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.

General

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

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

Take Shape for Life revenue increased 99% to $70.8 million compared with $35.6 million in the first nine months of 2008. Growth in revenues for the segment was driven by increased customer product sales as a result of an increase in active health coaches. The number of active health coaches during the third quarter increased to approximately 5,800 compared with 3,200 during the period a year ago, an increase of 81% and up from 4,650 at the close of the second quarter of 2009. We continue to see the benefits of a physician-lead network of coaches that are able to support their clients in their weight-loss efforts. In today's environment where trust and personal recommendations are becoming a more important component in consumer purchasing decisions, the Take Shape for Life model of one-on-one communication continues to excel. Take Shape for Life customers who have utilized the Medifast products and programs and successfully have addressed their body weight and health issues are increasingly choosing to become active health coaches. Becoming a health coach is a business opportunity that has a low cost of start-up and requires no holding of inventory as all orders are shipped to the end consumer. In the current economic environment, many people are looking for supplemental income to assist in paying the car payment or mortgage, and becoming a health coach allows for supplemental income in the form of a commission compensation on product sales and supporting the customer needs by providing education on the program and support to customers ordering through Take Shape for Life, and more importantly the ability to help others regain their health through the use of clinically proven Medifast products.

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

Overall, selling, general and administrative expenses increased by $22.6 million as compared to the first nine months of 2008. As a percentage of sales, selling, general and administrative expenses decreased to 64% versus 67.3% in the first nine months of 2008, which lead to an 88% increase in diluted earnings per share in the first nine months of 2009 versus prior year. Take Shape for Life commission expense, which is completely variable based upon product revenue, increased by approximately $15.6 million as the Company showed sales growth of 99% as compared to the first nine months of 2008. Salaries and benefits increased by approximately $2.95 million in the first nine months of 2009 as compared to last year. The increase includes the hiring of additional expertise in critical areas such as Take Shape for Life and the Medifast Weight Control Centers in the second half of 2008 which have greatly impacted revenue growth in 2009. In addition, the opening of new corporately owned clinics in the Houston, Dallas, and Austin, TX market also required the hiring of additional center managers and support staff. Areas that also experienced additional staffing due to the 49% sales growth in the first nine months of 2009 include manufacturing, distribution, call center, and IT. Advertising expense for the first nine months of 2009 was approximately $13.3 million compared to approximately $14.7 million for the same period last year, a decrease of $1.4 million or 10%. Communication expense increased by $250,000 and other expenses increased by $1.95 million which included items such as depreciation, amortization, credit card processing fees, charitable contributions, and property taxes. Operating expenses increased by $1.4 million which primarily resulted from additional printing expense for our direct to consumer postcard mailings, printed materials included in each product shipment, as well as maintenance, repairs, and supplies for our manufacturing and distribution facilities. Office expense increased by $900,000 and stock compensation expense increased by $1 million as additional restricted shares were issued to key executives and Board members in the third and fourth quarters of 2008, as well as the second and third quarters of 2009 which will be vesting over a five year term.

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

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

Net income: Net income was approximately $8.9 million for the first nine months of 2009 as compared to approximately $4.5 million for the first nine months of 2008, an increase of 98%. Pre-tax profit as a percent of sales increased to 12% in the first nine months of 2009 as compared to 8.4% in 2008. The improved profitability in the first nine months of 2009 is due to sales growth in the Take Shape for Life division and Medifast Weight Control Centers as well as improved advertising effectiveness in the Medifast Direct Marketing sales channel, gross margin improvement as well as leveraging the fixed costs associated with our vertically-integrated support structure.

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

Revenue: Revenue increased to $45 million in the third quarter of 2009 compared to $27.3 million in the third quarter of 2008, an increase of $17.7 million or 65%. The Take Shape for Life sales channel accounted for 62% of total revenue; direct marketing channel accounted for 27%, brick and mortar clinics 10%, and doctors 1%. Take Shape for Life sales, which are fueled by increased customer product sales as a result of an increase in active health coaches increased by 105% compared to the third quarter of 2008. As compared to the third quarter of 2008, the direct marketing sales channel, which is fueled primarily by consumer advertising, increased revenues by 14% year-over year, the advertising dollars spent were 5% more than the third quarter of 2008 as the Company continues to focus on more effective advertising spend. The Medifast Weight Control Centers increased sales by 106% due to the opening of new corporate and franchise locations and improvement in same store sales.

Take Shape for Life revenue increased 105% to $27.9 million compared with $13.6 million in the comparable quarter of 2008. Growth in revenues for the segment was driven by increased customer product sales as a result of an increase in active health coaches. The number of active health coaches during the second quarter increased to approximately 5,800 compared with 3,200 during the period a year ago, an increase of 81% and up from 4,650 at the close of the second quarter of 2009. We continue to see the benefits of a physician-lead network of coaches that are able to support their clients in their weight-loss efforts. In today's environment where trust and personal recommendations are becoming a more important component in consumer purchasing decisions, the Take Shape for Life model of one-on-one communication continues to excel. Take Shape for Life customers who have utilized the Medifast products and programs and successfully have addressed their body weight and health issues are increasingly choosing to become active health coaches. Becoming a health coach is a business opportunity that has a low cost of start-up and requires no holding of inventory as all orders are shipped to the end consumer. In the current economic environment, many people are looking for supplemental income to assist in paying the car payment or mortgage, and becoming a health coach allows for supplemental income in the form of a commission compensation on product sales and supporting the customer needs by providing education on the program and support to customers ordering through Take Shape for Life, and more importantly the ability to help others regain their health through the use of clinically proven Medifast products.

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

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

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

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

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

SEGMENT RESULTS OF OPERATIONS

                                               Net Sales by Segment for the Three Months Ended September 30,

                                                         2009                                   2008
Segments                                       Sales             % of Total            Sales          % of Total

Medifast                                   $   40,670,000                 90 %     $  24,945,000               91 %
All Other                                       4,336,000                 10 %         2,336,000                9 %
Total Sales                                $   45,006,000                100 %     $  27,281,000              100 %

                                                Net Sales by Segment for the Nine Months Ended September 30,

                                                         2009                                   2008
Segments                                       Sales             % of Total            Sales          % of Total

Medifast                                   $  108,159,000                 91 %     $  73,928,000               92 %
All Other                                      11,239,000                  9 %         6,059,000                8 %
Total Sales                                $  119,398,000                100 %     $  79,987,000              100 %

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

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

All Other Segment: The All Other reporting segment consists of the sales of Medifast Weight Control Centers and Medifast Weight Control Franchise Centers. Sales increased by $2,000,000 year-over year for the three month period ended September 30, 2009. Sales increased in the Medifast Weight Control Centers and Franchise Centers due to the opening of ten new corporate centers in 2008, and three in the second quarter of 2009 in Austin, TX and Texas, and the opening of twelve new franchise centers at the end of 2008 and into the first nine months of 2009. The Company is continuing to focus on improved advertising effectiveness, improved closing rates on walk-in sales, as well as the hiring of more experienced clinic operators to manage the clinics, and improved efficiencies in operation of the clinics. The Company now has twenty four corporately owned clinics, compared to twenty clinics in operation at the end of the third quarter of 2008. The Company also has twelve franchisee centers in operation.

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

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

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

                                                Net Profit by Segment for the Three Months Ended September 30,

                                                         2009                                  2008
Segments                                      Profit            % of Total           Profit           % of Total

Medifast                                   $   3,499,000                102 %     $   2,086,000               135 %
All Other                                        (65,000 )               -2 %          (537,000 )             -35 %
Total Net Profit                           $   3,434,000                100 %     $   1,549,000               100 %

                                                Net Profit by Segment for the Nine Months Ended September 30,

                                                         2009                                  2008
Segments                                      Profit            % of Total           Profit           % of Total

Medifast                                   $   9,930,000                111 %     $   6,093,000               136 %
All Other                                     (1,012,000 )              -11 %        (1,607,000 )             -36 %
Total Net Profit                           $   8,918,000                100 %     $   4,486,000               100 %

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

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

All Other Segment: The All Other reporting segment consists of the profit or loss of Medifast Weight Control Centers, Medifast Weight Control Franchise Centers, and corporate expenses related to the parent company operations. Year-over-year, the loss in the All Other segment decreased by $472,000. The Medifast Weight Control Centers and Franchise Centers showed an increase in net profitability year-over-year of $833,000. The increase in profitability was due to opening of ten new corporately owned centers in 2008, three new centers in 2009 in the Austin, Texas market, and opening twelve new franchise centers at the end of 2008 and first nine months of 2009. The increase in the total number of corporate clinics to twenty four, twelve operating franchise centers, and improvements in same store sales year-over-year led to additional sales and profitability. Medifast Corporate expenses increased by $361,000 year-over-year. Corporate expenses include items such as auditors' fees, attorney's fees, stock compensation expense and corporate governance related to NYSE, Sarbanes Oxley, and SEC regulations. See footnote 15, "Business Segments" for a detailed breakout of expenses.

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

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

All Other Segment: The All Other reporting segment consists of the profit or loss of Medifast Weight Control Centers, Medifast Weight Control Franchise Centers, and corporate expenses related to the parent company operations. Year-over-year, the loss in the All Other segment decreased by $595,000. The Medifast Weight Control Centers and Franchise Centers showed an increase in net profitability year-over-year of $1.6 million. The increase in the total number of corporate clinics to twenty four, twelve operating franchise centers, and improvements in same store sales year-over-year led to additional sales and profitability. Medifast Corporate expenses increased by $1 million year-over-year. Corporate expenses include items such as auditors' fees, attorney's fees, stock compensation expense, and corporate governance related to NYSE, Sarbanes Oxley, and SEC regulations. See footnote 15, "Business Segments" for a detailed breakout of expenses.

Seasonality

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

Inflation

Inflation generally affects us by increasing the costs of labor, overhead, and . . .