The following discussion and analysis of USANA's financial condition and results of operations should be read in conjunction with the Unaudited Consolidated Financial Statements and Notes thereto that are contained in this quarterly report, as well as Management's Discussion and Analysis of Financial Condition and Results of Operations that are included in our Annual Report on Form 10-K for the year ended January 3, 2009, and our other filings, including Current Reports on Form 8-K, that have been filed with the Securities and Exchange Commission ("SEC") through the date of this report.

Our fiscal year end is the Saturday closest to December 31st of each year. Fiscal year 2009 will end on January 2, 2010 and is a 52-week year. Fiscal year 2008 ended on January 3, 2009 and was a 53-week year.

Overview

We develop and manufacture high-quality nutritional and personal care products that are distributed internationally through a network marketing system, which is a form of direct selling. Our customer base comprises two types of customers; "Associates" and "Preferred Customers." Associates are independent distributors of our products who also purchase our products for their personal use. Preferred Customers purchase our products strictly for their personal use and are not permitted to resell or to distribute the products. As of April 4, 2009, we had approximately 184,000 active Associates and approximately 68,000 active Preferred Customers worldwide. For purposes of this report, we only count as active customers those Associates and Preferred Customers who have purchased product from USANA at any time during the most recent three-month period, either for personal use or for resale.

We have ongoing operations in the following markets, which are grouped and presented as follows:

† North America

† United States

† Canada

† Mexico

† Asia Pacific

† Southeast Asia/Pacific - Australia, New Zealand, Singapore, Malaysia, and the Philippines*

† East Asia - Hong Kong and Taiwan

† North Asia - Japan and South Korea

Because we have operations in multiple markets, with sales and expenses being generated and incurred in multiple currencies, our reported sales and earnings can be significantly affected by fluctuations in currency exchange rates. In general, our reported sales and earnings are affected positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar.

Our primary product lines consist of USANA† Nutritionals and Sensé - beautiful science† (Sensé), which is our line of personal care products. The USANA Nutritionals product line is further categorized into three separate classifications: Essentials, Optimizers, and Macro Optimizers. The following tables summarize the approximate percentage of total product revenue that has been contributed by our major product lines and our top-selling products for the current and prior-year periods indicated:

                                Quarter Ended
                             March 29,   April 4,
Product Line                   2008        2009
USANA† Nutritionals
Essentials                          35 %       33 %
Optimizers                          40 %       43 %
Macro Optimizers                    13 %       12 %
Sensé - beautiful science†          10 %        9 %
All Other *                          2 %        3 %

Quarter Ended

                    March 29,   April 4,
Key Product           2008        2009
USANA† Essentials          20 %       19 %
HealthPak 100 ™            12 %       12 %
Proflavanol†               10 %       11 %

As a manufacturer of nutritional and personal care products utilizing direct selling for the distribution of our products, we compete within two industries:
direct selling and nutrition. We believe that the most significant factors affecting us are the aging of the worldwide population, the general public's heightened awareness and understanding of the connection between diet and health, and the growing desire for a secondary source of income, all of which affect our ability to attract and retain Associates and Preferred Customers to sell and consume our products.

The number of active Associates and Preferred Customers is used by management as a key non-financial measure because the number of customers purchasing our products is a leading indicator for product sales. Associate sales account for the majority of our product sales, representing 89% of product sales during the first quarter of 2009. During the periods presented, changes in product sales were not significantly affected by changes in product price, rather, they were affected by variations in sales volumes principally relating to changes in the number of active Associates and Preferred Customers purchasing our products. Notably, the volume of average monthly product purchases by our active Associates and Preferred Customers, in their local currencies, has remained relatively constant over time. Accordingly, sales growth in local currencies is driven primarily by an increased number of active Associates and also Preferred Customers, rather than through increases in product purchase productivity.

We believe that our high-quality products and our financially rewarding Associate compensation plan ("Compensation Plan") are the key components to attracting and retaining Associates. To support our Associates in building their businesses, we sponsor meetings and events throughout the year, which offer information about our products and our network marketing system. These meetings are designed to assist Associates in their business development and to provide a forum for interaction with some of our Associate leaders and members of the USANA management team. We also provide low cost sales tools, which we believe are an integral part of building and maintaining a successful home-based business for our Associates.

In addition to Company-sponsored meetings and sales tools, we maintain a website exclusively for our Associates where they can keep up-to-date on the latest USANA news, obtain training materials, manage their personal information, enroll new customers, shop, and register for Company-sponsored events. Additionally, through this website, Associates can access other online services to which they may subscribe. For example, we offer an online business management service, which includes a tool that helps Associates track and manage their business activity, a personal webpage to which their prospects or retail customers can be directed, e-cards for advertising, and a tax management tool.

The tables below summarize the changes in our active customer base by geographic region. These numbers have been rounded to the nearest thousand as of the dates indicated.

                            Active Associates By Region
                              As of              As of        Change from   Percent
                          March 29, 2008     April 4, 2009    Prior Year    Change

North America:
United States              58,000    35.4 %  58,000    31.5 %           -       0.0 %
Canada                     25,000    15.2 %  26,000    14.1 %       1,000       4.0 %
Mexico                     12,000     7.3 %  13,000     7.1 %       1,000       8.3 %
North America Total        95,000    57.9 %  97,000    52.7 %       2,000       2.1 %

Asia Pacific:
Southeast Asia/Pacific     37,000    22.6 %  45,000    24.5 %       8,000      21.6 %
East Asia                  26,000    15.8 %  35,000    19.0 %       9,000      34.6 %
North Asia                  6,000     3.7 %   7,000     3.8 %       1,000      16.7 %
Asia Pacific Total         69,000    42.1 %  87,000    47.3 %      18,000      26.1 %

                          164,000   100.0 % 184,000   100.0 %      20,000      12.2 %




                              Active Preferred Customers By Region
                                  As of                   As of            Change from    Percent
                             March 29, 2008           April 4, 2009        Prior Year      Change

North America:
United States                49,000        63.6 %     41,000       60.3 %       (8,000 )     (16.3 )%
Canada                       18,000        23.4 %     16,000       23.6 %       (2,000 )     (11.1 )%
Mexico                        2,000         2.6 %      3,000        4.4 %        1,000        50.0 %
North America Total          69,000        89.6 %     60,000       88.3 %       (9,000 )     (13.0 )%

Asia Pacific:
Southeast Asia/Pacific        6,000         7.8 %      7,000       10.3 %        1,000        16.7 %
East Asia                     1,000         1.3 %      1,000        1.4 %            -         0.0 %
North Asia                    1,000         1.3 %         **        0.0 %       (1,000 )    (100.0 )%
Asia Pacific Total            8,000        10.4 %      8,000       11.7 %            -         0.0 %

                             77,000       100.0 %     68,000      100.0 %       (9,000 )     (11.7 )%

                            Total Active Customers By Region
                                As of                As of        Change from   Percent
                           March 29, 2008        April 4, 2009    Prior Year    Change

North America:
United States              107,000      44.4 %   99,000    39.3 %      (8,000 )    (7.5 )%
Canada                      43,000      17.9 %   42,000    16.7 %      (1,000 )    (2.3 )%
Mexico                      14,000       5.8 %   16,000     6.3 %       2,000      14.3 %
North America Total        164,000      68.1 %  157,000    62.3 %      (7,000 )    (4.3 )%

Asia Pacific:
Southeast Asia/Pacific      43,000      17.8 %   52,000    20.6 %       9,000      20.9 %
East Asia                   27,000      11.2 %   36,000    14.3 %       9,000      33.3 %
North Asia                   7,000       2.9 %    7,000     2.8 %           -       0.0 %
Asia Pacific Total          77,000      31.9 %   95,000    37.7 %      18,000      23.4 %

                           241,000     100.0 %  252,000   100.0 %      11,000       4.6 %

Our primary growth strategy includes continuing to attract and retain Associates through increased investment in Associate events and the marketing of our Compensation Plan. This includes continued Associate education on our Compensation Plan and the two enhancements that were announced during the third quarter of 2008. Some of the other growth opportunities that we frequently evaluate are entering new markets, introducing new and re-formulating existing products, strategic acquisitions, and capital investments that will help support our growth.

Forward-Looking Statements and Certain Risks

The statements contained in this report that are not purely historical are considered to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act. These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions, and strategies regarding the future. They may be identified by the use of words or phrases such as "believes," "expects," "anticipates," "should," "plans," "estimates," and "potential," among others. Forward-looking statements include, but are not limited to, statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue, and expense levels in the future and the sufficiency of our existing assets to fund our future operations and capital spending needs. Readers are cautioned that actual results could differ materially from the anticipated results or other expectations that are expressed in these forward-looking statements for the reasons that are detailed in our most recent Annual Report on Form 10-K. The fact that some of these risk factors may be the same or similar to those in our past SEC reports means only that the risks are present in multiple periods. We believe that many of the risks detailed here and in our other SEC filings are part of doing business in the industry in which we operate and will likely be present in all periods reported. The fact that certain risks are common in the industry does not lessen their significance. The forward-looking statements contained in this report, are made as of the date of this report, and we assume no obligation to update them or to update the reasons why our actual results could differ from those that we have projected. Among others, risks and uncertainties that may affect our business, financial condition, performance, development, and results of operations include:

† Our ability to attract and maintain a sufficient number of Associates;

† Our dependence upon a network marketing system to distribute our products;

† Activities of our independent Associates;

† Our planned expansion into international markets, including delays in commencement of sales in any new market, delays in compliance with local marketing or other regulatory requirements, or changes in target markets;

† Rigorous government scrutiny of network marketing practices;

† Potential political events, natural disasters, or other events that may negatively affect economic conditions;

† Potential effects of adverse publicity regarding the Company, nutritional supplements, or the network marketing industry;

† Reliance on key management personnel;

† Extensive government regulation of the Company's products, manufacturing, and network marketing system;

† Potential inability to sustain or manage growth, including the failure to continue to develop new products;

† An increase in the amount of Associate incentives;

† Our reliance on the use of information technology;

† The adverse effect of the loss of a high-level sponsoring Associate, together with a group of leading Associates, in that person's downline;

† The loss of product market share or Associates to competitors;

† Potential adverse effects of customs, duties, taxation, and transfer pricing regulations, including regulations governing distinctions between and Company responsibilities to employees and independent contractors;

† The fluctuation in the value of foreign currencies against the U.S. dollar;

† Our reliance on outside suppliers for raw materials and certain manufactured items;

† Shortages of raw materials that we use in certain of our products;

† Significant price increases of our key raw materials;

† Product liability claims and other risks that may arise with our manufacturing activity;

† Intellectual property risks;

† Liability claims that may arise with our "Athlete Guarantee" program;

† Continued compliance with debt covenants;

† Disruptions to shipping channels that are used to distribute our products to international warehouses; and

† The outcome of regulatory and litigation matters.

Results of Operations

Summary of Financial Results and Recent Developments

Net sales for the first quarter of 2009 were $97.3 million compared with $101.6 million in the first quarter of 2008. This decrease was primarily due to negative changes in currency exchange rates (i.e. a significant strengthening of the U.S. dollar), which reduced net sales by approximately $10.4 million, and was also due to a $2.0 million decrease in sales in the United States. Excluding the impact of negative changes in currency exchange rates, sales in most of our markets increased from the first quarter of 2008 to the first quarter of 2009. Additionally, we commenced operations in the Philippines in January, which added $1.7 million to net sales for the quarter.

The total number of active Associates in the first quarter of 2009 increased 12.2% from the first quarter of 2008. We believe this increase is due to the enhancements to our Compensation Plan that we implemented during 2008. The number of Preferred Customers decreased 11.7% from the first quarter of 2008. We believe that the deteriorating global economic conditions have contributed significantly to the decline in the number of Preferred Customers.

Net earnings decreased 8.9% to $6.6 million in the first quarter of 2009 from $7.3 million in the first quarter of 2008. This decrease was due primarily to lower net sales resulting from negative changes to currency exchange rates, declining sales in the United States, and higher Associate incentives expense. These were offset in part by lower selling, general and administrative expense and a lower effective tax rate.

Quarters Ended March 29, 2008 and April 4, 2009



Net Sales



The following table summarizes the changes in our net sales by geographic region
for the quarters ended as of the dates indicated:



                                   Net Sales by Region                                                       Change
                                      (in thousands)                   Change                 Impact of     excluding
                                      Quarter Ended                  from prior    Percent     currency    the impact
                           March 29, 2008        April 4, 2009          year       change      exchange    of currency

North America:
United States            $  38,550      38.0 % $ 36,489      37.5 % $     (2,061 )    (5.3 )%        N/A          (5.3 )%
Canada                      18,583      18.3 %   14,936      15.4 %       (3,647 )   (19.6 )%     (3,575 )        (0.4 )%
Mexico                       5,142       5.0 %    4,470       4.6 %         (672 )   (13.1 )%     (1,463 )        15.4 %
North America Total         62,275      61.3 %   55,895      57.5 %       (6,380 )   (10.2 )%     (5,038 )        (2.2 )%

Asia Pacific:
Southeast Asia/Pacific      21,545      21.2 %   19,938      20.5 %       (1,607 )    (7.5 )%     (4,691 )        14.3 %
East Asia                   13,615      13.4 %   16,955      17.4 %        3,340      24.5 %        (326 )        26.9 %
North Asia                   4,135       4.1 %    4,511       4.6 %          376       9.1 %        (393 )        18.6 %
Asia Pacific Total          39,295      38.7 %   41,404      42.5 %        2,109       5.4 %      (5,410 )        19.1 %

                         $ 101,570     100.0 % $ 97,299     100.0 % $     (4,271 )    (4.2 )% $  (10,448 )         6.1 %

The decrease in net sales in North America was primarily due to the impact of negative currency exchange rates on net sales in Canada and Mexico and to a decrease in net sales in the United States. The negative changes to currency decreased net sales in these two markets by $5.0 million year-over-year in the first quarter of 2009. In local currency, sales in Mexico increased by 15.4% and sales in Canada decreased by 0.4%, compared with the first quarter of last year. We believe that sales in the United States have been significantly affected by the uncertain economic conditions.

The increase in net sales in Asia Pacific came mostly from Hong Kong. Net sales in that market increased $3.5 million, or 42.0% from the first quarter of 2008, due to an increase in unit sales as a result of significant growth in the number of active Associates. Additionally, the commencement of operations in the Philippines in January added $1.7 million to net sales. The increases in these two markets were offset partially by lower sales in Southeast Asia/Pacific. This was due to negative changes in currency exchange rates, which reduced net sales by $4.7 million. Overall, changes in currency exchange rates reduced net sales by $5.4 million in our Asia Pacific region. Each of the markets in our Asia Pacific region, except Singapore and New Zealand, achieved local currency growth on a year-over-year basis.

Gross Profit

Gross profit increased to 79.6% of net sales for the quarter ended April 4, 2009, compared with 78.8% for the same quarter in 2008. This increase in gross profit margin can be attributed primarily to lower relative freight costs on shipments to customers. This was partially offset by negative changes in currency exchange rates and moderate increases in costs on certain raw materials.

Associate Incentives

As a percentage of net sales, Associate incentives increased to 43.1% during the first quarter of 2009, compared with 40.7% for the first quarter of 2008. This increase was due to the Compensation Plan enhancements that were implemented in the third quarter of 2008, and was partially offset by a decline in base commissions due to changes in currency.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased to 26.0% of net sales for the quarter ended April 4, 2009, compared with 26.6% for the comparable quarter in 2008. In absolute terms, our selling, general, and administrative expenses decreased by $1.7 million. The most significant components of this decrease in absolute terms were as follows:

† A decrease in legal and other professional fees of approximately $1.0 million;

† A decrease in event production costs of approximately $0.8 million associated with the Asia Pacific Convention, which was not held in 2009 as we hold this event every other year;

† A decrease in rent expense of approximately $0.4 million; and

† A decrease in expenses related to advertising and promotional activities of approximately $0.4 million;

The decreases in selling, general and administrative expenses listed above were partially offset by an increase in equity-based compensation expense of approximately $1.0 million.

The decrease in selling, general and administrative expense as a percentage of net sales can be attributed to the decreases listed above, partially offset by a decrease in net sales.

Income Taxes

Income taxes totaled 34.5% of earnings before income taxes for the first quarter of 2009, compared with 37.1% for the first quarter in 2008. This change was primarily due to increased tax benefits relating to our qualified production activities deduction.

Diluted Earnings Per Share

Diluted earnings per share decreased $0.01, or 2.3%, to $0.43 in the first quarter of 2009 compared with the first quarter of 2008. This change was due to a decrease in net sales, offset by lower overall operating costs, a lower effective tax rate, and a lower number of average shares outstanding.

Liquidity and Capital Resources

We have historically met our working capital and capital expenditure requirements by using both net cash flow from operations and by drawing on our line of credit. Our principal source of liquidity is our operating cash flow, the availability of which is directly affected by variations in the total revenues of the Company. There are no material restrictions on our ability to transfer and remit funds among our international markets.

As disclosed in our 2008 annual report on Form 10-K, we expected to have unusual cash payments during the first half of 2009. During the first quarter of 2009 we paid $7.0 million for an arbitration award and $1.3 million in tax payments resulting from an IRS audit. Additionally, we experienced a decrease in net earnings, as well as an increase in inventories due to increased safety stock levels in many of our markets, lower than expected sales in the United States, and higher inventory values resulting from changes in currency exchange rates. As a result of these items, we had a net use of cash for operating activities of $1.3 million.

As a U.S.-based, multi-national company, reporting in U.S. dollars, we have received a benefit to net sales for the last several years from changes in currency exchange rates as the U.S. dollar was relatively weak. Net sales and earnings during the first quarter of 2009, however, were negatively affected by a significant strengthening of the U.S. dollar. In general, our reported sales and earnings are affected positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar. Although it is difficult to estimate the impact that changes in currency exchange rates may have on our future operating results, we believe changes in currency exchange rates will have a significant negative effect on net sales and cash flows from operating activities in 2009.

Cash and cash equivalents decreased to $9.7 million at April 4, 2009, from $13.3 million at January 3, 2009. Net working capital increased to $5.8 million at April 4, 2009 from ($1.9) million at January 3, 2009. This increase in net working capital was due mostly to a decrease in other current liabilities as a result of the arbitration and tax payments mentioned above. The impact of these payments on our cash balance was partially offset by decreased spending on property, plant, and equipment due to the completion of the facility expansion projects that had been in progress for the last couple of years.

We have a share repurchase plan that has been ongoing since the fourth quarter of 2000. Our Board of Directors periodically approves additional dollar amounts for share repurchase under that plan. Share repurchases are made from time-to-time, in the open market, through block trades or otherwise, and are based on market conditions, the level of cash balances, general business opportunities, and other factors. There were no share repurchases during the first quarter of 2009. There currently is no expiration date on the remaining approved repurchase amount of $10.4 million and no requirement for future share repurchases.

We currently maintain a $40.0 million credit facility with Bank of America. As of April 4, 2009, our balance on this line of credit was $33.9 million. We will be required to pay the balance on this line of credit in full at the time of maturity in May 2011. This credit agreement contains restrictive covenants, . . .