NOTE D – COMMON STOCK AND EARNINGS PER SHARE

             Basic earnings per share are based on the weighted average number of shares outstanding for each period.  Shares redeemed have been included in the calculation of weighted average shares outstanding for basic earnings per share. Diluted earnings per common share are based on shares outstanding (computed under basic EPS) and potentially dilutive shares.  Potential shares included in dilutive earnings per share calculations include stock options granted but not exercised.

             Options to purchase 1,994 and 1,716 shares of stock were not included in the computation of EPS for the quarters ended July 1, 2000 and June 30, 2001, respectively, due to their exercise price being greater than the average market price of the shares.

             Options to purchase 1,674 and 1,729 shares of stock were not included in the computation of EPS for the six months ended July 1, 2000 and June 30, 2001, respectively, due to their exercise price being greater than the average market price of the shares.

NOTE E – SEGMENT INFORMATION

             The Company has four operating segments. Since the beginning of the second quarter of 2000, the United Kingdom (hereinafter includes The Netherlands) market has been serviced from the United States and is considered a part of the domestic operating segment of the Company.  Accordingly, all previously reported financial information for the United Kingdom has been included in the domestic segment for comparability purposes.  Additionally, the Company began its direct export program into Japan during the third quarter of 2000.  These results are also incorporated in the domestic segment. The Company’s operating segments are based on operating geographic regions. Management considers the geographic segments of the Company to be the only reportable operating segments.  These operating segments are evaluated regularly by management in determining the allocation of resources and in assessing the performance of the Company.  Management evaluates performance based on sales revenue and the amount of operating income or loss.

             Segment profit or loss is based on profit or loss from operations before income taxes.  Interest income and expense as well as income taxes, while significant, are not included in the Company’s determination of segment profit or loss in assessing the performance of a segment.

             Financial information summarized by geographic segment for the six months ended July 1, 2000 and June 30, 2001 is listed below:

(1)   Unallocated and Other includes certain corporate items and eliminations that are not allocated to the operating segments.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             The following discussion and analysis of USANA’s financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in this quarterly report.

General

             USANA develops and manufactures high-quality nutritional, personal care and weight management products.  USANA distributes its products through a network marketing system.  USANA refers to its independent distributors as Associates.  As of June 30, 2001, we had approximately 84,000 current Associates in the United States, Canada, Australia, New Zealand, Hong Kong, Japan and the United Kingdom.  We also offer a Preferred Customer program specifically designed for customers who desire to purchase USANA’s products for personal use and do not desire to resell or distribute products.  As of June 30, 2001, we had approximately 80,000 Preferred Customers worldwide.  Sales to Preferred Customers accounted for approximately 19% of net sales during the first six months of 2001.  USANA defines its Associates and Preferred Customers, within this document, as those who have purchased product from USANA at any time during the most recent 12-month period.

             The financial results for any quarter or six-month period referenced within this report are adjusted to reflect the Financial Accounting Standards Board guidelines on revenue recognition pursuant to Emerging Issues Task Force No 00-10 (“EITF 00-10”).  Under EITF 00-10 guidelines, historical and future revenue relating to amounts billed to a customer for shipping and handling should be classified as revenue.  The corresponding expenses are reported as cost of sales.  Historically, USANA has reported freight income and expense as a net amount within selling, general and administrative expense.

             USANA’s three primary product lines consist of USANA^â Nutritionals, LEAN LifelongÔ and SenséÔ. The USANA Nutritionals product line accounted for approximately 67% of net sales for the six months ended June 30, 2001.  USANA’s top selling products, USANA^â Essentials and Proflavanol^â represented approximately 29% and 12%, respectively, of net sales for the six months ended June 30, 2001.  The LEAN Lifelong product line accounted for approximately 11% of net sales for the six months ended June 30, 2001. The LEAN Lifelong product line includes several completely reformulated food products previously sold under the LEAN or USANA Nutritional brand names.  NutrimealÔ and Fibergy^â drink mixes, Nutribar and Fibergy bar, a LEAN Formula for weight management and several other related products for healthy diets are included in the LEAN Lifelong product line.  The Sensé product line consists of scientifically developed natural products designed to support healthy skin and hair by providing protection and nourishment on both the inside and outside of the dermal layers of the skin.  The Sensé product line accounted for approximately 13% of net sales for the six months ended June 30, 2001.

             In addition to these three principal product lines, USANA develops and makes available to Associates a number of materials to assist them in building their business and selling the products. These resource materials or sales aids, which may be purchased from USANA, include product brochures and business forms designed by USANA and printed by outside publishers.  Each major product line incorporates specifically designed sales aids.  From time to time we contract with authors and publishers to provide books, tapes and other items dealing with health and personal motivation and make these available to Associates. USANA also writes and develops materials for audio and videotapes, which are produced by third parties. New Associates are required to purchase a starter kit, containing USANA training materials, that assists them in starting and growing their business.  Affinity and identity are also furthered through the sale of logo merchandise such as clothing, caps, mugs, and other products. Associates do not earn commissions on sales aids, starter kits or logo merchandise.

             The fiscal year end of USANA is the Saturday closest to December 31 of each year.  Fiscal year 2001 will end on December 29, 2001.  Fiscal year 2000 ended on December 30, 2000.

Results of Operations

Quarters Ended June 30, 2001 and July 1, 2000

             Net Sales.  Net sales decreased 9.0% to $28.6 million for the quarter ended June 30, 2001, a decrease of $2.8 million from the $31.4 million reported for the comparable quarter in 2000.  The decrease in net sales is the result of:

             The decrease in the Associate base was partially offset by strong enrollments of Preferred Customers.  The Preferred Customer base increased 23% at June 30, 2001 compared to the levels present at July 1, 2000.  In September 2000, we began a direct export program for consumers in Japan.  Sales to Japan under the direct export program totaled $682,000 during the second quarter of 2001.

             The following tables illustrate the change in sales and customers by market for the quarters ended July 1, 2000 and June 30, 2001 (sales and customer information for the United Kingdom and Japan are incorporated in the numbers for the United States):

             Gross Profit.  Gross profit increased to 70.8% of net sales for the quarter ended June 30, 2001 from 69.3% for the comparable quarter in 2000.  The increase in gross profit can be attributed to:

             The increase in gross profit was partially offset by the compression of gross margins as a result of weaker foreign currencies relative to the U. S. dollar.

             Associate Incentives.  Associate incentives increased to 38.3% of net sales for the quarter ended June 30, 2001 from 38.0% for the comparable quarter in 2000.  The increase in Associate incentives as a percentage of net sales can primarily be attributed to products sold at reduced gross profit margins at our annual international convention that took place during the second quarter of 2000 that were not present for the comparable quarter in 2001.  Associates do not earn commissions on logo merchandise, discounted items and other merchandise sold at our convention.

             Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased to 28.5% of net sales for the quarter ended June 30, 2001 from 27.1% for the comparable quarter in 2000.  The increase in selling, general and administrative expenses as a percentage of net sales can primarily be attributed to lower sales in the second quarter of 2001 compared to the same period in 2000.  USANA has made a company-wide effort to better manage costs and was able to reduce selling, general and administrative expenses in absolute terms during the second quarter of 2001 by $371,000 despite spending $824,000 on our Japanese market.  We expect that selling, general and administrative expenses will continue to be pressured for the remainder of 2001 by costs associated with establishing operations in Japan, which is scheduled to open in late 2001.

             Other Income (Expense).  Interest expense (a component of Other, net) decreased $122,000 for the second quarter of 2001 when compared to the same period in 2000.  This decrease is a result of both lower interest rates and a lower level of debt throughout the second quarter of 2001 when compared to the same period in 2000.

             Net Earnings.  Net earnings increased to 1.7% of net sales for the quarter ended June 30, 2001 from 1.3% for the comparable quarter in 2000.  The increase in net earnings can primarily be attributed to:

             These benefits were partially offset by the 9.0% decline in net sales during the second quarter of 2001 when compared to the same period in 2000.

             Diluted earnings per share increased by $0.01 to $0.05 for the second quarter of 2001 from $0.04 reported in the comparable quarter of 2000.

Six Months Ended June 30, 2001 and July 1, 2000

             Net Sales.  Net sales decreased 10.9% to $56.2 million for the six months ended June 30, 2001, a decrease of $6.9 million from the $63.1 million reported for the comparable period in 2000.  The decrease in net sales is the result of:

             The value initiative was introduced in February 2000 and late March 2000 in the North American and Australia-New Zealand markets, respectively.  Sales to Japan under the direct export program totaled $1.2 million during the six months ended June 30, 2001.

             The following tables illustrate the change in sales and customers by market for the six months ended July 1, 2000 and June 30, 2001 (sales and customer information for the United Kingdom and Japan are incorporated in the numbers for the United States):

             Gross Profit.  Gross profit decreased to 70.9% of net sales for the six months ended June 30, 2001 from 72.5% for the comparable period in 2000.  The decrease in gross profit can be attributed to:

             Associate Incentives.  Associate incentives decreased to 38.2% of net sales for the six months ended June 30, 2001 from 39.2% for the comparable period in 2000.  The decrease in Associate incentives as a percentage of net sales can primarily be attributed to the value initiative.  In addition to reducing prices by an average of 24%, the value initiative also incorporated a reduction in the ratio of sales volume points to the wholesale price on customer product purchases.  Associate incentives are paid on the amount of sales volume points generated.

             Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased to 28.0% of net sales for the six months ended June 30, 2001 from 26.7% for the comparable period in 2000.  The increase in selling, general and administrative expenses as a percentage of net sales can be primarily attributed to lower sales in the first six months of 2001 compared to the same period in 2000.  USANA has made a company-wide effort to better manage costs and was able to reduce selling, general and administrative expenses in absolute terms during the first six months of 2001 by $1.1 million despite spending $1.4 million on our Japanese market.

             Other Income (Expense).  Foreign currency exchange losses (a component of Other, net) totaled $286,000 for the six months ended June 30, 2001 from a $33,000 gain for the comparable period in 2000.  The increase is due to the negative effect of weaker foreign currencies on intercompany loans with our foreign subsidiaries.  Additional discussion on our foreign currency risk is included in Item 3, “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK,” on page 19. The increase in other income (expense) was partially offset by a $103,000 decrease in interest expense for the first six months of 2001 when compared to the same period in 2000.