008 as well as the second and third quarters of 2009 that will be
vesting over a five year term.





Costs and
Expenses:  Cost of revenue increased $4.2 million to $10.8 million in
the third quarter of 2009 from $6.5 million in the third quarter of
2008.  As a percentage of sales, gross margin was 76.1% in the third
quarter of 2009 and 2008.





Income
taxes:In the third quarter of
2009, the Company recorded $2.1 million in income tax expense, which represents
an annual effective rate of 38.1%.  The tax rate increased due to an
increase in the Maryland state income tax rate as well as timing differences on
amortization expense on our intangible assets between book and tax financials
that increased our tax expense in 2009.    In the third
quarter of 2008, we recorded income tax expense of $802,000 which reflected an
estimated annual effective tax rate of 34.1%.  The Company anticipates
a tax rate of approximately 36-38% in 2009.


15





Net
income: Net income was approximately $3.4 million in the third quarter of 2009
as compared to approximately $1.5 million in the third quarter of 2008, an
increase of 122%.  Pre-tax profit as a percent of sales increased to
12.3% in the third quarter of 2009 as compared to 8.6% in 2008. The improved
profitability in the third quarter of 2009 is due to sales growth in Take Shape
for Life, Medifast Weight Control Centers, and Medifast Direct Marketing, as
well as improved advertising effectiveness in the Medifast Direct Marketing
sales channel, gross margin improvement as well as leveraging the fixed costs
associated with our vertically-integrated support structure.





SEGMENT
RESULTS OF OPERATIONS





Net Sales by Segment for the Three Months Ended
      September 30,2009
                                                                    
                                                                    
                                                                    2008Segments
                                                                    
                                                                    Sales
                                                                    
                                                                    
                                                                    % of Total
                                                                    
                                                                    
                                                                    Sales
                                                                    
                                                                    
                                                                    % of TotalMedifast
                                                                    
                                                                    $
                                                                    40,670,000
                                                                    
                                                                    
                                                                    
                                                                    90
                                                                    %
                                                                    
                                                                    $
                                                                    24,945,000
                                                                    
                                                                    
                                                                    
                                                                    91
                                                                    %All
      Other
                                                                    
                                                                    
                                                                    4,336,000
                                                                    
                                                                    
                                                                    
                                                                    10
                                                                    %
                                                                    
                                                                    
                                                                    2,336,000
                                                                    
                                                                    
                                                                    
                                                                    9
                                                                    %Total
      Sales
                                                                    
                                                                    $
                                                                    45,006,000
                                                                    
                                                                    
                                                                    
                                                                    100
                                                                    %
                                                                    
                                                                    $
                                                                    27,281,000
                                                                    
                                                                    
                                                                    
                                                                    100
                                                                    %Net Sales by Segment for the Nine Months Ended
      September 30,2009
                                                                    
                                                                    
                                                                    2008Segments
                                                                    
                                                                    Sales
                                                                    
                                                                    
                                                                    % of Total
                                                                    
                                                                    
                                                                    Sales
                                                                    
                                                                    
                                                                    % of TotalMedifast
                                                                    
                                                                    $
                                                                    108,159,000
                                                                    
                                                                    
                                                                    
                                                                    91
                                                                    %
                                                                    
                                                                    $
                                                                    73,928,000
                                                                    
                                                                    
                                                                    
                                                                    92
                                                                    %All
      Other
                                                                    
                                                                    
                                                                    11,239,000
                                                                    
                                                                    
                                                                    
                                                                    9
                                                                    %
                                                                    
                                                                    
                                                                    6,059,000
                                                                    
                                                                    
                                                                    
                                                                    8
                                                                    %Total
      Sales
                                                                    
                                                                    $
                                                                    119,398,000
                                                                    
                                                                    
                                                                    
                                                                    100
                                                                    %
                                                                    
                                                                    $
                                                                    79,987,000
                                                                    
                                                                    
                                                                    
                                                                    100
                                                                    %





Three
Months Ended September 30, 2009 and September 30, 2008





Medifast
Segment:  The Medifast reporting segment consists of the sales of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Condensed Consolidated
Results of Operations” management discussion for the three months ended
September 30, 2009 and 2008 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 $2,000,000 year-over year for the three
month period ended September 30, 2009. Sales increased in the Medifast Weight
Control Centers and Franchise Centers due to the opening of ten new corporate
centers in 2008, and three in the second quarter of 2009 in Austin, TX and
Texas, and the opening of twelve new franchise centers at the end of 2008 and
into the first nine months of 2009.  The Company is continuing to
focus on improved advertising effectiveness, improved closing rates on walk-in
sales, as well as the hiring of more experienced clinic operators to manage the
clinics, and improved efficiencies in operation of the clinics. The Company now
has twenty four corporately owned clinics, compared to twenty clinics in
operation at the end of the third quarter of 2008.  The Company also
has twelve franchisee centers in operation.





Nine
Months Ended September 30, 2009 and September 30, 2008





Medifast
Segment:  The Medifast reporting segment consists of the sales of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Condensed Consolidated
Results of Operations” management discussion for the nine months ended September
30, 2009 and 2008 above.


16





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 $5,180,000 year-over year for the nine
month period ended September 30, 2009. Sales increased in the Medifast Weight
Control Centers and Franchise Centers due to the opening of ten new corporate
centers in 2008, and three in the second quarter of 2009 in Austin, TX and
Texas, and the opening of twelve new franchise centers at the end of 2008 and
into the first nine months of 2009.  The Company is continuing to
focus on improved advertising effectiveness, improved closing rates on walk-in
sales, as well as the hiring of more experienced clinic operators to manage the
clinics, and improved efficiencies in operation of the clinics. The Company now
has twenty four corporately owned clinics, compared to twenty clinics in
operation at the end of the third quarter of 2008.  The Company also
has twelve franchisee centers in operation.





Net
      Profit by Segment for the Three Months Ended September
  30,2009
                                  
                                  
                                  2008Segments
                                  
                                  Profit
                                  
                                  
                                  % of Total
                                  
                                  
                                  Profit
                                  
                                  
                                  % of TotalMedifast
                                  
                                  $
                                  3,499,000
                                  
                                  
                                  
                                  102
                                  %
                                  
                                  $
                                  2,086,000
                                  
                                  
                                  
                                  135
                                  %All
      Other
                                  
                                  
                                  (65,000
                                  )
                                  
                                  
                                  -2
                                  %
                                  
                                  
                                  (537,000
                                  )
                                  
                                  
                                  -35
                                  %Total
      Net Profit
                                  
                                  $
                                  3,434,000
                                  
                                  
                                  
                                  100
                                  %
                                  
                                  $
                                  1,549,000
                                  
                                  
                                  
                                  100
                                  %Net
      Profit by Segment for the Nine Months Ended September
  30,2009
                                  
                                  
                                  2008Segments
                                  
                                  Profit
                                  
                                  
                                  % of Total
                                  
                                  
                                  Profit
                                  
                                  
                                  % of TotalMedifast
                                  
                                  $
                                  9,930,000
                                  
                                  
                                  
                                  111
                                  %
                                  
                                  $
                                  6,093,000
                                  
                                  
                                  
                                  136
                                  %All
      Other
                                  
                                  
                                  (1,012,000
                                  )
                                  
                                  
                                  -11
                                  %
                                  
                                  
                                  (1,607,000
                                  )
                                  
                                  
                                  -36
                                  %Total
      Net Profit
                                  
                                  $
                                  8,918,000
                                  
                                  
                                  
                                  100
                                  %
                                  
                                  $
                                  4,486,000
                                  
                                  
                                  
                                  100
                                  %





Three
Months Ended September 30, 2009 and September 30, 2008





Medifast
Segment:  The Medifast reporting segment consists of the profits of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Condensed Consolidated
Results of Operations” management discussion for the three months ended
September 30, 2009 and 2008 above.  See footnote 15, “Business
Segments” for a detailed breakout of expenses.





All Other
Segment:  The All Other reporting segment consists of the profit or
loss of Medifast Weight Control Centers, Medifast Weight Control Franchise
Centers, and corporate expenses related to the parent company
operations.  Year-over-year, the loss in the All Other segment
decreased by $472,000.  The Medifast Weight Control Centers and
Franchise Centers showed an increase in net profitability year-over-year of
$833,000.   The increase in profitability was due to opening of
ten new corporately owned centers in 2008, three new centers in 2009 in the
Austin, Texas market, and opening twelve new franchise centers at the end of
2008 and first nine months of 2009. The increase in the total number of
corporate clinics to twenty four, twelve operating franchise centers, and
improvements in same store sales year-over-year led to additional sales and
profitability.  Medifast Corporate expenses increased by $361,000
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
15, “Business Segments” for a detailed breakout of expenses.


17





Nine
Months Ended September 30, 2009 and September 30, 2008





Medifast
Segment:  The Medifast reporting segment consists of the profits of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Condensed Consolidated
Results of Operations” management discussion for the Nine months ended September
30, 2009 and 2008 above.  See footnote 15, “Business Segments” for a
detailed breakout of expenses.





All Other
Segment:  The All Other reporting segment consists of the profit or
loss of Medifast Weight Control Centers, Medifast Weight Control Franchise
Centers, and corporate expenses related to the parent company
operations.  Year-over-year, the loss in the All Other segment
decreased by $595,000.  The Medifast Weight Control Centers and
Franchise Centers showed an increase in net profitability year-over-year of $1.6
million.   The increase in the total number of corporate clinics
to twenty four, twelve operating franchise centers, and improvements in same
store sales year-over-year led to additional sales and profitability. Medifast
Corporate expenses increased by $1 million 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 15, “Business Segments” for a
detailed breakout of expenses.




Seasonality





The
Company's weight management products and programs have historically been subject
to seasonality.  Traditionally the holiday season in November/December
of each year is considered poor for diet control products and
services.  January and February generally show increases in sales, as
these months are considered the commencement of the “diet season.”  In
2009, seasonality has not been a significant factor.  This is largely
due to the increase in the consumer’s awareness of the overall health and
nutritional benefits accompanied with the use of the Company’s product
line.  As consumers continue to increase their association of
nutritional weight loss programs with overall health, seasonality will continue
to decrease.





Inflation





Inflation
generally affects us by increasing the costs of labor, overhead, and raw
material and packaging costs. The impact of inflation on our financial position
and results of operations was minimal during the third quarter of
2009.





Item 5.  Other
Information





Litigation:





There is
no pending or threatened litigation.





Other
Matters:





An
Independent Committee of the Board of Directors of Medifast was constituted to
review the public allegations of a third party "Convicted Felon" on his
website.  The Independent Committee of the Board of Directors of
Medifast Inc. recommended that the Company make a formal complaint to the
Securities and Exchange Commission and the Attorney General of Maryland as it
pertains to the convicted felon Minkow and his "for profit"
company's false and misleading claims against Medifast. There are
currently no pending matters of a material nature related to any government
investigation of the case involving Mr. Minkow, his company, its affiliates
or associates. Any actions related to any government
investigation pertaining to this complaint have been deemed confidential at
this time.





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





Code of
Ethics:   In August of 2006, the Company updated its Code
of Ethics by which directors, officers and employees commit and undertake to
personal and corporate growth, dedicate themselves to excellence, integrity and
responsiveness to the marketplace, and work together to enhance the value of the
Company for the shareholders, vendors, and customers.





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


18





Evaluation of
Disclosure
Controls and Procedures:




The
Securities and Exchange Commission defines the term “disclosure controls and
procedures” to mean a company’s controls and other procedures that are designed
to ensure that information required to be disclosed in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms. Based on the evaluation of the
effectiveness of our disclosure controls and procedures by our management, with
the participation of our Chief Executive Officer and our Chief Financial
Officer, as of the end of the period covered by this report, our Chief Executive
Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures at the end of the period covered by this report were
effective to ensure that information required to be disclosed in the reports
that we file or submit under the Securities Exchange Act of 1934 is
(i) recorded, processed, summarized and reported, within the time periods
specified in the Commission’s rules and forms, and (ii) accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
disclosure.





Changes in Internal
Control over
Financial Reporting:




No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
September 30, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.





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





SIGNATURES





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





Medifast,
Inc.




BY:
                  
                  /S/
      MICHAEL S. MCDEVITT
                  
                  November
      9, 2009Michael
      S. McDevittChief
      Executive Officer and Chief Financial Officer(principal
      executive officer and principal financial officer)




19





Index to
Exhibits





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




20