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 29, 2002

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 80301-2244

(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 ( )

As of August 8, 2002, there were 25,148,782 shares outstanding of the Registrant's Common Stock (par value $0.001 per share).

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	3
Consolidated Balance Sheets, June 29, 2002 (unaudited) and December 29, 2001	3
Consolidated Statements of Operations (unaudited), Three Months Ended June 29, 2002 and June 30, 2001	4
Consolidated Statements of Comprehensive Income (Loss) (unaudited), Six Months Ended June 29, 2002 and June 30, 2001	5
Consolidated Statements of Cash Flows (unaudited), Six Months Ended June 29, 2002 and June 30, 2001	6
Notes to Consolidated Financial Statements (unaudited)	7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	29
Item 2. Changes in Securities	29
Item 3. Defaults Upon Senior Securities	29
Item 4. Submission of Matters to a Vote of Security Holders	30
Item 5. Other Information	30
Item 6. Exhibits and Reports on Form 8-K	30
SIGNATURES	31
Certification of CEO	32
Certification of CFO	33

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WILD OATS MARKETS, INC.

Consolidated Balance Sheets

(in thousands, except share data)

	June 29,	December 29,
	2002	2001
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$ 12,728	$ 18,840
Inventories (net of reserves of $1,431 and $2,667, respectively)	47,502	54,058
Accounts receivable (net of allowance for doubtful
accounts of $564 and $1,070, respectively)	3,341	2,906
Income tax receivable	935	4,186
Prepaid expenses and other current assets	2,877	2,858
Deferred income taxes	5,459	5,378
Total current assets	72,842	88,226
Property and equipment, net	122,882	128,922
Goodwill, net	106,404	106,404
Other intangible assets, net	7,655	7,892
Deposits and other assets	2,896	2,992
Deferred income taxes	17,880	18,990
	$ 330,559  ======	$ 353,426  ======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$ 37,710	$ 39,796
Book overdraft	24,936	23,056
Accrued liabilities	40,156	39,526
Current portion of debt and capital leases	10,206	12,338
Total current liabilities	113,008	114,716
Long-term debt and capital leases	86,283	112,291
Other long-term obligations	18,324	19,404
	217,615	246,411
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; 25,105,680 and 24,766,409 shares
issued and outstanding	25	25
Additional paid-in capital	164,308	160,736
Note receivable, related party	(9,927)	(9,660)
Accumulated deficit	(40,111)	(42,277)
Accumulated other comprehensive loss	(1,351)	(1,809)
Total stockholders' equity	112,944	107,015
	$ 330,559  ======	$ 353,426  ======

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 29,	June 30,	June 29,	June 30,
	2002	2001	2002	2001
Sales	$236,186	$229,383	$469,200	$448,882
Cost of goods sold and occupancy costs	164,758	163,005	330,129	316,095
Gross profit	71,428	66,378	139,071	132,787
Operating expenses:
Direct store expenses	51,510	54,996	101,922	106,612
Selling, general and administrative expenses	14,761	13,376	28,934	24,459
Pre-opening expenses	645	85	1,014	1,515
Restructuring & asset impairment charges (income)		54,834	(652)	54,834
Income (loss) from operations	4,512	(56,913)	7,853	(54,633)
Loss on investment		(228)		(228)
Interest income	193	3	373	270
Interest expense	(2,347)	(2,765)	(4,782)	(5,498)
Income (loss) before income taxes	2,358	(59,903)	3,444	(60,089)
Income tax expense (benefit)	860	(21,783)	1,278	(21,851)
Net income (loss)	$ 1,498====	$(38,120) ======	$ 2,166====	$(38,238) ======
Net income (loss) per common share:
Basic	$ 0.06	$ (1.55)	$ 0.09	$ (1.58)
Diluted	$ 0.06	$ (1.55)	$ 0.09	$ (1.58)
Average common shares outstanding, basic	25,016	24,641	24,919	24,138
Dilutive effect of stock options	929		632
Average common shares outstanding,
assuming dilution	25,945=====	24,641=====	25,551=====	24,138=====

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

4

WILD OATS MARKETS, INC.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands) (unaudited)

	Three Months Ended		Six Months Ended
	June 29,	June 30,	June 29,	June 30,
	2002	2001	2002	2001
Net income (loss)	$ 1,498	$(38,120)	$ 2,166	$(38,238)
Other comprehensive income (loss):
Foreign currency translation adjustments
arising during the period	210	158	118	(106)
Cumulative effect of change in
accounting principle, net of
tax of $352				(586)
Recognition of hedge results to interest
expense during the period, net of
tax of $182, $98, $370 and
$136, respectively	303	164	617	228
Change in market value of cash flow
hedge during the period, net of tax
of $194, $84, $167 and $392,
respectively	(323)	(141)	(277)	(657)
Other comprehensive income (loss)	190	181	458	(1,121)
Comprehensive income (loss)	$ 1,688====	$(37,939) ======	$ 2,624====	$(39,359) ======

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

5

WILD OATS MARKETS, INC.

Consolidated Statements of Cash Flows

(in thousands) (unaudited)

	Six Months Ended
	June 29,      2002	June 30,      2001
Cash Flows from Operating Activities
Net income (loss)	$ 2,166	$ (38,238)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization	10,528	13,170
Loss (gain) on disposal of property and equipment	(39)	42
Deferred tax expense (benefit)	820	(21,851)
Restructuring and asset impairment charges (income)	(652)	54,834
Loss on investment		228
Other	(60)	57
Change in assets and liabilities:
Inventories	6,596	(307)
Receivables and other assets	2,746	4,903
Accounts payable	(236)	2,013
Accrued liabilities	1,900	5,202
Net cash provided by operating activities	23,769	20,053
Cash Flows from Investing Activities
Capital expenditures	(4,644)	(15,954)
Proceeds from sale of property and equipment	5	643
Net cash used in investing activities	(4,639)	(15,311)
Cash Flows from Financing Activities
Net repayments under line-of-credit agreement	(21,000)	(4,987)
Proceeds from notes payable and long-term debt		2,000
Repayments on notes payable, long-term debt and capital leases	(5,730)	(116)
Proceeds from issuance of common stock, net	1,434	354
Net cash used in financing activities	(25,296)	(2,749)
Effect of exchange rate changes on cash	54	(57)
Net increase (decrease) in cash and cash equivalents	(6,112)	1,936
Cash and cash equivalents at beginning of period	18,840	12,457
Cash and cash equivalents at end of period	$ 12,728  =====	$ 14,393  =====
Non-Cash Investing and Financing Activities
Stock issued in exchange for note receivable		$ 9,274  ====
Stock issued in partial payment of note payable	$ 1,210  ====
Partial 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 29, 2002, the consolidated statements of operations and comprehensive income (loss) for the three months and six months ended June 29, 2002 and June 30, 2001, as well as the consolidated statements of cash flows for the six months ended June 29, 2002 and June 30, 2001 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 2001 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.

Certain prior period information has been reclassified to conform to the current presentation.

2. New Accounting Standards

Statement of Financial Accounting Standards ("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 is effective for the Company on January 1, 2003 and will have no material effect on the Company's historical financial results.

During the first quarter ended March 30, 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 recission of SFAS No. 4. During the six months ended June 29, 2002, and June 30, 2001, there were no gains or losses on early extinguishment of debt.

Goodwill and Other Intangible Assets. Effective December 30, 2001, the Company implemented SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 was issued in July 2001, supersedes Accounting Principles Bulletin No. 17, Intangible Assets, and is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. SFAS No. 142 (1) prohibits the amortization of goodwill and indefinite-lived intangible assets, (2) requires testing of goodwill and indefinite-lived intangible assets on an annual basis for impairment (and more frequently if the occurrence of an event or circumstance indicates an impairment), (3) requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill and (4) removes the 40-year limitation on the amortization period of intangible assets that have finite lives.

In conjunction with its purchase acquisitions, the Company historically had recorded goodwill at the store level; however, based on the Company's recent consolidation of its brands to increase synergy and awareness, the Company has changed its goodwill accounting policy and accordingly has assigned the carrying value of its goodwill to one reporting unit at the enterprise level to recognize goodwill for the brand, as opposed to the past practice of recording goodwill at the store level. During the second quarter of

7

 fiscal 2002, the Company completed the impairment test prescribed by SFAS No. 142 and concluded that no impairment of goodwill existed as of December 30, 2001. The Company anticipates an annual decrease in amortization of goodwill of approximately $3.0 million and a corresponding annual increase to net income of $1.8 million. The Company intends to test goodwill for impairment annually or more frequently if the occurrence of an event or circumstance indicates potential impairment.

Also, upon implementation of SFAS No. 142, the Company identified intangible assets related to leasehold interest resulting from store lease agreements with a carrying value of approximately $7.9 million at December 30, 2001. The Company determined that there is no indication of impairment of these assets and that the average 20-year life assigned to these assets is appropriate. Going forward, the Company will test these intangibles for impairment annually or more frequently if the occurrence of an event or circumstance indicates impairment.

The amortization of intangibles expense (net of tax) and net income (loss) available to common stockholders are as follows (in thousands):

	Three Months Ended		Six Months Ended
	June 29,	June 30,	June 29,	June 30,
	2002	2001	2002	2001
Goodwill amortization	$ ---	$ 459	$ ---	$ 946
Leasehold interest amortization	$ 76	$ 62	$ 149	$ 120
Net income (loss) available to common stockholders	$ 1,498	$ (38,120)	$ 2,166	$ (38,238)

The following table illustrates net income (loss) available to common stockholders as if SFAS No. 142 had been implemented as of December 31, 2000 (in thousands):

	Three Months Ended		Six Months Ended
	June 29,	June 30,	June 29,	June 30,
	2002	2001	2002	2001
Reported net income (loss) per share available to common stockholders	$ 1,498	$ (38,120)	$ 2,166	$ (38,238)
Goodwill amortization	---	459	---	946
Adjusted net income (loss) available to common stockholders	$ 1,498  =====	$ (37,661) ======	$ 2,166  =====	$ (37,292) ======
EARNINGS PER SHARE - BASIC AND DILUTED
Reported net income (loss) per share available to common stockholders	$ 0.06	$ (1.55)	$ 0.09	$ (1.58)
Goodwill amortization	---	0.02	---	0.04
Adjusted net income (loss) per share available to common stockholders	$ 0.06  ====	$ (1.53) ====	$ 0.09  ====	$ (1.54) ====

During the three months and six months ended June 29, 2002, amortization of intangible assets expense was $119,000 and $237,000, respectively. The estimated amortization of intangible assets for each of the five fiscal years ending in fiscal 2006 is as follows (in thousands):

8

Fiscal Year	Amortization Expense
2002	$ 472,000
2003	472,000
2004	472,000
2005	472,000
2006	472,000

3. 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, the Company entered into a swap agreement in September 2000 to hedge the interest rate on $37.5 million of its borrowings as of June 29, 2002. The swap agreement locks in a one-month LIBOR rate of 6.6% and expires in August 2003. The fair value of the swap at June 29, 2002 was ($1.7 million), which has been recorded in the accompanying balance sheet in accrued liabilities.

4. 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 antidilutive (i.e., in a loss period). Antidilutive stock options of 1,288,177 and 1,840,007 for the six months and 1,420,861 and 1,738,071 for the three months ended June 29, 2002 and June 30, 2001, respectively, were not included in the earnings per share calculations.

5. Restructuring and Asset Impairment Income

During the second quarter of fiscal 2002, the Company recorded restructuring expense of $0 consisting of the following components:

Change in estimate related to fixed asset impairments for sites previously identified for closure or sale	$ 35,000
Change in estimate related to lease-related liabilities for sites previously identified for closure or sale	(678,000)
Fixed asset impairments for one additional store identified in the second quarter of fiscal 2002 to be closed during the third quarter of fiscal 2002	131,000
Fixed asset impairments for store construction project discontinuation	370,000
Severance for employees terminated during the second quarter of fiscal 2002	142,000
Total restructuring charge	$           0 =======

Details of the significant components are as follows:

• Change in estimate related to fixed asset impairments for sites previously identified for closure or sale ($35,000 of restructuring expense). During the second quarter of fiscal 2002, the Company determined that these fixed assets were not compatible with a new store design. Due to the new store design, such assets could not be relocated as contemplated under the original restructuring plan. As a result, the Company determined it could not recover the previously estimated carrying value of these assets, and therefore recognized an impairment charge of approximately $170,000 during the second quarter of fiscal 2002.  The assets will be disposed by the end of the third quarter of fiscal 2002.  Additionally, during the second quarter of fiscal 2002, the Company determined that it could partially recover the carrying value of certain fixed assets used in store front-end operations that were previously written off; therefore, the Company partially reversed the restructuring charge previously recorded for these fixed asset impairments and recognized restructuring income of approximately $135,000 during the second quarter of fiscal 2002.

9

• Change in estimate related to lease-related liabilities for sites previously identified for closure or sale ($678,000 of restructuring income). During the second quarter of fiscal 2002, the Company negotiated the early termination of a lease of property at which the Company had operated a kitchen in Los Angeles, California. Also during the quarter, the Company subleased a closed location in Hartford, Connecticut for the remaining lease term and provided a subsidy for the sublessee; the previously estimated lease-related liabilities in excess of the subsidy were reversed. Additionally, the Company subleased a site in Vancouver, British Columbia, Canada, for the remaining lease term and consequently reversed the previously estimated lease-related liabilities. For space adjacent to the Company's operating store in West Hartford, Connecticut, the Company negotiated a lease amendment with the landlord during the second quarter of fiscal 2002 and, as a result, will be removed from the lease in the first quarter of fiscal 2003; the Company reversed the excess lease-related liabilities previously recorded beyond this period. Due to these changes in facts and circumstances and the related changes in estimates, the Company recorded restructuring income during the second quarter of fiscal 2002.

• Fixed asset impairments for one additional store identified in the second quarter of fiscal 2002 to be closed during the third quarter of fiscal 2002 ($131,000 of restructuring expense). During the second quarter of fiscal 2002, the Company decided to close one store in the third quarter of fiscal 2002 due to failure to extend the lease term with the landlord. The assets will be disposed by the end of the third quarter of fiscal 2002.

• Fixed asset impairments for store construction project discontinuation ($370,000 of restructuring expense). During the second quarter of fiscal 2002, the Company determined that a new store design was required and construction of new stores based on the previously developed designs would be abandoned to incorporate the new store design changes. Assets in this charge included abandoned construction in progress (primarily leasehold improvements). The Company determined that it could not recover the carrying value of these fixed assets, and therefore recognized an impairment charge and disposed of the assets during the second quarter of fiscal 2002.

• Severance for employees terminated during the second quarter of fiscal 2002 ($142,000 of restructuring expense). During the second quarter of fiscal 2002, 65 employees were terminated in conjunction with the closure of one store in Cleveland, Ohio and the closure of the bakery operations within one support facility in Denver, Colorado during the quarter. The employees were notified of their involuntary termination during the second quarter of fiscal 2002. As of June 29, 2002, $100,000 of involuntary termination benefits had been paid to terminated employees; the remaining benefits of $42,000 will be paid during the third quarter of fiscal 2002.

During the first quarter of fiscal 2002, the Company recorded restructuring income of $652,000 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 2002	$ (761,000)
Gain on sale of assets for site sold during the first quarter of fiscal 2002	(253,000)
Change in estimate related to lease-related liabilities for sites previously identified for closure or sale	93,000
Severance for employees terminated during the first quarter of fiscal 2002	269,000
Total restructuring income	$ (652,000) =======

10

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 2002 ($761,000 of restructuring income). During the first quarter of fiscal 2002, the Company sold one store in Victoria, British Columbia, Canada. The purchaser assumed the lease-related obligations associated with this store. Based on this change in facts and circumstances, the Company reversed the remaining lease-related liabilities previously recorded for this store and therefore recognized restructuring income of $649,000 during the first quarter of fiscal 2002. During the first quarter of fiscal 2002, the Company also completed payment obligations for terminated lease obligations for sites in Boca Raton, Florida; Santa Fe, New Mexico and Framingham, Massachusetts; based on this change in facts and circumstances, the Company reversed the remaining lease-related liabilities previously recorded for these stores and therefore recognized restructuring income of $112,000 during the first quarter of fiscal 2002.

• Gain on sale of assets for site sold during the first quarter of fiscal 2002 ($253,000 of restructuring income). During the first quarter of fiscal 2002, the Company sold one store in Victoria, British Columbia, Canada. The sale agreement included payment for fixed assets. Based on this change in facts and circumstances, the Company recorded the gain on the sale of the fixed assets and reversed the fixed asset reserves previously recorded for this store and therefore recognized restructuring income of $253,000 during the first quarter of fiscal 2002.

• Change in estimate related to lease-related liabilities for sites previously identified for closure ($93,000 of restructuring expense). During the first quarter of fiscal 2002, the Company determined the likelihood of securing a subtenant for certain space in Tempe, Arizona was now remote due to the Company's obligation being at above-market rates, the unattractive site characteristics, and increasingly difficult real estate market conditions. With this change in facts and circumstances, the Company decided to fully reserve for the remaining lease obligations of the site and therefore recognized a restructuring charge of $93,000 during the first quarter of fiscal 2002.

• Severance for employees terminated during the first quarter of fiscal 2002 ($269,000 of restructuring expense). During the first quarter of fiscal 2002, 103 employees were terminated in conjunction with the closure of two stores in Boca Raton, Florida and Chesterfield, Missouri during the first quarter of fiscal 2002. The employees were notified of their involuntary termination during the first quarter of fiscal 2002. As of June 29, 2002, $269,000 of involuntary termination benefits had been paid to terminated employees.

11

The following table summarizes activity in the Company's restructuring-related accrual accounts during the first six months of fiscal 2002 (in thousands):

Exit Plans	1999 and prior	Q2 2000	Q4 2000	Q2 2001	Q3 2001	Q4 2001	Q1 2002	Q2 2002	Total
Balance, December 29, 2001	$ 2,458	$ 2,462	$ 4,061	$10,102	$ 87	$ 3,879			$23,049
New accruals:
Severance							$ 269		269
Lease-related liabilities	216	(649)	4			(239)			(668)
Cash received - lease-related liabilities	459								459
Note receivable in lieu of cash	375								375
Cash paid - severance				(95)		(55)	(213)		(363)
Cash paid - lease-related liabilities	(346)	(137)	(502)	(219)	(31)	(330)			(1,565)
Balance, March 30, 2002	3,162	1,676	3,563	9,788	56	3,255	56		21,556
New accruals:
Severance								$ 142	142
Lease-related liabilities	(305)	(6)	(5)	(358)	(10)	6			(678)
Cash paid - severance				(16)		(2)	(56)	(100)	(174)
Cash paid - lease-related liabilities	(198)	(114)	(292)	(230)	(26)	(73)			(933)
	1	1	1	2	1	1		3
Balance, June 29, 2002	$ 2,659  =====	$ 1,556  =====	$ 3,266  =====	$ 9,184  =====	$ 20  ==	$ 3,186 =====	$ ---  ===	$ 42  ===	$19,913  ======

_______________________________

1 The restructuring accrual balance consists of lease-related liabilities

2 The restructuring accrual balance consists of $9.2 million for lease-related liabilities and $25,000 for employee termination benefits.

3 The restructuring accrual balance consists of employee termination benefits.

12

As of June 29, 2002, the components of the accruals related to the Company's restructuring activities are accrued liabilities ($5.1 million) and other long-term obligations ($14.8 million).

6. Long-Term Debt

As of June 29, 2002, the Company was in violation of one financial covenant, a fixed charge coverage ratio for the fiscal quarter ended June 29, 2002. The Company obtained a waiver of the violation of the covenant for the fiscal quarter ended June 29, 2002, from all necessary lenders in exchange for a waiver fee of $75,000. As of June 29, 2002, there were $62.5 million in borrowings outstanding under the revolving facility and $33.8 million in borrowings outstanding under the term loan.  For the six months ended June 29, 2002, the Company recorded $1.3 million of income tax expense, primarily as a result of income before income taxes of $3.4 million during the period.

7. Income Taxes

The Company has a $23.3 million net deferred tax asset, 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 29, 2002, the Company recorded $860,000 of income tax expense, primarily as a result of income before income taxes of $2.4 million during the period. For the six months ended June 29, 2002, the Company recorded $1.3 million of income tax expense, primarily as a result of income before income taxes of $3.4 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.

The Company has determined that it must amend its 1999, 2000 and 2001 tax returns to correct the reporting of deemed dividend income from a foreign subsidiary. Such determination was the result of an internal self-review and not the result of any tax audit by the Internal Revenue Service or other tax authority. The Company believes that such amended tax returns will not materially affect the consolidated results, liquidity or financial position of the Company, or have any impact on tax expense reported in financial statements for 1999, 2000 and 2001. The Company believes that it has sufficient net operating loss carryovers to carry back to such tax years in order to eliminate any additional tax liability, but expects that it will have liability for interest and potential penalties. Current estimates of total tax liability, interest and potential penalties is not more than approximately $400,000. The Company believes that it has sufficient reserves to cover any interest and potential penalties that may result from the amended returns. The Company intends to seek a waiver from the Internal Revenue Service for certain penalties; however, no assurance can be given that such waiver will be granted.

8. Related Party Transactions

In May 2002, the Company's Board of Directors agreed to amend the Employment Agreement of Perry D. Odak, the Company's CEO and President, to extend through December 2002 the period during which the issuance by the Company of additional securities as part of an equity financing will entitle Mr. Odak to receive up to 300,000 stock options exercisable for the Company's common stock. This will allow Mr. Odak to maintain his 5% equity ownership in the Company. Mr. Odak was issued options to purchase 5,856 shares of common stock under a provision of his Employment Agreement that provided for the maintenance of his 5% equity position in the event of a capital-raising transaction and the determination that the issuance of 111,269 shares of common stock registered on Form S-3 filed in April 2002, under the terms of a settlement agreement resolving the lawsuit brought against the Company by former directors and co-founders Michael Gilliland and Elizabeth Cook, was properly categorized as a capital-raising transaction.  In August of 2002, the Company's Board of Directors approved a third amendment to Mr. Odak's Employment Agreement, pursuant to which up to 70,000 of the stock options to which Mr. Odak would be entitled under his Employment Agreement as a result of the closing of a capital raising transaction may be granted to other employees of the Company designated by Mr. Odak. The options would only be granted upon the closing of the capital raising transaction, have a 10-year term, vest over four years and have an exercise price equal to the closing price of the Company's stock on the date the capital raising transaction was concluded. An equal number of options would be granted simultaneously to Mr. Odak; provided that the options granted to Mr. Odak would only be exercisable as the options granted to other employees terminated (as opposed to expired) without exercise. At the time the options are issued as proposed under the amendment to the Employment Agreement, a simultaneous matching grant by the Company of up to 70,000 additional options from the Company's 1996 Equity Incentive Plan will be made to the same employees. The Company may incur quarterly compensation expense, based on any increase in the then-current stock price over the exercise price, as a result of the issuance of the initial 70,000 options to the designated employees and Mr. Odak.

Effective June 29, 2002, the Company assigned its rights in the Employment Agreement, dated April 24, 2001, between the Company and Stephen Kaczynski to Sparky, Inc., a wholly-owned subsidiary of the Company. The Company also assigned its rights, effective June 29, 2002, in the Employment Agreement, dated December 17, 2001, between the Company and Edward Dunlap to Wild Oats Financial, Inc., a wholly-owned subsidiary of the Company.

Elizabeth C. Cook and Michael C. Gilliland, former executive officers and directors of the Company, each own a one-third interest in Pretty Good Groceries, Inc. ("PGG"), which in the past operated two grocery stores, and currently operates one store in Boulder, Colorado. Through January 2002, PGG purchased certain items through the Company's volume purchase discount programs with its distributors, and also purchased items from the Company's commissaries and warehouses at cost. The Company had a receivable

13

 of approximately $80,000 at December 29, 2001 related to the purchases by PGG of goods from the Company or its suppliers. At December 29, 2001, the Company also had a receivable for certain personal expenses of Mr. Gilliland and Ms. Cook, the amount of which was in dispute. All receivables related to these items were paid as part of the settlement of litigation described below.

Ms. Cook and Mr. Gilliland are trustees of Wild Oats Community Foundation ("Foundation"), a non-profit organization formed by Ms. Cook and Mr. Gilliland to provide health-related services. During fiscal 1998 and fiscal 1999, the Foundation entered into sublease arrangements with the Company for space adjacent to three of the Company's stores leased by the Company. In fiscal 2001, the sublease obligations between the Foundation and the Company were terminated, and other subtenants were placed in two of the three wellness center locations. The third primary lease for space sublet by the Foundation expired by its own terms. The Company had a receivable related to subtenant rent due from the Foundation, which was paid as part of the settlement of the litigation described below.

In May 1998, PGG II, a limited liability company two-thirds owned by Mr. Gilliland and Ms. Cook, purchased a small underperforming store in Boulder, Colorado from the Company. PGG II paid the wholesale cost of the inventory in the store at time of transfer. PGG II disputed whether there was consideration due for equipment transferred to PGG II as part of the original purchase transaction, and the parties reached a settlement on the value of the equipment as part of the settlement of the litigation described below.

In January 2001, the Company borrowed $2.0 million from Ms. Cook and Mr. Gilliland. The loan was evidenced by a demand note that bears interest at 9.0% per annum and default rate interest at 15% per annum. Mr. Gilliland and Ms. Cook filed suit against the Company in January 2002 for payment of the note after demand was made, but payment was not received. In March 2002 the parties settled the litigation through execution of a settlement agreement under which the plaintiffs agreed to a $200,000 offset against the principal balance of the note in settlement of certain identified receivables alleged to be due to the Company. The Company made a $590,000 cash repayment of loan principal and agreed to repay the remaining principal balance of $1.2 million, together with interest at 9% per annum, over a five-month period with cash and by the issuance of equity securities. The Company issued 111,269 shares (after giving effect to certain adjustments pursuant to the settlement agreement) of common stock to Ms. Cook and Mr. Gilliland in March 2002, and filed a registration statement on Form S-3 to register the resale by Ms. Cook and Mr. Gilliland of those shares. As of May 9, 2002, all of the shares had been sold.

In fiscal 2000, the Company recorded a note receivable in the amount of approximately $75,000 from Bacchus Beverage Corporation, an entity owned by Patrick Gilliland, Mr. Gilliland's brother, which was a subtenant in excess space located adjacent to one of the Company's stores. In March 2002, the Company agreed to extinguish the remaining balance on the note in exchange for a $35,000 cash payment. 

9. Distributor Contract

On June 14, 2002, the Company entered into a new primary distribution agreement with Tree of Life, Inc. ("Tree of Life") as distributor. The distribution arrangement commences effective September 1, 2002, which is the date upon which the Company's existing primary distribution contract with United Natural Foods, Inc. expires. The new agreement has no specified term, although either party can terminate the agreement after three years upon 120 days' prior written notice to the other party. Either party also may terminate the agreement for defaults by the other party of certain provisions of the agreement. Under the terms of the new agreement, the Company is obligated to purchase 90% of its total cost of goods from specified categories of goods for sale in its U.S. stores from Tree of Life, except in certain defined circumstances when such percentage-purchasing obligation is excused. 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. The Company believes Tree of Life has sufficient warehouse capacity and distribution technology to service the Company's existing stores' distribution needs for natural foods and products as well as the needs of new stores in the future. Upon expiration of the existing distribution agreement with the Company's current primary distributor, other than the agreement with Tree of Life, the Company will have no other supply contracts with the majority of its smaller vendors,

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 who could discontinue selling to Wild Oats at any time. Although the Company believes that it could develop alternative sources of supply, any such termination may create a short-term disruption in store-level merchandise selection. Any significant disruption in the supply of goods could have a material impact on our overall sales volume and cost of goods.

A transition fee is referenced in the Company's new distribution agreement with Tree of Life. The Company will use the transition fee to offset the transition costs incurred during the transition of the Company's primary distribution relationship to Tree of Life. These costs include, but are not limited to, the cost of retagging store shelves, modification of product inventory, disposal of discontinued products, resetting of products on store shelves and training of store personnel in new procedures, and legal and consulting expenses. A portion of the transition support fee received in the second quarter was used to defray transition expenses incurred, and had no material impact on the reported second quarter earnings.

10. Litigation

In April 2000, the Company was named as defendant in S/H -Ahwatukee, LLC and YP- Ahwatukee LLC v. Wild Oats Markets, Inc., Superior Court of Arizona, Maricopa County, by a landlord alleging Wild Oats breached a continuous operations clause arising from the closure of a Phoenix, Arizona store. The landlord dismissed the same suit, filed in 1999, without prejudice in 1999, after the Company presented a possible acceptable subtenant, but subsequently rejected the subtenant. Plaintiff claimed $1.5 million for diminution of value of the shopping center plus accelerated rent, fees and $360,000 in attorneys' fees and costs. After trial in November 2001, the judge awarded the plaintiff $326,000 in damages and $210,000 in attorneys' fees and the Company has reserved such amounts. In April 2002 the plaintiffs filed a motion to alter or amend the judgment to increase the amount thereof to $1.1 million. The judge denied the motion. The plaintiffs have filed a notice of intent to file an appeal.

In October 2000 the Company was named as defendant in 3601 Group Inc. v. Wild Oats Northwest, Inc., Wild Oats, Inc. and Wild Oats Markets, Inc., a suit filed in Superior Court for King County, Washington, by a property owner who claimed that Alfalfa's Inc., our predecessor in interest, breached a lease in 1995 related to certain property in Seattle, Washington.  Plaintiff subsequently increased its damages claim from $377,000 to $2.4 million. Both parties filed motions for summary judgment. After hearing, the court denied the Company's motion and granted the plaintiff's motion, ruling that the Company had anticipatorily breached its lease obligations. A trial on damages was held in July 2002 and the jury awarded no damages, based on its determination that the plaintiff had benefited monetarily from our lease termination. The Company intends to seek an award of attorneys' fees.

In June 2002, the Company was named as a defendant in In Re Kava Kava Litigation, a class-action suit consolidated from three cases filed in Los Angeles Superior Court by plaintiffs alleging that most major grocery stores, including Wild Oats, and supplements manufacturers, distributed, manufactured, and/or sold kava-kava supplements without appropriate warnings that such may cause liver damage. Plaintiffs seek the removal of the products from the stores, the addition of certain warning labels before the products can be resold, and unspecified damages including disgorgement of profits from the sale of kava kava products. The Company has tendered defense of the suit to all its manufacturers of kava kava products, and a number have agreed to assume the defense on a pro-rata basis.  In August 2002, the court stayed the action, pending FDA review of the issue.

The Company also 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.

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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 Company's continued compliance with its credit facility covenants; the ability to raise additional equity financings; the timing and execution of new store openings, relocations, remodels, sales and closures; the timing and impact of the Fresh Look program; 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. During the second quarter of fiscal 2002, we had a 9.6% increase in average weekly sales, a 6.1% increase in average weekly customer count and a 3.3% rise in average sales per customer chain-wide as compared to the second quarter of fiscal 2001.  We believe that these improvements were primarily driven by continued positive customer response to our marketing and merchandising programs, including the Fresh Look program, and operational improvements at store level.  Our marketing and merchandising initiatives have been expanded to additional Wild Oats stores in Arizona, Arkansas, Illinois, New Mexico, Ohio, Tennessee and Utah. To date, 60 of the 73 natural foods supermarket format stores in our chain have implemented these marketing programs, which are designed to drive greater awareness of Wild Oats and to increase customer traffic through weekly advertising circulars distributed to customers via newspaper inserts and direct mail.

Over the last twelve months, we instituted new programs to improve customer service and store-level execution. We also implemented inventory reduction programs, centralized product ordering to refocus store management energies on store-level operations, and reset store merchandise for customer convenience in many stores. We believe these programs also contributed to overall operational improvements that increased store sales, customer counts and average transaction sizes in the second quarter of fiscal 2002.

Store format. 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 and Nature's^(R) - A Wild Oats Market tradenames, 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. Our profitability has been and will continue to be affected by the mix of natural foods supermarkets and farmers market stores opened, acquired or relocated and whether stores are being opened in markets where we have an existing presence.  In fiscal 2001, we redesigned the natural foods supermarket format store layout and design. We further refined the store layout and design during the second quarter of fiscal 2002, and in April 2002, we opened the first of our redesigned natural foods supermarket format stores in Long Beach, California.  We also plan to expand the farmers market store format as our second, parallel store format. We believe this format, which is primarily located in metropolitan San Diego, California and Texas, appeals to a more value-conscious customer. This format has historically produced higher comparable store sales results than the natural foods supermarket format stores, although margins are lower. The format also appears to perform better in the face of new competition, whether from conventional or natural foods supermarket competitors.

Comparable store sales results. Sales of a store are deemed to be comparable commencing in the thirteenth full month of operations for new, relocated and acquired stores. A variety of factors affect our comparable store sales results, including, among others:

• general economic conditions

• the opening of stores by us or by our competitors in markets where we have existing stores

• the relative proportion of new or relocated stores to mature stores

• the timing of advertising and promotional events

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• store remodels

• store closures

• our ability to effectively execute our operating plans

• changes in consumer preferences for natural foods products

• availability of produce and other seasonal merchandise.

Past increases in comparable store sales may not be indicative of future performance.

The farmers market format stores, which depend heavily on produce sales, are more susceptible to sales fluctuations resulting from the availability and price of certain produce items. As a result of marketing and merchandising initiatives, including the Fresh Look program, and operational improvements, and the closure of one weaker store, comparable store sales chain-wide increased by 5.2% in the second quarter of fiscal 2002, as compared to 7.3% in the first quarter of fiscal 2002, 5.7% in the fourth quarter of fiscal 2001, 5.5% in the third quarter of fiscal 2001, 3.9% in the second quarter of fiscal 2001, and 1.0% in the first quarter of fiscal 2001.  Expansion of our marketing and merchandising initiatives late in the second quarter and early in the third quarter of 2002, coupled with other marketing and merchandising initiatives planned in the second half of the year, are expected to increase comparable store sales between 5.5 percent and 7.0 percent for the remainder of the year. No new store openings are anticipated until early 2003.  There can be no assurance that comparable store sales for any particular period will not decrease in the future.

Store openings, closings, sales, remodels, relocations and acquisitions. In the second quarter of fiscal 2002, we opened one new store in Long Beach, California, and we closed one underperforming store in Cleveland, Ohio and the bakery operations of a support facility in Denver, Colorado. We also terminated the lease obligation for one location formerly used as a kitchen in Los Angeles, California. In the second quarter of fiscal 2001, we opened no new stores and we closed no stores.

The Company currently has an inventory of 15 vacant sites, not including those referenced below, comprising closed store, kitchen and warehouse 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. We are actively seeking subtenants or assignees for the spaces, although many of the sites are difficult to sublease or assign because of unusual site characteristics, surpluses of vacant retail space in the markets in which the sites are located, or because the remaining lease terms are relatively short. In the second quarter of fiscal 2002, we negotiated the early termination of one empty kitchen facility. We sublet one closed store location for the remaining lease term with a subsidy for the sublessee, and sublet another adjacent space. We negotiated a lease amendment with the landlord on space adjacent to an operating stores during the second quarter of fiscal 2002 and, as a result, our lease obligation for the space will terminate. We also entered into a contract for sale of one kitchen facility, subject to satisfaction of certain conditions to closing. The lease for one vacant site expired after the end of the quarter.

Our ability to increase the number of stores opened in fiscal 2003 and beyond may depend upon our ability to raise additional equity financings. In October 2001, we executed an amendment to our credit facility. As part of such amendment, our borrowings were limited to $125.0 million, and we agreed to restrictive covenants, including covenants regarding our ability to enter into new leases and to make certain capital expenditures. Absent additional equity funding, the limitations on capital expenditures did not allow us to complete and open in fiscal 2002 all of the stores for which we currently have signed leases; therefore, some openings were rescheduled into early fiscal 2003. We have proposed to raise $30.0 million or more in equity financings, and have executed confidentiality agreements with, made presentations to and provided due diligence to a number of interested parties. If the Company is successful in raising additional equity financing of $30.0 million or more, under the terms of the amended credit facility we will be allowed to increase the number of new leases we may execute and new stores we may open, based on the amount of equity financings raised and the format of the stores proposed to be opened. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."

As has been our practice in the past, we will continue to evaluate the profitability, strategic positioning, impact of potential competition, and sales growth potential of all of our stores on an ongoing basis. We may, from time to time, make decisions regarding closures, disposals, relocations or remodels in accordance with such evaluations.

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Pre-opening expenses. Pre-opening expenses include labor, rent, advertising, utilities, supplies and certain other costs incurred prior to a store's opening. Historically, pre-opening expenses for natural foods supermarket format stores have averaged approximately $250,000 to $350,000 per store, and farmers market format stores have averaged approximately $75,000 per store, although the amount per store may vary depending on whether the store is the first to be opened in a market or is part of a cluster of stores in that market. As part of the Fresh Look advertising initiatives implemented by the Company, we expect that pre-opening expenses will increase to $400,000 per natural foods supermarket store, and $150,000 per farmers market store, as we boost grand opening and weekly advertising.

Restructuring and Asset Impairment Income. During the second quarter of fiscal 2002, the Company's management made certain decisions relating to the Company's operations which changed estimates of prior restructuring and asset impairment charges and resulted in net restructuring and asset impairment expense of $0. During the first quarter of fiscal 2002, the Company's management made certain decisions relating to the Company's operations which also changed estimates of prior restructuring and asset impairment charges and resulted in restructuring and asset impairment income of $652,000. See the Company's 2001 Annual Report filed on Form 10-K for the fiscal year ended December 29, 2001 for a detailed discussion of restructuring and asset impairment charges during the last three years.

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. 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 are believed 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 not readily apparent from other sources. Actual results may differ from these estimates.

On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates, including those related to:

• asset impairment charges
• restructuring charges and store closing costs
• allowance for bad debt
• inventory valuation and reserves
• self-insurance reserves
• reserves for contingencies and litigation
• goodwill valuation

The consolidation of our brands to increase synergy and awareness has resulted in a change to our goodwill accounting policy. During the second quarter of fiscal 2002, the Company recorded goodwill at the enterprise level to recognize goodwill for the brand, as opposed to past practice of recording goodwill at the store level. See Note 2, Notes to Consolidated Financial Statements. See also the Company's 2001 Annual Report filed on Form 10-K for the fiscal period ended December 29, 2001, for disclosures of the remaining critical accounting policies that continue in existence unchanged from that annual period.

2002 Outlook

Continued improvement in gross margins, in conjunction with an expected reduction in direct store expenses and SG&A expenses as a percent of sales, is expected to translate into net earnings per diluted share of $0.08, and $0.10 to $0.11 in the third quarter and fourth quarter, respectively. Combined with net income of $2.2 million, or $0.09 per diluted share, for the first half of 2002, projected net earnings for the full year 2002 is expected to reach $0.27 to $0.28 per diluted share. Net earnings per share estimates provided above do not reflect the impact of any potential equity placement.

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
• fluctuations in quarterly results of operations
• impact of merchandising and marketing initiatives, including the Fresh Look program, on store performance
• economic conditions

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• competition
• labor issues
• loss of key management
• government regulations
• changes in suppliers, distributors and manufacturers
• volatility in our stock price

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 2002 and 2003 will experience operating losses for the first six to 12 months of operation, in accordance with historical trends.

Assuming the availability of funds in fiscal 2002 for capital expenditures, we will remodel certain of our older stores. Remodels and remerchandising typically cause short-term disruption in sales volume and related increases in certain expenses as a percentage of sales, such as payroll. We cannot predict whether sales disruptions and the related impact on earnings may be greater in time or volume than projected in future remodeled or remerchandised stores.

The construction or acquisition of new stores, remodeling of existing stores, as well as completion of capital purchases of new technology systems required 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 existing credit agreement contains limitations on our ability to make capital expenditures that may constrain future growth without additional equity financings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."

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.

As discussed above, we have implemented the Fresh Look program and other merchandising and marketing initiatives in additional natural foods supermarket format stores in fiscal 2002. There can be no assurances that these programs will be successful in those stores, nor that the cost of program roll-out will be at or below the costs incurred in fiscal 2001.

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.

From time to time, unions will attempt to organize employees or portions of the employee base at stores or our distribution or manufacturing facilities. Responses to organization attempts require substantial management and employee time and are disruptive to operations. In addition, from time to time certain of our stores may be subject to informational picketing, which can discourage customer traffic and lower sales volumes. Our ability to attract, hire and retain qualified employees at store and home-office levels is critical to our continued success.

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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.

We are subject to a myriad of local, state and federal regulations governing the operation of our stores and support facilities, including licensing laws governing the sale of particular categories of products, health and sanitation laws, laws governing the manufacture, labeling and importation of private label products, labor laws controlling wages, benefits and employment conditions of our employees and advertising regulations governing the manner in which we may advertise products we sell. In addition, in the fall of 2002, the National Organic Standards, a comprehensive program of regulations governing the growing, production, handling and sale of goods advertised as "organic", will be fully implemented. Consumer and regulatory concerns regarding food safety issues, new technology or competitive pressures may trigger modifications in existing laws and the implementation of new laws governing components of our business operations. Such modifications can have a material impact on our sales volume, costs of goods and direct store expenses. Modification of such laws may also impact the vendors and manufacturers who provide goods and services to us, raising the cost of such items or decreasing their availability. 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.

On June 14, 2002, the Company entered into a new primary distribution agreement with Tree of Life, Inc. ("Tree of Life") as distributor. The distribution arrangement commences effective September 1, 2002, which is the date upon which our existing primary distribution contract with United Natural Foods, Inc. expires. The new agreement has no specified term, although either party can terminate the agreement after three years upon 120 days' prior written notice to the other party. Either party also may terminate the agreement for defaults by the other party of certain provisions of the Agreement. Under the terms of the new agreement, we are obligated to purchase 90% of our total cost of goods from specified categories of goods for sale in our U.S. stores from Tree of Life, except in certain defined circumstances when such percentage purchasing obligation is excused. 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. We believe Tree of Life has sufficient warehouse capacity and distribution technology to service the Company's existing stores' distribution needs for natural foods and products as well as the needs of new stores in the future. Upon expiration of the existing distribution agreement with our current primary distributor, other than the agreement with Tree of Life, we will have no other supply contracts with the majority of our smaller vendors, who could discontinue selling to Wild Oats at any time. Although we believe that we could develop alternative sources of supply, any such termination may create a short-term disruption in store-level merchandise selection. Any significant disruption in the supply of goods could have a material impact on our overall sales volume and cost of goods.

We received a transition fee as a part of the new distribution agreement with Tree of Life. We will use the transition fee to offset the transition costs incurred during the transition of the Company's primary distribution relationship to Tree of Life. These costs include, but are not limited to, the cost of retagging store shelves, modification of product inventory, disposal of discontinued products, resetting of products on store shelves and training of store personnel in new procedures, and legal and consulting expenses. A portion of the transition fee received was used to defray transition expenses incurred in the second quarter, but had no material impact on reported second quarter earnings.

Our stock price has been and continues to be fairly volatile. Our stock price is affected by our quarterly and year-end results, results of our major competitors and suppliers, general market and economic conditions and publicity about our competitors, our vendors, our industry or us. Volatility in our stock price may affect our future ability to raise proceeds from equity financings, renegotiate our existing credit agreement or enter into a new borrowing relationship, or affect our ability to obtain new store sites on favorable economic terms.

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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 29,	June 30,	June 29,	June 30,
	2002	2001	2002	2001
Sales	100.0 %	100.0 %	100.0 %	100.0 %
Cost of goods sold and occupancy costs	69.8	71.1	70.4	70.4
Gross margin	30.2	28.9	29.6	29.6
Direct store expenses	21.8	24.0	21.7	23.8
Selling, general and administrative expenses	6.2	5.8	6.2	5.4
Pre-opening expenses	0.3	0.0	0.2	0.3
Restructuring and asset impairment charges		23.9	(0.1)	12.2
Income (loss) from operations	1.9	(24.8)	1.7	(12.1)
Loss on investment		0.1		0.1
Interest expense, net	0.9	1.2	0.9	1.2
Income (loss) before income taxes	1.0	(26.1)	0.7	(13.4)
Income tax expense (benefit)	0.4	(9.5)	0.3	(4.9)
Net income (loss)	0.6 %        ====	(16.6)% ======	0.5 % ====	(8.5)% =====

Sales. Sales for the three months ended June 29, 2002, increased 3.0% to $236.2 million from $229.4 million in the same period in fiscal 2001. Sales for the six months ended June 29, 2002, increased 4.5% to $469.2 million from $448.9 million in the same period in fiscal 2001. The increases were primarily attributed to improvements in same-store sales resulting from the positive impact of the Fresh Look program and overall operational improvements. Comparable store sales increased 5.2% for the second quarter of fiscal 2002 from a 7.3% increase in the first quarter of fiscal 2002, as compared to a 3.9% increase in the second quarter of fiscal 2001, due to operational improvements in a number of stores; the implementation of new marketing programs, including the Fresh Look program, in selected regions; and one store closure. We are proposing additional Fresh Look rollouts in the remainder of fiscal 2002.

Gross Profit. Gross profit for the three months ended June 29, 2002 increased 7.6% to $71.4 million from $66.4 million in the same period in fiscal 2001. Gross profit for the six months ended June 29, 2002 increased 4.7% to $139.1 million from $132.8 million in the same period in fiscal 2001. As a percentage of sales, gross profit increased to 30.2% in the second quarter of fiscal 2002 from 28.9% in the same period in fiscal 2001 due primarily to lower occupancy costs, which were partially offset by lower merchandise margins resulting from the implementation of the Fresh Look program and a shift in sales mix between store formats. Excluding one-time charges of $2.4 million related to increased inventory reserves during the second quarter of fiscal 2001, gross profit increased to 30.2% in the second quarter of fiscal 2002 from 30.0% in the second quarter of fiscal 2001. As the Company implements certain strategic initiatives that include the lowering of prices in selected stores, or in selected regions, gross profit in the remainder of fiscal 2002 may be negatively affected by lower margins on certain items.

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Direct Store Expenses. Direct store expenses for the three months ended June 29, 2002 decreased 6.3% to $51.5 million from $55.0 million in the same period in fiscal 2001, and for the six months ended June 29, 2002 decreased 4.4% to $101.9 million from $106.6 million in the same period in fiscal 2001. As a percentage of sales, direct store expenses decreased to 21.8% in the second quarter of fiscal 2002 from 24.0% in the same period in fiscal 2001. The decreases are primarily due to the reduction of store-level marketing expenses and other cost containment measures. Direct store expenses in the second quarter of fiscal 2001 included $1.8 million of one-time charges related to employee benefits expenses and bad debt reserves. Excluding such one-time charges, direct store expenses as a percentage of sales in the second quarter of fiscal 2001 were 23.2%.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended June 29, 2002 increased 10.4% to $14.8 million from $13.4 million in the same period in fiscal 2001, and for the six months ended June 29, 2002 increased 18.3% to $28.9 million from $24.5 million in the same period in fiscal 2001. Selling, general and administrative expenses included one-time charges related to strategic repositioning activities of $800,000 in the second quarter of fiscal 2001 and $1.6 million in the first half of fiscal 2001. As a percentage of sales, selling, general and administrative expenses increased to 6.2% in the second quarter of fiscal 2002 from 5.8% in the same period in fiscal 2001; excluding the one-time charges, selling, general and administrative expenses as a percentage of sales were 5.5% in the second quarter of fiscal 2001. The increases are attributable to severance costs for former employees, recruiting and relocation costs, as well as increases in advertising and merchandising expenses related to the Fresh Look program. Based on the first six months' results, we have increased our projected level of selling, general and administrative expenses for the remainder of fiscal 2002 and the first quarter of fiscal 2003, and now expect that annualized selling, general and administrative expenses as a percentage of sales will be approximately 6.0% for at least the next nine to 12 months until such time as sales increase to leverage the expenses as a percentage of sales. The increases in selling, general and administrative expenses attributable to the expanded advertising program are expected to remain constant per store in the future.

Pre-Opening Expenses. Pre-opening expenses for the three months ended June 29, 2002 increased to $645,000 compared to $85,000 during the same period in fiscal 2001, and for the six months ended June 29, 2002 decreased 33.1% to $1.0 million from $1.5 million in the same period in fiscal 2001. As a percentage of sales, pre-opening expenses decreased to 0.2% in the first half of fiscal 2002 from 0.3% in the same period in fiscal 2001, due to the opening of one new store in the first half of fiscal 2002 as compared to the opening of four new stores in the first half of fiscal 2001. As part of the Company's increase in marketing efforts relating to the Fresh Look program, we anticipate that pre-opening expenses for new natural foods supermarket stores will increase from an estimated $250,000 historically to an estimated $400,000 per new store, and those of the farmers market format will increase from $75,000 historically to an estimated $150,000 in the future.

Interest Expense, Net. Net interest expense for the three months ended June 29, 2002 decreased 22.0% to $2.2 million from $2.8 million in the same period in fiscal 2001, and for the six months ended June 29, 2002 decreased 15.7% to $4.4 million from $5.2 million in the same period in fiscal 2001 due to decreased borrowings during the six-month period. As part of the October 2001 amendment to our credit facility, our revolving line interest rates on prime-based and LIBOR-based loans are prime plus 2.25% and one-month LIBOR plus 3.75%, respectively, both increasing by 0.5% each June 30 and January 1 through January 1, 2003 when the rate will remain constant through the maturity date of August 1, 2003. Due to the current state of the U.S. economy, management believes 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.

Restructuring and Asset Impairment Income. During the second quarter of fiscal 2002, we recorded restructuring expense of $0, consisting of the following significant components:

• Change in estimate related to fixed asset impairments for sites previously identified for closure or sale ($35,000 of restructuring expense). During the second quarter of fiscal 2002, we determined that these fixed assets were not compatible with a new store design. Due to the new store design, such assets could not be relocated as contemplated under the original restructuring plan. As a result, we determined we could not recover the previously estimated carrying value of these assets, and therefore recognized an impairment charge of approximately $170,000 during the second quarter of fiscal 2002. Additionally, during the second quarter of fiscal 2002, we determined that we could partially recover the carrying value of certain fixed assets used in store front-end operations that were previously written off; therefore, we partially reversed the restructuring charge previously recorded for these fixed asset impairments and recognized restructuring income of approximately $135,000 during the second quarter of fiscal 2002.

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• Change in estimate related to lease-related liabilities for sites previously identified for closure or sale ($678,000 of restructuring income). During the second quarter of fiscal 2002, we negotiated the early termination of a lease of property at which we had operated a kitchen in Los Angeles, California. Also during the quarter, we subleased a closed location in Hartford, Connecticut for the remaining lease term and provided a subsidy for the sublessee; the previously estimated lease-related liabilities in excess of the subsidy were reversed. Additionally, we subleased a site in Vancouver, British Columbia, Canada, for the remaining lease term and consequently reversed the previously estimated lease-related liabilities. For space adjacent to our operating store in West Hartford, Connecticut, we negotiated a lease amendment with the landlord during the second quarter of fiscal 2002 and, as a result, will be removed from the lease in the first quarter of fiscal 2003; we reversed the excess lease-related liabilities previously recorded. Due to these changes in facts and circumstances and the related changes in estimates, we recorded restructuring income during the second quarter of fiscal 2002.

• Fixed asset impairments for one additional store identified in the second quarter of fiscal 2002 to be closed during the third quarter of fiscal 2002 ($131,000 of restructuring expense). During the second quarter of fiscal 2002, we decided to close one store in the third quarter of fiscal 2002 due to failure to extend the lease term with the landlord. The assets will be disposed by the end of the third quarter of fiscal 2002.

• Fixed asset impairments for store construction project discontinuation ($370,000 of restructuring expense). During the second quarter of fiscal 2002, we determined that a new store design was required and construction of new stores based on the previously developed designs would be abandoned to incorporate the new store design changes. Assets in this charge included abandoned construction in progress (primarily leasehold improvements). We determined that we could not recover the carrying value of these fixed assets, and therefore recognized an impairment charge and disposed of the assets during the second quarter of fiscal 2002.

• Severance for employees terminated during the second quarter of fiscal 2002 ($142,000 of restructuring expense). During the second quarter of fiscal 2002, 65 employees were terminated in conjunction with the closure of one store in Cleveland, Ohio and the closure of the bakery operations within one support facility in Denver, Colorado during the quarter. The employees were notified of their involuntary termination during the second quarter of fiscal 2002. As of June 29, 2002, $100,000 of involuntary termination benefits had been paid to terminated employees; the remaining benefits of $42,000 will be paid during the third quarter of fiscal 2002.

During the first quarter of fiscal 2002, we recorded restructuring income of $652,000. 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 2002 ($761,000 of restructuring income). During the first quarter of fiscal 2002, we sold one store in Victoria, British Columbia, Canada. The purchaser assumed the lease-related obligations associated with this store. Based on this change in facts and circumstances, we reversed the remaining lease-related liabilities previously recorded for this store and therefore recognized restructuring income of $649,000 during the first quarter of fiscal 2002. During the first quarter of fiscal 2002, we also concluded payments for terminated lease obligations for sites in Boca Raton, Florida; Santa Fe, New Mexico and Framingham, Massachusetts; based on this change in facts and circumstances, we reversed the remaining lease-related liabilities previously recorded for these stores and therefore recognized restructuring income of $112,000 during the first quarter of fiscal 2002.

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• Gain on sale of assets for site sold during the first quarter of fiscal 2002 ($253,000 of restructuring income). During the first quarter of fiscal 2002, we sold one store in Victoria, British Columbia, Canada. The sale agreement included payment for fixed assets. Based on this change in facts and circumstances, we recorded the gain on the sale of the fixed assets and reversed the fixed asset reserves previously recorded for this store and therefore recognized restructuring income of $253,000 during the first quarter of fiscal 2002.

• Change in estimate related to lease-related liabilities for sites previously identified for closure ($93,000 of restructuring expense). During the first quarter of fiscal 2002, we determined the likelihood of securing a subtenant for certain space in Tempe, Arizona was now remote due to our obligation being at above-market rates, the unattractive site characteristics, and increasingly difficult real estate market conditions. With this change in facts and circumstances, we decided to fully reserve for the remaining lease obligations of the site and therefore recognized a restructuring charge of $93,000 during the first quarter of fiscal 2002.

• Severance for employees terminated during the first quarter of fiscal 2002 ($269,000 of restructuring expense). During the first quarter of fiscal 2002, 103 employees were terminated in conjunction with the closure of two stores in Boca Raton, Florida and Chesterfield, Missouri during the first quarter of fiscal 2002. The employees were notified of their involuntary termination during the first quarter of fiscal 2002. As of June 29, 2002, $269,000 of involuntary termination benefits had been paid to terminated employees.

A summary of restructuring activity by store count is as follows:

	RESTRUCTURING STORE COUNT
	Fiscal Year               Ending		Period  Ending
			June 29,
	2000	2001	2002
Stores remaining at commencement of period		9	6
Stores identified in fiscal 2000 for closure or sale	22
Stores identified in fiscal 2001 for closure or sale		6
Stores identified in fiscal 2002 for closure or sale			1
Identified stores closed or abandoned	(10)	(3)	(3)
Identified stores sold	(3)	(2)	(3)
Reversal of stores identified for closure or sale		(4)
Identified stores remaining at period end	9  ===	6  ===	1  ===

Income Tax Expense. For the three months ended June 29, 2002, we recorded $860,000 of income tax expense, primarily as a result of income before income taxes of $2.4 million during the period. . For the six months ended June 29, 2002, we recorded $1.3 million of income tax expense, primarily as a result of income before income taxes of $3.4 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, 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.

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Liquidity and Capital Resources

Our primary sources of capital have been cash flow from operations (which includes inventory and 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 $23.8 million during the first six months of fiscal 2002 as compared to $20.1 million during the same period in fiscal 2001. Cash from operating activities increased during this period primarily due to an increase in net income before depreciation and amortization expense and changes in 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 $4.6 million during the first six months of fiscal 2002 as compared to $15.3 million during the same period in fiscal 2001. The decrease is due to a reduction in capital expenditures related to new store construction and remodels.

Net cash used in financing activities was $25.3 million during the first six months of fiscal 2002 as compared to $2.7 million used in financing activities during the same period in fiscal 2001. The increase reflects $26.0 million in debt repayments and $590,000 in partial repayment of a related-party note, partially offset by proceeds from stock option exercises.

We have a net deferred tax asset of $23.3 million on our balance sheet, primarily as a result of $54.9 million of restructuring and asset impairment charges recorded during fiscal 2001. The net deferred tax asset will reduce cash required for payment of federal and state income taxes, as we believe we will generate sufficient taxable income for realization of the asset in the future.  The Company has determined that it must amend its 1999, 2000 and 2001 tax returns to correct the reporting of deemed dividend income from a foreign subsidiary. Such determination was the result of an internal self-review and not the result of any tax audit by the Internal Revenue Service or other tax authority. The Company believes that such amended tax returns will not materially affect the consolidated results, liquidity or financial position of the Company, or have any impact on tax expense reported in financial statements for 1999, 2000 and 2001. The Company believes that it has sufficient net operating loss carryovers to carry back to such tax years in order to eliminate any additional tax liability, but expects that it will have liability for interest and potential penalties. Current estimates of total tax liability, interest and potential penalties is not more than approximately $400,000. The Company believes that it has sufficient reserves to cover any interest and potential penalties that may result from the amended returns. The Company intends to seek a waiver from the Internal Revenue Service for certain penalties; however, no assurance can be given that such waiver will be granted.

As of June 29, 2002, we were in violation of one financial covenant, a fixed charge coverage ratio for the fiscal quarter ended June 29, 2002. We obtained a waiver of the violation of the covenant for the fiscal quarter ended June 29, 2002, from all necessary lenders under the credit facility, in exchange for a waiver fee of $75,000.

The Company is proposing to raise $30.0 million or more in an offering of the Company's equity to provide additional liquidity, although such equity financing is not a requirement of the amended credit facility. On June 7, 2002, the Company filed a registration statement on Form S-3 to register the Company for offer and sale 3.25 million shares of the Company's common stock in connection with such placement, in addition to 1.2 million shares previously registered. The Company engaged JP Morgan Securities Inc. to act as the advisor to the Company in any equity financing, for which JP Morgan Securities will receive compensation of up to 5% of any financing consummated by the Company. JP Morgan Securities Inc. is affiliated with J.P. Morgan Partners (SBIC), LLC, which holds approximately 9.4% of our outstanding common stock.

We maintain an interest rate risk management strategy, which is required by our amended credit facility terms, that uses derivative instruments to minimize significant, unanticipated earnings fluctuations that may arise from volatility in interest rates. The Company's specific goals are to (1) manage interest rate sensitivity by modifying the repricing or maturity characteristics of some of its debt and (2) lower (where possible) the cost of its borrowed funds. In accordance with the Company's interest rate risk management strategy, and in accordance with the requirements of our credit facility, the Company has entered into a swap agreement to hedge the interest rate on $37.5 million of its borrowings. The swap agreement locks in a one-month LIBOR rate of 6.6% and expires on August 1, 2003.

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Capital Expenditures. We spent approximately $4.6 million during the first six months of fiscal 2002 for new store construction, development, remodels and other capital expenditures, exclusive of acquisitions. Capital expenditures originally planned for certain of the stores rescheduled to open in fiscal 2002 were incurred commencing in the fourth quarter of fiscal 2001. The aggregate amount to construct all five originally scheduled stores was originally estimated at $15.0 million to $20.0 million, but may be revised downward as part of our comprehensive review of the business operations and strategic plan. We have terminated one store's lease obligations. 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. As part of our reexamination of our operating strategies, we anticipate that the average capital expenditures to open a natural foods supermarket format store will be $2.5 million to $4.0 million in the future, partly because of our decision to reduce the size or simplify the format of our food service department in new stores, as well as our decision not to increase store size in the majority of geographic areas. Our average capital expenditures to open a farmers market format store are estimated at $1.5 million to $2.25 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. Under our amended credit facility, we are limited in our new store capital expenditures to an aggregate $3.1 million in the second quarter of fiscal 2002 for the first six months, and an aggregate $3.2 million in the third quarter. Proceeds from any equity offering in excess of $30.0 million may be used to increase our total allowable level of capital expenditures by $4.0 million per natural foods supermarket format store and $2.25 million per farmers market format store. If we are successful in raising the additional equity financing, we plan to use the equity proceeds to complete the early construction of two stores in fiscal 2002 and execute leases for and commence capital expenditures on up to 15 new stores through fiscal 2003. Although there can be no assurance that actual capital expenditures will not exceed anticipated levels, we believe that cash generated from operations and available under our existing credit facility will be sufficient to satisfy our budgeted capital expenditure requirements through the remainder of fiscal 2002.

The cost of initial inventory for a new store is approximately $300,000 to $800,000 depending on the store format; however, we obtain vendor financing for most of this cost. Pre-opening costs currently are approximately $250,000 to $350,000 per store and are expensed as incurred. Pre-opening costs for natural foods supermarket format stores in the future are projected to increase from $250,000 to $400,000 per store, and pre-opening costs for farmers market format stores are projected to increase from $75,000 to $150,000, as a result of increased advertising for new stores. The amounts and timing of such pre-opening costs will depend upon the availability of new store sites and other factors, including the location of the store and whether it is in a new or existing market for us, the size of the store, and the required build-out at the site. Costs to acquire future stores, if any, are impossible to predict and could vary materially from the cost to open new stores. There can be no assurance that actual capital expenditures will not exceed anticipated levels, although our amended credit facility contains aggregate limits on the amounts of capital expenditures we may make. We believe that cash generated from operations and available under our existing credit facility will be sufficient to satisfy our budgeted cash requirements through fiscal 2002.

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 2002, our expectations for comparable store sales; the impact of changes resulting from further implementation of our Fresh Look merchandising, advertising and pricing program; levels of cannibalization; 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 Company's ability to conclude an equity financing; the timing and success of the continued implementation of the Fresh Look program; 

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the timing and execution of new store openings, relocations, remodels, sales and closures; 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. 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.

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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 and are subject to exchange rate fluctuations between the two currencies. To the extent that cash is 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 $125.0 million revolving credit facility. The facility has two separate lines of credit, a revolving line of up to $86.2 million and a term loan of up to $38.8 million, each with a three-year term expiring August 1, 2003. As part of the October 2001 amendment of the credit facility, which had an original credit capacity of $157.5 million, borrowings under the credit facility have been limited to $125.0 million. As of June 29, 2002, there were $62.5 million in borrowings outstanding under the $86.2 million revolving line of this facility and $33.8 million in borrowings outstanding under the $38.8 million term note. As part of the amendment to the credit facility, the interest rate on the facility was amended to either prime plus 2.25% or one-month LIBOR plus 3.75%, at our election, and the rates increase by 0.5% starting January 1, 2002 and each six months thereafter through January 2003. Because the interest rates on these facilities are 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 debt as of June 29, 2002, would be an annual increase or decrease of approximately $963,000 in interest expense and a corresponding decrease or increase of approximately $605,000 in the Company's net income after taxes.

In September 2000, as required by the Company's 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 on variable rate debt is 6.6%. At June 29, 2002, the notional principal amount of the interest rate swap agreement was $37.5 million, expiring on August 1, 2003. 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 2002, the loss, net of taxes, included in other comprehensive loss for this cash flow hedge was approximately $303,000.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

In April 2000, the Company was named as defendant in S/H -Ahwatukee, LLC and YP- Ahwatukee LLC v. Wild Oats Markets, Inc., Superior Court of Arizona, Maricopa County, by a landlord alleging Wild Oats breached a continuous operations clause arising from the closure of a Phoenix, Arizona store. The landlord dismissed the same suit, filed in 1999, without prejudice in 1999, after the Company presented a possible acceptable subtenant, but subsequently rejected the subtenant. Plaintiff claimed $1.5 million for diminution of value of the shopping center plus accelerated rent, fees and $360,000 in attorneys' fees and costs. After trial in November 2001, the judge awarded the plaintiff $326,000 in damages and $210,000 in attorneys' fees and the Company has reserved such amounts. In April 2002 the plaintiffs filed a motion to alter or amend the judgment to increase the amount thereof to $1.1 million. The judge denied the motion. The plaintiffs have filed a notice of intent to file an appeal.

In October 2000 the Company was named as defendant in 3601 Group Inc. v. Wild Oats Northwest, Inc., Wild Oats, Inc. and Wild Oats Markets, Inc., a suit filed in Superior Court for King County, Washington, by a property owner who claimed that Alfalfa's Inc., our predecessor in interest, breached a lease in 1995 related to certain property in Seattle, Washington.  Plaintiff subsequently increased its damages claim from $377,000 to $2.4 million. Both parties filed motions for summary judgment. After hearing, the court denied the Company's motion and granted the plaintiff's motion, ruling that the Company had anticipatorily breached its lease obligations. A trial on damages was held in July 2002 and the jury awarded no damages, based on its determination that the plaintiff had benefited monetarily from our lease termination. The Company intends to seek an award of attorneys' fees.

In June 2002, the Company was named as a defendant in In Re Kava Kava Litigation, a class-action suit consolidated from three cases filed in Los Angeles Superior Court by plaintiffs alleging that most major grocery stores, including Wild Oats, and supplements manufacturers, distributed, manufactured, and/or sold kava-kava supplements without appropriate warnings that such may cause liver damage. Plaintiffs seek the removal of the products from the stores, the addition of certain warning labels before the products can be resold, and unspecified damages including disgorgement of profits from the sale of kava kava products. The Company has tendered defense of the suit to all its manufacturers of kava kava products, and a number have agreed to assume the defense on a pro-rata basis.  In August 2002, the court stayed the action, pending FDA review of the issue.

The Company also 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

The Company and plaintiffs Michael C. Gilliland and Elizabeth C. Cook entered into a settlement agreement on March 21, 2002, pursuant to which, in the second quarter of 2002, the Company issued an aggregate of 111,269 shares (after giving effect to certain adjustments specified in the settlement agreement) of common stock, $0.001 par value, of the Company. The shares were issued in payment of an aggregate of $1.2 million in principal and accrued interest on a promissory note issued by the Company in January 2001 in exchange for cash.

The issuance of the shares to Mr. Gilliland and Ms. Cook was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) of such Act, as a transaction by the Company not involving any public offering. Mr. Gilliland and Ms. Cook founded the Company, and were officers and served on the Company's Board of Directors until their resignations in 2001. Mr. Gilliland and Ms. Cook owned in excess of 5% of the Company's common stock at the time of issuance. Resale of the shares by Mr. Gilliland and Ms. Cook was registered by the Company pursuant to a registration statement on Form S-3 (No. 333-85908). Mr. Gilliland and Ms. Cook may be deemed to be underwriters in connection with the resale of the shares issued to them pursuant to the settlement agreement.  In connection with the foregoing, Mr. Odak was issued options to purchase 5,856 shares of common stock under a provision of his Employment Agreement that provided for the maintenance of his 5% equity position in the event of a capital-raising transaction.

Item 3. Defaults Upon Senior Securities

None.

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

At the Company's Annual Meeting of Stockholders, held on May 7, 2002, the Company's stockholders elected each of the following directors for a three-year term: David L. Ferguson and James B. McElwee. The following number of votes elected the directors:

 

Director	For	Withheld
David L. Ferguson	18,869,847	179,642
James B. McElwee	18,867,969	181,520

The remaining directors whose terms continue after the meeting date are John A. Shields, David Chamberlain, Brian Devine, Mo Siegel and Perry D. Odak.

The Company's stockholders ratified the selection of PricewaterhouseCoopers LLP as independent accountants for the Company for its fiscal year ended December 28, 2002. The shareholders voted for the ratification by the following number of votes:

For	Against	Abstain	Broker Non-Votes
18,805,881	224,321	19,287	0

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:

10.1      Second Amendment to Employment Agreement between Wild Oats Markets, Inc. and Perry D. Odak, dated June 19, 2002.

10.2      Third Amendment to Employment Agreement between Wild Oats Markets, Inc. and Perry D. Odak, dated August 12, 2002.

10.3      Assignment of Kaczynski Employment Agreement, dated June 29, 2002, between Registrant and Sparky, Inc.

10.4      Assignment of Dunlap Employment Agreement, dated June 29, 2002, between Registrant and Wild Oats Financial, Inc.

10.5      Re-filing of correct version of Edward F. Dunlap Equity Incentive Plan (incorrect version filed as Exhibit 10.20 to the Company's
             Annual Report filed on Form 10-K for fiscal year ending December 29, 2001)

(b) Reports on Form 8-K:

None.

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SIGNATURES

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 13th day of August, 2002.

Wild Oats Markets, Inc.

By: /s/Edward F. Dunlap

Edward F. Dunlap

Chief Financial Officer

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Certification of CEO 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 29, 2002 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 12, 2002

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.

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Certification of CFO 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 29, 2002 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 12, 2002

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.

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EX-10.1

SECOND AMENDMENT TO EMPLOYMENT AGREEMENT

THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT by and between Wild Oats Markets, Inc. (the "Company") and Perry D. Odak (the "Executive") is dated June 19, 2002.

RECITALS

A. The Executive and the Company entered into an Employment Agreement dated March 6, 2001 (the "Employment Agreement"); and

B. Under Section 4(b) of the Employment Agreement, the Company shall pay the Executive as Incentive Compensation in respect to each fiscal year (or a portion thereof) of the Company during the Term, an amount determined in accordance with any bonus or short term incentive compensation program (which may be based upon achieving certain specified performance criteria) which may be established by the Board either for the Executive or for senior management;

C. Section 4(b) of the Employment Agreement further provides for the Executive's good faith consideration of waiving all or a portion of the Incentive Compensation otherwise payable to him for the first 12 months of service to the extent that the Company incurs a loss in connection with its obligation to arrange for the purchase of the Executive's house under Section 4(h) of the Employment Agreement;

D. The parties have agreed to an extension of the date on which the Incentive Compensation shall be paid in order to provide for sufficient time to determine whether the Company will incur a loss in connection with the Company's obligation to purchase the Executive's house for purposes of Section 4(b) of the Agreement; and

E. The Board of Directors and the Executive have agreed that the first Incentive Compensation payment date shall be as provided below.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises, terms, provisions and conditions set forth in this Second Amendment to Employment Agreement, the parties hereby agree:

1. Amendment to Section 4(b) - Incentive Compensation. The last sentence in the first full paragraph is deleted and replaced with the following:

"The amount of Incentive Compensation to be paid by the Company to the Executive for the first twelve (12) months of service during the Term hereof shall not be less than Two Hundred Fifty Thousand Dollars ($250,000), which amount shall be paid only if the Executive remains in the employment of the Company on October 20, 2002 or is terminated by the Company other than for Cause (or he terminates for Good Reason) during such period."

2. The following sentence is added at the end of Section 4(b) of the Employment Agreement:

"The Incentive Compensation payment to the Executive for the first 12 months of service during the Term shall be due on or before October 2, 2002, in order to provide sufficient time for the Executive to evaluate whether the Company has incurred a loss in connection with the Company's obligation to purchase the Executive's house."

3. Confirmation. In all other respects, the terms of the Employment Agreement are hereby confirmed.

IN WITNESS WHEREOF, this Second Amendment to Employment Agreement has been executed by the Company, by its duly authorized officer, and by the Executive, as of the date first above written.

THE EXECUTIVE	WILD OATS MARKETS, INC.
/s/ Perry D. Odak	By:  /s/ Freya Brier
Perry D. Odak	Name: Freya Brier
	Title: V.P., Legal

EX-10.2

THIRD AMENDMENT TO EMPLOYMENT AGREEMENT

THIS THIRD AMENDMENT TO EMPLOYMENT AGREEMENT by and between Wild Oats Markets, Inc. (the "Company") and Perry D. Odak (the "Executive") is dated August 12, 2002.

RECITALS

A. The Executive and the Company entered into an Employment Agreement dated March 6, 2001 (the "Employment Agreement");

B. Under Section 4(d) of the Employment Agreement, in the event of the issuance by the Company of additional securities as part of a capital raising transaction (the "Issuance") during the 270 days following the date of the Employment Agreement, the Company shall automatically grant to the Executive on the date of the Issuance (provided he has become an employee and remained in the continuous employment of the Company), options to acquire such additional number of shares of common stock sufficient to maintain the Executive's percentage interest as of such date (if such options were exercised) at five percent (5%) of the sum of (i) the number of shares of common stock outstanding (on a fully diluted basis) upon the date of the Executive's purchase (after taking into account the shares sold to the Executive) plus (ii) the number of shares issued pursuant to such capital raising transaction plus the number of shares subject to such options; provided, however, that the Executive shall not be granted options to acquire more than 300,000 shares in the aggregate pursuant to this provision;

C. In May 2002, the Company's Board of Directors agreed to amend the Employment Agreement to extend through December 2002 the period during which the Issuance will entitle Mr. Odak to receive up to 300,000 stock options exercisable for the Company's common stock, to allow Mr. Odak to maintain his 5% equity ownership in the Company; and

D. The Executive and the Company desire to provide for the grant of options to other officers of the Company.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises, terms, provisions and conditions set forth in this Third Amendment to Employment Agreement, the parties hereby agree:

1. Amendment to Section 4(d) - Stock Options. The first sentence is deleted and replaced with the following:

"If, by reason of the issuance by the Company of additional shares of Stock pursuant to a capital raising transaction at any time or times prior to January 1, 2003, the number of Shares purchased by the Executive pursuant to the Purchase Agreement represents less than five percent (5%) of the sum of (i) the number of shares of Stock outstanding (on a fully diluted basis) upon the date of the Executive's purchase (after taking into account the shares sold to the Executive) plus (ii) the number of shares issued pursuant to such capital raising transaction, the Company shall automatically grant to the Executive, on the date of issuance of the Stock in the capital raising transaction (provided he has become an employee and remained in the continuous employment of the Company), options to acquire such additional number of shares of Stock sufficient to maintain the Executive's percentage interest as of such date (if such options were exercised) at five percent (5%) of the sum of (i) and (ii) plus the number of shares subject to such options; provided, however, that the Executive shall not be granted options to acquire more than 300,000 shares in the aggregate pursuant to this provision."

2. The following sentence is added at the end of Section 4(d) of the Employment Agreement:

"Notwithstanding anything in this Section 4(d) to the contrary, the Company shall be deemed to have satisfied its obligations under this Section 4(d) with respect to the number of options represented by the Antidilution Options, as defined below (but in no event with respect to options to purchase more than 70,000 Shares), if the Company satisfies each of the conditions set forth below:

(1) the Company grants, to employees of the Company (other than the Executive), options (the "Employee Options") to acquire shares of Stock on the same date it would have been required to grant options to the Executive under this Section 4(d) but for the application of this sentence;

(2) the Employee Options (a) have an exercise price equal to the fair market value of a share of Stock as of the date of grant (as determined under the Company's 1996 Equity Incentive Plan (the "Incentive Plan")), (b) have a term of 10 years, (c) become vested and exercisable over four (4) years at the rate of 2.0833% per month following the date of grant provided the optionee has remained in the continuous employee of the Company and subject to acceleration under the same conditions that apply to the vesting of the Restricted Shares, (d) terminate upon the optionee's termination of employment for any reason, except that any Employee Options that are vested and exercisable upon the optionee's termination of employment shall terminate six (6) months following the optionee's termination of employment as a result of the optionee's disability, twelve (12) months following the optionee's termination of employment by reason of death and thirty (30) days (but in no event later than the remaining term of the Employee Option) following the optionee's termination of employment for any other reason other than cause, as such is defined in the Incentive Plan and attachments thereto, in which event the Employee Options shall terminate upon termination of employment and (e) are otherwise subject to the terms of the Incentive Plan;

(3) the Company grants to the Executive options (the "Antidilution Options") to purchase one half (1/2) of the number of Shares subject to the Employee Options; and

(4) the terms of the Antidilution Options comply with the provisions of this Section 4(d), determined without regard to this sentence, except that (a) the Antidilution Options become exercisable on the date on which they otherwise would have become exercisable in accordance with this Section 4(d); provided that the number of Antidilution Options that have become exercisable may not exceed one half (1/2) of the number of Employee Options that have expired or been forfeited, in either case, without having been exercised and (b) the Antidilution Options expire on the date on which they otherwise would have expired in accordance with this Section 4(d); provided that on each date on which one or more Employee Options are exercised a number of Antidilution Options equal to one-half (1/2) of the number of Employee Options so exercised shall immediately expire."

3. Confirmation. In all other respects, the terms of the Employment Agreement are hereby confirmed.

IN WITNESS WHEREOF, this Third Amendment to Employment Agreement has been executed by the Company, by its duly authorized officer, and by the Executive, as of the date first above written.

THE EXECUTIVE	WILD OATS MARKETS, INC.
/s/ Perry D. Odak	By:   Freya Brier
Perry D. Odak	Name:  Freya Brier,
	Title:  V.P., Legal

EX-10.3

ASSIGNMENT AND ASSUMPTION OF EMPLOYMENT AGREEMENT

THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is between Wild Oats Markets, Inc. (the "Assignor") and Sparky, Inc. ("Assignee").

RECITALS

A. Wild Oats Markets, Inc. entered into an Employment Agreement (the "Employment Agreement") with Stephen A. Kaczynski (the "Employee") dated April 24, 2001;

B. The Employment Agreement provides for the Employee to serve as Senior Vice President of Merchandising and to perform such customary functions of this position;

C. Sparky, Inc., is a wholly owned subsidiary of Assignor that handles the purchasing for Assignor;

D. The Assignor wishes to assign its interest in the Employment Agreement to the Assignee;

NOW THEREFORE, effective June 29, 2002, in consideration of the continuing services of Employee as a corporate officer for Assignor and certain other good and valuable consideration paid to Wild Oats Markets, Inc., the receipt and sufficiency of which are hereby acknowledged, Assignor grants, transfers, assigns and conveys unto Assignee its entire right, title and interest in and to the Employment Agreement, and Assignee agrees to assume the obligations of Assignor thereunder.

WILD OATS MARKETS, INC	SPARKY, INC.
By: /s/Freya Brier, V.P., Legal	By:  /s/ Karen Novotny, Secretary

ACKNOWLEDGMENT AND CONSENT OF EMPLOYEE

Employee hereby acknowledges and consents to the assignment of Assignor's interest in the Employment Agreement to Assignee, effective June 29, 2002.

STEPHEN A. KACZYNSKI

By: /s/ Stephen A. Kaczynski

EX-10.4

ASSIGNMENT AND ASSUMPTION OF EMPLOYMENT AGREEMENT

THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is between Wild Oats Markets, Inc. (the "Assignor") and Wild Oats Financial, Inc. ("Assignee").

RECITALS

A. Wild Oats Markets, Inc. entered into an Employment Agreement (the "Employment Agreement") with Edward F. Dunlap (the "Employee") dated December 17, 2001;

B. The Employment Agreement provides for the Employee to serve as Chief Financial Officer and to perform such customary functions of this position;

C. Wild Oats Financial, Inc. is a wholly owned subsidiary of Assignor that handles the financial functions of Assignor;

D. Assignor wishes to assign its interest in the Employment Agreement to the Assignee;

NOW THEREFORE, effective June 29, 2002, in consideration of the continuing services of Employee as a corporate officer for Assignor and certain other good and valuable consideration paid to Wild Oats Markets, Inc., the receipt and sufficiency of which are hereby acknowledged, Assignor grants, transfers, assigns and conveys unto Assignee its entire right, title and interest in and to the Employment Agreement and Assignee agrees to assume the obligation of the Assignor thereunder.

WILD OATS MARKETS, INC.	WILD OATS FINANCIAL, INC.
By: /s/Freya Brier, V.P., Legal	By:  /s/ Karen Novotny, Secretary

ACKNOWLEDGMENT AND CONSENT OF EMPLOYEE

Employee hereby acknowledges and consents to the assignment of Assignor's interest in the Employment Agreement to Assignee, effective June 29, 2002.

EDWARD F. DUNLAP

By: /s/ Edward F. Dunlap

EX-10.5

WILD OATS MARKETS, INC.

EDWARD DUNLAP EQUITY INCENTIVE PLAN

1. PURPOSES

(a) The purpose of the Plan is to induce Edward Dunlap ("Executive" or "Optionee") to enter into an employment arrangement with Wild Oats Markets, Inc. as Chief Financial Officer, 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 120,000 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 grant of the Option, (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 the date of hire of the Executive.

WILD OATS MARKETS, INC.

NON-QUALIFIED STOCK OPTION

EDWARD DUNLAP, Optionee:

Wild Oats Markets, Inc. (the "Company"), pursuant to the Edward Dunlap Equity Incentive Plan (the "Plan"), has this day granted to you, the optionee named above, an option to purchase shares of the common stock of the Company ("Common Stock"). This option is 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 option are as follows:

1. (a) The total number of shares of Common Stock subject to this option is ____________________________

(a) Subject to the conditions stated herein, this 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. (a) The exercise price of this option 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 this option.

(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, this option 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. This option may not be exercised for any number of shares which would require the issuance of anything other than whole shares.

4. Notwithstanding anything to the contrary contained herein, this option may not be exercised unless the shares issuable upon exercise of this option 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. The term of this option commences 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 this option be exercised on or after the date on which it terminates. This option shall terminate prior to the expiration of its term as follows: Thirty (30) days after the termination of your employment with the Company for any reason or for no reason unless;

(a) 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

(b) 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

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

However, this option may be exercised on or after the termination of employment only as to that number of vested shares as to which it was exercisable on the date of termination of employment under the provisions of paragraphs 1 and 3 of this option; provided however, that if your employment is terminated prior to the First Exercise Date (as defined in subparagraph 3(a) hereof), subject to paragraph 1 hereof, the date of your termination of employment shall be deemed the First Exercise Date.

6. (a) This option may be exercised, to the extent specified above, by delivering a notice of exercise (in a form designated by the Company) 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.

(i) By exercising this option 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 (1) the exercise of this option; (2) the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise; or (3) the disposition of shares acquired upon such exercise.

7. This option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you.

8. Any notices provided for in this option 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 (5) 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. If the partners hereto shall have any conflict regarding the terms of this option, the interpretation of the Company's Compensation Committee shall prevail.

Dated the ______ day of _________________, 200_.

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 this option are set forth in the option and the Plan; and

(b) Acknowledges that as of the date of grant of this option, it sets forth the entire understanding between the undersigned optionee and the Company and its affiliates regarding the acquisition of stock in the Company and supersedes all prior oral and written agreements on that subject with the exception of the following agreements only:

NONE _____________________

(Initial)

OTHER __________________________________________________________

__________________________________________________________

__________________________________________________________

___________________________________________________

Optionee

Address: ___________________________________________

___________________________________________

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       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 Edward Dunlap 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, and (iii) if this exercise related to an incentive stock option, to notify you in writing within fifteen (15) days after the date of any disposition of any of the shares of Common Stock issued upon exercise of this option that occurs within two (2) years after the date of grant of this option or within one (1) year after such shares of Common Stock are issued upon exercise of this option.

I hereby make the following certifications and representations with respect to the number of shares of Common Stock of the Company listed above (the "Shares"), which are being acquired by me for my own account upon exercise of the Option as set forth above:

I further acknowledge that I will not be able to resell the Shares for at least ninety days after the stock of the Company becomes publicly traded (i.e., subject to the reporting requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934) under Rule 701 and that more restrictive conditions apply to affiliates of the Company under Rule 144.

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.

I further agree that, if required by the Company (or a representative of the underwriters) in connection with the first underwritten registration of the offering of any securities of the Company under the Act, I will not sell or otherwise transfer or dispose of my shares of Common Stock or other securities of the Company during such period (not to exceed two hundred seventy (270) days) following the effective date of the registration statement of the Company filed under the Act (the "Effective Date") as may be requested by the Company or the representative of the underwriters. For purposes of this restriction I will be deemed to own securities that (i) are owned directly or indirectly by me, including securities held for my benefit by nominees, custodians, brokers or pledges; (ii) may be acquired by me within sixty (60) days of the Effective Date; (iii) are owned directly or indirectly, by or for my brothers or sisters (whether by whole or half blood), spouse, ancestors and lineal descendants; or (iv) are owned, directly or indirectly, by or for a corporation, partnership, estate or trust of which I am a shareholder, partner or beneficiary, but only to the extent of my proportionate interest therein as a shareholder, partner or beneficiary thereof. I further agree that the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period.

Very truly yours,

_________________________________