10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(X)	QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 28, 2003
	OR
( )	TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________

Commission file number 0-21577

WILD OATS MARKETS, INC.(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
Incorporation or organization) 84-1100630
(I.R.S. Employer Identification Number)

3375 Mitchell Lane
Boulder, Colorado 80301
(Address of principal executive offices, including zip code)

(303) 440-5220
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
  Yes       ( X )       No      (    )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2):
  Yes       ( X )       No      (    )

As of August 1, 2003, there were 29,882,306 shares outstanding of the Registrant's Common Stock (par value $.001 per share).

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets, June 28, 2003 (unaudited) and December 28, 2003	3
	Consolidated Statements of Operations (unaudited), Three and Six Months Ended June 28, 2003 and June 29, 2002	4
	Consolidated Statements of Comprehensive Income (unaudited), Three and Six Months Ended June 28, 2003 and June 29, 2002	5
	Consolidated Statements of Cash Flows (unaudited), Six Months Ended June 28, 2003 and June 29, 2002	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 2.	Changes in Securities	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Item 5.	Other Information	24
Item 6.	Exhibits and Reports on Form 8-K	25
SIGNATURE AND EXHIBITS
	Signature	26
Exhibit 10.1	Wild Oats Markets, Inc. David B. Clark Equity Incentive Plan
Exhibit 10.2	Wild Oats Markets, Inc. Severance Agreement between Registrant and David B. Clark, dated June 2, 2003
Exhibit 31.1	CEO Certification in Accordance with Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	CFO Certification in Accordance with Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	CEO Certification in Accordance with Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2	CEO Certification in Accordance with Section 906 of the Sarbanes-Oxley Act of 2002

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

WILD OATS MARKETS, INC.

Consolidated Balance Sheets

(in thousands, except share data)

				June 28,	December 28,
				2003 (unaudited)	2002
ASSETS
	Current assets:
		Cash and cash equivalents		$ 15,275	$ 11,367
		Inventories		47,785	47,175
		Accounts receivable		3,087	2,524
		Income tax receivable		328	250
		Prepaid expenses and other current assets		2,252	2,163
		Deferred tax asset		4,910	4,656
			Total current assets	73,637	68,135
	Property and equipment, net			123,963	122,359
	Goodwill, net			106,404	106,404
	Other intangible assets, net			7,244	7,415
	Deposits and other assets			3,926	3,622
	Deferred tax asset			13,050	15,650
				$ 328,224	$ 323,585
LIABILITIES AND STOCKHOLDERS’ EQUITY
	Current liabilities:
		Accounts payable		$ 42,622	$ 34,819
		Book overdraft		22,483	22,777
		Accrued liabilities		35,955	37,943
		Current portion of debt and capital leases		16	146
			Total current liabilities	101,076	95,685
	Long-term debt and capital leases			39,886	43,075
	Other long-term obligations			14,330	17,923
				155,292	156,683
	Commitments and contingencies
	Stockholders’ equity:
		Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding		-	-
		Common stock, $0.001 par value; 60,000,000 shares    authorized, 29,826,948 and 29,658,660 shares issued and    outstanding, respectively		30	30
		Additional paid-in capital		215,175	213,482
		Note receivable, related party		(10,482)	(10,200)
		Accumulated deficit		(31,745)	(35,368)
		Accumulated other comprehensive loss		(46)	(1,042)
			Total stockholders’ equity	172,932	166,902
				$ 328,224	$ 323,585

The accompanying notes are an integral part of the consolidated financial statements.

3

WILD OATS MARKETS, INC.

Consolidated Statements of Operations

(in thousands, except per-share data) (unaudited)

			THREE MONTHS ENDED		SIX MONTHS ENDED
			June 28,	June 29,	June 28,	June 29,
			2003	2002	2003	2002
Sales			$ 242,248	$ 236,186	$ 478,235	$ 469,200
Cost of goods sold and occupancy costs			171,026	164,758	336,154	330,129
Gross profit			71,222	71,428	142,081	139,071
Operating expenses:
	Direct store expenses		50,327	51,510	101,191	101,922
	Loss (gain) on disposal of assets		(100)	-	1,368	-
	Selling, general and administrative    expenses		16,797	14,761	32,774	28,934
	Pre-opening expenses		101	645	1,023	1,014
	Restructuring and asset impairment    income		(145)	-	(1,881)	(652)
		Income from operations	4,242	4,512	7,606	7,853
	Interest income		179	193	355	373
	Interest expense		(842)	(2,347)	(1,835)	(4,782)
	Loss on early extinguishment of debt		-	-	(186)	-
		Income before income taxes	3,579	2,358	5,940	3,444
	Income tax expense		1,396	860	2,317	1,278
Net income			$ 2,183	$ 1,498	$ 3,623	$ 2,166
Net income per common share:
	Basic		$ 0.07	$ 0.06	$ 0.12	$ 0.09
	Diluted		$ 0.07	$ 0.06	$ 0.12	$ 0.09
Weighted average common shares    outstanding, basic			29,775	25,016	29,739	24,919
Dilutive effect of stock options			487	929	323	632
Weighted average common shares    outstanding, assuming dilution			30,262	25,945	30,062	25,551

The accompanying notes are an integral part of the consolidated financial statements.

4

WILD OATS MARKETS, INC.

Consolidated Statements of Comprehensive Income

(in thousands) (unaudited)

		THREE MONTHS ENDED		SIX MONTHS ENDED
		June 28,	June 29,	June 28,	June 29,
		2003	2002	2003	2002
Net income		$ 2,183	$ 1,498	$ 3,623	$ 2,166
Other comprehensive income (loss):
	Foreign currency translation      adjustments arising during      the period	270	210	488	118
	Recognition of hedge results      to interest expense during      the period, net of tax of $153,      $182, $316, and 370, respectively	256	303	528	617
	Change in market value of cash      flow hedge during the period,      net of tax of $0, $194, $12, and      $167, respectively	1	(323)	(20)	(277)
Other comprehensive income		527	190	996	458
Comprehensive income		$ 2,710	$ 1,688	$ 4,619	$ 2,624

The accompanying notes are an integral part of the consolidated financial statements

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WILD OATS MARKETS, INC.

Consolidated Statements of Cash Flows

(in thousands) (unaudited)

					SIX MONTHS ENDED
					June 28,	June 29,
					2003	2002
CASH FLOWS FROM OPERATING ACTIVITIES
	Net income				$ 3,623	$ 2,166
	Adjustments to reconcile net income to net cash from    operating activities:
		Depreciation and amortization			10,866	10,528
		Loss (gain) on disposal of property and equipment			1,368	(39)
		Deferred tax expense			1,983	820
		Income tax benefit from employee exercise of stock options			111
		Restructuring and asset impairment income			(1,881)	(652)
		Loss on early extinguishment of long-term debt			186	-
		Other			(5)	(60)
	Change in assets and liabilities:
		Inventories, net			(455)	6,596
		Receivables, net, and other assets			(281)	2,746
		Accounts payable			7,416	(236)
		Accrued liabilities			(2,884)	1,900
				Net cash provided by operating activities	20,047	23,769
CASH FLOWS FROM INVESTING ACTIVITIES
	Capital expenditures				(13,516)	(4,644)
	Proceeds from sale of property and equipment				4	5
				Net cash used in investing activities	(13,512)	(4,639)
CASH FLOWS FROM FINANCING ACTIVITIES
	Net repayments under line-of-credit agreement				(4,100)	(21,000)
	Repayments on notes payable, long-term debt and capital    leases				(37,098)	(5,730)
	Proceeds from long term debt				37,879	-
	Payment of debt issuance costs				(721)	-
	Proceeds from issuance of common stock				1,343	1,434
			Net cash used in financing activities		(2,697)	(25,296)
Effect of exchange rate changes on cash					70	54
Net increase(decrease) in cash and cash equivalents					3,908	(6,112)
Cash and cash equivalents at beginning of period					11,367	18,840
Cash and cash equivalents at end of period					$ 15,275	$ 12,728
NON-CASH INVESTING AND FINANCING ACTIVITIES
	Stock issued in payment of note payable					$ 1,210
	Settlement of note payable against accounts receivable					$ 200

The accompanying notes are an integral part of the consolidated financial statements.

6

WILD OATS MARKETS, INC.

Notes to Consolidated Financial Statements

(unaudited)

1. Nature of Operations and Basis of Presentation

Wild Oats Markets, Inc. ("Wild Oats" or the "Company"), headquartered in Boulder, Colorado, owns and operates natural foods grocery stores in the United States and Canada. The Company also operates commissary kitchens and warehouses that supply the stores. The Company’s operations are concentrated in one market segment, grocery stores, and are geographically concentrated in the western and central parts of the United States.

The consolidated balance sheet as of June 28, 2003, the consolidated statements of operations and comprehensive income for the three months and six months ended June 28, 2003 and June 29, 2002, as well as the consolidated statements of cash flows for the six months ended June 28, 2003 and June 29, 2002 have been prepared without an audit. In the opinion of management, all adjustments, consisting only of normal, recurring adjustments necessary for a fair statement thereof, have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with financial statements and notes thereto included in the Company's 2002 Annual Report on Form 10-K. The results of operations for interim periods presented are not necessarily indicative of the operating results for the full year.

The unaudited information included in the consolidated financial statements for the three months and six months ended June 28, 2003 and June 29 2002 includes the results of operations of the Company for the 13 weeks and 26 weeks then ended.

2. Implementation of New Accounting Pronouncements

The Company receives allowances from its vendors through a variety of programs and arrangements, including cooperative advertising and markdown reimbursement programs. The allowances are intended to offset the Company’s costs of promoting, advertising and selling the vendors’ products in its stores. Vendor allowances are recognized as a reduction of cost of sales or related selling expense when the intended purpose of the vendor funds is satisfied. Cooperative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising occurs. Markdown reimbursements are credited to cost of goods sold during the period in which the related promotional markdown is taken.

The FASB’s Emerging Issues Task Force ("EITF") Issue No. 02-16, Accounting By a Customer (Including a Reseller) for Cash Consideration Received From a Vendor addressed the accounting treatment for vendor allowances. The adoption of EITF Issue No. 02-16 in fiscal 2003 did not have a material impact on the Company’s financial position or results of operations.

The FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, An Interpretation of ARB 51 ("FIN 46"). The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. As of June 28, 2003, the Company was not party to a VIE; therefore, management believes FIN 46 will not have a material effect on the Company.

7

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company has adopted the disclosure provisions as of December 28, 2002 and it had no impact.

SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, was issued on July 30, 2002. SFAS No. 146 will require companies to recognize costs associated with exit or disposal activities when they occur rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 became effective for the Company on January 1, 2003 and management believes it will have no material effect on the Company’s financial position or historical financial results.

During the quarter ended June 29, 2002, the Company adopted the provisions of SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145, among other things, rescinds SFAS No. 4, which required that gains and losses from extinguishment of debt be classified as an extraordinary item, net of related income tax effects. SFAS No. 145 is to be applied in fiscal years beginning after May 15, 2002 and encourages early application of the rescission of SFAS No. 4. In connection with the refinancing of its credit facility, the Company incurred a non-cash charge to write off the remaining unamortized debt issuance cost from its prior credit facility in the first quarter of fiscal 2003 of approximately $186,000, which is included in income from continuing operations.

3. New Accounting Pronouncements

During April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments and hedging activities, resulting primarily from decisions reached by the FASB Derivatives Implementation Group subsequent to the original issuance of SFAS No. 133. This Statement is generally effective prospectively for contracts and hedging relationships entered into after June 30, 2003. Management believes that adoption of SFAS No. 149 will have minimal impact on the Company.

During May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments With Characteristics of both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability, or an asset in some circumstances. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The Company currently has no financial instruments falling within the scope of this Statement, therefore, management believes that adoption of SFAS No. 150 will have minimal impact on the Company.

4. Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure ("SFAS 148"). The statement amends SFAS 123 to provide alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 improves the prominence and clarity of the pro forma disclosures required by SFAS 123 by prescribing a specific tabular format and by requiring disclosure in the "Summary of Significant Accounting Policies" or its equivalent. In addition, SFAS 148 improves the timeliness of those disclosures by requiring their inclusion in financial reports for interim periods. SFAS 148 is effective for financial statements for fiscal years ending after December 15, 2002.

8

At June 28, 2003, the Company has seven stock-based employee compensation plans, six of which are described more fully in Note 10 – Stock Plans and Options in our fiscal 2002 Annual Report filed on Form 10-K for the period ended December 28, 2002, and one of which was created in the second fiscal quarter of 2003 as an inducement to employment for a new executive. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and Related Interpretations. Some stock-based employee compensation cost is reflected in net income for options issued at a discount as Board of Directors compensation. All other options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant; therefore, no other employee compensation cost is reflected in net income.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, as amended, to stock-based employee compensation:

			THREE MONTHS ENDED		SIX MONTHS ENDED
			June 28,	June 29,	June 28,	June 29,
			2003	2002	2003	2002
Net income, as reported			$ 2,183	$ 1,498	$ 3,623	$ 2,166
	Add: Stock-based employee      compensation expense      included in reported net income,      net of tax		23	117	155	131
	Deduct: Total stock-based      employee compensation      expense determined under      fair value based method for      all awards, net of tax		(771)	(709)	(1,409)	(1,198)
		Pro forma net income	1,435	906	2,369	1,099
	Earnings per share
		Basic – as reported	$ 0.07	$ 0.06	$ 0.12	$ 0.09
		Basic – pro forma	$ 0.05	$ 0.04	$ 0.08	$ 0.04
		Diluted – as reported	$ 0.07	$ 0.06	$ 0.12	$ 0.09
		Diluted - pro forma	$ 0.05	$ 0.03	$ 0.08	$ 0.04

5. Property and Equipment

As a result of the significant store closings, remodels and resets, the Company undertook a review of all fixtures and equipment in its stores, including a physical inventory in conjunction with an asset tagging exercise.  During the first quarter of fiscal 2003, the Company substantially completed the review and recorded a $1.5 million loss on disposal of fixtures and equipment that will no longer be used in the stores.  This loss approximates a 1.2% write-down of the fixed assets carrying value.

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6. Debt Covenant Compliance and Liquidity

In February of 2003, the Company completed the refinancing of its credit facility with Wells Fargo Bank N.A. The Company’s new facility has a $75.0 million limit, with a three-year term with a one-year renewal option. Under the new credit facility, the Company has the option to increase the total facility to $135.0 million through the addition of new lenders and through the agreement of the current lending group to increase their total commitments.

As part of the new credit facility, the Company gave the lenders collateral in the form of security interest in accounts, equipment and fixtures, inventory and other assets. The Company has also granted a leasehold mortgage in those leasehold interests previously mortgaged to secure the former credit facility, although it has no obligation to provide an interest in any new leaseholds. The new credit facility contains limitations on capital expenditures and the signing of new leases. The interest rate on the facility is currently either prime plus 1.0% or one-month LIBOR plus 2.25%, at the Company’s election, and the rates modify depending on the ratio of average total funded debt, as defined under the credit facility, plus six times rent expense, to EBITDAR for the four fiscal quarter periods then ended, as calculated on the Company’s quarterly compliance certificate. The Company believes that cash generated from operations and available under its credit facility will be sufficient to meet its capital expenditure requirements in fiscal 2003.

The Company anticipates that it will comply with the monthly and quarterly financial covenants in the credit agreement. In the event that business conditions worsen, management has identified contingency actions to enable the Company to remain in compliance with the financial covenants. Even if the Company remains in compliance with its monetary covenants, a technical default could result due to a breach of the financial covenants. In the absence of a waiver or amendment to such financial covenants, such non-compliance would constitute a default under the credit agreement, and the lenders would be entitled to accelerate the maturity of the indebtedness outstanding thereunder. In the event that such non-compliance appears likely, or occurs, the Company will seek approval, as it has in the past, from the lenders to renegotiate financial covenants and/or obtain waivers, as required. However, there can be no assurance that future amendments or waivers will be obtained.

7. Derivatives and Hedging Activities

In accordance with the Company’s interest rate risk-management strategy and as required by the terms of the Company’s credit facility, in September 2000, the Company entered into a swap agreement to hedge the interest rate on $30.0 million of its borrowings as of March 29, 2003. The swap agreement locks in a one-month LIBOR rate of 6.7% and expires in August 2003. The fair value of the swap at June 28, 2003 was ($136,000), which has been recorded in the accompanying balance sheet in accrued liabilities. There is no obligation to renew the swap under the refinanced facility.

8. Earnings Per Share

Earnings per share are calculated in accordance with the provisions of SFAS No. 128, Earnings Per Share. SFAS No. 128 requires the Company to report both basic earnings per share, which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted-average number of common shares outstanding and all dilutive potential common shares outstanding, except where the effect of their inclusion would be anti-dilutive. Anti-dilutive stock options of 1,212,503 and 1,420,861 for the three months and 1,701,874 and 1,288,177 for the six months ended June 28, 2003 and June 29, 2002, respectively, were not included in the earnings per share calculations.

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9. Goodwill and Finite Lived Intangible Assets

During the second quarter of fiscal 2003, no goodwill was recognized as a result of acquisitions, no goodwill was impaired, and no other changes in the carrying amount of goodwill occurred.

Finite lived intangible assets consist of the following (in thousands):

	June 28,	December 28,
	2003	2002
Leasehold interests	$ 9,035	$ 9,035
Liquor licenses and other intangibles	168	104
	9,203	9,139
Less accumulated amortization	(1,959)	(1,724)
	$ 7,244	$ 7,415

Amortization expense related to finite lived intangible assets was $121,000 and $119,000 for the three months and $243,000 and $237,000 for the six months ended June 28, 2003 and June 29, 2002, respectively. The estimated amortization of finite lived intangible assets for each of the five fiscal years ending in fiscal 2007 is as follows (in thousands):

FISCAL YEAR	AMORTIZATION EXPENSE
2003	$ 484
2004	$ 485
2005	$ 485
2006	$ 469
2007	$ 465

10. Restructuring and Asset Impairment Income

During the second quarter of fiscal 2003, the Company recorded restructuring income of $145,000 consisting of the following components:

Change in estimate related to lease-related liabilities for sites previously identified for closure or sale that were closed, sold or disposed of during the second quarter of fiscal 2003		$ (2,195,000)
Severance for employees terminated during the second quarter of fiscal 2003		117,000
Change in estimate related to lease-related liabilities for sites previously identified for closure or sale		1,933,000
	Total restructuring income	$ (145,000)

Details of the significant components are as follows:

• Change in estimate related to lease-related liabilities for sites previously identified for closure or sale that were closed, sold or disposed of during the second quarter of fiscal 2003 ($2,195,000 of restructuring income) – During the second quarter of fiscal 2003, the Company concluded a sublease transaction with a subtenant in Irvine, California, the viability of whose business led the Company to determine that the subtenant’s business stability supported reversal of the remaining reserves of $2,195,000.

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• Severance for employees terminated in the second quarter of fiscal 2003 ($117,000 of restructuring expense) – During the second quarter of fiscal 2003, 37 employees were notified of their involuntary termination in conjunction with the closure of two stores in Irvine and Los Angeles, California. As of June 28, 2003, $41,000 of involuntary termination benefits had been paid to these employees; the remaining benefits of $76,000 will be paid during the third quarter of fiscal 2003.

• Changes in estimate related to lease-related liabilities for sites previously identified for closure or sale ($1,933,000 of restructuring expense) – During the second quarter of fiscal 2003, the Company determined that additional time will be needed to dispose of certain lease obligations for four vacant sites. This determination was largely driven by results of current disposition efforts by the Company, and is attributable to poor marketability and/or unattractive characteristics of the space, which may require improvement allowances and rent concessions by the Company. As a result, the Company increased its estimated reserves for these sites by $1,988,000. Offsetting this charge was $55,000 in restructuring income related to the early termination of leases in Cleveland, Ohio and Santa Fe, New Mexico. Based on these changes in facts and circumstances and the related changes in estimates, the Company adjusted or reversed the remaining lease-related liabilities previously recorded for these locations and recognized net restructuring expense of $1,933,000 during the second quarter of fiscal 2003.

During the first quarter of fiscal 2003, the Company recorded restructuring income of $1,736,000 consisting of the following components:

Change in estimate related to lease related liabilities for sites previously identified for closure or sale that were closed, sold or disposed of during the first quarter of fiscal 2003		$ (441,000)
Change in estimate related to lease-related liabilities for sites previously identified for closure or sale		(1,295,000)
	Total restructuring income	$ (1,736,000)

Details of the significant components are as follows:

• Change in estimate related to lease-related liabilities for sites previously identified for closure or sale that were closed, sold or disposed of during the first quarter of fiscal 2003 ($441,000 of restructuring income) – During the first quarter of fiscal 2003, the Company completed payment obligations under a lease for excess space located in West Hartford, Connecticut, and under lease termination agreements for sites located in West Hollywood, California and Kansas City, Missouri. The Company closed a commissary facility in Federal Heights, Colorado, after weather-related structural damage rendered the facility untenantable. Based on these changes in facts and circumstances, the Company reversed the remaining lease-related liabilities previously recorded for these locations and, therefore, recognized restructuring income of $441,000 during the first quarter of fiscal 2003.

• Changes in estimate related to lease-related liabilities for sites previously identified for closure or sale ($1,295,000 of restructuring income) – During the first quarter of fiscal 2003, the Company reviewed the viability of a subtenant in Fort Collins, Colorado, and determined the subtenant’s business stability supported reversal of the remaining reserves of $628,000 which had been previously established. Subsequent to the first quarter of fiscal 2003, the Company negotiated the early termination of leases in Cleveland, Ohio and Santa Fe, New Mexico, with payment obligations to terminate in the second and fourth quarters of fiscal 2003, respectively. The settlements were for less than previously estimated and accrued, and $980,000 was reversed to income. Offsetting this income, the Company recorded a charge of $313,000 for the difference between the terms of a new signed sublease for a closed location in Hartford, Connecticut, and the terms of a prior sublease for the same location under which the prior subtenant had defaulted. Based on these changes in facts and circumstances and the related changes in estimates, the Company adjusted or reversed the remaining lease-related liabilities previously recorded for these locations and recognized net restructuring income of $1,295,000 during the first quarter of fiscal 2003.

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The following table summarizes accruals related to the Company’s restructuring activities during the first six months of fiscal 2003 (in thousands):

	1999
EXIT	AND	Q2	Q4	Q2	Q4	Q4
PLANS	PRIOR	2000	2000	2001	2001	2002	TOTAL
Balance:
December 28, 2002	$ 2,123	$ 1,162	$ 2,351	$ 6,032	$ 2,844	$ 3,552	$ 18,064
New accruals:
Lease-related liabilities	313	(250)	(230)	(701)	(868)	-	(1,736)
Cash paid:
Severance	-	-	-	(1)	-	-	(1)
Lease-related liabilities	(133)	(73)	(170)	(494)	(133)		(1,003)
Balance:
March 29, 2003	$ 2,303	$ 839	$ 1,951	$ 4,836	$ 1,843	$ 3,552	$ 15,324
New accruals:
Severance	-	-	-	-	-	117	117
Lease-related liabilities	477		1,726	(107)	(26)	(2,332)	(262)
Cash paid:
Severance	-	-	-	-	-	(41)	(41)
Lease-related liabilities	(210)	(76)	(295)	(148)	(1,817)	(52)	(2,598)
Balance:	1	1	1	1		2
June 28, 2003	$ 2,570	$ 763	$ 3,382	$ 4,581	$         -	$ 1,244	$ 12,540

Note:	1. The restructuring accrual balance consists of lease-related liabilities.
	2. The restructuring accrual balance consists of lease-related liabilities and $76,000 for employee termination benefits.

As of June 28, 2003, the components of the accruals related to the Company’s restructuring activities are accrued liabilities of $3.1 million and other long-term obligations of $9.4 million.

11. Income Taxes

The Company has a $19.3 million net deferred tax asset as of June 28, 2003, primarily as a result of the $54.9 million of restructuring and asset impairment charges recorded during fiscal 2001. For the three months ended June 28, 2003, the Company recorded $1.4 million of income tax expense, primarily as a result of income before income taxes of $3.6 million during the period. For the six months ended June 28, 2003, the Company recorded $2.3 million of income tax expense, as a result of income before income taxes of $5.9 million during the period. The recoverability of the net deferred tax asset is primarily dependent upon the Company generating sufficient taxable income in the future. Although realization of the net deferred tax asset is not assured, the Company believes it is more likely than not that the Company will generate sufficient taxable income in the future to realize the full amount of the deferred tax asset. The Company's assessment is based on projections that assume that the Company can maintain its current store contribution margin. Furthermore, the Company expects to maintain the aggregate sales growth experienced over the past five years, which would generate additional taxable income. The primary uncertainty related to the realization of the deferred tax asset is the Company’s ability to achieve its four-year business plan and generate future taxable income to realize the full amount of the deferred tax asset. The Company believes that the sales, gross margin, store contribution margin, and selling, general and administrative expenses assumptions in its four-year business plan are reasonable and, more likely than not, attainable. The Company will continue to assess the recoverability of the net deferred tax asset, and to the extent it is determined in the future that a valuation allowance is required, it will be recognized as a charge to earnings at that time.

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12. Related Party Transactions

In September 2002, the Company filed suit against Michael Gilliland and Elizabeth Cook, former officers and directors and greater than 5% stockholders of the Company, together with two individuals and three limited liability corporations, for a temporary restraining order and damages related to a breach of Mr. Gilliland’s noncompetition covenant, contained in his 1996 employment agreement, arising from the opening of a competitive grocery store in New Mexico. A jury trial is scheduled for October 2004.

13. Contingencies

Wild Oats Markets Canada, Inc., as successor to Alfalfa’s Canada, Inc., a Canadian subsidiary of the Company, is a defendant in Helen Fakhri and Ady Aylon, as Representative Plaintiffs v. Alfalfa’s Canada, Inc., a class action suit brought in the Supreme Court, British Columbia, Canada in October 2002 by representative plaintiffs alleging to represent two classes of plaintiffs – those who contracted Hepatitis A allegedly through the consumption of food purchased at a Capers Community Market in the spring of 2002, and those who were inoculated against Hepatitis A as a result of news alerts by Capers and the Vancouver Health Authority. In April 2003, the plaintiffs filed a motion for certification of the litigation as a class action lawsuit. The Company intends to vigorously defend both class certification and the suit itself. The Company is not able to estimate the potential outcome of the suit at this time.

The Company is named as defendant in various actions and proceedings arising in the normal course of business. In all of these cases, the Company is denying the allegations and is vigorously defending against them and, in some cases, has filed counterclaims. Although the eventual outcome of the various lawsuits cannot be predicted, it is management’s opinion that these lawsuits will not result in liabilities that would materially affect the Company’s consolidated results of operations, financial position, or cash flows.

During the normal course of its business, the Company has provided certain indemnities under which it may be required to make payments in relation to certain transactions. These indemnities include indemnities to the Company’s landlords for losses arising from the Company’s use and occupation of leased premises and indemnities to directors and officers of the Company to the maximum extent permitted by the laws of the State of Delaware. The duration of these indemnities varies, and in certain cases, is indefinite. In addition, the majority of these indemnities do not provide for any limitation of the maximum potential future payments the Company would be obligated to make. As such, the Company is unable to estimate with any reasonableness its potential exposure under the indemnities. The Company has not recorded any liability for the indemnities in the accompanying consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is both reasonably determinable and probable. The Company carries specific and general liability insurance policies, which the Company believes would provide, in most circumstances, some, if not total, recourse to any claims arising from these indemnifications.

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Item 2.  Management's Discussion And Analysis Of Financial Condition And Results Of Operations

This report on Form 10-Q contains certain forward-looking statements regarding our future results of operations and performance. Important factors that could cause differences in results of operations include, but are not limited to, the timing and execution of new store openings, relocations, remodels, sales and closures; the timing and impact of promotional and advertising campaigns; the impact of competition; changes in product supply or suppliers; changes in management information needs; changes in customer needs and expectations; governmental and regulatory actions; general industry or business trends or events; changes in economic or business conditions in general or affecting the natural foods industry in particular; and competition for and the availability of sites for new stores and potential acquisition candidates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement Regarding Forward-Looking Statements."

Overview

Marketing and Merchandising Initiatives and Operational Improvements. In fiscal 2003, we are implementing or completing initiatives and controls, designed to drive continued improvement in our business and, ultimately, promote steady growth in value to our stakeholders. These initiatives include, but are not limited to:

• revised private label program
• enhanced customer service and staff training
• centralized buying and pricing
• centralized scale hosting
• centralized back door receiving and replenishment
• SKU rationalization and new item introductions
• validated asset tracking
• remodeling and resetting merchandise in our stores

We continue to execute our real estate strategy. To the date of this report, we have signed leases or letters of intent for 30 proposed new sites opening in fiscal 2003, fiscal 2004 and fiscal 2005. In the second quarter of fiscal 2003 and continuing to the date of filing this report on Form 10-Q, we signed 13 new leases for stores scheduled to open in fiscal 2003 and 2004. These include locations for both our Wild Oats and Henry’s Marketplace stores.

New Marketing Initiatives: In the second quarter of fiscal 2003, we launched new marketing initiatives to complement our existing advertising flyer program in key markets, including Denver, Colorado, Albuquerque, New Mexico and Portland, Oregon. These initiatives included direct mail with coupons and radio advertising. Based on the early positive results of these programs, we intend to use these marketing tactics on a market-by-market basis in the future where store densities in a market warrant their use, or where we face increasing competition.

Store formats. We operate two store formats: the natural foods supermarket and farmers market formats. The natural foods supermarket format store, operated under the Wild Oats(R) Natural Marketplace trade name, is generally 20,000 to 35,000 gross square feet, and the farmers market store, operated under the Henry’s Marketplace(R) and Sun Harvest(TM) tradenames, is generally 15,000 to 25,000 gross square feet.

Store openings, closing, remodels and property dispositions. At June 28, 2003, we had 100 stores located in 25 states and Canada, as compared to 102 stores in 23 states and Canada at the end of the second quarter of fiscal 2002. In the second quarter of fiscal 2003, we opened no new stores and closed under-performing stores in Los Angeles and Irvine, California. In fiscal 2003, through the date of this report, we have opened four new stores, including one new store in Lexington, Kentucky opened in August 2003. We currently have new store sites under construction and scheduled for opening in 2003 in Chino Hills, California; Colorado Springs and Denver, Colorado; Franklin, Tennessee and Park City, Utah. In fiscal 2003, we have commenced remodeling and/or major resetting of 15 of our stores, six of which were completed in the second quarter of fiscal 2003.

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We currently have an inventory of 10 vacant sites comprising closed store and office locations and excess unoccupied space acquired during acquisitions or other leasing transactions, for which we have rent obligations; appropriate accruals have been made for such obligations. In the second quarter of fiscal 2003, we added one closed store to the inventory of vacant sites, sublet one store site and negotiated the termination of two leases.

Factors Impacting Results of Operations

Our results of operations have been and will continue to be affected by, among other things:

• the number, timing and mix of store openings, acquisitions, relocations, remodels or closings
• availability of capital
• impact of merchandising and marketing initiatives
• economic conditions
• competition
• labor issues
• loss of key management
• government regulations
• changes in suppliers, distributors and manufacturers
• volatility in our stock price

Our quarterly results of operations may differ materially from quarter to quarter for a variety of reasons, including the timing and success of new store openings, overall store performance, changes in the economy, seasonality and the timing of holidays, significant increases or decreases in prices for or availability of goods and services, competitive pressure and labor disturbances, as well as other factors mentioned in this section.

New stores build their sales volumes and refine their merchandise selection gradually and, as a result, generally have lower gross margins and higher operating expenses as a percentage of sales than more mature stores. We anticipate that the new stores opened in fiscal 2003 will experience operating losses for the first six months of operation, in accordance with trends for new, prototype stores opened in fiscal 2002 and 2003.

The construction or acquisition of new stores, remodeling of existing stores, as well as completion of capital purchases of new technology systems necessary for efficient operation of our business require substantial capital expenditures. In the past, our capital expenditures have been funded by cash generated from operations, bank debt and equity financing proceeds. These sources of capital may not be available to us in the future; in addition, our credit agreement contains limitations on our ability to make capital expenditures.

We have implemented and continue to implement merchandising and marketing initiatives in our stores. There can be no assurances that these programs will be successful in those stores.

Downturns in general economic conditions in communities, states, regions or the nation as a whole can affect our results of operations. While purchases of food generally do not decrease in a slower economy, consumers may choose less expensive alternative sources for food purchases. In addition, downturns in the economy make the disposition of excess properties, for which the Company continues to pay rent and other carrying costs, substantially more difficult as the markets become saturated with vacant space and market rents decrease.

As mentioned previously, we compete with both natural foods and conventional grocers. As competition in certain markets intensifies, our results of operations may be negatively impacted through loss of sales, reduction in margin from competitive price modifications, and disruptions in our employee base.

Our ability to attract, hire and retain qualified employees at store and home-office levels is critical to our continued success. Our future direction and success is dependent in large part on the continued services of certain key executive officers. Loss of any key officer may have an adverse affect on current operations and future growth programs.

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We are subject to a myriad of local, state and federal regulations governing the operation of our stores and support facilities. Such laws can have a material impact on our sales volume, costs of goods and direct store expenses. In addition, from time to time we are audited by various governmental agencies for compliance with existing laws, and we could be subject to fines or operational modifications as a result of noncompliance.

The Company currently purchases approximately 28.2% of its aggregate cost of goods for all product categories for all stores from its existing primary distributor, Tree of Life, Inc. Any significant disruption in the supply of goods from Tree of Life or other distributors or vendors could have a material impact on our overall sales volume and cost of goods.

Our stock price has been and continues to be fairly volatile. Volatility in our stock price may affect our future ability to raise proceeds from equity financings, enter into borrowing relationships, or affect our ability to obtain new store sites on favorable economic terms.

Critical Accounting Policies and Estimates. Our discussion and analysis of the Company’s financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are contingent upon future events or otherwise not readily determinable. The appropriateness of these policies and estimates are evaluated on an on going basis with the resulting adjustments from any revisions reflected in the financial statements. Actual results may differ from our estimates.

We believe the following accounting policies affect the material estimates used in the preparation of our consolidated financial statements.

• Insurance and Self-Insurance Reserves – The Company is self-insured for certain losses relating to workers’ compensation claims, general liability, and employee medical and dental benefits. The Company has purchased stop-loss coverage to limit its exposure to any significant levels of claims. Self-insured losses are accrued based upon the Company’s estimates of the aggregate insured claims incurred using certain actuarial assumptions followed in the insurance industry and the Company’s historical claim experiences. If the Company experiences an increase in claims, if actuarial assumptions are inaccurate, or if insurance industry costs increase beyond current expectations, then additional reserves may be required. Based upon critical review of actual historical claims development patterns for the Company, as well as for the industry, in the second quarter of fiscal 2003, the Company revised certain claim development assumptions used in estimating its workers’ compensation and general liability reserves for earlier claim years, resulting in a reduction of selling, general, administrative expenses, and direct store expenses.

• Inventory Valuation – Store inventories are valued principally at the lower of cost or market, with cost primarily determined under the retail inventory method on a first-in first-out basis. Certain highly perishable inventories are valued primarily at the lower of cost or market, with cost determined on a first-in, first-out basis. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are determined by applying a cost-to-retail ratio for various groupings of similar items to the retail value of inventories. Inherent in the retail inventory method calculations are certain management judgments and estimates, including shrinkage, which could impact the ending inventory valuation at cost as well as the resulting gross margins.

See our Fiscal 2002 Annual Report filed on Form 10-K for the period ended December 28, 2002, for additional disclosures of critical accounting policies. See also "Notes to Consolidated Financial Statements – Note 2 – Implementation of New Accounting Pronouncements and Note 3 – New Accounting Pronouncements" for disclosure of the effect of new accounting pronouncements during the second quarter of fiscal 2003.

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Results of Operations

The following table sets forth for the periods indicated, certain selected income statement data expressed as a percentage of sales:

	THREE MONTHS ENDED		SIX MONTHS ENDED
	June 28,	June 29,	June 28,	June 29,
	2003	2002	2003	2002
Sales	100.0%	100.0%	100.0%	100.0%
Cost of goods sold and occupancy    costs	70.6	69.8	70.3	70.4
Gross margin	29.4	30.2	29.7	29.6
Direct store expenses	20.8	21.8	21.1	21.7
Loss (gain) on disposal of assets	0.0	(0.0)	0.3	(0.0)
Selling, general and administrative    expenses	6.9	6.2	6.9	6.2
Pre-opening expenses	0.0	0.3	0.2	0.2
Restructuring and asset impairment    income	(0.1)	(0.0)	(0.4)	(0.1)
Income from operations	1.8	1.9	1.6	1.7
Interest income	0.1	0.0	0.1	0.0
Interest expense	(0.4)	0.9	(0.4)	0.9
Loss on early extinguishment of debt	0.0	0.0	0.0	0.0
Income before income taxes	1.5	1.0	1.3	0.7
Income tax expense	0.6	0.4	0.5	0.3
Net income	0.9%	0.6%	0.8%	0.5%

Sales. Sales for the three months ended June 28, 2003, increased 2.6% to $242.2 million from $236.2 million in the same period in fiscal 2002. Sales for the six months ended June 28, 2003, increased 1.9% to $478.2 million from $469.2 million in the same period in fiscal 2002. The quarter and year-to-date increases were primarily attributed to three new store openings in the first six months of fiscal 2003, as compared to one new store opening in the first six months of fiscal 2002. We calculate comparable store sales net of coupons and discounts commencing in the thirteenth full month of operations for new, relocated and acquired stores. Comparable store sales were negative 0.1% for the second quarter of fiscal 2003, as compared to a positive 5.2% in the second quarter of fiscal 2002, due to increased competitive pressures, continued operational modifications and issues, a continued weak economy and road construction adjacent to 5% of our stores. We anticipate sales will slowly increase as we open five additional new stores in the remainder of fiscal 2003 and move into the holiday season.

Gross Profit. Gross profit for the three months ended June 28, 2003 decreased 0.3% to $71.2 million from $71.4 million in the same period in fiscal 2002. Gross profit for the six months ended June 28, 2003, increased 2.2% to $142.1 million from $139.1 million in the same period in fiscal 2002, primarily due to the higher merchandise margins in key product categories in the first quarter of fiscal 2003. As a percentage of sales, gross profit decreased to 29.4% in the second quarter of fiscal 2003 from 30.2 % in the same period in fiscal 2002, due partly to increased produce costs, coupon redemptions from direct marketing campaigns in targeted markets, as well as discounts given on close out merchandise as part of the closure of two stores in the second quarter of fiscal 2003 and the Company’s on-going efforts to reduce slow-moving items to make room for new products in its stores.

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Direct Store Expenses. Direct store expenses for the three months ended June 28, 2003 decreased 2.3% to $50.3 million from $51.5 million in the same period in fiscal 2002. Direct store expenses for the six months ended June 28, 2003 decreased 0.7% to $101.2 million from $101.9 million in the same period in fiscal 2002, due to a continued focus on store-level expenses, as well as a significant decline in workers’ compensation liability estimates resulting from lower rates of injury incidents. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates."   As a percentage of sales, direct store expenses decreased to 20.7% in the second quarter of fiscal 2003 from 21.8% in the same period in fiscal 2002, as a result of consistent execution of operational improvements.

Loss (Gain) on Disposal of Assets. Loss (gain) on disposal of assets for the six months ended June 28, 2003 increased to a $1.4 million loss from a $57,000 gain in the same period in fiscal 2002. During the first quarter of fiscal 2003, we substantially completed a physical inventory of fixtures and equipment and recorded a $1.5 million loss on disposal of fixtures and equipment (approximately 1.2% of our fixed assets carrying value) that we will no longer use in our stores.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended June 28, 2003 increased 13.8% to $16.8 million from $14.8 million in the same period in fiscal 2002. Selling, general and administrative expenses for the six months ended June 28, 2003 increased 13.3% to $32.8 million from $28.9 million in the same period in fiscal 2002, due to increased marketing spending and increases in staffing to support certain IT initiatives focused on back door receiving, order replenishment, and labor scheduling, as well as the addition of regional staff to open and support new store growth. As a percentage of sales, selling, general and administrative expenses increased to 6.9% in the second quarter of fiscal 2003 from 6.2% in the same period in fiscal 2002. We anticipate that selling, general and administrative expenses will gradually decrease as a percentage of sales during the remainder of the year as we focus on expense control and add five new stores to our sales base.

Pre-Opening Expenses. Pre-opening expenses for the three months ended June 28, 2003, decreased to $101,000 compared to $645,000 during the same period in fiscal 2002. Pre-opening expenses for the six months ended June 28, 2003, increased 0.9% over the same period in fiscal 2002 due to the opening of three stores in the first six months of fiscal 2003, as compared to one store opening in the same period in 2002. As a percentage of sales, pre-opening expenses decreased to zero percent in the second quarter of fiscal 2003 from 0.3% in the same period in fiscal 2002, due to the opening of no new stores, as compared to the opening of one new store in the same period in 2002. Pre-opening expenses should increase in the aggregate in the third and fourth quarters as we prepare for five new store openings in the remainder of fiscal 2003.

Restructuring and Asset Impairment Income. During the second quarter of fiscal 2003, we recorded restructuring income of $145,000. Details of the significant components are as follows:

• Change in estimate related to lease-related liabilities for sites previously identified for closure or sale that were closed, sold or disposed of during the second quarter of fiscal 2003 ($2,195,000 of restructuring income) – During the second quarter of fiscal 2003, we reviewed the viability of a subtenant in Irvine, California, and determined the subtenant’s business stability supported reversal of the remaining reserves of $2,195,000.

• Severance for employees terminated in the second quarter of fiscal 2003 ($117,000 of restructuring expense) – During the second quarter of fiscal 2003, 37 employees were notified of their involuntary termination in conjunction with the closure of stores in Irvine and Los Angeles, California. As of June 28, 2003, $41,000 of involuntary termination benefits had been paid to these employees; the remaining benefits of $76,000 will be paid during the third quarter of fiscal 2003.

• Changes in estimate related to lease-related liabilities for sites previously identified for closure or sale $(1,933,000 of restructuring expense) – During the second quarter of fiscal 2003, we determined that additional time will be needed to dispose of certain lease obligations for four sites. This determination was largely driven by results of current disposition efforts, and is attributable to poor marketability and/or unattractive characteristics of the space, which may require improvement allowances and rent concessions by the Company. As a result, the company increased its estimated reserves for these sites by $1,988,000. Offsetting this charge was $55,000 in restructuring income related to the early termination of leases in Cleveland, Ohio and Santa Fe, New Mexico. Based on these changes in facts and circumstances and the related changes in estimates, we adjusted or reversed the remaining lease-related liabilities previously recorded for these locations and recognized net restructuring expense of $1,933,000 during the second quarter of fiscal 2003.

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During the first quarter of fiscal 2003, the Company recorded restructuring income of $1,736,000 consisting of the following components:

• Change in estimate related to lease-related liabilities for sites previously identified for closure or sale that were closed, sold or disposed of during the first quarter of fiscal 2003 ($441,000 of restructuring income) – During the first quarter of fiscal 2003, we completed payment obligations under a lease for excess space located in West Hartford, Connecticut, and under lease termination agreements for sites located in West Hollywood, California and Kansas City, Missouri. We closed a commissary facility in Federal Heights, Colorado, after weather-related structural damage rendered the facility untenantable. Based on these changes in facts and circumstances, the Company reversed the remaining lease-related liabilities previously recorded for these locations and, therefore, recognized restructuring income of $441,000 during the first quarter of fiscal 2003.

• Changes in estimate related to lease-related liabilities for sites previously identified for closure or sale ($1,295,000 of restructuring income) – During the first quarter of fiscal 2003, we reviewed the viability of a subtenant in Fort Collins, Colorado, and determined the subtenant’s business stability supported reversal of the remaining reserves of $628,000. Subsequent to the first quarter of fiscal 2003, we negotiated the early termination of leases in Cleveland, Ohio and Santa Fe, New Mexico, with payment obligations to terminate in the second and fourth quarters of fiscal 2003, respectively. The settlements were for less than previously estimated and accrued, and $980,000 was reversed to income. Offsetting this income, we recorded a charge of $313,000 for the difference between the terms of a new signed sublease for a closed location in Hartford, Connecticut, and the terms of the prior sublease for the same location under which the prior subtenant had defaulted. Based on these changes in facts and circumstances and the related changes in estimates, we adjusted or reversed the remaining lease-related liabilities previously recorded for these locations and recognized net restructuring income of $1,295,000 during the first quarter of fiscal 2003.

Interest Income. Interest income for the three months ended June 28, 2003 decreased 7.3% to $179,000 from $193,000 for the same period in fiscal 2002, as a result of a lower level of daily-invested funds. Interest income for the six months ended June 28, 2003 decreased 4.8% to $355,000 from $373,000 for the same period in fiscal 2002, due to a lower level of invested funds.

Interest Expense. Interest expense for the three months ended June 28, 2003 decreased 64.1% to $842,000 from $2.3 million in the same period in fiscal 2002, due to decreased borrowings during the three-month period. Interest expense for the six-month period ended June 28, 2003 decreased 61.6% to $1.8 million from $4.8 million as compared with the same period in fiscal 2002, due to decreased borrowings and the lower interest rate on our current credit facility entered into in February 2003. Due to the current state of the U.S. economy, we believe that the variable interest rates will remain constant during the next six to 12 months. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources" below.

Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt for the six months ended June 28, 2003 was $186,000 due to the refinancing of the credit facility in the first quarter, which required the write-off of the unamortized debt costs associated with the old facility.

Income Tax Expense. For the three months ended June 28, 2003, we recorded $1.4 million of income tax expense, as a result of income before income taxes of $3.6 million during the period. Income tax expense for the six months ended June 28, 2003 is $2.3 million as a result of income before taxes of $5.9 million during the same period. Our effective tax rate on income from continuing operations is expected to be in the range of 38.5% to 40.0% for fiscal 2003 as compared to a fiscal 2002 rate of 40.7%. See "Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Liquidity and Capital Resources" below.

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Liquidity and Capital Resources

Our primary sources of capital have been cash flow from operations (which includes trade payables), bank indebtedness, and the sale of equity securities. Primary uses of cash have been the financing of new store development, new store openings, relocations, remodels and acquisitions and repayment of debt.

Net cash provided by operating activities was $20.0 million during the first six months of fiscal 2003 as compared to $23.8 million during the same period in fiscal 2002. Cash from operating activities decreased during this period primarily due to changes in net income and working capital items. We have not required significant external financing to support inventory requirements at our existing and new stores because we have been able to rely on vendor financing for most of the inventory costs, and we anticipate that vendor financing will continue to be available for new store openings.

Net cash used in investing activities was $13.5 million during the first six months of fiscal 2003 as compared to $4.6 million during the same period in fiscal 2002. The increase is due to an increase in capital expenditures for new stores and remodels.

Net cash used in financing activities was $2.7 million during the first six months of fiscal 2003 as compared to $25.3 million during the same period in fiscal 2002. The decrease reflects lower debt repayments under the new credit facility due to an increase in capital expenditures and a decrease in cash flow from operations.

We have a net deferred tax asset of $17.9 million on our balance sheet as of June 28, 2003, primarily as a result of $54.9 million of restructuring and asset impairment charges recorded during fiscal 2001. The recoverability of the net deferred tax asset is primarily dependent upon the Company generating sufficient taxable income in the future which, if achieved, will reduce cash required for payment of federal and state income taxes. Although realization of the net deferred tax asset is not assured, we believe it is more likely than not that the Company will generate sufficient taxable income in the future to realize the full amount of the deferred tax asset. Our assessment is based on projections that assume that the Company can maintain its current store contribution margin. Furthermore, we expect to maintain the sales growth experienced over the past five years that would generate additional taxable income. The primary uncertainty related to the realization of the deferred tax asset is the Company’s ability to achieve its four-year business plan and generate future taxable income to realize the full amount of the deferred tax asset. We believe that the sales, gross margin, store contribution margin, and selling, general and administrative expenses assumptions in our four-year business plan are reasonable and, more likely than not, attainable. We will continue to assess the recoverability of the net deferred tax asset and to the extent it is determined in the future that a valuation allowance is required, it will be recognized as a charge to earnings at that time.

Credit Facility. Our credit facility has a $75.0 million limit, which we believe to be adequate for our current borrowing needs, with a three-year term maturing February 2006, with a one-year renewal option. Under the facility, we have the option to increase the total facility to $135.0 million through the addition of new lenders and through the agreement of the current lending group to increase their total commitments. Outstanding borrowings under the facility were approximately $39.9 million as of June 28, 2003.

As part of the facility, we have given our lenders collateral in the form of cash, equipment and fixtures, inventory, and other assets. We have also granted certain leasehold mortgages. The facility contains limitations on capital expenditures and the signing of new leases, although we believe such limitations will not restrict our announced growth plans. The interest rate on the facility is currently either prime plus 1.0% or one-month LIBOR plus 2.25% at our election, and the rates modify depending on the ratio of average total funded debt, as defined under the credit facility, plus six times rent expense, to EBITDAR for the four fiscal quarter periods then ended, as calculated on our quarterly compliance certificate. Additionally, we are charged a commitment fee on the unused portion of the line ranging from 0.25% to 0.5% based on performance objectives as defined in the credit agreement. We believe that cash generated from operations and available under our credit facility will be sufficient to meet our capital expenditure requirements in fiscal 2003

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Capital Expenditures. We spent approximately $6.9 million during the second quarter and $13.5 million during the first six months of fiscal 2003 for new store construction, remodels and other capital expenditures. Our average capital expenditures to open a leased store, including leasehold improvements, equipment and fixtures, have ranged from approximately $2.0 million to $5.0 million historically, excluding inventory costs and initial operating losses. We anticipate that the average capital expenditures to open a natural foods supermarket format store will be $2.5 million to $3.0 million in the future; however, our ability to negotiate turnkey leases in the future will result in substantially lower capital expenditure per store, in return for a slightly higher rent rate over the lease term. Our average capital expenditures to open a farmers market format store are estimated at $1.5 million to $2.0 million in the future. Delays in opening new stores may result in increased capital expenditures and increased pre-opening costs for the site, as well as lower than planned sales for the Company.

Cautionary Statement Regarding Forward-Looking Statements

This Report on Form 10-Q contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, which involve known and unknown risks. Such forward-looking statements include statements as to the Company's plans to open, acquire or relocate additional stores; the anticipated performance of such stores; the impact of competition and current economic uncertainty; the sufficiency of funds to satisfy the Company's cash requirements through the remainder of fiscal 2003, our expectations for comparable store sales; the impact of changes resulting from our merchandising, advertising and pricing programs; expected pre-opening expenses and capital expenditures; and other statements containing words such as "believes," "anticipates," "estimates," "expects," "may," "intends" and words of similar import or statements of management's opinion. These forward-looking statements and assumptions involve known and unknown risks, uncertainties and other factors that may cause the actual results, market performance or achievements of the Company to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause differences in results of operations include, but are not limited to, the timing and execution of new store openings, relocations, remodels, sales and closures; the impact of competition; changes in product supply or suppliers and supplier performance levels; changes in management information needs; changes in customer needs and expectations; governmental and regulatory actions; general industry or business trends or events; changes in economic or business conditions in general or affecting the natural foods industry in particular; and competition for and the availability of sites for new stores and potential acquisition candidates. The Company undertakes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this Report.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, the Company is exposed to fluctuations in interest rates and the value of foreign currency. The Company employs various financial instruments to manage certain exposures when practical.

The Company is exposed to foreign currency exchange risk. The Company owns and operates three natural foods supermarkets and a commissary kitchen in British Columbia, Canada. The commissary supports the three Canadian stores and does not independently generate sales revenue. Sales made from the Canadian stores are made in exchange for Canadian dollars. To the extent that those revenues are repatriated to the United States, the amounts repatriated are subject to the exchange rate fluctuations between the two currencies. The Company does not hedge against this risk because of the small amounts of funds at risk.

The Company's exposure to interest rate changes is primarily related to its variable rate debt issued under its credit facility. On February 26, 2003, the Company refinanced the credit facility and reduced the total commitment available to a $75.0 million revolving line of credit, with a three-year term expiring February 25, 2006. The interest rate on the amended facility is currently either prime plus 1.0% or one-month LIBOR plus 2.25%, at our election, and the rates modify depending on the ratio of average total funded debt, as defined under the credit facility, plus six times rent expense, to EBITDAR for the four fiscal quarter periods then ended, as calculated on our quarterly compliance certificate. Because the interest rate on the facility is variable, based upon the prime rate or LIBOR, the Company's interest expense and net income are affected by interest rate fluctuations. If interest rates were to increase or decrease by 100 basis points, the result, based upon the existing outstanding non-hedged variable rate debt as of June 28, 2003, would be an annual increase or decrease of approximately $99,000 in interest expense and a corresponding decrease or increase of approximately $60,000 in the Company’s net income after taxes.

22

In September 2000, as required by the Company’s former credit facility, the Company entered into an interest rate swap to hedge its exposure on variable rate debt positions. Variable rates are predominantly linked to LIBOR as determined by one-month intervals. The interest rate provided by the swap fixed one-month LIBOR at 6.7%. At June 28, 2003, the notional principal amount of the interest rate swap agreement was $30.0 million, expiring in August 2003. There is no obligation to renew the swap under the refinanced facility. The notional amount is the amount used for the calculation of interest payments that are exchanged over the life of the swap transaction on the amortized principal balance. In the second quarter of fiscal 2003, the loss, net of taxes, included in other comprehensive income for this cash flow hedge was approximately $256,000.

Item 4. Controls and Procedures

We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rule 13a–14 under supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, as of June 28, 2003. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings. No significant changes were made to our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation. The design of any future system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions regardless of how remote.

23

Part II.  OTHER INFORMATION

Item 1.  Legal Proceedings

The Company is named as defendant in various actions and proceedings arising in the normal course of business. In all of these cases, the Company is denying the allegations and is vigorously defending against them and, in some cases, has filed counterclaims. Although the eventual outcome of the various lawsuits cannot be predicted, it is management’s opinion that these lawsuits will not result in liabilities that would materially affect the Company’s consolidated results of operations, financial position, or cash flows.

Item 2.  Changes in Securities and Use of Proceeds

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Submission of Matters to a Vote of Security Holders

At the Company’s Annual Meeting of Stockholders, held on May 5, 2003, the Company’s stockholders elected each of the following directors, and the Company’s Board of Directors for a three-year term: David Chamberlain, Perry Odak and Mark Retzloff. The following number of votes elected the directors

Director	For	Withheld
David Chamberlain	23,528,284	2,293,307
Perry Odak	22,113,964	3,707,627
Mark Retzloff	22,189,284	3,632,307

The remaining directors whose terms continue after the meeting date are John Shields, Brian Devine, David Gallitano, James McElwee and Stacey Bell. One additional director, Ann-Marie Austin-Stephens, was elected by the Board to fill a newly created Board seat in May 2003.

The Company’s stockholders ratified the selection of PricewaterhouseCoopers LLP as independent accountants for the Company for its fiscal year ended December 27, 2003. The shareholders voted for the ratification by the following number of votes:

For	Against	Abstain	Broker Non-Votes
25,043,910	736,822	50,859	0

Item 5.  Other Information

The Audit Committee of the Board of Directors pre-approves all non-audit services provided by the Company’s independent accountants, PricewaterhouseCoopers LLP. The aggregate fees billed for non-audit services rendered for the second quarter of fiscal 2003 were $11,000 for tax services.

24

Item 6. 

(a)	Exhibits. The following exhibits to this report filed on Form 10-Q are furnished as required by Item 601 of Regulation S-K:
	Exhibit Number	Description of Document
	10.1#+	David B. Clark Equity Incentive Plan
	10.2#+	Severance Agreement between Registrant and David B. Clark, dated June 2, 2003
	31.1+	CEO Certification under Section 302 of Sarbanes-Oxley Act of 2002
	31.2+	CFO Certification under Section 302 of Sarbanes-Oxley Act of 2002
	32.1+	CEO Certification under Section 906 of Sarbanes-Oxley Act of 2002
	32.2+	CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002

(b)	Reports on Form 8-K. The Company filed the following report on Form 8-K during the quarterly period ended June 28, 2003:
	(1)	Report dated May 9, 2003, filed on Form 8-K, under Item 5, "Other Events" announcing the addition of a new Board member.
	(2)	Report dated May 13, 2003, filed on Form 8-K, under Item 12, "Results of Operations and Financial Condition" regarding Registrant’s results of operations and financial condition for the period ended March 29, 2003.

__________________________________

#	Management Compensation Plan.
+	Included herewith.

25

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boulder, County of Boulder, State of Colorado, on the 11th day of August 2003.

Wild Oats Markets, Inc.

(Registrant)

By: /s/ Edward F. Dunlap

Edward F. Dunlap

Executive Officer and Chief Financial Officer

(Principal Financial and Accounting Officer)

26

EX-10.1

Exhibit 10.1

WILD OATS MARKETS, INC.

DAVID B. CLARK EQUITY INCENTIVE PLAN

1. PURPOSES

(a) The purpose of the Plan is to induce David B. Clark ("Executive" or "Optionee") to enter into an employment arrangement with Wild Oats Markets, Inc. as Senior V.P./ General Manager, Wild Oats Store Operations, and pursuant to which the Executive may be given an opportunity to benefit from increases in value of the common stock of the Company ("Common Stock") through the granting of Nonstatutory Stock Options.

(b) All Options shall be Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each Option.

2. DEFINITIONS

(a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code.

(b) "BOARD" means the Board of Directors of the Company.

(c) "CODE" means the Internal Revenue Code of 1986, as amended.

(d) "COMMITTEE" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan.

(e) "COMPANY" means Wild Oats Markets, Inc. a Delaware corporation.

(f) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the employment or relationship as a Director or Consultant is not interrupted or terminated. The Board, in its sole discretion, may determine whether Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; or (ii) transfers between locations of the Company or between the Company, Affiliates or their successors.

(g) "DIRECTOR" means a member of the Board.

(h) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company.

(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

(j) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock of the Company determined as follows:

(1) If the Common Stock is listed on any established stock exchange, or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable;

(2) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board.

(k) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

(l) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option.

(m) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(n) "OPTION" means a stock option granted pursuant to the Plan.

(o) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan.

(p) "OPTIONEE" means a person to whom an Option is granted pursuant to the Plan.

(q) "PLAN" means this Wild Oats Markets, Inc. 1996 Equity Incentive Plan.

(r) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

(s) "STOCK AWARD" means any right granted under the Plan, including any Option.

(t) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan.

3. ADMINISTRATION

(a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c).

(b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:

(1) To determine when and how each Stock Award shall be granted; whether a Stock Award will be an Incentive Stock Option or a Nonstatutory Stock Option.

(2) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.

(3) To amend the Plan or a Stock Award as provided in Section 13.

(4) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan.

(c) The Board may delegate administration of the Plan to a committee or committees ("Committee") of one or more members of the Board. In the discretion of the Board, a Committee may consist solely of two or more Outside Directors, in accordance with Code Section 162(m), or solely of two or more Non-Employee Directors, in accordance with Rule 16(b)-3. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in this Plan to the Board shall thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan.

4. SHARES SUBJECT TO THE PLAN

(a) Subject to the provisions of Section 12 relating to adjustments upon changes in stock, the stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate 100,000 shares of the Common Stock. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full (or vested in the case of Restricted Stock), the stock not acquired under such Stock Award shall cease to be subject to the Plan.

(b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise.

5. ELIGIBILITY

(a) Stock Awards other than Incentive Stock Options may be granted only to Employees, Directors or Consultants.

(b) Subject to the provisions of Section 12 relating to adjustments upon changes in stock, no person shall be eligible to be granted Options covering more than one hundred thousand (100,000) shares of the Common Stock in any calendar year. This subsection 5(c) shall not apply until (i) the earliest of: (A) the first material modification of the Plan (including any increase to the number of shares reserved for issuance under the Plan in accordance with Section 4); (B) the issuance of all of the shares of Common Stock reserved for issuance under the Plan; (C) the expiration of the Plan; or (ii) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder.

6. OPTION PROVISIONS

Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions:

(a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted.

(b) PRICE. The exercise price of each Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code.

(c) CONSIDERATION. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, or (ii) at the discretion of the Board or the Committee, at the time of the Common Stock is issued pursuant to the exercise, (A) by delivery to the Company of other Common Stock of the Company, (B) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other Common Stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration that may be acceptable to the Board.

In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement.

(d) TRANSFERABILITY. A Nonstatutory Stock Option may be transferred to the extent provided in the Option Agreement; provided that if the Option Agreement does not expressly permit the transfer of a Nonstatutory Stock Option, the Nonstatutory Stock Option shall not be transferable except by will, by the laws of descent and distribution or pursuant to a domestic relations order satisfying the requirements of Rule 16b-3 and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person or any transferee pursuant to a domestic relations order. Notwithstanding the foregoing, the person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option.

(e) VESTING. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised.

(f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination) but only within such period of time ending on the earlier of (i) the date thirty (30) days after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.

An Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director, or Consultant (other than upon the Optionee's death or disability) would result in liability under Section 16(b) of the Exchange Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the Option Agreement, or (ii) the tenth (10th) day after the last date on which such exercise would result in such liability under Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (other than upon the Optionee's death or disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the first paragraph of this subsection 6(f), or (ii) the expiration of a period of thirty (30) days after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant during which the exercise of the Option would not be in violation of such registration requirements.

(g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination), but only within such period of time ending on the earlier of (i) the date six (6) months following such termination (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.

(h) DEATH OF OPTIONEE. In the event of the death of an Optionee during, or within a period specified in the Option after the termination of, the Optionee's Continuous Status as an Employee, Director or Consultant, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option at the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date twelve (12) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.

(i) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate.

(j) RE-LOAD OPTIONS. Without in any way limiting the authority of the Board or Committee to make or not to make grants of Options hereunder, the Board or Committee shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionee to a further Option (a "Re-Load Option") in the event the Optionee exercises the Option evidenced by the Option agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option (i) shall be for a number of shares equal to the number of shares surrendered as part or all of the exercise price of such Option; (ii) shall have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (iii) shall have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option.

Any such Re-Load Option shall be a Nonstatutory Stock Option. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares under subsection 4(a) and shall be subject to such other terms and conditions as the Board or Committee may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options.

7. RESERVED

8. CANCELLATION AND RE-GRANT OF OPTIONS

(a) The Board or the Committee shall have the authority to effect, at any time and from time to time, (i) the repricing of any outstanding Options under the Plan and/or (ii) with the consent of any adversely affected holders of Options, the cancellation of any outstanding Options under the Plan and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of shares of stock, but having an exercise price per share not less than eighty-five percent (85%) of the Fair Market Value for a Nonstatutory Stock Option. Notwithstanding the foregoing, the Board or the Committee may grant an Option with an exercise price lower than that set forth above if such Option is granted as part of a transaction to which section 424(a) of the Code applies.

(b) Shares subject to an Option canceled under this Section 8 shall continue to be counted against the maximum award of Options permitted to be granted pursuant to subsection 5(c) of the Plan. The repricing of an Option under this Section 7, resulting in a reduction of the exercise price, shall be deemed to be a cancellation of the original Option and the grant of a substitute Option; in the event of such repricing, both the original and the substituted Options shall be counted against the maximum awards of Options permitted to be granted pursuant to subsection 5(c) of the Plan. The provisions of this subsection 8(b) shall be applicable only to the extent required by Section 162(m) of the Code.

9. COVENANTS OF THE COMPANY

(a) During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of stock required to satisfy such Stock Awards.

(b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares under Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act of 1933, as amended (the "Securities Act") either the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained.

10. USE OF PROCEEDS FROM STOCK

Proceeds from the sale of stock pursuant to Stock Awards shall constitute general funds of the Company.

11. MISCELLANEOUS

(a) The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest pursuant to subsection 6(e) or 7(d), notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest.

(b) Neither an Employee, Director nor a Consultant nor any person to whom a Stock Award is transferred in accordance with the Plan shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such person has satisfied all requirements for exercise of the Stock Award pursuant to its terms.

(c) Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Employee, Consultant or other holder of Stock Awards any right to continue in the employ of the Company or any Affiliate or to continue serving as a Consultant and Director, or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee with or without notice and with or without cause, or the right to terminate the relationship of any Consultant pursuant to the terms of such Consultant's agreement with the Company or Affiliate or service as a Director pursuant to the Company's By-laws.

(d) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options.

(e) The Company may require any person to whom a Stock Award is granted, or any person to whom a Stock Award is transferred in accordance with the Plan, as a condition of exercising or acquiring stock under any Stock Award, (1) to give written assurances satisfactory to the Company as to such person's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Stock Award for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise or acquisition of stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock.

(f) To the extent provided by the terms of a Stock Award Agreement, the person to whom a Stock Award is granted may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under a Stock Award by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to the participant as a result of the exercise or acquisition of stock under the Stock Award; or (3) delivering to the Company owned and unencumbered shares of the Common Stock of the Company.

12. ADJUSTMENTS UPON CHANGES IN STOCK

(a) If any change is made in the stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan pursuant to subsection 4(a) and the maximum number of shares subject to award to any person during any calendar year pursuant to subsection 5(d), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such outstanding Stock Awards. Such adjustments shall be made by the Board or the Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company".)

(b) In the event of: (1) a dissolution, liquidation or sale of substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; or (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then to the extent permitted by applicable law: (i) any surviving corporation or an Affiliate of such surviving corporation shall assume any Stock Awards outstanding under the Plan or shall substitute similar Stock Awards for those outstanding under the Plan, or (ii) such Stock Awards shall continue in full force and effect. In the event any surviving corporation and its Affiliates refuse to assume or continue such Stock Awards, or to substitute similar options for those outstanding under the Plan, then, with respect to Stock Awards held by persons then performing services as Employees, Directors or Consultants, the time during which such Stock Awards may be exercised shall be accelerated and the Stock Awards terminated if not exercised prior to such event.

13. AMENDMENT OF THE PLAN AND STOCK AWARDS

(a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 12 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary for the Plan to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or securities exchange listing requirements.

(b) The Board may in its sole discretion submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers.

(c) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide the Executive with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith.

(d) Rights and obligations under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing.

(e) The Board at any time, and from time to time, may amend the terms of any one or more Stock Award; provided, however, that the rights and obligations under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing.

14. TERMINATION OR SUSPENSION OF THE PLAN

(a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate ten (10) years from the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated.

(b) Rights and obligations under any Stock Award granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the consent of the person to whom the Stock Award was granted.

15. EFFECTIVE DATE OF PLAN.

This Plan shall become effective on June 26, 2003.

WILD OATS MARKETS, INC.

NON-QUALIFIED STOCK OPTION

OPTION AGREEMENT

DAVID B. CLARK, Optionee:

Wild Oats Markets, Inc. (the "Company"), pursuant to the David B. Clark Equity Incentive Plan (the "Plan"), has this day granted to you, the optionee named above ("Optionee"), options (the "Options") to purchase shares of the common stock of the Company ("Common Stock"). The Options are not intended to qualify and will not be treated as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").

The details of your Options are as follows:

1. SHARES; VESTING. (a) The total number of shares of Common Stock subject to the Options are ____________________________

(a) Subject to the conditions stated herein, the Option shall be exercisable with respect to each installment shown below on or after the date of vesting applicable to such installment; provided, however, that should Optionee's employment terminate for "cause" this option shall be terminated and canceled immediately and shall not be exercisable for any number of shares. For purposes of this option, "cause" shall mean misconduct including, but not limited to, criminal acts involving moral turpitude or dishonesty.

NUMBER OF SHARES (INSTALLMENT)

DATE OF EARLIEST EXERCISE (VESTING)

2. EXERCISE PRICE; PAYMENT. (a) The exercise price of the Options is $_______ per share, being not less than eighty five percent (85%) of the fair market value of the Common Stock on the date of grant of the Options.

(a) Payment of the exercise price per share is due in full in cash (including check) upon exercise of all or any part of each installment which has become exercisable by you.

(b) Notwithstanding the foregoing, the Options may be exercised pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which results in the receipt of cash (or check) by the Company prior to the issuance of Common Stock.

3. WHOLE SHARES. The Options may not be exercised for any number of shares which would require the issuance of anything other than whole shares.

4. REGISTERED STOCK. Notwithstanding anything to the contrary contained herein, the Options may not be exercised unless the shares issuable upon exercise of the Options are then registered under the Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Act.

5. TERM; TERMINATION. (a) The term of the Options commence on the date hereof and, unless sooner terminated as set forth below or in the Plan, terminates ten (10) years from the date of grant. In no event may the Options be exercised on or after the date on which they terminate.

(b) The Options shall terminate prior to the expiration of its term 30 days after the termination of your employment with the Company for any reason or for no reason, other than cause as defined above, unless:

(i) such termination of employment is due to your permanent and total disability (within the meaning of Section 422(c)(6) of the Code), in which event the option shall terminate on the earlier of the termination date set forth above or six (6) months following such termination of employment; or

(ii) such termination of employment is due to your death, in which event the option shall terminate on the earlier of the termination date set forth above or twelve (12) months after your death; or

(iii) during any part of such thirty (30) days period the option is not exercisable solely because of the condition set forth in Section 4 above, in which event the Options shall not terminate until the earlier of the termination date set forth above or until they shall have been exercisable for an aggregate period of thirty (30) days after the termination of employment.

The Options may be exercised on or after the termination of employment only as to that number of vested shares as to which they were exercisable on the date of termination of employment under the provisions of Section 1 of this Option Agreement.

6. METHOD OF EXERCISE. (a) The Options may be exercised by delivering a notice of exercise (in the form attached hereto as Attachment 2) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require pursuant to the Plan. In the event of a "cashless exercise", you may exercise the Options by providing such documentation to the brokerage firm retained by the Company to administer cashless exercises as such brokerage firm may require.

(b) By exercising the Options you agree that the Company may require you to enter an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (i) the exercise of the Options; (ii) the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise; or (iii) the disposition of shares acquired upon such exercise.

7. TRANSFERABILITY. The Options are not transferable, except by will or by the laws of descent and distribution, and are exercisable during your life only by you.

8. NOTICES. Any notices provided for in this Option Agreement shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five days after deposit in the United States mail, postage prepaid, addressed to you at the address specified below or at such other address as you hereafter designate by written notice to the Company.

9. CONFLICT. The Options is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this option, including without limitation the provisions of the Plan relating to option provisions, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this option and those of the Plan, the provisions of the Plan shall control. If the parties hereto shall have any conflict regarding the terms of the Options, the interpretation of the Company's Compensation Committee shall prevail.

Dated the ___ day of ____________, 2002.

Very truly yours,

WILD OATS MARKETS, INC.

By ___________________________________

Duly authorized on behalf of the Board of Directors

The undersigned:

(a) Acknowledges receipt of the foregoing option and the attachments referenced therein and understands that all rights and liabilities with respect to the Options are set forth in this option agreement and the Plan; and

(b) Acknowledges that as of the date of grant of the Options, this option agreement sets forth the entire understanding between the undersigned optionee and the Company and its affiliates regarding the Options which are the subject hereof, and supersedes all prior oral and written agreements on that subject.

___________________________________________________

Optionee

Address: ___________________________________________

___________________________________________

ATTACHMENTS:

Attachment 1 – David B. Clark Equity Incentive Plan

Attachment 2 – Form of Notice of Exercise

NOTICE OF EXERCISE

Date of Exercise

Wild Oats Markets, Inc.

3375 Mitchell Lane

Boulder, CO 80301

Ladies and Gentlemen:

This constitutes notice under my stock option that I elect to purchase the number of shares for the price set forth below.

Type of option (check one) Incentive Nonstatutory

Stock option dated:

Number of shares as to which

option is exercised:

Certificates to be issued in

name of: _____________________

Total exercise price: $

Cash payment delivered herewith: $

By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the 1996 Equity Incentive Plan, (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of this option.

I further acknowledge that all certificates representing any of the Shares subject to the provisions of the Option shall have endorsed thereon appropriate legends reflecting the foregoing limitations, as well as any legends reflecting restrictions pursuant to the Company's Articles of Incorporation, Bylaws and/or applicable securities laws.

Very truly yours,

_________________________________

EX-10.2

Exhibit 10.2

SEVERANCE AGREEMENT

THIS AGREEMENT, dated June 2, 2003, is made by and between Wild Oats Markets, Inc., a Delaware corporation (the "Company"), and David Clark (the "Executive").

WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and

WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and

WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control;

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows:

1.  Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof.

2.  Term of Agreement. The Term of this Agreement shall commence on the date hereof and shall continue in effect through December 31, 2004; provided, however, that commencing on January 1, 2003 and each January 1 thereafter, the Term shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend the Term; and further provided, however, that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than twenty-four (24) months beyond the month in which such Change in Control occurred.

3.  Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Benefits and the other payments and benefits described herein. Except as provided in Section 10.1 hereof, no Severance Benefits shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company.

4.  The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change in Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason.

5.  Compensation Other Than Severance Benefits.

5.1  Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability.

5.2  If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason.

5.3  If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason.

6.  Severance Benefits.

6.1  Subject to Section 9 below, if the Executive's employment is terminated following a Change in Control and during the Term, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Benefits") and the payment referred to in Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that such position is not correct. The Executive shall not be entitled to receive any Severance Benefits under this Agreement under any circumstances other than those set forth in this paragraph.

(A)  In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to two times the sum of (i) the Executive's base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (ii) the average annual bonus earned by the Executive pursuant to any discretionary annual bonus or incentive plan maintained by the Company in respect of the two fiscal years ending immediately prior to the fiscal year in which occurs the Date of Termination or, if the Executive has not been eligible for at least two annual bonuses as of the Date of Termination, the bonus earned by the Executive in respect of the fiscal year immediately prior to the fiscal year in which occurs the Date of Termination.

(B)  For the twenty-four (24) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, disability, accident and health insurance benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health insurance benefits shall be provided through a third-party insurer. Benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be reduced to the extent benefits of the same type are received by or made available to the Executive during the twenty-four (24) month period following the Executive's termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason.

(C)  Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level of the individual and corporate performance goals established with respect to such award, if the Company's incentive compensation plan has such a concept, or, if not, at a level commensurate with the Executive's position at the Company and the incentive compensation awards paid to similarly situated executives of the Company, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period.

(D)  In addition to the benefits to which the Executive is entitled under each DC Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the two years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's compensation (as defined in the DC Pension Plan) during the twelve (12) months immediately preceding the Date of Termination or, if higher, during the twelve months immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (z) without regard to any amendment to the DC Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder, and (ii) the excess, if any, of (x) the Executive's account balance under the DC Pension Plan as of the Date of Termination over (y) the portion of such account balance that is nonforfeitable under the terms of the DC Pension Plan.

(E)  Each option to acquire common stock of the Company granted under a Company incentive plan or other arrangement that is held by the Executive on the Date of Termination shall, as of such date, vest and become immediately exercisable in full.

6.2  (A)  Subject to Section 9 below, whether or not the Executive becomes entitled to the Severance Benefits, if any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, and after taking into account the phase out of itemized deductions and personal exemptions attributable to the Gross-Up Payment, shall be equal to the Total Payments.

(B)  For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.

(C)  In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments.

6.3  The payments provided in subsections (A), (C) and (D) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of Section 6.2 hereof); provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such amount shall be repaid by the Executive to the Company no later than the fifth (5th) business day after demand by the Company. At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).

6.4  The Company also shall pay to the Executive fifty percent (50%) all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. Within five (5) business days following the final resolution and any such dispute, attempted enforcement or tax proceeding, either (i) the Company shall pay to the Executive the remaining fifty percent (50%) of such fees and expenses not previously paid to the Executive, if the Executive prevails on at least one material issue in such dispute, attempted enforcement or tax proceeding or (ii) the Executive shall repay to the Company the fifty percent (50%) of such fees and expenses previously paid to the Executive, if the Executive does not prevail on at least one material issue in such dispute, attempted enforcement or tax proceeding.

7.  Termination Procedures and Compensation During Dispute.

7.1  Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 11 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail.

7.2  Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given).

7.3  Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence.

7.4  Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement.

8.  No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, except as specifically provided in Section 6.1(B) hereof, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise.

9.  Restrictive Covenants

The Executive agrees that restrictions on his activities during and after his employment are necessary to protect the goodwill, Confidential Information and other legitimate interests of the Company and its Subsidiaries, and that the agreed restrictions set forth below will not deprive the Executive of the ability to earn a livelihood:

(A)  While the Executive is in the employment of the Company and, if the Executive is entitled to benefits under Section 6.1 hereof upon termination of employment, for a period of twenty-four (24) months after such termination of employment (the "Non-Competition Period"), the Executive shall not, directly or indirectly, whether as owner, partner, investor, consultant, agent, employee, co-venturer or otherwise, compete with the business of the Company or any of its Subsidiaries within a twenty (20) mile radius of any location where the Company operates a retail store at the date of termination of employment, or at which the Company has entered into a letter of intent or similar commitment for or entered into obligations relating to the opening of a retail store to be opened within the period of this covenant. Specifically, but without limiting the foregoing, the Executive agrees not to engage in any manner in any activity that is directly or indirectly competitive with the business of the Company or any of its Subsidiaries as conducted or which has been proposed by management within six months prior to termination of the Executive's employment. Restricted activity also includes without limitation accepting employment or a consulting position with any person who is, or at any time within twelve (12) months prior to termination of the Executive's employment has been, a licensee of the Company or any of its Subsidiaries. For the purposes of this Section 9, the business of the Company and its Subsidiaries shall mean retail operations for the sale of natural and organic foods, including groceries, meat, seafood, dairy and frozen products and produce, as well as natural vitamins, supplements, homeopathic remedies and body care products.

(B)  The Executive agrees that during the Non-Competition Period or in connection with any termination of employment pursuant to which the Executive is entitled to benefits under Section 6.1, the Executive will not, either directly or through any agent or employee, Solicit any employee of the Company or any of its Subsidiaries to terminate his or her relationship with the Company or any of its Subsidiaries or to apply for or accept employment with any enterprise competitive with the business of the Company, or Solicit any customer, supplier, licensee or vendor of the Company or any of its Subsidiaries to terminate or materially modify its relationship with them, or, in the case of a customer, to conduct with any person any business or activity which such customer conducts or could conduct with the Company or any of its Subsidiaries.

(C)  The Executive and the Company further agree that following any termination of the Executive's employment pursuant to which the Executive is entitled to benefits under Section 6.1, (i) the Executive shall not make statements or representations, otherwise communicate, directly or indirectly, in writing, orally, or otherwise, or take any action which may, directly, or indirectly, disparage or be damaging to the Company or any if its Subsidiaries or affiliates or their respective former or current officers, directors, employees, advisors, businesses or reputations, (ii) the Company shall instruct its Board members and senior management to not make statements or representations, otherwise communicate, directly, or indirectly, in writing, orally or otherwise, or take any action which may, directly, or indirectly, disparage or be damaging to the Executive or his reputation. The Executive and the Company further agree that, in the event the Executive's employment with the Company is terminated other than by the Company for Cause or as a result of the Executive's death, the Executive and the Company shall refer to the Executive's departure as a "resignation" in any press release or other external announcement or communication concerning the Executive's departure from the Company. Nothing in this paragraph is intended to undermine any obligations the Executive or the Company may have to comply with applicable law, or prohibit the Executive or the Company from providing truthful testimony or information pursuant to subpoena, court order, discovery demand or similar legal process, or truthfully responding to lawful inquiries by any governmental or regulatory entity.

(D)  The provisions of this Section 9 shall not be deemed to preclude the Executive from employment or engagement during the Non-Competition Period following termination of employment hereunder (i) in a business engaged in retail sales, provided such employment or engagement does not otherwise violate the provisions of this Section 9, or (ii) by a corporation, some of the activities of which are competitive with the business of the Company, if the Executive's activities do not relate to such competitive business, and nothing contained in this Section 9 shall be deemed to prohibit the Executive, during the Non-Competition Period following termination of employment hereunder, from acquiring or holding, solely as an investment, publicly traded securities of any competitor corporation so long as such securities do not, in the aggregate, constitute more than 3% of the outstanding voting securities of such corporation.

(E)  The Executive acknowledges that the Company and its Subsidiaries continually develop Confidential Information, that the Executive may develop Confidential Information for the Company or its Subsidiaries and that the Executive may learn of Confidential Information during the course of his employment under this Agreement. The Executive will comply with the policies and procedures of the Company and its Subsidiaries for protecting Confidential Information and shall never disclose to any person (except as required by applicable law or legal process or for the proper performance of his duties and responsibilities to the Company and its Subsidiaries, or in connection with any litigation between the Company and the Executive (provided that the Company shall be afforded a reasonable opportunity in each case to obtain a protective order)), or use for his own benefit or gain, any Confidential Information obtained by the Executive incident to his employment or other association with the Company or any of its Subsidiaries. The Executive understands that this restriction shall continue to apply after his employment terminates, regardless of the reason for such termination. All documents, records, tapes and other media of every kind and description relating to the business, present or otherwise, of the Company or its Subsidiaries and any copies, in whole or in part, thereof (the "Documents"), whether or not prepared by the Executive, shall be the sole and exclusive property of the Company and its Subsidiaries. The Executive shall safeguard all Documents and shall surrender to the Company at the time his employment terminates, or at such earlier time or times as the Board or its designee may specify, all Documents then in the Executive's possession or control.

(F)  Without limiting the foregoing, it is understood that the Company shall not be obligated to make any of the payments or to provide for any of the benefits specified in Sections 6.1 and 6.2 hereof, and shall be entitled to recoup the pro rata portion of any such payments and of the value of any such benefits previously provided to the Executive in the event of a material breach by the Executive of the provisions of this Section 9 (such pro ration to be determined as a fraction, the numerator of which is the number of days from such breach to the second anniversary of the date on which the Executive terminates employment and the denominator of which is 730), which breach continues without having been cured within 15 days after written notice to the Executive specifying the breach in reasonable detail.

(G)  The Executive and the Company agree that in the event the Executive seeks a reference from the Company in connection with any future or prospective employment, the Company's response to any such reference inquiry shall be limited to and consistent with the following: start and end dates of employment, position(s) held and last salary.

For purposes of this Section 9, the following definitions shall apply:

(I)  "Confidential Information" means any and all information of the Company and its Subsidiaries that is not generally known by others with whom they compete or do business, or with whom they plan to compete or do business and any and all information not readily available to the public, which, if disclosed by the Company or its Subsidiaries could reasonably be of benefit to such person or business in competing with or doing business with the Company. Confidential Information includes without limitation such information relating to (1) the development, research, testing, manufacturing, store operational processes, marketing and financial activities, including costs, profits and sales, of the Company and its Subsidiaries, (2) the Products and all formulas therefor, (3) the costs, sources of supply, financial performance and strategic plans of the Company and its Subsidiaries, (4) the identity and special needs of the customers and suppliers of the Company and its Subsidiaries and (5) the people and organizations with whom the Company and its Subsidiaries have business relationships and those relationships. Confidential Information also includes comparable information that the Company or any of its Subsidiaries have received belonging to others or which was received by the Company or any of its Subsidiaries with an agreement by the Company that it would not be disclosed. Confidential Information does not include information which (i) is or becomes available to the public generally (other than as a result of a disclosure by the Executive), (ii) was within the Executive's possession prior to the date hereof or prior to its being furnished to the Executive by or on behalf of the Company, provided that the source of such information was not bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the Company or any other party with respect to such information, (iii) becomes available to the Executive on a non-confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the Company or any other party with respect to such information, or (iv) was independently developed the Executive without reference to the Confidential Information.

(II)  "Products" mean all products planned, researched, developed, tested, manufactured, sold, licensed, leased or otherwise distributed or put into use by the Company or any of its Subsidiaries, together with all services provided to third parties or planned by the Company or any of its Subsidiaries, during the Executive's service; as used herein, "planned" refers to a Product or service which the Company has decided to introduce within six months from the date as of which such term is applied.

(III)  "Subsidiary" means any corporation or other business organization of which the securities having a majority of the normal voting power in electing the board of directors or similar governing body of such entity are, at the time of determination, owned by the Company directly or indirectly through one or more Subsidiaries.

(IV)  "Solicit" means any direct or indirect communication of any kind whatsoever, regardless of by whom initiated, inviting, advising, encouraging or requesting any person or entity, in any manner, with respect to any action.

10.  Successors; Binding Agreement.

10.1  In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination.

10.2  This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate.

11.  Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt:

To the Company:

Wild Oats Markets, Inc

3375 Mitchell Lane

Boulder, CO 80301

Attention: Chief Executive Officer

With a copy to: General Counsel

12.  Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Colorado. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6, 7 and 9 hereof) shall survive such expiration.

13.  Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

14.  Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

15.  Settlement of Disputes; Arbitration. 15.1 All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Committee and shall be in writing. Any denial by the Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Committee shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Committee a decision of the Committee within sixty (60) days after notification by the Committee that the Executive's claim has been denied.

15.2 Any further dispute or controversy arising under or in connection with this Agreement may, at the Executive's option, be settled by arbitration in Boulder, Colorado in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the evidentiary standards set forth in this Agreement shall apply. If the Executive chooses to settle any dispute or controversy by arbitration, judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.

15.3 The Executive acknowledges that he has carefully read and considered all the terms and conditions of this Agreement, including the restraints imposed upon him pursuant to Section 9 hereof. The Executive agrees that said restraints are necessary for the reasonable and proper protection of the Company and its Subsidiaries and that each and every one of the restraints is reasonable in respect to subject matter, length of time and geographic area. The Executive further acknowledges that, were he to breach any of the covenants contained in Section 9 hereof, the damage to the Company would be irreparable. The Executive therefore agrees that the Company, in addition to any other remedies available to it, and notwithstanding any provision of this Agreement to the contrary, shall be entitled to seek preliminary and permanent injunctive relief against any breach or threatened breach by the Executive of any of said covenants, without having to post bond. The parties further agree that, in the event that any provisions of Section 9 hereof shall be determined by any court of competent jurisdiction to be unenforceable by reason of its being extended over too great a time, too large a geographic area or too great a range of activities, such provision shall be deemed to be modified to permit its enforcement to the maximum extent permitted by law.

16.  Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below:

(A)  "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act.

(B)  "Auditor" shall have the meaning set forth in Section 6.2 hereof.

(C)  "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code.

(D)  "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act.

(E)  "Board" shall mean the Board of Directors of the Company.

(F)  "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) that has not been cured within 30 days after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Committee by clear and convincing evidence that Cause exists.

(G)  A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred:

(I)  any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 31% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a Non-Control Merger (as defined in paragraph (III) below); or

(II)  the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or;

(III)  there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than a merger or consolidation (a "Non-Control Merger") immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the Company, the entity surviving such merger or consolidation or any parent thereof; or

(IV)  the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or any parent thereof.

Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions.

(H)  "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time.

(I)  "Committee" shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Compensation Committee of the Board, plus (ii) in the event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)).

(J)  "Company" shall mean Wild Oats Markets, Inc., a Delaware corporation and, except in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise.

(K)  "DC Pension Plan" shall mean any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company.

(L)  "Date of Termination" shall have the meaning set forth in Section 7.2 hereof.

(M)  "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties.

(N)  "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time.

(O)  "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code.

(P)  "Executive" shall mean the individual named in the first paragraph of this Agreement.

(Q)  "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (ii) and (iii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VII) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, (x) in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof or (y) in the case of first act or failure to act following a Change in Control and described in paragraph (IV) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof:

(I)  the assignment to the Executive of any duties materially and adversely inconsistent with the Executive's status as a senior executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control;

(II)  a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time;

(III)  the relocation of the Executive's principal place of employment to a location more than 25 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations;

(IV)  the failure by the Company to pay to the Executive any portion of the Executive's current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due;

(V)  the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control;

(VI)  the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or

(VII)  any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective.

The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder.

For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that Good Reason does not exist.

(S)  "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof.

(T)  "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof.

(U)  "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

(V)  "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred:

(I)  the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control;

(II)  the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control;

(III)  any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or

(IV)  the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.

(W)  "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees.

(X)  "Severance Benefits" shall have the meaning set forth in Section 6.1 hereof.

(Y)  "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof.

(Z)  "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein).

(AA)  "Total Payments" shall mean those payments so described in Section 6.2 hereof.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

Wild Oats Markets, Inc.

By: /s/ Freya R. Brier

Name: Freya R. Brier

Title: V.P., Legal

By: /s/ David Clark

Address: 1916 Cambridge Way

Edmond, OK 73013

EX-31.1

CERTIFICATION OF CEO Exhibit 31.1

Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	I, Perry D. Odak, Chief Executive Officer of Wild Oats Markets, Inc., certify that:
1.	I have reviewed this report for the three and six months ended June 28, 2003 on Form 10-Q of Wild Oats Markets, Inc. (the "Registrant");
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
	a)	Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
	b)	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and .
	c)	Disclosed in this report any changes in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.	The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: August 8, 2003

/s/ Perry D. Odak

Perry D. Odak, Chief Executive Officer

EX-31.2

CERTIFICATION OF CFO Exhibit 31.2

Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	I, Edward F. Dunlap, Chief Financial Officer of Wild Oats Markets, Inc., certify that:
1.	I have reviewed this report for the three and six months ended June 28, 2003 on Form 10-Q of Wild Oats Markets, Inc. (the "Registrant");
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
	a)	Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
	b)	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
	c)	Disclosed in this report any changes in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.	The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):
	a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
Date: August 11, 2003
/s/ Edward F. Dunlap
Edward F. Dunlap, Chief Financial Officer

EX-32.1

CERTIFICATION OF CEO Exhibit 32.1

Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Wild Oats Markets, Inc. (the "Company") on Form 10-Q for the period ended June 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Perry D. Odak, as Chief Executive Officer of the Company hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:
	(1)	the Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and
	(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Perry D. Odak

Perry D. Odak, Chief Executive Officer

August 8, 2003

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

EX-32.2

CERTIFICATION OF CFO Exhibit 32.2

Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Wild Oats Markets, Inc. (the "Company") on Form 10-Q for the period ended June 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Edward F. Dunlap, as Chief Financial Officer of the Company hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:
	(1)	the Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and
	(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Edward F. Dunlap

Edward F. Dunlap, Chief Financial Officer

August 11 , 2003

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.