UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




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




For the
quarterly period ended June 30, 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 ̈




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
filerx




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




Yes  ̈    No  x




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





Class
              
              Outstanding at
                August
      6, 2009Common
      stock, $.001 par value per share
              
              15,220,960
      shares





Index





Item
      I - Financial Information:Condensed
      Consolidated Financial Statements (unaudited)Condensed
      Consolidated Balance Sheets –
                      June
      30, 2009 and December 31, 2008
                    3Condensed
      Consolidated Statements of Income –
                      Three
      and Six Months Ended June 30, 2009 and 2008
                    4Condensed
      Consolidated Statements of Cash Flows –
                      Six
      Months Ended June 30, 2009 and 2008
                    5Notes
      to Condensed Consolidated Financial Statements
                    6Management
      Discussion and Analysis of Financial Condition
                      And
      Results of Operations
                    13Item
      IIExhibits
                    20EX
      31.1EX
      31.2EX
      32.1


2


MEDIFAST,
INC AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)





June 30, 2009
                      
                      
                      December 31, 2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      11,073,000
                      
                      
                      $
                      1,841,000Accounts
      receivable-net of allowance for doubtful accounts of
    $100,000
                      
                      
                      582,000
                      
                      
                      
                      448,000Inventory
                      
                      
                      11,188,000
                      
                      
                      
                      13,856,000Investment
      securities
                      
                      
                      1,339,000
                      
                      
                      
                      1,099,000Deferred
      compensation
                      
                      
                      535,000
                      
                      
                      
                      531,000Prepaid
      expenses and other current assets
                      
                      
                      1,723,000
                      
                      
                      
                      2,034,000Prepaid
      income tax
                      
                      
                      1,777,000
                      
                      
                      
                      1,131,000Note
      receivable - current
                      
                      
                      180,000
                      
                      
                      
                      180,000Deferred
      tax asset
                      
                      
                      100,000
                      
                      
                      
                      100,000Total
      Current Assets
                      
                      
                      28,497,000
                      
                      
                      
                      21,220,000Property,
      plant and equipment - net
                      
                      
                      21,880,000
                      
                      
                      
                      21,709,000Trademarks
      and intangibles - net
                      
                      
                      4,697,000
                      
                      
                      
                      5,547,000Deferred
      tax asset, net of current portion
                      
                      
                      1,351,000
                      
                      
                      
                      1,131,000Note
      receivable, net of current portion
                      
                      
                      1,012,000
                      
                      
                      
                      1,080,000Other
      assets
                      
                      
                      352,000
                      
                      
                      
                      350,000TOTAL
      ASSETS
                      
                      $
                      57,789,000
                      
                      
                      $
                      51,037,000LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
                      
                      $
                      5,711,000
                      
                      
                      $
                      5,130,000Line
      of credit
                      
                      
                      2,693,000
                      
                      
                      
                      3,164,000Current
      maturities of long-term debt
                      
                      
                      257,000
                      
                      
                      
                      257,000Total
      Current liabilities
                      
                      
                      8,661,000
                      
                      
                      
                      8,551,000Long-term
      debt, net of current liabilities
                      
                      
                      4,185,000
                      
                      
                      
                      4,313,000Total
      liabilities
                      
                      
                      12,846,000
                      
                      
                      
                      12,864,000Stockholders'
      equity:Common
      stock; par value $.001 per share; 20,000,000 authorized;
                        15,220,960
      and 14,585,960 shares issued and outstanding, respectively
                      
                      
                      15,000
                      
                      
                      
                      15,000Additional
      paid-in capital
                      
                      
                      34,705,000
                      
                      
                      
                      30,787,000Accumulated
      other comprehensive (loss)
                      
                      
                      (173,000
                      )
                      
                      
                      (389,000
                      )Retained
      earnings
                      
                      
                      20,737,000
                      
                      
                      
                      15,253,00055,284,000
                      
                      
                      
                      45,666,000Less:  cost
      of 301,092 and 272,192 shares of common stock
                        in
      treasury, respectively
                      
                      
                      (2,058,000
                      )
                      
                      
                      (1,956,000
                      )Less:
      unearned stock compensation
                      
                      
                      (8,283,000
                      )
                      
                      
                      (5,537,000
                      )Total
      Stockholders' Equity
                      
                      
                      44,943,000
                      
                      
                      
                      38,173,000TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                      
                      $
                      57,789,000
                      
                      
                      $
                      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 June 30,
                    
                    
                    Six
      Months Ended June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenue
                    
                    $
                    40,713,000
                    
                    
                    $
                    27,537,000
                    
                    
                    $
                    74,393,000
                    
                    
                    $
                    52,706,000Cost
      of sales
                    
                    
                    9,751,000
                    
                    
                    
                    6,677,000
                    
                    
                    
                    17,805,000
                    
                    
                    
                    12,777,000Gross
      Profit
                    
                    
                    30,962,000
                    
                    
                    
                    20,860,000
                    
                    
                    
                    56,588,000
                    
                    
                    
                    39,929,000Selling,
      general, and administration
                    
                    
                    26,174,000
                    
                    
                    
                    18,451,000
                    
                    
                    
                    47,785,000
                    
                    
                    
                    35,457,000Income
      from operations
                    
                    
                    4,788,000
                    
                    
                    
                    2,409,000
                    
                    
                    
                    8,803,000
                    
                    
                    
                    4,472,000Other
      income/(expense)Interest
      expense
                    
                    
                    (37,000
                    )
                    
                    
                    (87,000
                    )
                    
                    
                    (74,000
                    )
                    
                    
                    (191,000
                    )Interest
      income
                    
                    
                    40,000
                    
                    
                    
                    43,000
                    
                    
                    
                    73,000
                    
                    
                    
                    82,000Other
      income/expense
                    
                    
                    (32,000
                    )
                    
                    
                    (41,000
                    )
                    
                    
                    (67,000
                    )
                    
                    
                    (6,000
                    )(29,000
                    )
                    
                    
                    (85,000
                    )
                    
                    
                    (68,000
                    )
                    
                    
                    (115,000
                    )Income
      before provision for income taxes
                    
                    
                    4,759,000
                    
                    
                    
                    2,324,000
                    
                    
                    
                    8,735,000
                    
                    
                    
                    4,357,000Provision
      for income tax (expense)
                    
                    
                    (1,760,000
                    )
                    
                    
                    (752,000
                    )
                    
                    
                    (3,251,000
                    )
                    
                    
                    (1,420,000
                    )Net
      income
                    
                    $
                    2,999,000
                    
                    
                    $
                    1,572,000
                    
                    
                    $
                    5,484,000
                    
                    
                    $
                    2,937,000Basic
      earnings per share
                    
                    $
                    0.22
                    
                    
                    $
                    0.12
                    
                    
                    $
                    0.41
                    
                    
                    $
                    0.22Diluted
      earnings per share
                    
                    $
                    0.20
                    
                    
                    $
                    0.11
                    
                    
                    $
                    0.37
                    
                    
                    $
                    0.21Weighted
      average shares outstanding -Basic
                    
                    
                    13,417,667
                    
                    
                    
                    13,138,202
                    
                    
                    
                    13,277,293
                    
                    
                    
                    13,119,497Diluted
                    
                    
                    15,039,547
                    
                    
                    
                    13,791,623
                    
                    
                    
                    14,899,173
                    
                    
                    
                    13,772,918





See
accompanying notes to condensed consolidated financial
statements.


4


MEDIFAST,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)





Six
      Months Ended June 30,2009
                    
                    
                    2008Cash
      flows from operating activities:Net
      income
                    
                    $
                    5,484,000
                    
                    
                    $
                    2,937,000Adjustments
      to reconcile net income to net cash provided by operating activities
      from continuing operations:Depreciation
      and amortization
                    
                    
                    2,536,000
                    
                    
                    
                    2,243,000Realized
      loss on investment securities
                    
                    
                    67,000
                    
                    
                    
                    38,000Common
      stock issued for services
                    
                    
                    104,000
                    
                    
                    
                    70,000Stock
      options cancelled during period
                    
                    
                    -
                    
                    
                    
                    (77,000
                    )Vesting
      of unearned compensation
                    
                    
                    1,068,000
                    
                    
                    
                    296,000Net
      change in other comprehensive gain (loss)
                    
                    
                    217,000
                    
                    
                    
                    (162,000
                    )Deferred
      income taxes
                    
                    
                    (220,000
                    )
                    
                    
                    --Changes
      in assets and liabilities:Decrease
      (Increase) in accounts receivable
                    
                    
                    (134,000
                    )
                    
                    
                    18,000Decrease
      (Increase) in inventory
                    
                    
                    2,667,000
                    
                    
                    
                    (1,857,000
                    )Decrease
      (Increase) in prepaid expenses & other current assets
                    
                    
                    312,000
                    
                    
                    
                    (347,000
                    )(Increase)
      in deferred compensation
                    
                    
                    (4,000
                    )
                    
                    
                    (11,000
                    )(Increase)
      in prepaid taxes
                    
                    
                    (646,000
                    )
                    
                    
                    (987,000
                    )(Increase)
      in other assets
                    
                    
                    (2,000
                    )
                    
                    
                    (251,000
                    )Increase
      in accounts payable and accrued expenses
                    
                    
                    582,000
                    
                    
                    
                    2,033,000(Decrease)
      in income taxes payable
                    
                    
                    -
                    
                    
                    
                    (592,000
                    )Net
      cash provided by operating activities
                    
                    
                    12,031,000
                    
                    
                    
                    3,351,000Cash
      Flow from Investing Activities:(Purchase)
      of investment securities, net
                    
                    
                    (308,000
                    )
                    
                    
                    (4,000
                    )(Purchase)
      of property and equipment
                    
                    
                    (1,857,000
                    )
                    
                    
                    (4,546,000
                    )Net
      cash (used in) investing activities
                    
                    
                    (2,165,000
                    )
                    
                    
                    (4,550,000
                    )Cash
      Flow from Financing Activities:Issuance
      of common stock, options and warrants
                    
                    
                    -
                    
                    
                    
                    17,000(Repayment)
      of long-term debt, net
                    
                    
                    (128,000
                    )
                    
                    
                    (136,000
                    )Increase
      (decrease) in line of credit, net
                    
                    
                    (471,000
                    )
                    
                    
                    1,103,000Decrease
      in note receivable
                    
                    
                    68,000
                    
                    
                    
                    66,000(Purchase)
      of treasury stock
                    
                    
                    (102,000
                    )
                    
                    
                    -Net
      cash provided by (used in) financing activities
                    
                    
                    (633,000
                    )
                    
                    
                    1,050,000NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                    
                    
                    9,233,000
                    
                    
                    
                    (149,000
                    )Cash
      and cash equivalents - beginning of the period
                    
                    
                    1,841,000
                    
                    
                    
                    2,195,000Cash
      and cash equivalents - end of period
                    
                    $
                    11,074,000
                    
                    
                    $
                    2,046,000Supplemental
      disclosure of cash flow information:Interest
      paid
                    
                    $
                    37,000
                    
                    
                    $
                    191,000Income
      taxes
                    
                    $
                    4,132,000
                    
                    
                    $
                    3,008,000Supplemental
      disclosure of non cash activity:Common
      stock issued to Executives and Directors over 2-6 year vesting
      periods
                    
                    $
                    1,068,000
                    
                    
                    $
                    296,000Common
      shares issued for options or warrants
                    
                    $
                    -
                    
                    
                    $
                    42,000Options
      cancelled during period
                    
                    $
                    -
                    
                    
                    $
                    (77,000
                    )Common
      stock issued for services
                    
                    $
                    104,000
                    
                    
                    $
                    70,000





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
June 2009, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles (“SFAS 168”). SFAS 168 will become the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (“GAAP”),
superseding existing FASB, American Institute of Certified Public Accountants
(“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting
literature. SFAS 168 reorganizes the thousands of GAAP pronouncements into
roughly 90 accounting topics and displays them using a consistent structure.
Also included is relevant Securities and Exchange Commission guidance organized
using the same topical structure in separate sections. SFAS 168 will be
effective for financial statements issued for reporting periods that end after
September 15, 2009. All future references to authoritative accounting
literature in our financial statements issued for reporting periods that end
after September 15, 2009 will be referenced in accordance with SFAS
168.




In
May 2009, the FASB issued Statement of Financial Accounting Standards
No. 165, Subsequent Events (“SFAS 165”). SFAS 165 establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. SFAS 165 applies prospectively to both interim and annual
financial periods ending after June 15, 2009. The adoption of SFAS 165 did
not result in any material change to our policies.




In
April 2009, the FASB issued FSP No. 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments (“FSP 107-1”). FSP 107-1
amends FASB Statement No. 107, Disclosures about Fair Value of Financial
Instruments, and Accounting Principles Board Opinion No. 28, Interim
Financial Reporting, to require disclosures about fair value of financial
instruments for interim periods of publicly traded companies as well as in
annual financial statements. FSP 107-1 is effective for interim reporting
periods ending after June 15, 2009. The adoption of FSP 107-1 had no
material effect on our disclosures in our financial statements.




From time
to time, new accounting pronouncements are issued by the FASB or other standards
setting bodies that we adopt as of the specified effective date. Unless
otherwise discussed in these financial statements and notes or in our financial
statements and notes included in our Annual Report on Form 10-K for the year
ended December 31, 2008, we believe the impact of any other recently issued
standards that are not yet effective are either not applicable to us at this
time or will not have a material impact on our consolidated financial statements
upon adoption.




6




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.





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





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





In
addition, 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.


7





As of June 30, 2009
                
                
                As of December 31, 2008Gross
      Carrying
                
                
                Accumulated
                
                
                Gross
      Carrying
                
                
                AccumulatedAmount
                
                
                Amortization
                
                
                Amount
                
                
                AmortizationCustomer
      lists
                
                $
                8,332,000
                
                
                $
                5,379,000
                
                
                $
                8,332,000
                
                
                $
                4,649,000Trademarks,
      patents, and copyrightsfinite
      life
                
                
                1,640,000
                
                
                
                805,000
                
                
                
                1,640,000
                
                
                
                685,000infinite
      life
                
                
                909,000
                
                
                
                -
                
                
                
                909,000
                
                
                
                -Total
                
                $
                10,881,000
                
                
                $
                6,184,000
                
                
                $
                10,881,000
                
                
                $
                5,334,000





Amortization
expense for the six months ended June 30, 2009 and 2008 was as
follows:





2009
                
                
                2008Customer
      lists
                
                $
                730,000
                
                
                $
                804,000Trademarks
      and patents
                
                
                120,000
                
                
                
                122,000Total
      Trademarks and Intangibles
                
                $
                850,000
                
                
                $
                926,000





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.
              Note
      Receivable





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





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.


8


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




On
January 1, 2008, the Company adopted SFAS No. 157 “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, provides a consistent
framework for measuring fair value under Generally Accepted Accounting
Principles and expands fair value financial statement disclosure requirements.
SFAS 157’s valuation techniques are based on observable and unobservable inputs.
Observable inputs reflect readily obtainable data from independent sources,
while unobservable inputs reflect our market assumptions. SFAS 157 classifies
these inputs into the following hierarchy:




Level 1
Inputs– Quoted prices for identical instruments in active markets.




Level 2
Inputs– Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments  in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value
drivers are observable.




Level 3
Inputs– Instruments with primarily unobservable value drivers.




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





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





Assets
                  
                  Level I
                  
                  
                  Level II
                  
                  
                  Level III
                  
                  
                  TotalInvestment
      securities
                  
                  $
                  1,339,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  1,339,000Cash
      equivalents
                  
                  
                  11,073,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  11,073,000Total
      Assets
                  
                  $
                  12,412,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  12,412,000Liabilities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      Liabilities
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -




Effective
this quarter, we implemented Statement of Financial Accounting Standards No.
157, Fair Value Measurements, or SFAS 157, for our nonfinancial assets and
liabilities that are remeasured at fair value on a non-recurring basis. The
adoption of SFAS 157 for our nonfinancial assets and liabilities that are
remeasured 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.


9


13.
            Share
      Based Payments





Stock-Based Compensation





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





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 $1,068,000 and $296,000 at
June 30, 2009 June 30, 2008, respectively.   There was no expense
related to vesting of options under FASB 123R at June 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 participation and guidance in Medifast’s strong sales and profit
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 shares of Medifast, Inc. common stock for estate
planning and retirement purposes.  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
following summarizes the stock option activity for the Six Months ended June 30,
2009:





Shares
                      
                      
                      Weighted
                        Average
                        Exercise Price
                      
                      
                      Weighted
                        Average
                        Contractual
                        Term (Years)Outstanding,
      December 31, 2008
                      
                      
                      143,334
                      
                      
                      
                      3.00Options
      grantedOptions
      reinstatedOptions
      exercisedOptions
      forfeited or expiredOutstanding
      June 30, 2009
                      
                      
                      143,334
                      
                      
                      
                      3.00
                      
                      
                      
                      0.83Options
      exercisable, June 30, 2009
                      
                      
                      143,334
                      
                      
                      
                      3.00
                      
                      
                      
                      0.83Options
      available for grant at June 30, 2009
                      
                      
                      1,079,166


10


14.
            Reclassifications





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





15.
            Subsequent
      Events





On July
2, 2009, Medifast, Inc., a Delaware corporation, established a $5 million
unsecured line of credit with Bank of America.  Borrowings under the
line of credit facility will bear interest at LIBOR + 175 basis points and
credit is available for a period of one year.   The line of
credit may be used for general working capital requirements and for general
corporate needs of Medifast, Inc.





On July
2, 2009, Medifast, Inc. also received a 3 year unsecured term loan with a 5 year
amortization from Bank of America to repay the $2.7 million balance on its
Merrill Lynch line of credit that expired on July 1, 2009.  The
interest rate is at LIBOR + 200 basis points.




16.
            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.




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


11





Three Months Ended June 30,
      2009Medifast
                    
                    
                    All Other
                    
                    
                    Eliminations
                    
                    
                    ConsolidatedRevenues,
      net
                    
                    $
                    36,756,000
                    
                    
                    $
                    3,957,000
                    
                    
                    
                    
                    
                    
                    $
                    40,713,000Cost
      of Sales
                    
                    
                    8,938,000
                    
                    
                    
                    813,000
                    
                    
                    
                    
                    
                    
                    
                    9,751,000Other
      Selling, General and Adminstrative Expenses
                    
                    
                    21,750,000
                    
                    
                    
                    3,148,000
                    
                    
                    
                    
                    
                    
                    
                    24,898,000Depreciation
      and Amortization
                    
                    
                    1,052,000
                    
                    
                    
                    256,000
                    
                    
                    
                    
                    
                    
                    
                    1,308,000Interest
      (net)
                    
                    
                    (4,000
                    )
                    
                    
                    1,000
                    
                    
                    
                    
                    
                    
                    
                    (3,000
                    )Provision
      for income taxes
                    
                    
                    1,760,000
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    1,760,000Net
      income (loss)
                    
                    $
                    3,260,000
                    
                    
                    $
                    (261,000
                    )
                    
                    
                    
                    
                    
                    $
                    2,999,000Segment
      Assets
                    
                    $
                    37,744,000
                    
                    
                    $
                    20,045,000
                    
                    
                    
                    
                    
                    
                    $
                    57,789,000





Three Months Ended June 30,
      2008Medifast
                    
                    
                    All Other
                    
                    
                    Eliminations
                    
                    
                    ConsolidatedRevenues,
      net
                    
                    $
                    25,503,000
                    
                    
                    $
                    2,034,000
                    
                    
                    
                    
                    
                    
                    $
                    27,537,000Cost
      of Sales
                    
                    
                    6,297,000
                    
                    
                    
                    380,000
                    
                    
                    
                    
                    
                    
                    
                    6,677,000Other
      Selling, General and Adminstrative Expenses
                    
                    
                    15,510,000
                    
                    
                    
                    1,820,000
                    
                    
                    
                    
                    
                    
                    
                    17,330,000Depreciation
      and Amortization
                    
                    
                    915,000
                    
                    
                    
                    247,000
                    
                    
                    
                    
                    
                    
                    
                    1,162,000Interest
      (net)
                    
                    
                    9,000
                    
                    
                    
                    35,000
                    
                    
                    
                    
                    
                    
                    
                    44,000Provision
      for income taxes
                    
                    
                    752,000
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    752,000Net
      income (loss)
                    
                    $
                    2,020,000
                    
                    
                    $
                    (448,000
                    )
                    
                    
                    
                    
                    
                    $
                    1,572,000Segment
      Assets
                    
                    $
                    28,397,000
                    
                    
                    $
                    20,818,000
                    
                    
                    
                    
                    
                    
                    $
                    49,215,000





Six Months Ended June 30,
    2009Medifast
                    
                    
                    All Other
                    
                    
                    Eliminations
                    
                    
                    ConsolidatedRevenues,
      net
                    
                    $
                    67,490,000
                    
                    
                    $
                    6,903,000
                    
                    
                    
                    
                    
                    
                    $
                    74,393,000Cost
      of Sales
                    
                    
                    16,308,000
                    
                    
                    
                    1,497,000
                    
                    
                    
                    
                    
                    
                    
                    17,805,000Other
      Selling, General and Adminstrative Expenses
                    
                    
                    39,530,000
                    
                    
                    
                    5,786,000
                    
                    
                    
                    
                    
                    
                    
                    45,316,000Depreciation
      and Amortization
                    
                    
                    2,042,000
                    
                    
                    
                    494,000
                    
                    
                    
                    
                    
                    
                    
                    2,536,000Interest
      (net)
                    
                    
                    (4,000
                    )
                    
                    
                    5,000
                    
                    
                    
                    
                    
                    
                    
                    1,000Provision
      for income taxes
                    
                    
                    3,251,000
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    3,251,000Net
      income (loss)
                    
                    $
                    6,363,000
                    
                    
                    $
                    (879,000
                    )
                    
                    
                    
                    
                    
                    $
                    5,484,000Segment
      Assets
                    
                    $
                    37,744,000
                    
                    
                    $
                    20,045,000
                    
                    
                    
                    
                    
                    
                    $
                    57,789,000





Six Months Ended June 30,
    2008Medifast
                    
                    
                    All Other
                    
                    
                    Eliminations
                    
                    
                    ConsolidatedRevenues,
      net
                    
                    $
                    48,983,000
                    
                    
                    $
                    3,723,000
                    
                    
                    
                    
                    
                    
                    $
                    52,706,000Cost
      of Sales
                    
                    
                    12,024,000
                    
                    
                    
                    753,000
                    
                    
                    
                    
                    
                    
                    
                    12,777,000Other
      Selling, General and Adminstrative Expenses
                    
                    
                    29,755,000
                    
                    
                    
                    3,467,000
                    
                    
                    
                    
                    
                    
                    
                    33,222,000Depreciation
      and Amortization
                    
                    
                    1,757,000
                    
                    
                    
                    484,000
                    
                    
                    
                    
                    
                    
                    
                    2,241,000Interest
      (net)
                    
                    
                    20,000
                    
                    
                    
                    89,000
                    
                    
                    
                    
                    
                    
                    
                    109,000Provision
      for income taxes
                    
                    
                    1,420,000
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    1,420,000Net
      income (loss)
                    
                    $
                    4,007,000
                    
                    
                    $
                    (1,070,000
                    )
                    
                    
                    
                    
                    
                    $
                    2,937,000Segment
      Assets
                    
                    $
                    28,397,000
                    
                    
                    $
                    20,818,000
                    
                    
                    
                    
                    
                    
                    $
                    49,215,000


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




Six
Months Ended June 30, 2009 and June 30, 2008





Revenue:  Revenue
increased to $74.4 million for the first six months of 2009 compared to $52.7
million for the first six months of 2008, an increase of $21.7 million or 41%.
The Take Shape for Life sales channel accounted for 58% of total revenue, direct
marketing channel accounted for 31%, 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 96%
compared to the first six months of 2008. As compared to the first six months of
2008, the direct marketing sales channel, which is fueled primarily by consumer
advertising, decreased revenues by approximately 8% year-over year, however, the
advertising dollars spent were 15% less than the the first six months of 2008 as
the Company continues to focus on more effective advertising
spend.  The Medifast Weight Control Centers increased sales by 93% due
to the opening of new corporate and franchise locations and improvement in same
store sales.





Take
Shape for Life revenue increased 96% to $42.9 million compared with $21.9
million in the first six months of 2008. Growth in revenues for the segment were
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 4,650 compared with 2,800 during the period a year
ago, an increase of 66% and up from 4,000 at the close of the first 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 eleven franchise
locations.  In the first six months of 2009, the Company experienced
revenue growth of 93% versus the same time period last year.  The
average monthly sales per clinic increased to $42,000 for the first six months
of 2009 compared to $40,000 a year ago.  In the expanding Dallas, TX
market, the average monthly revenue per clinic is approximately
$54,000.  In the second quarter of 2009, the Company opened three
additional corporately owned centers in the Austin, TX market.  In the
third and fourth quarter of 2009, the Company plans on opening seven to ten
additional corporately owned clinics in existing markets.





Overall,
selling, general and administrative expenses increased by $12.3 million as
compared to the first six months of 2008.  As a percentage of sales,
selling, general and administrative expenses decreased to 64.3% versus 67.2% in
the first six months of 2008, which lead to a 76% increase in diluted earnings
per share in the first six months of 2009 versus prior
year.   Take Shape for Life commission expense, which is
completely variable based upon product revenue, increased by approximately $8.9
million as the Company showed sales growth of 96% as compared to the first six
months of 2008.  Salaries and benefits increased by approximately $1.6
million in the first six 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 eight new corporately owned clinics in the Houston, TX
market, two in the Dallas, TX market, and three in the Austin, TX market also
required the hiring of additional center managers and support
staff.  Areas that also experienced additional staffing due to the 41%
sales growth include manufacturing, distribution, call center, and
IT.  Advertising expense for the first six months of 2009 was
approximately $8.8 million compared to approximately $10.4 million for the same
period last year, a decrease of $1.6 million or 15%.  Communication
expense increased by $150,000 and other expenses increased by $1.2 million which
included items such as depreciation, amortization, credit card processing fees,
charitable contributions, and property taxes.  Operating expenses
increased by $750,000 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 $500,000 and stock compensation expense increased by $773,000 as additional
restricted shares were issued to key executives and Board members in the third
andfourth
quarters of 2008, as well as the second quarter of 2009 that will be vesting
over a five year term.





Costs and
Expenses:  Cost of revenue increased $5 million to $17.8 million for
the first six months of 2009 from $12.8 million for the first six months of
2008.  As a percentage of sales, gross margin increased to 76.1% from
75.8% in the six 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 six months
of 2009, the Company recorded $3,251,000 in income tax expense, which represents
an annual effective rate of 37.2%.  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 six
months of 2008, we recorded income tax expense of $1,420,000 which reflected an
estimated annual effective tax rate of 32.6%.  The Company anticipates
a tax rate of approximately 36-38% in 2009.


14


Net
income: Net income was approximately $5.5 million for the first six months of
2009 as compared to approximately $2.9 million for the first six months of 2008,
an increase of 87%.  Pre-tax profit as a percent of sales increased to
11.7% in the first six months of 2009 as compared to 8.3% in 2008. The improved
profitability in the first six 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 June 30, 2009 and June 30, 2008





Revenue:  Revenue
increased to $40.7 million in the second quarter of 2009 compared to $27.5
million in the second quarter of 2008, an increase of $13.2 million or 48%. The
Take Shape for Life sales channel accounted for 59% of total revenue, direct
marketing channel accounted for 29%, brick and mortar clinics 10%, and doctors
2%.  Take Shape for Life sales, which are fueled byincreased customer product
sales as a result of an increase in active health coaches increased by 98%
compared to the second quarter of 2008. As compared to the second quarter of
2008, the direct marketing sales channel, which is fueled primarily by consumer
advertising, decreased revenues by approximately 1% year-over year, however, the
advertising dollars spent were 16% less than the second quarter of 2008 as the
Company continues to focus on more effective advertising spend.  The
Medifast Weight Control Centers increased sales by 111% due to the opening of
new corporate and franchise locations and improvement in same store
sales.





Take
Shape for Life revenue increased 98% to $24 million compared with $12.1 million
in the comparable quarter of 2008.   Growth in revenues for the
segment were 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 4,650 compared with
2,800 during the period a year ago, an increase of 66% and up from 4,000 at the
close of the first 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 eleven franchise centers.
In the second quarter of 2009, the Company experienced revenue growth of 111%
versus the same time period last year.  The average monthly sales per
clinic increased to $45,000 in the second quarter of 2009 compared to $41,000 a
year ago, and increase of 10%.  In the expanding Dallas, TX market,
the average monthly revenue per clinic in the second quarter of 2009 was
approximately $57,000.  In the second quarter of 2009, the Company
opened three additional corporately owned centers in the Austin, TX
market.  In the third and fourth quarter of 2009, the Company plans on
opening seven to ten additional corporately owned clinics in existing
markets.





Overall,
selling, general and administrative expenses increased by $7.7 million as
compared to the second quarter of 2008.  As a percentage of sales,
selling, general and administrative expenses decreased to 64.3% versus 67% in
the second quarter of 2008, which lead to an 82% increase in diluted earnings
per share in the second quarter of 2009 versus prior year.   Take
Shape for Life commission expense, which is completely variable based upon
revenue, increased by approximately $5.1 million as the Company showed sales
growth of 98% as compared to the second quarter of 2008.  Salaries and
benefits increased by approximately $950,000 in the second 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 2008 which have greatly impacted revenue
growth in 2009.   In addition, the opening of eight new
corporately owned clinics in the Houston, TX market, two in the Dallas, TX, and
two in the Austin, TX market also required the hiring of additional center
managers and support staff.  Areas that also experienced additional
staffing due to the 48% sales growth in the second quarter of 2009 include
manufacturing, distribution, call center, and IT.  Advertising expense
for the second quarter of 2009 was approximately $4.5 million compared to
approximately $5.2 million for the same period last year, a decrease of $700,000
or 16%.  Communication expense, increased by $250,000 and other
expenses increased by $700,000 which included items such as depreciation,
amortization, credit card processing fees, charitable contributions, and
property taxes.  Operating expenses increased by $500,000 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 $491,000 as additional restricted shares were
issued to key executives and Board members in the third andfourth
quarters of 2008 as well as the second quarter of 2009 that will be vesting over
a five year term.


15


Costs and
Expenses:  Cost of revenue increased $3.1 million to $9.8 million in
the second quarter of 2009 from $6.7 million in the second quarter of
2008.  As a percentage of sales, gross margin increased to 76% from
75.8% in the second quarter 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 second quarter of
2009, the Company recorded $1,760,000 in income tax expense, which represents an
annual effective rate of 37%.  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 second
quarter of 2008, we recorded income tax expense of $752,000 which reflected an
estimated annual effective tax rate of 32.4%.  The Company anticipates
a tax rate of approximately 36-38% in 2009.





Net
income: Net income was approximately $3 million in the second quarter of 2009 as
compared to approximately $1.6 million in the second quarter of 2008, an
increase of 89%.  Pre-tax profit as a percent of sales increased to
11.7% in the second quarter of 2009 as compared to 8.4% in 2008. The improved
profitability in the second quarter 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.





SEGMENT
RESULTS OF OPERATIONS




Net
      Sales by Segment for the Three Months Ended June 30,2009
                          
                          
                          2008Segments
                          
                          Sales
                          
                          
                          %
      of Total
                          
                          
                          Sales
                          
                          
                          %
      of TotalMedifast
                          
                          $
                          36,756,000
                          
                          
                          
                          90
                          %
                          
                          $
                          25,503,000
                          
                          
                          
                          93
                          %All
      Other
                          
                          
                          3,957,000
                          
                          
                          
                          10
                          %
                          
                          
                          2,034,000
                          
                          
                          
                          7
                          %Total
      Sales
                          
                          $
                          40,713,000
                          
                          
                          
                          100
                          %
                          
                          $
                          27,537,000
                          
                          
                          
                          100
                          %





Net
      Sales by Segment for the Six Months Ended June 30,2009
                      
                      
                      2008Segments
                      
                      Sales
                      
                      
                      %
      of Total
                      
                      
                      Sales
                      
                      
                      %
      of TotalMedifast
                      
                      $
                      67,490,000
                      
                      
                      
                      91
                      %
                      
                      $
                      48,983,000
                      
                      
                      
                      93
                      %All
      Other
                      
                      
                      6,903,000
                      
                      
                      
                      9
                      %
                      
                      
                      3,723,000
                      
                      
                      
                      7
                      %Total
      Sales
                      
                      $
                      74,393,000
                      
                      
                      
                      100
                      %
                      
                      $
                      52,706,000
                      
                      
                      
                      100
                      %





Three
Months Ended June 30, 2009 and June 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 June 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 $1,923,000 year-over year for the three
month period ended June 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, Texas and the
opening of eleven new franchise centers at the end of 2008 and into the first
six months of 2009.  In addition, the Dallas market continues to
mature with the average clinic generating $57,000 per month in sales in the
second quarter 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 seventeen clinics in
operation at the end of the second quarter of 2008.  The Company also
has eleven franchisee centers in operation.


16





Six
Months Ended June 30, 2009 and June 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 six months ended June 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 $3,180,000 year-over year for the six
month period ended June 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, Texas, and the
opening of eleven new franchise centers at the end of 2008 and first six months
of 2009.  In addition, the Dallas market continues to mature with the
average clinic generating $54,000 per month in sales in the first six 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 and training 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 seventeen clinics in
operation at the end of the second quarter of 2008.  The Company also
has eleven franchisee centers in operation.





Net
      Profit by Segment for the Three Months Ended June 30,2009
                      
                      
                      2008Segments
                      
                      Profit
                      
                      
                      % of Total
                      
                      
                      Profit
                      
                      
                      % of TotalMedifast
                      
                      $
                      3,260,000
                      
                      
                      
                      109
                      %
                      
                      $
                      2,020,000
                      
                      
                      
                      128
                      %All
      Other
                      
                      
                      (261,000
                      )
                      
                      
                      -9
                      %
                      
                      
                      (448,000
                      )
                      
                      
                      -28
                      %Total
      Net Profit
                      
                      $
                      2,999,000
                      
                      
                      
                      100
                      %
                      
                      $
                      1,572,000
                      
                      
                      
                      100
                      %





Net
      Profit by Segment for the Six Months Ended June 30,2009
                      
                      
                      2008Segments
                      
                      Profit
                      
                      
                      % of Total
                      
                      
                      Profit
                      
                      
                      % of TotalMedifast
                      
                      $
                      6,363,000
                      
                      
                      
                      116
                      %
                      
                      $
                      4,007,000
                      
                      
                      
                      136
                      %All
      Other
                      
                      
                      (879,000
                      )
                      
                      
                      -16
                      %
                      
                      
                      (1,070,000
                      )
                      
                      
                      -36
                      %Total
      Net Profit
                      
                      $
                      5,484,000
                      
                      
                      
                      100
                      %
                      
                      $
                      2,937,000
                      
                      
                      
                      100
                      %





Three
Months Ended June 30, 2009 and June 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 June 30,
2009 and 2008 above.  See footnote 16, “Business Segments” for a
detailed breakout of expenses.





All Other
Segment:  The All Other reporting segment consists of the profit or
loss of Medifast Weight Control Centers, Medifast Weight Control Franchise
Centers, and corporate expenses related to the parent company
operations.  Year-over-year, the loss in the All Other segment
decreased by $187,000.  The Medifast Weight Control Centers, and
Franchise Centers showed an increase in net profitability year-over-year of
$598,000.   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 new franchise centers at the end of 2008 and
first six months of 2009. The increase in the total number of corporate clinics
to twenty four and eleven operating franchise centers led to additional sales
and profitability.  Medifast Corporate expenses increased by $411,000
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
16, “Business Segments” for a detailed breakout of expenses.


17


Six
Months Ended June 30, 2009 and June 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 six months ended June 30,
2009 and 2008 above.  See footnote 16, “Business Segments” for a
detailed breakout of expenses.





All Other
Segment:  The All Other reporting segment consists of the profit or
loss of Medifast Weight Control Centers, Medifast Weight Control Franchise
Centers, and corporate expenses related to the parent company
operations.  Year-over-year, the loss in the All Other segment
decreased by $191,000.  The Medifast Weight Control Centers, and
Franchise Centers showed an increase in net profitability year-over-year of
$810,000.   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 new franchise centers at the end of 2008 and
early 2009. The increase in the total number of corporate clinics to twenty four
and eleven operating franchise centers led to additional sales and
profitability.  Medifast Corporate expenses increased by $619,000
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
16, “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 second 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
pertaining to alleged illegal activities of Take Shape for Life, a
Direct Selling Subsidiary of Medifast Inc.  Other public Direct Selling
Companies have been attacked by this individual and his network of associates
using the same blueprint of allegations. These public allegations were made in
mid- February and were immediately followed by significant short selling and
short selling option puts that shaved over $30 million from the Market
Capitalization of Medifast. The company has demanded that this third
party take down its website information containing false information or be
subject to appropriate legal action.




Medifast,
in a press release on February 17th, 2009,
responded to the False Claims in SEC File # 001-31573; Film #09617581. The
Independent Committee appointed Chairman Mr. Barry B. Bondroff, CPA, an officer
and director with Gorfine, Schiller & Gardyn, PA.  Members are:
Mr. George J. Lavin Esq, founding Partner of the law firm, Lavin, O’Neil, Ricci,
Ceprone & Dispicio, who is an expert in Product Liability Law, Lt. Gen.
Dennis M. McCarthy USMC (Ret.), Executive Director of the Reserve Officers
Association of the United States and a licensed attorney, Capt. Joseph D.
Calderone USNR (Ret.), chaplain and counselor of the Villanova University Law
School, and Mr. Charles P. Connolly, former President and CEO of First Union
Corp of PA and DE .




After an
investigation of the facts and information developed to date the committee
unanimously agreed that the allegations were false, misleading and or without
merit.





Counsel
forwarded three cease and desist demands by letter to Barry Minkow , a convicted
felon, and FDI, of which Minkow/FDI confirmed receiving two. In addition, the
Company has filed formal   complaints with the NYSE, SEC,
and ATTORNEY GENERAL OF MARYLAND to this time. Management as directed
by the Board continues to monitor the situation and will continue to take
appropriate action as it deems necessary.


18


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.





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
June 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
                  August 6, 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