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 July 4, 2009, we had approximately 200,000 active Associates and approximately 69,000 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 U.S. dollar 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 USANA Foods (formerly 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:

                              Six Months Ended
                             June 28,   July 4,
Product Line                   2008      2009
USANA® Nutritionals
Essentials                         35 %      33 %
Optimizers                         40 %      43 %
USANA Foods                        13 %      12 %
Sensé - beautiful science®         10 %       9 %
All Other *                         2 %       3 %

Six Months Ended

                    June 28,   July 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 six months ended July 4, 2009. Typically, changes in product sales are not significantly affected by changes in product price, but rather, they are affected by variations in product 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, remains relatively constant over time. Accordingly, sales growth in local currencies is driven primarily by an increased number of active Associates and Preferred Customers.

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
                          June 28, 2008     July 4, 2009     Prior Year    Change

North America:
United States             57,000    33.7 %  65,000    32.5 %       8,000      14.0 %
Canada                    26,000    15.4 %  26,000    13.0 %           -       0.0 %
Mexico                    13,000     7.7 %  15,000     7.5 %       2,000      15.4 %
North America Total       96,000    56.8 % 106,000    53.0 %      10,000      10.4 %

Asia Pacific:
Southeast Asia/Pacific    39,000    23.1 %  46,000    23.0 %       7,000      17.9 %
East Asia                 27,000    16.0 %  40,000    20.0 %      13,000      48.1 %
North Asia                 7,000     4.1 %   8,000     4.0 %       1,000      14.3 %
Asia Pacific Total        73,000    43.2 %  94,000    47.0 %      21,000      28.8 %

                         169,000   100.0 % 200,000   100.0 %      31,000      18.3 %




                             Active Preferred Customers By Region
                                 As of                   As of           Change from   Percent
                             June 28, 2008            July 4, 2009       Prior Year    Change

North America:
United States               49,000        63.6 %     42,000       60.9 %      (7,000 )   (14.3 )%
Canada                      17,000        22.1 %     15,000       21.7 %      (2,000 )   (11.8 )%
Mexico                       3,000         3.9 %      3,000        4.3 %           -       0.0 %
North America Total         69,000        89.6 %     60,000       86.9 %      (9,000 )   (13.0 )%

Asia Pacific:
Southeast Asia/Pacific       6,000         7.8 %      7,000       10.1 %       1,000      16.7 %
East Asia                    1,000         1.3 %      1,000        1.5 %           -       0.0 %
North Asia                   1,000         1.3 %      1,000        1.5 %           -       0.0 %
Asia Pacific Total           8,000        10.4 %      9,000       13.1 %       1,000      12.5 %

                            77,000       100.0 %     69,000      100.0 %      (8,000 )   (10.4 )%

                            Total Active Customers By Region
                                As of                As of        Change from   Percent
                            June 28, 2008        July 4, 2009     Prior Year    Change

North America:
United States              106,000      43.1 %  107,000    39.8 %       1,000       0.9 %
Canada                      43,000      17.5 %   41,000    15.2 %      (2,000 )    (4.7 )%
Mexico                      16,000       6.5 %   18,000     6.7 %       2,000      12.5 %
North America Total        165,000      67.1 %  166,000    61.7 %       1,000       0.6 %

Asia Pacific:
Southeast Asia/Pacific      45,000      18.3 %   53,000    19.7 %       8,000      17.8 %
East Asia                   28,000      11.4 %   41,000    15.2 %      13,000      46.4 %
North Asia                   8,000       3.2 %    9,000     3.4 %       1,000      12.5 %
Asia Pacific Total          81,000      32.9 %  103,000    38.3 %      22,000      27.2 %

                           246,000     100.0 %  269,000   100.0 %      23,000       9.3 %

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 - the Elite Bonus and the Matching Bonus. Other growth opportunities that we frequently evaluate include entering new markets, introducing new products, 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 second quarter of 2009 increased $2.9 million to $112.1 million, compared with $109.2 million in the second quarter of 2008. Net sales during the first six months of 2009 decreased $1.4 million to $209.4 million, compared with $210.8 million for the same period in 2008. The most significant items impacting net sales during the second quarter and first six months of 2009 were negative changes in currency exchange rates (i.e. a significant strengthening of the U.S. dollar when compared to prior year exchange rates) and changes in product sales driven by an 18.3% increase in the number of active Associates and a 10.4% decrease in the number of active Preferred Customers. Net sales were also impacted by the commencement of our

operations in the Philippines in January, which added $1.6 million to net sales for the quarter and $3.3 million for the first six months of 2009, and to a lesser extent, an increase in product prices in certain of our markets.

Net earnings during the second quarter of 2009 decreased 12.8% to $8.8 million from $10.1 million in the second quarter of 2008. Net earnings during the first six months of 2009 decreased 11.2% to $15.4 million from $17.4 million during the same period of the prior year. These decreases were due primarily to the negative effect of currency exchange rates and higher Associate incentives expense relative to net sales, which were offset in part by lower selling, general and administrative expense and a lower effective tax rate.

Quarters Ended June 28, 2008 and July 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
                    June 28, 2008          July 4, 2009           year       change      exchange     of currency

North America:
United States    $  40,125      36.8 %  $  39,908     35.6 %  $       (217 )    (0.5 )%         N/A          (0.5 )%
Canada              19,527      17.9 %     16,454     14.7 %        (3,073 )   (15.7 )%      (2,482 )        (3.0 )%
Mexico               6,269       5.7 %      6,379      5.7 %           110       1.8 %       (1,742 )        29.5 %
North America
Total               65,921      60.4 %     62,741     56.0 %        (3,180 )    (4.8 )%      (4,224 )         1.6 %

Asia Pacific:
Southeast
Asia/Pacific        24,170      22.1 %     24,518     21.9 %           348       1.4 %       (4,116 )        18.5 %
East Asia           15,057      13.8 %     19,649     17.5 %         4,592      30.5 %         (375 )        33.0 %
North Asia           4,060       3.7 %      5,185      4.6 %         1,125      27.7 %         (372 )        36.9 %
Asia Pacific
Total               43,287      39.6 %     49,352     44.0 %         6,065      14.0 %       (4,863 )        25.2 %

                 $ 109,208     100.0 %  $ 112,093    100.0 %  $      2,885       2.6 %  $    (9,087 )        11.0 %

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. Negative changes to currency decreased net sales in these two markets by $4.2 million in the second quarter of 2009 when compared with the second quarter of 2008. Excluding changes in currency exchange rates, sales in Mexico increased by 29.5% when compared with the second quarter of 2008; however sales in Canada decreased by 3.0%. These changes were due to the fluctuations in product sales related to changes in the number of active Associates and Preferred Customers in each of these markets.

Although the number of active Associates in the United States increased 14.0% in the second quarter of 2009 when compared with the second quarter of 2008, net sales in this market declined slightly. We believe that this is due primarily to a decrease in product sales to Preferred Customers, since the number of active Preferred Customers decreased by 14.3% in the second quarter of 2009 when compared with the second quarter of 2008. We have also seen a slight decrease in the average product order amount from new Associates on their initial purchase. We believe that both of these decreases are due primarily to current economic conditions. For the first time in over a year, however, the number of active Preferred Customers in the United States increased slightly on a sequential quarter basis.

The increase in net sales in Asia Pacific was due mainly to higher product sales resulting from a 28.8% increase in the number of active Associates in the second quarter of 2009 when compared with the second quarter of 2008. Most of this increase in the number of active Associates came from double-digit growth in Hong Kong, Malaysia, and South Korea, and also the commencement of our operations in the Philippines. Sales growth in this region was partially offset by negative changes to currency exchange rates, which reduced net sales by $4.9 million. Similar to the United States, we have also seen a slight decrease in the average product order amount from new Associates on their initial purchase in certain markets within this region. Sales in this region were also affected, to a lesser extent, by an increase in product prices in certain of our markets.

Gross Profit

Gross profit decreased to 78.8% of net sales for the quarter ended July 4, 2009, from 80.0% for the same quarter in 2008. This decrease in gross profit margin can be attributed primarily to negative changes in currency exchange rates and increased costs of certain raw materials. This decrease, however, was partially offset by product price increases, mostly in our Asia Pacific region, and lower relative freight costs on shipments to our customers.

Associate Incentives

As a percentage of net sales, Associate incentives increased to 44.9% during the second quarter of 2009, compared with 41.8% for the second quarter of 2008. This increase was due to the Compensation Plan enhancements (the Elite Bonus and Matching Bonus) that were implemented in the third quarter of 2008.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased to 22.1% of net sales for the quarter ended July 4, 2009, compared with 23.6% for the comparable quarter in 2008. In absolute terms, our selling, general, and administrative expenses decreased by $1.0 million. The most significant components of this decrease in absolute terms were as follows:

† A decrease in legal and other professional fees of approximately $0.9 million; and

† A decrease in promotional expenses of approximately $0.5 million.

The decreases in selling, general and administrative expenses listed above were partially offset by an increase in equity-based compensation expense of approximately $0.7 million.

The decrease in selling, general and administrative expense as a percentage of net sales can be attributed to the decreases listed above, combined with slightly higher sales.

Income Taxes

Income taxes totaled 34.5% of earnings before income taxes for the second quarter of 2009, compared with 36.6% for the same quarter in 2008. This decrease was due to reduced tax reserves related to uncertain tax positions, a lower effective state tax rate, and benefits recognized for amended tax returns.

Diluted Earnings Per Share

Diluted earnings per share decreased $0.04, or 6.6%, to $0.57 in the second quarter of 2009, compared with second quarter 2008 earnings per share of $0.61. This decrease was primarily due to the negative effect of currency exchange rates. Additionally, higher Associate Incentives expense and lower gross profit margins contributed to this decrease. This decrease was partially offset by lower absolute selling, general and administrative expenses, a lower number of average shares outstanding, and a lower effective tax rate.

Six Months Ended June 28, 2008 and July 4, 2009



Net Sales



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



                            Net Sales by Region                                                         Change
                              (in thousands)                     Change                  Impact of     excluding
                             Six Months Ended                   from prior    Percent     currency    the impact
                    June 28, 2008          July 4, 2009           year        change      exchange    of currency

North America:
United States    $  78,675      37.3 %  $  76,397     36.5 %  $      (2,278 )    (2.9 )%        N/A          (2.9 )%
Canada              38,110      18.1 %     31,390     15.0 %         (6,720 )   (17.6 )%     (6,056 )        (1.7 )%
Mexico              11,411       5.4 %     10,849      5.2 %           (562 )    (4.9 )%     (3,206 )        23.2 %
North America
Total              128,196      60.8 %    118,636     56.7 %         (9,560 )    (7.5 )%     (9,262 )        (0.2 )%

Asia Pacific:
Southeast
Asia/Pacific        45,715      21.7 %     44,456     21.2 %         (1,259 )    (2.8 )%     (8,807 )        16.5 %
East Asia           28,672      13.6 %     36,604     17.5 %          7,932      27.7 %        (702 )        30.1 %
North Asia           8,195       3.9 %      9,696      4.6 %          1,501      18.3 %        (764 )        27.6 %
Asia Pacific
Total               82,582      39.2 %     90,756     43.3 %          8,174       9.9 %     (10,273 )        22.3 %

                 $ 210,778     100.0 %  $ 209,392    100.0 %  $      (1,386 )    (0.7 )% $  (19,535 )         8.6 %

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. Negative changes to currency decreased net sales in Canada and Mexico by $9.3 million in the first six months of 2009, when compared with the same period in 2008. Excluding changes in currency exchange rates; however sales in Mexico increased by 23.2% and sales in Canada decreased by 1.7% when compared with the first six months of 2008. These changes were due to the fluctuations in product sales related to the changes in the number of active Associates and Preferred Customers in each of these markets.

Although the number of active Associates in the United States has increased, net sales in this market declined slightly during the first six months of 2009 compared with the same period in 2008. We believe that this is due primarily to a decrease in product sales to Preferred Customers related to a decrease in the number of active customers in this group. We have also seen a slight decrease . . .