The following discussion and analysis of USANA's financial condition and results of operations is presented in six sections:

†          Overview

†          Customers

†          Current Focus and Recent Developments

†          Results of Operations

†          Liquidity and Capital Resources

†          Forward-Looking Statements and Certain Risks

This discussion and analysis 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 December 31, 2011, 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.

Overview

We develop and manufacture high-quality, science-based nutritional and personal care products that are distributed internationally through a network marketing system, which is a form of direct selling. Our customer base is comprised of 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 June 30, 2012, we had approximately 235,000 active Associates and approximately 66,000 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/Europe - United States (including direct sales from the United States to the United Kingdom and the Netherlands), Canada, Mexico, France(1), and Belgium(1)

† Asia Pacific

† Southeast Asia/Pacific - Australia, New Zealand, Singapore, Malaysia, the Philippines, and Thailand(1)

† Greater China - Hong Kong, China, and Taiwan

† North Asia - Japan and South Korea

Our primary product lines consist of USANA† Nutritionals, USANA Foods, and Sensé
- beautiful science† (Sensé), which is our line of personal care products. The USANA Nutritionals product line is further categorized into two separate classifications: Essentials and 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
                             July 2,   June 30,
                              2011       2012
Product Line
USANA® Nutritionals
Essentials                        29 %       28 %
Optimizers                        49 %       51 %
USANA Foods                       12 %       12 %
Sensé - beautiful science®         7 %        7 %
All Other                          3 %        2 %

Key Product
USANA® Essentials                 18 %       18 %
Proflavanol®                      12 %       12 %
HealthPak 100 ™                    9 %        8 %

We believe that our ability to attract and retain Associates and Preferred Customers to sell and consume our products is positively influenced by a number of factors. Some of these factors include: the general public's heightened awareness and understanding of the connection between diet and long-term health, the aging of the worldwide population as older people generally tend to consume more nutritional supplements, and the growing desire for a secondary source of income and small business ownership.

We believe that our high-quality products and our financially rewarding Associate Compensation Plan are the key components to attracting and retaining Associates. We strive to ensure that our products are up-to-date with the latest science in nutrition research and to keep our product lines relatively compact, which we believe simplifies the selling and buying process for our Associates and Preferred Customers. We also periodically make changes to our Compensation Plan in an effort to ensure that our plan is among the most rewarding in the industry, to encourage behavior that we believe leads to a more successful business for our Associates, and to ensure that our plan provides us with leverage to grow sales and earnings. For example, during the second quarter of 2012 we modified the Matching Bonus component of our Compensation Plan, changing it from a short-term incentive to a long-term incentive. We now refer to this bonus as our Lifetime Matching Bonus. We believe that the Lifetime Matching Bonus will be a more attractive incentive to our Associates and will help facilitate long-term growth for both our Associates and the Company.

To further 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 our management team. We also provide low cost sales tools, including online sales, business management, and training tools, which we believe are an integral part of building and maintaining a successful home-based business for our Associates. Although we provide training and sales tools, we ultimately rely on our Associates to sell our products, attract new customers to purchase our products, and educate and train new Associates.

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, net sales and gross profit are affected positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar. Currency fluctuations, however, have the opposite effect on our Associate incentives and selling, general and administrative expenses. During the six months ended June 30, 2012, net sales outside of the United States represented approximately 76% of consolidated net sales. In our net sales discussions that follow, we approximate the impact of currency fluctuations on net sales by translating current year sales at the average exchange rates in effect during the comparable periods of the prior year.

Customers

Because we utilize a direct selling model for the distribution of our products, the success and growth of our business is primarily based on our ability to attract new Associates and retain existing Associates to sell and consume our products. Notably, sales to Associates account for the majority of our product sales, representing 90% of product sales during the six months ended June 30, 2012. Additionally, it is important to attract and retain Preferred Customers as consumers of our products. Increases or decreases in product sales are typically the result of variations in product sales volumes relating to fluctuations in the number of active Associates and Preferred Customers purchasing our products. The number of active Associates and Preferred Customers is, therefore, used by management as a key non-financial measure.

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
                          July 2, 2011      June 30, 2012    Prior Year    Change

North America/Europe      83,000    37.4 %  82,000    34.9 %      (1,000 )    (1.2 )%

Asia Pacific:
Southeast Asia/Pacific    43,000    19.4 %  58,000    24.7 %      15,000      34.9 %
Greater China             87,000    39.2 %  87,000    37.0 %           -       0.0 %
North Asia                 9,000     4.0 %   8,000     3.4 %      (1,000 )   (11.1 )%
Asia Pacific Total       139,000    62.6 % 153,000    65.1 %      14,000      10.1 %

                         222,000   100.0 % 235,000   100.0 %      13,000       5.9 %




                             Active Preferred Customers By Region
                                 As of                   As of          Change from   Percent
                             July 2, 2011            June 30, 2012      Prior Year    Change

North America/Europe        53,000        77.9 %     52,000      78.8 %      (1,000 )    (1.9 )%

Asia Pacific:
Southeast Asia/Pacific       6,000         8.8 %      6,000       9.1 %           -       0.0 %
Greater China                8,000        11.8 %      7,000      10.6 %      (1,000 )   (12.5 )%
North Asia                   1,000         1.5 %      1,000       1.5 %           -       0.0 %
Asia Pacific Total          15,000        22.1 %     14,000      21.2 %      (1,000 )    (6.7 )%

                            68,000       100.0 %     66,000     100.0 %      (2,000 )    (2.9 )%

Current Focus and Recent Developments

We are currently focusing our efforts on: (i) growing our business in Greater China, (ii) the implementation of our strategy to stabilize and grow our North American markets, and (iii) international expansion.

Our development efforts in Greater China during the first six months of 2012 have included further educating our Associates on the USANA products that we introduced in China during 2011, and on our China compensation plan. Additionally, in the first quarter of 2012 we opened a new branch office in Shenzhen, which is a key city for our business in southern China.

In North America/Europe, we continued to execute our stabilization and growth strategy, which focuses on strengthening our partnership with Associates, introducing North America-specific incentives, and implementing our global marketing strategy. During the

first six months of 2012, we made progress on each component of this strategy. For example, we have held an increased number of meetings and events where members of our management team have worked closely with our Associate Leaders to grow our business. The most significant event occurred in April 2012, in Los Angeles, California, where members of our management team launched our new Lifetime Matching Bonus in front of a sold-out venue of North American Associates. The Lifetime Matching Bonus has been very well received by our Associates in all of our markets. Finally, we offered a promotion specifically for our Associates in Mexico for a portion of the first and second quarters of 2012. We believe that this promotion has also contributed to the momentum we are experiencing in Mexico and North America in general.

In terms of international expansion, we commenced operations in Thailand, France and Belgium at the end of the first quarter of 2012. In the second quarter of 2012, these markets contributed $1.2 million to net sales. Our initial experience with these markets is that they are heavily consumer focused. As such, we believe that it will take time for our existing Associate leaders in these markets to find and develop entrepreneurs to grow each respective market. Consequently, we believe that sales growth in each of these markets will occur at a slower rate than we initially anticipated.

Results of Operations

Summary of Financial Results

Net sales for the second quarter of 2012 increased 8.0%, to $160.9 million, compared with the second quarter of 2011. This net sales increase was driven by sales growth in each of our regions with the exception of North Asia, and also included the addition of Thailand, France, and Belgium. Currency fluctuation during the quarter reduced net sales by approximately $2.7 million.

As previously mentioned, during the quarter we launched our Lifetime Matching Bonus incentive. This new bonus was introduced to our Associates with a short-term promotion similar to promotions that we have offered with success in the past. We believe that this promotion contributed to our sales and Associate growth during the quarter. Specifically, we estimate that this promotion added approximately $4.6 million to net sales, the majority of which was recognized in our Greater China and Southeast Asia Pacific regions. Further, price increases in certain markets contributed an estimated $4.7 million to net sales during the quarter. These and other factors that contributed to our sales results during the second quarter of 2012 are discussed below under our regional results.

Net earnings for the second quarter of 2012 increased 20.9%, to $16.7 million, compared with the second quarter of 2011. This increase was primarily the result of higher net sales, improved gross margins, lower relative Associate incentives, and a lower effective tax rate.

Quarters Ended July 2, 2011 and June 30, 2012



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
                                    (in thousands)                  Change
                                     Quarter Ended                from prior    Percent
                           July 2, 2011        June 30, 2012         year       change

North America/Europe     $  60,267    40.5 % $  62,464    38.8 % $      2,197       3.6 %

Asia Pacific:
Southeast Asia/Pacific      27,225    18.3 %    34,271    21.3 %        7,046      25.9 %
Greater China               53,678    36.0 %    56,770    35.3 %        3,092       5.8 %
North Asia                   7,755     5.2 %     7,396     4.6 %         (359 )    (4.6 )%
Asia Pacific Total          88,658    59.5 %    98,437    61.2 %        9,779      11.0 %

                         $ 148,925   100.0 % $ 160,901   100.0 % $     11,976       8.0 %

North America/Europe: The increase in net sales in this region was primarily due to increased sales per Associate, which we believe was due mostly to the momentum generated by the introduction of our Lifetime Matching Bonus and the related short-term promotion that we offered. We estimate that this short-term promotion added $0.8 million to net sales in this region during the quarter. Net sales also benefited by $0.5 million from the inclusion of France and Belgium during the quarter. These improvements were partially offset by the effects of fluctuations in foreign currency exchange rates, which reduced net sales in this region by $1.7 million.

The number of active Associates in this region declined by 1.2% on a year-over-year basis, but increased 6.5% sequentially. Considering the historical customer declines we have experienced in this region for some time, we believe that both our sequential quarter and year-over-year results are meaningful improvements in this region. We believe that these improvements are primarily due to our new Lifetime Matching Bonus and the short-term promotion previously mentioned.

Asia Pacific: The increase in net sales in this region was driven by growth in Southeast Asia Pacific and Greater China, which was primarily the result of
(i) an increase in the number of active Associates, (ii) price increases in certain markets, and (iii) the introduction of our Lifetime Matching Bonus program and the related short-term promotion. We estimate that price increases added $4.7 million to net sales in this region for the quarter and that the short-term promotion added $3.8 million. Net sales for the quarter also benefited by $0.7 million from the inclusion of Thailand. While we experienced sales growth this quarter in nearly all of our markets in this region, the most significant growth continues to be in the Philippines, where net sales increased 124.4% year-over-year. The improvements in net sales in this region during the second quarter of 2012 were partially offset by: (i) an estimated $4.0 million increase in sales ahead of certain strategic changes that were to be implemented in Hong Kong during the second quarter of 2011, and (ii) the effects of fluctuations in foreign currency exchange rates, which reduced net sales by $1.0 million during the second quarter of 2012.

The number of active Associates in this region increased by 10.1% compared to the prior year quarter. This increase was primarily the result of excitement generated by the introduction of our Lifetime Matching Bonus program and the related short-term promotion. Again, of the markets in this region, the Philippines generated the most significant Associate growth, where the number of active Associates increased 100.0% on a year-over-year basis.

Gross Profit

Gross profit margins improved modestly to 82.6% of net sales for the second quarter of 2012 from 82.4% for the second quarter of 2011. Overall, this improvement can be attributed to price increases that took place in several of our international markets toward the end of the first quarter of 2012, which we estimate improved gross profit margins by approximately 60 basis points. To a lesser extent, lower net freight costs on shipments to our customers and leverage gained on fixed costs from increasing net sales also contributed to improved gross margins. Improvements to gross margin during the second quarter of 2012 were partially offset by increases in raw material costs, which we estimate reduced gross profit margins by approximately 40 basis points, and, to a lesser extent, the impact of a strengthening in the U.S. dollar.

Associate Incentives

Associate incentives decreased to 44.1% of net sales during the second quarter of 2012, compared with 45.5% for the second quarter of 2011. This decrease can be attributed to price increases that took place toward the end of the first quarter. Payout under our Matching Bonus program benefited further from our continued efforts to efficiently manage this component of our Associate Compensation Plan.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased modestly to 22.9% of net sales for the second quarter of 2012, compared with 22.7% for the second quarter of 2011.

In absolute terms, our selling, general and administrative expenses increased $3.0 million for the second quarter of 2012, compared with the second quarter of 2011. The most significant components of this increase in absolute terms were as follows:

† An increase in equity compensation expense of approximately $1.1 million, which was due mostly to a low comparable in the prior year quarter resulting from the recapture of previously recognized expense on canceled equity awards;

† New market costs of approximately $1.1 million; and

† An increase in wage-related expenses of approximately $0.6 million.

Income Taxes

Our effective income tax rate during the second quarter of 2012 was 32.8%, compared with 34.5% in the second quarter of 2011. This decrease resulted primarily from a restructuring of USANA's Hong Kong and Singapore operations implemented during the quarter, which included a one-time favorable adjustment to jurisdictional deferred tax assets and liabilities.

Diluted Earnings Per Share

Diluted earnings per share increased 26.1% during the current year quarter when compared with the second quarter of 2011. This increase was due to higher net earnings and a lower number of diluted shares outstanding, which was the result of share repurchases over the last twelve months.

Six Months Ended July 2, 2011 and June 30, 2012



Net Sales



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



                                  Net Sales by Region
                                    (in thousands)                  Change
                                   Six Months Ended               from prior    Percent
                           July 2, 2011        June 30, 2012         year       change

North America/Europe     $ 120,288    41.1 % $ 121,096    38.4 % $        808       0.7 %

Asia Pacific:
Southeast Asia/Pacific      51,919    17.7 %    66,523    21.1 %       14,604      28.1 %
Greater China              105,789    36.2 %   113,405    36.0 %        7,616       7.2 %
North Asia                  14,495     5.0 %    13,997     4.5 %         (498 )    (3.4 )%
Asia Pacific Total         172,203    58.9 %   193,925    61.6 %       21,722      12.6 %

                         $ 292,491   100.0 % $ 315,021   100.0 % $     22,530       7.7 %

North America/Europe: The increase in net sales in this region during the first six months of 2012 when compared with the same period in 2011 was primarily due to increased sales per Associate and momentum generated, in large part, by the introduction of our Lifetime Matching Bonus program and the related short-term promotion that we offered in the second quarter. Net sales during the first six months of 2012 also benefited by $0.5 million from the inclusion of France and Belgium. These improvements were partially offset by the effects of fluctuations in foreign currency exchange rates, which reduced net sales in this region by $2.4 million during the first six months of 2012 when compared with the same period in 2011.

Asia Pacific: The increase in net sales in this region during the first six months of 2012 was driven by growth in Southeast Asia Pacific and Greater China, which was primarily the result of: (i) an increase in the average number of active Associates throughout the first six months of 2012, (ii) a surge in sales ahead of price increases that took place in certain of these markets, (iii) the impact of these price increases, and (iv) the introduction of our Lifetime Matching Bonus program and the related short-term promotion that we offered. We estimate that the surge in sales ahead of price increases added $11.0 million, that the price increases added $7.1 million, and that the short-term promotion added $3.8 million to net sales in this region during the first six months of 2012. Net sales also benefited by $0.8 million from the inclusion of Thailand in the current year. These increases were partially offset by certain events that contributed to sales in this region during the first six months of 2011 that did not occur in 2012, namely: (i) an estimated $4.0 million surge in sales ahead of certain strategic changes that were to be implemented in Hong Kong, and
(ii) the recognition of approximately $3.0 million of deferred revenue during the first quarter of 2011.

Gross Profit

Gross profit for the first six months of 2012 increased slightly to 82.4% of net sales compared with 82.3% in the prior year period, largely as a result of price increases in several of our international markets introduced toward the end of the first quarter of 2012. We also experienced benefits from leverage on increasing sales as well as an increasing percentage of sales from certain international markets where we have higher gross margins. Although currency fluctuation negatively impacted gross profit margins for the second quarter of 2012, we experienced an overall benefit to gross profit margins from currency fluctuation for the first six months of 2012. Improvements to gross margins during the first six months of 2012 were partially offset by increases in raw material costs.

Associate Incentives

Associate incentives decreased to 44.1% of net sales during the first six months of 2012, compared with 45.3% for the first six months of 2011. This decrease can be attributed to: (i) the temporary surge in sales we experienced during the first quarter of 2012 ahead of the price changes discussed above (when we experience a temporary surge or decline in sales our Associate incentives as a percent of net sales typically react in an inverse manner), and (ii) the impact of these price increases on the full second quarter of 2012. Payout under our Matching Bonus program benefited further from our continued efforts to efficiently manage this component of our Associate Compensation Plan.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased slightly to 23.7% of net sales for the first six months of 2012, compared with 23.8% for the same period in 2011. This slight change reflects leverage gained on increased sales outside the United States in markets where selling, general and administrative expenses are lower, partially offset by costs associated with opening our new markets and low initial sales in these markets.

In absolute terms, our selling, general and administrative expenses increased $5.1 million for the first six months of 2012, compared with the same period in 2011. The most significant components of this increase in absolute terms were as follows:

† New market costs of approximately $1.8 million; and

† An increase in equity compensation expense of approximately $0.8 million due mostly to a low comparable in the prior year period;

† An increase in wage-related expenses of approximately $0.8 million;

† An increase in credit card and bank fees that vary with sales of approximately $0.7 million; and

† An increase related to our corporate branding efforts of approximately $0.7 million.

Income Taxes

Our effective income tax rate during the first six months of 2012 was 33.6%, compared with 34.5% in the first six months of 2011. This decrease resulted primarily from a restructuring of USANA's Hong Kong and Singapore operations implemented during the second quarter, which included a one-time favorable adjustment to jurisdictional deferred tax assets and liabilities.

Diluted Earnings Per Share

Diluted earnings per share increased 27.2% during the first six months of 2012 when compared to the first six months of 2011. This increase was due to higher net earnings and a lower number of diluted shares outstanding, which was the result of share repurchases by the Company over the last twelve months.

Liquidity and Capital Resources

We have historically met our working capital and capital expenditure . . .