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.

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.

General

Nine Months Ended September 30, 2008 and September 30, 2007

Revenue: Revenue increased to $80 million for the first nine months of 2008 compared to $64 million for the first nine months of 2007, an increase of $16 million or 25%. The direct marketing sales channel accounted for 45% of total revenue, Take Shape for Life 44%, brick and mortar clinics 8%, and doctors 3%. As compared to the first nine months of 2007, the direct marketing sales channel, which is fueled primarily by consumer advertising, decreased revenues by approximately 2% year-over year, however, the advertising dollars spent to achieve nearly the same amount of sales were 3% less than the first nine months of 2007 as the Company continues to focus on more effective advertising spend. Take Shape for Life sales, which are fueled by person-to-person recruiting and support increased by 77% compared to the first nine months of 2007. The Medifast Weight Control Centers increased sales by 66% due to the opening of new clinics, and wholesale doctor's sales decreased by 25% due to certain doctors transitioning to the professional division of Take Shape for Life.

The Take Shape for Life division grew 77% year-over-year. This growth can largely be attributed to the tools and training that led to an increase in the ability of the division to both promote growth in recruiting of health coaches, as well as better supporting this growth as it occurs. This continued investment proved to be a large part of the current growth trends in Take Shape for Life sales, as well as the number of active health coaches. The growth in this segment correlates directly to the increase in health coaches, which began to accelerate following our National Convention in July 2007. The number of active health coaches grew 94% to 3,200 at the end of the third quarter of 2008 as compared to 1,650 for the same time period in 2007, and up from 2,800 at the end of the second quarter of 2008. The Company recently completed our 2008 National Convention in Orlando, FL on July 26th, 2008 where approximately 750 health coaches participated, an increase of nearly 88% from prior year. The individuals that attended the event attended workshops and heard lectures by accredited individuals in the areas of recruiting, product and nutrition knowledge, and business skills.

The Medifast Weight Control Centers, which represent approximately 8% of the Company's overall revenues, are currently operating in twenty locations in Dallas, Houston, and Orlando. In the first nine months of 2008, the Company experienced revenue growth of 66% versus the same time period last year. The average monthly revenue per clinic also witnessed growth of 11%, averaging $40,000 per clinic in the first nine month of 2008 as compared to $36,000 in the first nine months of 2007. In the expanding Dallas, TX market, the average monthly revenue per clinic is approximately $50,000. In the estimated $40 billion weight loss and health living industry, the brick and mortar clinic model has always made up a significant portion of overall sales. The recent growth in the Medifast Weight Control Centers has proven that the model is in high demand from a select portion of the weight loss consumers. Throughout 2007, the Company invested in the infrastructure of its clinic model. The major aspects of the investment in this division included an expanded executive team, the creation of a point of sale system, a robust customer data tracking system, and finalizing the franchise opportunity documentation. During the first nine months of 2008, the Company opened eight additional corporately owned clinics in the Houston, TX market and two additional centers in the Dallas, TX market. The Company plans on opening two additional corporately owned clinics in the Houston market by the end of 2008.

On February 18, 2008, the Company announced that it has sold its first franchise of Medifast Weight Control Centers. The Company sold the rights to open four clinics in the Greater Baltimore Metropolitan Area. The franchisee also has the rights to open four additional Medifast Weight Control Centers in the Baltimore area over the next two years, bringing the total to eight locations. On June 3, 2008 the Company announced that it sold the rights to open four Medifast Weight Control Centers in Southern California and three Medifast Weight Control Centers in Central California to two different local business operators. On October 8, 2008, the Company announced the opening of its first franchise clinic in the Baltimore, MD area as well as plans for four additional franchisees to be open by the end of the year.

Overall, selling, general and administrative expenses increased by $10.7 million as compared to the first nine months of 2007. Take Shape for Life commission expense, which is completely variable based upon revenue, increased by approximately $7.3 million as the Company showed sales growth of 77% as compared to the first nine months of 2007. Salaries and benefits increased by approximately $1.4 million in the first nine months of 2008. 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 2007 which have greatly impacted the revenue growth in the first nine months of 2008. Additional personnel were hired in the call center during the first and second quarters of 2008 as the Company brought the outsourced Take Shape for Life call center in-house early in the second quarter of 2008. Advertising expense for the first nine months of 2008 was approximately $14.7 million compared to approximately $15.1 million for the same period last year, a decrease of $400,000. Going forward, savings will be realized on communication expense as a result of bringing the call center in-house. The opening of eight new corporately owned clinics in the Houston, TX market and two in the Dallas, TX market also required the hiring of additional center managers and support staff. Communication expense decreased by $200,000 as a result of the Take Shape for Life call center moving in-house during the second quarter of 2008. Other expenses increased by $1.8 million which included items such as depreciation, amortization, credit card processing fees, charitable contributions, and property taxes. Operating expenses increased by $650,000 which primarily resulted from additional printing expense for our direct to consumer postcard mailings as well as maintenance, repairs, and supplies for our manufacturing and distribution facilities. Stock compensation expense increased by $129,000 as additional restricted shares were issued to key executives and Board members in the 3rd quarter of 2008 that will be vesting over a five year term.

Costs and Expenses: Cost of revenue increased $3.3 million to $19.3 million in the first nine months of 2008 from $16 million for the first nine months of 2007. As a percentage of sales, gross margin increased to 75.9% from 75.1% for the first nine months of 2008. The margin improved due to efficiencies gained from new machinery purchases in prior year, new shipping rules that resulted in additional shipping revenue from customers netting against shipping expense, as well as a price increase on July 1, 2008.

Income taxes: For the first nine months of 2008 the Company recorded $2.2 million in income tax expense, which represents an annual effective rate of 33.1%. For the first nine months of 2007, we recorded income tax expense of $1.5 million which reflected an estimated annual effective tax rate of 31.5%. The Company anticipates a tax rate of approximately 32-34% in 2008.

Net income: Net income was $4.5 million for the first nine months of 2008 as compared to $3.2 million for the first nine months of 2007, an increase of 41%. The improved profitability during the first nine months of 2008 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, and gross margin improvement.

Three Months Ended September 30, 2008 and September 30, 2007

Revenue: Revenue increased to $27.3 million in the third quarter of 2008 compared to $21.8 million in the second quarter of 2007, an increase of $5.5 million or 25%. The Take Shape for Life sales channel accounted for 50% of total revenue, direct marketing channel accounted for 39%, brick and mortar clinics 8%, and doctors 3%. Take Shape for Life sales, which are fueled by person-to-person recruiting and support increased by 99% compared to the third quarter of 2007. As compared to the third quarter of 2007, the direct marketing sales channel, which is fueled primarily by consumer advertising, decreased revenues by approximately 15% year-over year, however, the advertising dollars spent were 16% less than the third quarter of 2007 as the Company continues to focus on more effective advertising spend. The Medifast Weight Control Centers increased sales by 77% due to the opening of new clinics, and doctor's sales decreased by 25% due to certain doctors transitioning to the professional division of Take Shape for Life.
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The Take Shape for Life division grew 99% year-over-year. This growth can largely be attributed to the tools and training that led to an increase in the ability of the division to both promote growth in recruiting of health coaches, as well as better supporting this growth as it occurs. This continued investment proved to be a large part of the current growth trends in Take Shape for Life sales, as well as the number of active health coaches. The growth in this segment correlates directly to the increase in health coaches, which began to accelerate following our National Convention in July 2007. The number of active health coaches grew 94% to 3,200 at the end of the third quarter of 2008 as compared to 1,650 for the same time period in 2007, and up from 2,800 at the end of the second quarter of 2008. The Company recently completed our 2008 National Convention in Orlando, FL on July 26th, 2008 where approximately 750 health coaches participated, an increase of nearly 88% from prior year. The individuals that attended the event attended workshops and heard lectures by accredited individuals in the areas of recruiting, product and nutrition knowledge, and business skills.

The Medifast Weight Control Centers, which represent approximately 8% of the Company's overall revenues, are currently operating in twenty locations in Dallas, Houston, and Orlando. In the third quarter of 2008, the Company experienced revenue growth of 77% versus the same time period last year. In the expanding Dallas, TX market, the average monthly revenue per clinic is approximately $51,000. During the third quarter of 2008, the Company opened three additional corporately owned clinics in the Houston, TX market. The Company plans on opening two additional corporately owned clinics in the Houston market by the end of 2008.

Overall, selling, general and administrative expenses increased by $3.6 million as compared to the third quarter of 2007. Take Shape for Life commission expense, which is completely variable based upon revenue, increased by approximately $2,800,000 as the Company showed sales growth of 99% as compared to the third quarter of 2007.. Salaries and benefits increased by approximately $500,000 in the third quarter of 2008 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 2007 which have greatly impacted the revenue growth in the first nine months of 2008. Additional personnel were hired in the call center during the first and second quarter of 2008 as the Company brought the outsourced Take Shape for Life call center in-house early in the second quarter of 2008. The opening of eight new corporately owned clinics in the Houston, TX market and two in the Dallas, TX market also required the hiring of additional center managers and support staff. Advertising expense for the third quarter of 2008 was approximately $4.3 million compared to approximately $5.1 million for the same period last year, a decrease of $800,000 or 16%. Communication expense, decreased by $50,000 as the outsourced Take Shape for Life call center was brought in-house early in the second quarter of 2008. Other expenses increased by $650,000 which included items such as depreciation, amortization, credit card processing fees, charitable contributions, and property taxes. Operating expenses increased by $250,000 which primarily resulted from additional printing expense for our direct to consumer postcard mailings as well as maintenance, repairs, and supplies for our manufacturing and distribution facilities. Stock compensation expense increased by $129,000 as additional restricted shares were issued to key executives and Board members in the 3rd quarter of 2008 that will be vesting over a five year term.

Costs and Expenses: Cost of revenue increased $1 million to $6.5 million in the third quarter of 2008 from $5.5 million in the third quarter of 2007. As a percentage of sales, gross margin increased to 76.1% from 74.7% in the third quarter of 2007. The margin improved due to efficiencies gained from new machinery purchases in prior year, new shipping rules that resulted in additional shipping revenue from customers netting against shipping expense, as well as a price increase on July 1, 2008.

Income taxes: In the third quarter of 2008, the Company recorded $802,000 in income tax expense, which represents an annual effective rate of 34.1%. In the third quarter of 2007, we recorded income tax expense of $446,000 which reflected an estimated annual effective tax rate of 32%. The Company anticipates a tax rate of approximately 32-34% in 2008.

Net income: Net income was $1.5 million in the third quarter of 2008 as compared to $954,000 in the third quarter of 2007, an increase of 62%. The improved profitability in the third quarter of 2008 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, and gross margin improvement.

SEGMENT RESULTS OF OPERATIONS

           Net Sales by Segment for the Three Months Ended Sept. 30,

                         2008                          2007
Segments         Sales        % of Total       Sales        % of Total

Medifast      $ 24,945,000             91 % $ 20,580,000             94 %
All Other        2,336,000              9 %    1,266,000              6 %
Total Sales   $ 27,281,000            100 % $ 21,846,000            100 %

Net Sales by Segment for the Nine Months Ended Sept. 30,

                         2008                          2007
Segments         Sales        % of Total       Sales        % of Total

Medifast      $ 73,928,000             92 % $ 60,916,000             95 %
All Other        6,059,000              8 %    3,059,000              5 %
Total Sales   $ 79,987,000            100 % $ 63,975,000            100 %

Three Months Ended September 30, 2008 and September 30, 2007

Medifast Segment: The Medifast reporting segment consists of the sales of Medifast Direct, Take Shape for Life, and Doctors. As this represents the majority of our business this is referenced to the "Condensed Consolidated Results of Operations" management discussion for the three months ended September 30, 2008 and 2007 above.

All Other Segment: The All Other reporting segment consists of the sales of Hi-Energy and Medifast Weight Control Centers. Sales increased by $1,070,000 year-over year for the three month period ended September 30th. Sales increased in the Hi-Energy and Medifast Weight Control Centers sales due to the opening of ten new centers in the first nine months of 2008, including three centers opened in Houston, TX during the third quarter. In addition, the Dallas market continues to mature with the average clinic generating $51,000 per month in sales. 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 with a new point of sale software system. The Company now has twenty corporately owned clinics, compared to ten clinics in operation at the end of the third quarter of 2007.

Nine Months Ended September 30, 2008 and September 30, 2007

Medifast Segment: The Medifast reporting segment consists of the sales of Medifast Direct, Take Shape for Life, and Doctors. As this represents the majority of our business this is referenced to the "Condensed Consolidated Results of Operations" management discussion for the nine months ended September 30, 2008 and 2007 above.

All Other Segment: The All Other reporting segment consists of the sales of Hi-Energy and Medifast Weight Control Centers. Sales increased by $3,000,000 year-over year for the nine-month period ended September 30, 2008. Sales increased in the Hi-Energy and Medifast Weight Control Centers sales due to the opening of ten new centers in the first nine months of 2008, including eight centers in Houston, TX and two centers in Dallas, TX. The Dallas, TX market continues to mature with the average clinic generating $51,000 per month in sales. 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 with a new point of sale software system. The Company now has twenty corporately owned clinics, compared to ten clinics in operation at the end of the third quarter of 2007.

Net Profit by Segment for the Three Months Ended Sept. 30,

                              2008                         2007
Segments             Profit       % of Total      Profit       % of Total

Medifast           $ 2,086,000            135 % $ 1,513,000            159 %
All Other             (537,000 )          -35 %    (559,000 )          -59 %
Total Net Profit   $ 1,549,000            100 % $   954,000            100 %

Net Profit by Segment for the Nine Months Ended Sept. 30,

                              2008                          2007
Segments              Profit       % of Total       Profit       % of Total

Medifast           $  6,093,000            136 % $  4,915,000            152 %
All Other            (1,607,000 )          -36 %   (1,680,000 )          -52 %
Total Net Profit   $  4,486,000            100 % $  3,235,000            100 %

Three Months Ended September 30, 2008 and September 30, 2007

Medifast Segment: The Medifast reporting segment consists of the profits of Medifast Direct, Take Shape for Life, and Doctors. As this represents the majority of our business this is referenced to the "Condensed Consolidated Results of Operations" management discussion for the three months ended September 30, 2008 and 2007 above. See footnote 15, "Business Segments" for a detailed breakout of expenses.

All Other Segment: The All Other reporting segment consists of the profit or loss of Hi-Energy and Medifast Weight Control Centers, and corporate expenses related to the parent company operations. Year-over-year, the loss in the All Other segment decreased by $22,000. The Hi-Energy and Medifast Weight Control Centers showed an increase in net profitability year-over-year of $237,000. The increase in profitability was due to opening of ten new centers in the first nine months of 2008, including three centers in the Houston, TX market during the third quarter of 2008. The increase in the total number of clinics to twenty led to additional sales and profitability. Medifast Corporate expenses increased by $215,000 year-over-year. Corporate expenses include items such as auditors' fees, attorney's fees, Board of Director expenses, investor relations, corporate consulting, and corporate outings. See footnote 15, "Business Segments" for a detailed breakout of expenses.

Nine Months Ended September 30, 2008 and September 30, 2007

Medifast Segment: The Medifast reporting segment consists of the profits of Medifast Direct, Take Shape for Life, and Doctors. As this represents the majority of our business this is referenced to the "Condensed Consolidated Results of Operations" management discussion for the three months ended September 30, 2008 and 2007 above. See footnote 15, "Business Segments" for a detailed breakout of expenses.

All Other Segment: The All Other reporting segment consists of the profit or loss of Hi-Energy and Medifast Weight Control Centers, and corporate expenses related to the parent company operations. Year-over-year, the loss in the All Other segment decreased by $73,000. The Hi-Energy and Medifast Weight Control Centers showed an increase in net profitability year-over-year of $434,000. The increase in profitability was due to opening of ten new centers in the first nine months of 2008, including three centers in the Houston, TX market during the third quarter of 2008. The increase in the total number of clinics to twenty led to additional sales and profitability. Medifast Corporate expenses increased by $361,000 year-over-year. Corporate expenses include items such as auditors' fees, attorney's fees, Board of Director expenses, investor relations, corporate consulting, and corporate outings. See footnote 15, "Business Segments" for a detailed breakout of expenses.

Seasonality

The Company's weight management products and programs have historically been subject to seasonality. Traditionally the holiday season in November/December of each year is considered poor for diet control products and services. January and February generally show increases in sales, as these months are considered the commencement of the "diet season." In 2008, seasonality has not been a significant factor. This is largely due to the increase in the consumer's awareness of the overall health and nutritional benefits accompanied with the use of the Company's product line. As consumers continue to increase their association of nutritional weight loss programs with overall health, seasonality will continue to decrease.

Inflation

Inflation generally affects us by increasing the costs of labor, overhead, and raw material and packaging costs. The impact of inflation on our financial position and results of operations was minimal during the third quarter of 2007, however in 2008 the Company is continuing to be negatively impacted by increasing raw material costs.