10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 27, 2003

OR

(  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-21577

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

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

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

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class

Common Stock, $.001 par value

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K:

  Yes       ( X )       No       (    )

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

  Yes       ( X )       No       (    )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2):

  Yes       ( X )       No       (    )

The aggregate market value of the voting common stock held by non-affiliates was $310,522,421, as computed by reference to the price at which the common stock was sold as reported by NASDAQ National Market, as of the last business day of the Registrant’s most recently completed second fiscal quarter and the total number of shares of common stock outstanding as of March 1, 2004 held by non-affiliates.

As of March 1, 2004, the total number of shares outstanding of the Registrant’s common stock, $.001 par value, was 3,231,749 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on May 6, 2004, have been incorporated by reference into Part III of this report.

TABLE OF CONTENTS

PART I.
Item 1.	Business	3
Item 2.	Properties	11
Item 3.	Legal Proceedings	13
Item 4.	Submission of Matters to a Vote of Security Holders	13
PART II.
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	14
Item 6.	Selected Financial Data	15
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 8.	Financial Statements and Supplementary Data	35
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	76
Item 9A.	Controls and Procedures	76
PART III.
Item 10.	Directors and Executive Officers of the Registrant	77
Item 11.	Executive Compensation	77
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	77
Item 13.	Certain Relationships and Related Transactions	77
Item 14.	Principal Accountant Fees and Services	77
PART IV.
Item 15.	Exhibits, Financial Statements, Financial Statements Schedules and Reports on Form 8-K	78

PART I.

Item 1.

BUSINESS

Who are we:

Wild Oats Markets, Inc. ("Wild Oats") is one of the largest natural foods supermarket chains in North America. As of March 1, 2004, we operated 102 natural foods stores in 24 states and British Columbia, Canada under several names, including:

• Wild Oats Natural Marketplace (nationwide)

• Henry’s Marketplace (San Diego and Orange County, CA)

• Sun Harvest Farms (Texas)

• Capers Community Market (British Columbia, Canada)

We are dedicated to providing a broad selection of high-quality natural, organic and gourmet foods, environmentally friendly household products and the most extensive selection of natural vitamins, supplements, herbal and homeopathic remedies and body care products at competitive prices, in an inviting and educational store environment that emphasizes customer service. Our stores feature natural alternatives for virtually every product category found in conventional supermarkets. Wild Oats provides its customers with a one-stop, full-service shopping alternative to both conventional supermarkets and traditional health food stores, with an emphasis on great tasting fresh foods, education and information on wellness issues. Our comprehensive selection of natural and organic products appeals to health-conscious shoppers while offering virtually every product category found in a conventional supermarket, including dry grocery, produce, meat, poultry, seafood, dairy, frozen, prepared foods, bakery, vitamins and supplements, health and body care, and household items. Our unique positioning, coupled with industry data that states that the natural products industry currently comprises less than 5% of the total grocery industry, offers significant potential for us to continue to expand our customer base.

A Recap of 2003

Wild Oats’ sales grew from $919.1 million in 2002 to a record $969.2 million in fiscal 2003, an overall sales growth of 5.4%. Our improvements in sales resulted from the addition of eight new stores, nationwide increases in comparable store sales resulting from a number of successful operational, merchandising and marketing initiatives, and the positive impact of an extensive strike at conventional grocery stores in southern California beginning in October 2003.

Fiscal 2003 was a year in which many of the initiatives commenced in 2001 and 2002 were refined and fully implemented. These initiatives included:

• Consolidation of brand names through the renaming of our Natures^(R) stores in the northwest to Wild Oats Natural Marketplace^(R).
• Completion of our SKU rationalization program and implementation of a centralized authorized product list.
• Refinement of our brand identity as a leader in the natural and organic products industry and as a resource for information and education for our customers.
• Redesign and relaunch of our new lines of private label products.
• Refinement of our prototype floor plans for both our natural foods supermarket and farmers market formats, and the construction of eight new stores using those prototypes.

We continue to focus on growth through new store development in areas where we already had a market presence. In 2003, we opened eight new stores: Henry’s Marketplace stores in Chino Hills and Costa Mesa, California; and Wild Oats stores in Littleton, Colorado; Louisville and Lexington, Kentucky; Portland, Maine; Franklin, Tennessee and Salt Lake City, Utah. Of these new stores, four were in existing markets, one was a relocation and three were in new markets. We also closed four under-performing stores: in Tucson, Arizona; Irvine and Los Angeles, California; and Nashville, Tennessee (which store was relocated to a larger facility). During 2004 through the date of this report, we opened one additional store in Colorado Springs, Colorado, closed one store in Phoenix, Arizona and sold one store in New York, New York. As a result, as of March 1, 2004, we had 102 stores located in 24 states and Canada, as compared to 99 stores in 23 states and Canada as of the end of fiscal 2002. A summary of store openings, acquisitions, closures and sales is as follows:

	TOTAL STORE COUNT
		Fiscal Year Ending					Period Ending
							March 1,
		1999	2000	2001	2002	2003	2004
Store count at beginning of period		63	110	106	107	99	103
Stores opened		13	14	4	1	8	1
Stores acquired*		40	2
Stores closed		(6)	(17)	(1)	(5)	(4)	(1)
Stores sold			(3)	(2)	(4)		(1)
Store count at end of period		110	106	107	99	103	102

*Includes 24 stores added through two pooling-of-interest transactions in 1999

Wild Oats was in the forefront in fiscal 2003 in addressing national concerns regarding the safety of our food chain and health and wellness issues raised by our daily lifestyles. Food safety concerns arising from the discovery of the first U.S. case of Bovine Spongiform Encephalopathy (BSE), commonly known as "Mad Cow" disease, and published reports of PCBs in farmed salmon, as well as continued concerns about the use of antibiotics and growth hormones in livestock and pesticide residues on fruits and vegetables, focused consumer awareness on natural and organic foods as a safer alternative to conventional products. In response, Wild Oats promoted its "worry-free beef" – 100% vegetarian fed, to reduce the risk of BSE, and like all of our meats, raised without added hormones or antibiotics. We also introduced an exclusive line of PCB free Irish salmon, and as always, offered our customers a bountiful selection of organic fresh and frozen fruits and vegetables with no pesticide residues. Increases in public awareness of obesity and in Type II diabetes and other diseases linked to obesity and nutrition, raised the consumer’s awareness of wellness, and in response, Wild Oats removed products containing hydrogenated or "trans fats" from its shelves. The growing popularity of various diets, such as low carbohydrate diets, and consumer demand for specialty products to address dietary restrictions arising from medical conditions, such as gluten-free products, increased consumer interest in the nutritional content of food, and Wild Oats responded by creating new signage and shopping guides to identify lower carbohydrate and gluten-free products.

Natural products industry

Retail sales of natural products have grown from $7.6 billion in 1994 to $17.4 billion in fiscal 2002, a compound growth rate of 10.9%, and total sales of natural products (including over the internet, by practitioners, by multi-level marketers and through mail order) reached $36.4 billion in fiscal 2002, a 7% increase over the prior year (Natural Foods Merchandiser, June 2003). Sales growth in the traditional grocery industry has remained relatively flat over the same period. We believe that this growth reflects a broadening of the natural products consumer base, which is being propelled by several factors, including healthier eating patterns, increasing concern regarding food purity and safety, and greater environmental awareness. While natural products generally have higher costs of production and correspondingly higher retail prices, we believe that more of the population now attributes added value to high-quality natural products and is willing to pay a premium for such products, although overall industry growth may slow slightly due to the softening economy. Despite the increase in natural foods sales within conventional supermarkets, we believe that conventional supermarkets still lack the total shopping experience that natural foods stores offer.

Operating strategy

Our objective is to become the grocery store of choice both for natural foods shoppers and quality-conscious consumers in each of our markets by emphasizing the following key elements of our operating strategy:

Destination format. Our stores are one-stop, full-service supermarkets for customers seeking high-quality natural and gourmet foods and related products. Our prototype stores range from 26,000 to 32,000 square feet, and offer a wide range of stock-keeping units of natural foods products in virtually every product category found in a conventional supermarket. Our stores carry a much broader selection of natural and gourmet foods and related products than those offered by typical independent natural foods stores or conventional supermarkets.

Highest standards in the industry. We seek to offer the highest quality products throughout our merchandise categories, and emphasize unique products and brands not typically found in conventional supermarkets. We believe our product standards are the highest in the industry. We routinely conduct quality assurance checks of our manufacturers’ facilities to verify compliance with our standards. Each of our stores tailors its product mix to meet the preference of its local market, and where cost of goods and distribution logistics allow, source produce from local organic growers. We also operate regional commissary kitchens and bakeries that provide our stores with fresh bakery items and an unique assortment of prepared foods for the quality- and health-conscious consumer.

Educational and entertaining store environment. Each store strives to create a fun, friendly and educational environment that makes grocery shopping enjoyable, encouraging shoppers to spend more time in the store and to purchase new products. In order to enhance our customers’ understanding of natural foods and how to prepare them, we train our store staff to educate customers as to the benefits and quality of our products and prominently feature educational brochures, newsletters, and in-store demonstrations and product samplings, as well as an in-store consumer information department. Computer kiosks offer access to our website and informational databases on health issues. Many stores offer cafe seating areas, and espresso and fresh juice bars, all of which emphasize the comfortable, relaxed nature of the shopping experience. We believe our knowledgeable store staff and high ratio of store staff to customers results in significantly higher levels of customer service.

Extensive community involvement. We seek to engender customer loyalty by demonstrating our high degree of commitment to the local communities in which we operate. Each store makes significant monetary and in-kind contributions to local not-for-profit organizations through programs such as "5% Days," where a store may, once each calendar quarter, donate 5% of its net sales from one day to a local not-for-profit group, and a "Charity Work Benefit" where we pay employees for time spent volunteering for local charities. We also offer eScrip^TM which allows customers to donate to the charity or school of their choice. In 2003, we introduced Natureworks PCA, a compostable deli container made from corn in an effort to minimize the impact of our stores on the environment.

Multiple store formats. We operate in one operating segment, retail grocery, with two store formats: natural foods supermarkets, which emphasize natural and organic products and high-quality service; and farmers market stores, which emphasize fresh produce, natural living products and price value. While each format has the same core demographic customer profile, differing demographic appeals of each of the formats allows us to operate successfully in a diverse set of markets, enabling us to reach a broader customer base, increase our market penetration and have greater flexibility with real estate selection.

Competitive pricing. We seek to offer products at prices that are competitive with those of other natural foods stores and conventional markets. Our "Wild Buy" program offers a large weekly selection of unadvertised, in store specials, while our flyer continues to offer aggressive advertised specials on items our customers want most. We believe these pricing programs broaden our consumer appeal and encourage our customers to fulfill more of their shopping needs at our stores.

Educated Staff. To ensure a high level of customer service, our staff is trained in product knowledge, customer service and selling techniques. We believe our new training programs have increased staff retention and improved customer satisfaction. Our newest prototypes emphasize education of and information for our customers, and our staff training programs are being modified to ensure that staff can answer health, wellness and product questions, or have the tools to research and respond to customer requests.

Growth strategy

Our growth strategy is to increase total year-over-year sales and income through:

• Improved guest service and store execution
• Opening of new stores
• Increased consumer awareness of Wild Oats as a brand and a destination
• Introduction of new products, including private label lines

We intend to continue our expansion strategy by increasing penetration in existing markets and expanding into new regions that we believe are currently underserved by natural foods retailers. While we believe that most of our store expansion will result from new store openings, we may continue to evaluate acquisition opportunities in both existing and new markets.

We currently have leases and letters of intent signed for 30 new stores to be opened or relocated in the remainder of fiscal 2004 or fiscal 2005. The proposed sites are in Arizona; California; Colorado; Florida; Indiana; Nebraska; Nevada; Ohio; Oregon; and Utah. These include locations for both our Wild Oats Natural Marketplace and Henry’s Marketplace stores. In 2004, we plan to open 15 new stores, including several in metropolitan Phoenix, Arizona; several in metropolitan San Diego and Los Angeles, California; Colorado Springs (already open) and Superior, Colorado; Indiana; Nebraska; Ohio; metropolitan Portland, Oregon, and Salt Lake City, Utah.

Changes in store base. In fiscal 2003, we opened eight new stores. We closed four under-performing stores: Irvine and Los Angeles, California, one in Tucson, Arizona, and one in Nashville, Tennessee, which was relocated to a larger building. Of the closed stores, one lease has been terminated through agreement with the landlord, two have been sublet to other tenants and one currently remains vacant. As of the date of this report, we also have sold one 2,500 square foot store that did not fit our format in New York, New York.

Our new prototype design for our Wild Oats natural foods supermarket format stores was unveiled in our new store in Long Beach, California in April of 2002, and features an expanded produce department, a relocated natural living department with lower shelving, softer flooring and reading, areas to encourage customers to take advantage of the health and nutrition literature available; liquid and dry bulk goods in the same merchandising area; an expanded deli area redesigned to focus the staff’s attention on the customer, even when working on food preparation; and a warm and inviting new decor. In fiscal 2003 all our new Wild Oats stores were built according to this prototype, and we also opened the first two of our new farmers market prototype stores in Costa Mesa and Chino Hills, California. Our new farmers market prototype features a larger square footage, and expanded deli, meat/seafood and bakery departments. On average, stores built according to our new prototypes perform better upon opening than prior store models.

Year-over-year comparable store sales growth. Comparable store sales (we deemed sales of a store comparable commencing in the 13^th full month of operations) increased 2.4% in fiscal 2003, as compared to 5.2% increase in fiscal 2002, primarily due to improved store execution resulting in increased sales nationwide, as well as increased store sales due to the conventional grocery store strike in southern California in 20 of our stores in the comparable base.

Products

Overview. We offer our customers a broad selection of unique, high-quality products that are natural alternatives to those found in conventional supermarkets. We generally do not offer well-known national conventional brands and focus instead on a comprehensive selection of natural branded products within each category. Although the core merchandise assortment is similar at each of our stores, individual stores adapt the product mix to reflect local and regional preferences. Our stores source produce from local organic growers whenever possible and typically offer a variety of local products unique to the region. In addition, in certain markets, our stores may offer more prepared foods, gourmet and ethnic items, as well as feature more value-added services such as gift baskets, catering and home delivery, while in other markets, a store may focus more on bulk foods, produce and staple grocery items. We regularly introduce new high-quality and locally grown products in our merchandise selection to minimize overlap with products carried by conventional supermarkets.

We continue to evaluate our product selection based not just on taste and price, but also in relation to our mission and values, which emphasize accountability and giving back to our communities as two key values of our business. In keeping with our mission and values, in fiscal 2003, we completed Fair Trade purchasing agreements for coffee and bananas, which ensures a fair price for these products to our foreign growers to support higher standard of living. We removed products containing hydrogenated oils from our stores and added new and informative signage regarding food safety in our seafood and meat departments. In the first quarter of fiscal 2003, we removed all products containing ephedra, which was later banned by the FDA in 2004 for safety reason.

We intend to continue to expand and enhance our prepared foods, value-added items (such as marinated or stuffed meats and seafood) and in-store cafe environment. We believe that consumers are increasingly seeking convenient, healthy, "ready-to-eat" meals and that by increasing our commitment to this category we can provide an added service to our customers, broaden our customer base and further differentiate our stores from conventional supermarkets and traditional natural foods stores.

A continued inability in 2003 to realize projected supply chain efficiencies resulted in some distribution disruptions during fiscal 2003, and did not allow us to take advantage of certain leveraged buying opportunities. In the fourth quarter, we announced that we would be switching our primary distribution relationship to United Natural Foods, Inc. ("UNFI"), and we are currently in that transition, which is expected to be substantially completed in the first quarter of 2004.

Quality standards. Our objective is to offer products that taste great and meet the following standards:

• Foods free of preservatives, artificial colors, synthetic additives and added hormones
• Locally and organically grown produce and regional products, whenever possible
• Personal care and household items that are not tested on animals

We continually evaluate new and existing products and vendors. We also track controversial and innovative industry issues to keep our customers well-informed about product trends. Before a new product can be approved for purchase by the stores, our Standards Department reviews the product for compliance with the following, amongst other criteria:

• No added hormones, antibiotics or animal by-products in feed.
• No artificial colorings, flavorings or additives.
• Use of environmentally and socially responsible practices.

In fiscal 2003, in our Wild Oats stores, we introduced an exclusive line of Irish farmed salmon without the PCB contamination issues of some farmed salmon. Our beef products are never fed animal by-products, to eliminate the concern of potential infection with BSE or "Mad Cow" disease.

Private label. The natural foods industry is highly fragmented and characterized by many small independent vendors. As a result, we believe that our customers do not have strong loyalty to particular brands of natural foods products. In contrast to conventional supermarkets whose private label products are intended to be low-cost alternatives to name-brand products, we developed our "Wild Oats^(R)" and "Henry’s^(R)" private label program in order to build brand loyalty to specific products based on our relationship with our customers and our reputation as a natural foods authority. Through this program, we have successfully introduced a number of high-quality, unique natural and organic private label products, such as cereals, breads, salad dressings, vitamins, chips, salsa, pretzels, cookies, juices, pasta, pasta sauces, oils, tuna, frozen products such as pizza and veggie burgers, and pet foods. In fiscal 2003, we rolled out a new private label strategy that includes a new designfor our private label products and new product formulations to further improve their quality. We intend to continue to eliminate slow-moving private label products and to expand our private label product offerings on a selected basis.

Pricing. In general, natural and gourmet foods and related products have higher costs of production and correspondingly higher retail prices than conventional grocery items. Our pricing strategy has been to maintain prices that are at or below those of our natural foods competitors while educating our customers about the higher quality and added value of our products to differentiate them from conventional products. Like most conventional supermarkets, we regularly feature dozens of sale items, and we use an advertising flyer program featuring a broad selection of sale items from all departments. Our flyers feature strong sale pricing on selected perishable products, as well as advertised sales on a broad selection of grocery, frozen foods, vitamins, supplements and body care products. In-store unadvertised "Wild Buys" add variety and encourage frequent shopping trips by our customers. Sale items are promoted through a variety of media, including direct mail, newspapers and in-store flyers. We regularly monitor the prices at natural foods and conventional supermarket competitors to ensure our prices remain competitive.

Company culture and store operations

Company culture. Our culture is embodied in our mission statement:

"Wild Oats was founded on the vision of enhancing the lives of our customers and

our people with products and education that support health and well-being.

Wild Oats is committed to providing the highest quality, fresh and natural food,

and health and wellness products in vibrant stores with people who are

friendly, eager and ready to educate.

At Wild Oats, we sell food that remembers its roots." ^(R)TM

Our values of service, integrity, quality, giving back to our communities, increasing value for our stakeholders (which include our stockholders, our employees and our communities) and accountability were adopted to support our mission statement. As part of our values, we believe that knowledgeable, satisfied and motivated staff members have a positive impact on store performance and overall profitability. We have implemented product knowledge training programs for certain departments to ensure that staff receive consistent training on issues affecting the products they sell. We will continue to focus on customer service in the coming years, with training for existing staff as well as new employees. In fiscal 2003, we continued to enhance our staff level training with structured programs, built a strong network of certified trainers in each store, improved our training for new store openings and introduced classes on selling skills. Additionally, we focused attention on our store leadership and delivered training to managers in many key areas.

Management and employees. Our stores are organized into five geographic regions, each of which has a regional director who is responsible for the store operations within his or her region and who reports to our senior management. The regional directors are responsible for, and frequently visit, their cluster of stores to monitor financial performance and ensure adherence to our operating standards. We maintain a staff of corporate level department specialists including natural living, food service, produce and floral, meat/poultry/seafood and grocery merchandising directors who manage centralized buying programs and formulate store-level merchandising, pricing and staff training to ensure company-wide adherence to product standards and store concept service expectations.

Staff members at the store and regional levels participate in incentive plans that tie compensation awards to the achievement of specified store-level or region-wide sales, profitability and other performance criteria. We also seek to foster enthusiasm and dedication in our staff members through comprehensive benefits packages, including health and disability insurance, an employee stock purchase plan and an employer-matching 401(k) plan.

Purchasing and distribution

We have centralized merchandising departments for each major product category. These departments set product standards, approve products and negotiate volume purchase discount arrangements with distributors and vendors. The wholesale segment of the natural foods industry provides a large and growing array of product choices across the full range of grocery product categories. In 2001, we announced that we signed a new primary distribution arrangement with Tree of Life, Inc. ("TOL"). Unfortunately, the parties were never able to take advantage of the operational and purchasing synergies offered by that arrangement, and in the fourth quarter of fiscal 2003, we announced that the parties would be terminating the relationship and that Wild Oats would be converting a secondary contract with UNFI to a primary relationship. We entered into a new primary distribution agreement with UNFI in January of 2004.  The distribution arrangement commences effective April 1, 2004 and has a five-year term. Either party 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 a majority of certain specified categories of goods for sale in our U.S. stores from UNFI, except in certain defined circumstances when such purchasing obligation is excused. We believe UNFI has sufficient warehouse capacity and distribution technology to service our existing stores' distribution needs for natural foods and products as well as the needs of new stores in the future. We will receive, as part of the new agreement, a transition fee payable over the term of the agreement and subject to the Company meeting certain minimum purchase requirements, to offset a portion of the transition costs incurred during the transition of our primary distribution relationship to UNFI. 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.  We have since entered into a secondary contract with TOL. In the first quarter of 2004, we began the process of transitioning from TOL to UNFI, and expect that the process will be substantially completed by the end of the first quarter of 2004. To date, the transition has not resulted in any unusual or unexpected disruptions in product supply.

We currently operate two warehouse facilities in Riverside, California and in San Antonio, Texas, which receive and distribute purchases of produce and grocery items that cannot currently be delivered cost effectively directly to the stores by outside vendors. In February 2004, we brought on-line a new, state-of-the-art 241,000 square foot perishable goods Distribution Center ("DC") to service our stores located in the western United States. We believe this facility will improve the quality and freshness of the perishable products we sell in our stores by providing the appropriate ambient temperature from arrival at our docks to loading on outgoing trucks. As we enter new markets, we will evaluate the need for additional warehouse and distribution facilities.

We operate commissary kitchens in Phoenix, Arizona; Denver, Colorado; Portland, Oregon and Vancouver, British Columbia, Canada. These facilities produce deli food, take-out food, bakery products and certain private label items for sale in our stores. Each kitchen can make deliveries to stores within a certain radius of the facility. We will evaluate the need for new commissary kitchens as we expand into new markets. For stores outside the delivery area of our commisary kitchens, the food service department produces their own goods from standard recipes.

Marketing

We recognize the importance of building brand awareness within our trade areas and advertise in traditional media outlets such as radio, newspapers, outdoor and direct mail to gain new customer trial and repeat business. During the second half of fiscal 2003, we reduced the frequency of advertising flyer inserts for our natural foods supermarket format to bi-weekly (from weekly) and redeployed these efforts into other consumer communication vehicles. During the second half of fiscal 2003, we shifted our distribution strategy to target consumers based on demographic information, distributing less often to a smaller, but more targeted group. We anticipate continuing this program in fiscal 2004. Our farmers market format stores primarily use flyers and "weekly specials" advertising to generate consumer interest and drive customer traffic.

We also focus on in-store consumer education through the use of a variety of media, including in-store flyers, informational brochures and signage that promote the depth of our merchandise selection, benefits of natural products and competitive prices. When we first enter a new market, we execute an intense marketing and public relations campaign to build awareness of our new store and its selection of natural products. After the initial campaign, this advertising is supplemented by the marketing strategies described above, as the same are tailored to the unique circumstances of the new store. Our public relations department promotes the Company and its achievements, manages a consistent flow of internal and external communications and assists in educating consumers about our position on issues of importance, such as genetically modified foods and the use of antibiotics in livestock production. This group also plans and implements media coverage and community events as part of our grand opening celebrations at our new stores.

Advertising costs net of vendor reimbursement for stores averaged 1.5% of sales in fiscal 2003. We offset a certain amount of such costs through a promotional program with our vendors, which allows for different degrees of promotional participation by the vendor in our weekly flyers. Advertising costs net of vendor reimbursement for stores averaged 1.4% of sales in fiscal 2002.

Management information systems

Our management information systems have been designed to provide detailed store-level financial data, including sales, gross margin, payroll and store contribution, to regional directors and store directors and to our headquarters on a timely basis. We determined that our ability to control costs would be increased by capital improvements in technology and software. In fiscal 2003, we made substantial investments in information systems, and implemented a number of information management initiatives intended to make us more competitive in the marketplace, including the following:

• An enterprise-wide financial planning, sales forecasting and budgeting tool for multiple scenarios, levels of detail, and what-if analysis;
• An in-store signage and shelf tag printing system controlled by our home office. The system provides better accuracy of POS signage and shelf labels, more efficient production, and a more consistent look of signage from store to store; and
• A scale hosting system, which enables us to control space pricing, product descriptions, ingredients, cooking instructions and other printed material on weighed items.

In fiscal 2003, we commenced implementation of a back-door replenishment program, a structured and integrated technology-based process for product ordering, vendor electronic data interchange (EDI), vendor replenishment and store back-door receiving and accounting. The back-door replenishment program will improve verification of the accuracy of deliveries and increase the efficiency of our warehouse and in-store receiving departments, as well as provide more control over inventory costs, and quantity and overstock. We expect to complete the implementation of this program in the natural foods supermarket format stores in the third quarter of fiscal 2004.

In fiscal 2004, we intend to commence implementation of :

• Automated Labor Scheduling system to forecast employee schedules based on holidays, special events, high sales periods, employee availability and employee status;
• Time and Attendance system for managing and controlling labor costs at all locations; and
• Warehouse Management System for our new distribution warehouse in Riverside, California. This also includes a suite of applications for electronic ordering and receiving of product, invoice matching and integration to our financial accounting system.

Competition

Our competitors currently include other independent and multi-unit natural foods supermarkets, smaller traditional natural foods stores, conventional supermarkets and specialty grocery stores. While certain conventional supermarkets, smaller traditional natural foods stores and small specialty stores do not offer as complete a range of products as we do, they compete with us in one or more product categories. In recent years, several of the larger conventional grocers have added or expanded specialty sections in their stores devoted specifically to natural and organic foods and body care products, and have expanded their offerings of vitamins and supplements. We believe that these specialty sections do not offer the customer service, product selection and depth of product knowledge that we offer in our stores.

A number of other natural foods supermarkets offer a range of natural foods products similar to those offered in our stores. We believe that the principal competitive factors in the natural foods industry include customer service, quality and variety of selection, store location and convenience, price and store atmosphere. We directly compete with one gourmet and natural foods competitor in California, Colorado, Florida, Illinois, Massachusetts, New Mexico and Texas (a total of 75% of our current total sales are in these markets). We believe our natural foods supermarket concept is differentiated from that of our primary competitor through our higher product standards and more competitive pricing. Our physical stores are smaller in size, and less expensive to build, which gives us access to markets that may not have the diversity believed necessary to support large box stores. We do not believe we have any competitors for our farmers market format stores.

Employees

As of March 1, 2004, we employed approximately 4,900 full-time individuals and 3,400 part-time individuals. Approximately 7,957 of our employees are engaged at the store-level and 374 are devoted to regional and administrative corporate activities. We believe that we maintain a good relationship with our employees. However, based on our past history of union organizing activity, we anticipate that in the future one or more of our stores may be the subject of attempted organizational campaigns by labor unions representing grocery industry workers.

In fiscal 2003, we modified certain features of our benefits plans and introduced additional plans to provide our employees with a broad range of competitive benefits. All of our store employees participated in an incentive program that provides periodic payments based on achieving certain store-level performance targets and operations standards. Our eligibility rules were expanded to open health and welfare programs to approximately 2,000 more employees. Preventive and prescription coverage was also expanded under our medical and dental programs with an emphasis on "wellness". Life insurance and disability programs were expanded to include coverage for part-time employees.

Available information

Our Corporate Internet website is http://www.wildoatsinc.com, ("Internet Website"), where we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such materials to the SEC. These reports are also maintained by the SEC on their website at http://www.sec.gov. Additionally, the public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The Charter of the Board of Directors’ Nominating Committee and our Code of Ethics are also posted on our Internet Website. We will post on our Internet Website any waivers, granted to the principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, that relate to any element of the Code of Ethics enumerated in Item 406(b) of Regulation S-K.

Item 2.

PROPERTIES

We currently lease approximately 54,000 square feet for our corporate headquarters in Boulder, Colorado. The lease has one and one-half years remaining on the term, with one three-year renewal option.

We lease all of our currently operating stores. We currently have letters of intent or leases signed for 30 sites projected to be opened in the remainder of fiscal 2004 and fiscal 2005, including 16 Henry’s farmers market format store sites in Arizona and California, and 14 Wild Oats natural foods supermarket format stores. We currently anticipate opening 15 new stores in 2004, including several in metropolitan Phoenix, Arizona; several in metropolitan San Diego and Los Angeles, California; Colorado Springs and Superior, Colorado; metropolitan Portland, Oregon, and Salt Lake City, Utah. Our leases typically provide for a 10- to 15-year base term and generally have several renewal periods. The rental payments are generally fixed base rates, although many of our older leases called for payment of minimum base rent with additional rent calculated on a percentage of sales over a certain break point. All of the leases are accounted for as operating leases. The majority of leases signed in fiscal 2003, and beyond, were, or will be, negotiated on a turnkey basis, which substantially reduces our capital expenditures, with modest increases in long-term rent.

Store locations

The following map and store list show, as of March 1, 2004, the natural foods grocery stores that Wild Oats operates in each state and Canadian province and the cities in which our stores are located.

Arizona:	Phoenix, Scottsdale, Tucson (2)
Arkansas:	Little Rock
California:	Chino Hills, Costa Mesa, Escondido, Hemet, Laguna Beach, Laguna Niguel, Long Beach, Pasadena, San Diego (11), Santa Monica (2), Yorba Linda
Colorado:	Boulder (3), Colorado Springs (2), Denver (8), Fort Collins
Connecticut:	West Hartford, Westport
Florida:	Fort Lauderdale, Melbourne, Miami, Miami Beach, West Palm Beach
Illinois:	Evanston, Hinsdale
Indiana	Indianapolis
Kansas	Kansas City (2)
Kentucky	Lexington, Louisville
Massachusetts	Boston (3)
Maine	Portland
Missouri	Kansas City, St. Louis
Nebraska	Omaha
Nevada	Las Vegas (2), Reno
New Jersey:	Princeton
New Mexico:	Albuquerque (3), Santa Fe
Ohio:	Cincinnati, Cleveland, Upper Arlington
Oklahoma:	Tulsa
Oregon:	Bend, Eugene (2), Portland (7)
Tennessee:	Franklin, Memphis, Nashville
Texas:	Austin (2), Corpus Christi, El Paso, McAllen, San Antonio (3)
Utah:	Park City, Salt Lake City (2)
Washington:	Vancouver
British Columbia, Canada:	Vancouver (2), West Vancouver

Support Facilities:

We have three office facilities separate from stores: two in Colorado and one in California, from which regional and home office support are provided. We have four commissary kitchens, one free standing kitchen in Portland, Oregon and three commissary facilities as part of three stores in Arizona, Colorado and British Columbia, Canada. We also have two distribution warehouses, one in California and one in Texas.

Item 3.

LEGAL PROCEEDINGS

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

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 an aggregate $536,000 in damages and attorneys' fees. The Company's appeal of judgment was denied in the first quarter of fiscal 2004, and the Company has filed a motion for reconsideration. The Company plans to seek certification of the decision to the Arizona Supreme Court. The Company has recognized a charge to restructuring expense during the fourth quarter of 2003 in the amount of $705,000, including estimated attorney's fees and estimated interest accrued on the judgment.

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 claims that Alfalfa's Inc., our predecessor on interest, breached a lease in 1995 related to certain property in Seattle, Washington. After trial in fiscal 2002, a jury awarded $0 in damages to the plaintiffs, and the Company was subsequently awarded $190,000 in attorneys' fees. The plaintiff appealed and the matter has been remanded to the trial court.

In September 2002, the Company filed suit against Michael Gilliland and Elizabeth Cook, former officers and directors and greater than 5% stockholders of the Company, together with two individuals and three limited liability corporations, for a temporary restraining order and damages related to a breach of Mr. Gilliland's noncompetition covenant, contained in his 1996 employment agreement, arising from the opening of a competitive grocery store in New Mexico. The lawsuit is captioned Wild Oats Markets, Inc. v. Michael C. Gilliland, Elizabeth C. Cook, Mark R. Clapp; Patrick Gilliland, Westside Farmer's Market LLC, Westside Liquors LLC and Milagro Cafe LLC. Mr. Gilliland and Ms. Cook have counterclaimed, claiming that Ms. Cook was entitled to severance payments, and that both were undercompensated in the receipt of option grants. After a hearing, the court issued a temporary restraining order against Mr. Gilliland, prohibiting him from engaging in the operation of the competing grocery store. The temporary restraining order was subsequently vacated at the Company's request and the Company dropped its claims for injunctive relief as it did not believe the injunctive relief granted made any material difference in Mr. Gilliland's behavior. The Company discontinued severance payments made to Mr. Gilliland based on his material breach of his employment contract. The Company continues to pursue its suit for damages. A related suit was filed against Mr. Gilliland and his brother, Patrick Gilliland, for misappropriation of trade secrets and insider trading related to Patrick Gilliland's postings on a financial chat board that he was receiving and trading upon confidential information of the Company. The Company has filed a motion to have the two suits consolidated in Boulder County District Court in March 2004.

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 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II.

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY

AND RELATED STOCKHOLDER MATTERS

The Company’s common stock is traded on the NASDAQ National Market under the symbol "OATS".

The following are the quarterly high and low sales prices for each quarter of the past two years:

	HIGH	LOW
First Quarter 2002	10.160	7.900
Second Quarter 2002	16.250	8.600
Third Quarter 2002	14.109	8.350
Fourth Quarter 2002	12.960	8.310
First Quarter 2003	10.750	7.120
Second Quarter 2003	11.970	9.190
Third Quarter 2003	12.700	9.750
Fourth Quarter 2003	12.290	10.000

As of March 1, 2004, Wild Oats’ common stock was held by 571 stockholders of record. No cash dividends have been declared previously on our common stock, and we do not anticipate declaring a cash dividend in the near future. Our Second Amended and Restated Credit Agreement for our credit facility contains restrictions on the payment of cash dividends without lender consent for so long as amounts remain unpaid under the facility.

Item 6.

SELECTED FINANCIAL DATA

(in thousands, except per-share amounts and number of stores)

The following data for the fiscal years ended December 27, 2003, December 28, 2002, December 29, 2001, December 30, 2000, and January 1, 2000 are derived from the consolidated financial statements of the Company. The following data should be read in conjunction with the Company’s consolidated financial statements, related notes thereto and other financial information included elsewhere in this report on Form 10-K.

FISCAL YEAR	2003	2002	2001	2000	1999
STATEMENT OF OPERATIONS DATA:
Sales	$ 969,204	$ 919,130	$ 893,179	$ 838,131	$ 721,091
Cost of goods sold and occupancy costs	683,592	644,862	634,631	581,980	499,627
Gross profit	285,612	274,268	258,548	256,151	221,464
Direct store expenses	208,908	198,379	207,898	187,085	154,055
Store contribution	76,704	75,889	50,650	69,066	67,409
Selling, general and administrative expenses	64,659	55,186	53,131	36,687	29,739
Loss (gain) on disposal of assets, net	2,087	21	477	(306)	14
Pre-opening expenses	2,890	1,897	1,562	3,289	2,767
Restructuring and asset impairment charges (income), net	(892)	(832)	54,906	42,066	12,642
Income (loss) from operations	7,960	19,617	(59,426)	(12,670)	22,247
Loss on investment	-	-	228	2,060	-
Loss on early extinguishment of debt	186	-	-	-	-
Interest expense, net	1,881	7,975	9,447	8,850	4,280
Income (loss) before income taxes	5,893	11,642	(69,101)	(23,580)	17,967
Income tax expense (benefit)	2,302	4,733	(25,189)	(8,559)	5,198
Net income (loss) before cumulative effect of change in accounting principle	3,591	6,909	(43,912)	(15,021)	12,769
Cumulative effect of change in accounting principle, net of tax (1)					281
Net income (loss)	$ 3,591	$ 6,909	$ (43,912)	$ (15,021)	$ 12,488
Basic net income (loss) per common share	$ 0.12	$       0.26	$ (1.80)	$ (0.65)	$ 0.55
Weighted average number of common shares outstanding	29,851	26,481	24,424	23,090	22,806
Diluted net income (loss) per common share	$ 0.12	$      0.26	$ (1.80)	$ (0.65)	$ 0.53
Weighted average number of common shares outstanding	30,258	27,082	24,424	23,090	23,467
Number of stores at end of period	103	99	107	106	110
BALANCE SHEET DATA:
Working capital deficit	$ (40,416)	$ (27,550)	$ (26,490)	$ (16,102)	$ (20,971)
Total assets	$ 336,591	$ 323,585	$ 353,426	$ 372,632	$ 350,629
Long-term debt (including capitalized leases)	$ 30,179	$ 43,075	$ 112,291	$ 116,839	$ 80,328
Stockholders’ equity	$ 175,086	$ 166,902	$ 107,015	$ 151,564	$ 165,387

(1)  In fiscal 1999 the Company recorded $281,000 in expenses associated with a cumulative effect of a change in accounting principle.

Item 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

Wild Oats Markets, Inc. is one of the largest natural food supermarket chains in North America, with 102 stores in 24 states and British Columbia, Canada, as of March 1, 2004. We have always differentiated our stores and our products from our competitors by our uncompromising commitment to natural and organic products and to our customers’ education in the areas of health and wellness. In fiscal 2003, we implemented a number of new strategies to promote our areas of differentiation in the consumer’s mind, including:

• Refinement of our brand identity as a leader in the natural and organic products industry
• Investment in new store signage and merchanding to improve consumer understanding of recent issues surrounding food safety and the integral role of nutrition and diet in overall wellbeing
• Continued training of staff to ensure detailed product knowledge, an ability to assist consumers with health and wellness issues
• Re-engineering of key departments in our stores
• Creation of a body of in-store consumer education materials through a variety of media
• Active sampling and demonstration programs
• Creation of new private label product lines.

Our identification as a leading retailer of the broadest selection of natural and organic products is the foundation of our differentiation from our competition. Along with providing great tasting products in a welcoming and invigorating store environment, we view consumer education as one important key to attracting and retaining loyal customers and increasing basket size. We have introduced new strategies to communicate information on certain food safety concerns and dietary trends, such as our product signage that our beef comes from exclusively grain-fed cattle and our introduction of "Are You Counting Carbs" signage and merchandising in the first quarter of 2004. We have implemented new training programs to enhance consumer service. In 2003, we commenced the re-engineering of our vitamin, supplement and body care department (to be reintroduced as our "Holistic Health" department), including a full redesign of fixtures, lighting, flooring, navigational signage and custom product displays. As part of that re-engineering, we have designed advanced training programs in product knowledge and selling techniques for our Holistic Health staff, along with department-oriented incentive programs, and we are updating and expanding our consumer education materials ranging from product-specific and issue-related brochures to educational videos and access to computer research tools on health and wellness. This newly re-engineered Holistic Health department will be introduced in mid-2004. In 2003, we introduced active sampling of products from our perishables departments and private label lines, which expanded our existing vendor-sponsored demonstration programs as a way to introduce our customers to our new products and encourage shopping of all departments of our stores. We continue to expand our private label product lines with the introduction of unique products from around the world, including two new, custom-created lines of vitamins, minerals and supplements. In 2004, we will be re-engineering our deli departments to enhance product offerings, including our "grab and go" and entree offerings, offer seasonal menus, increase informational signage and improve overall customer service.

Our revenues are primarily derived from the retail sale of products at our stores. Internally, we look to a variety of indicators to evaluate our periodic financial performance, including: comparable store sales; sales per square foot; average basket size; customer count; inventory turns (i.e., how quickly inventory is sold); percentage of total sales by department; department margins; and staff productivity. In fiscal 2003, we continued to focus on increasing comparable store sales results, basket size and customer count through improvements in store-level customer service, execution and presentation, as well as regional and national promotion of Wild Oats Natural Marketplace and Henry’s Marketplace as brand identities. In the fourth quarter of fiscal 2003, comparable stores’ customer traffic increased 4.8% and the average transaction per customer increased 4.9%, while average basket size in the fourth quarter of fiscal 2003 was $21.23, compared to $20.04 in the fourth quarter of fiscal 2002. Average weekly store sales increased 9.7% and sales per square foot increased 10% in the fourth quarter of fiscal 2003, as compared to the same period in fiscal 2002.

Major initiatives implemented and completed during fiscal 2003 and aimed at our targeted areas of improvement included:

• Increased staff training and revised incentive programs
• Resetting of merchandise according to item movement and customer preference
• Refreshing of stores’ environments through remodels and the installation of new decor packages
• Improved store-level informational and sale signage
• Investment in labor scheduling programs to ensure proper staffing levels at all times
• Inventory reduction programs to ensure shelf space for new products
• Shift to centralized buying, pricing and scale hosting to ensure consistency chainwide, and refocus store staff energies on customer service

We built brand awareness in 2003 through a number of methods, including: the re-engineering of our existing private label product lines and the introduction of 140 new private label products; consumer education campaigns regarding a number of issues key to the natural products industry, including trans fats; genetically modified organisms and the sustainability of certain seafood; brand-specific education and advertising on issues of concern to all consumers, including the safety of our meat and seafood in light of "Mad Cow" disease and concerns over contaminants in farm-raised fish, and the availability in our stores of products for specific diet regimes, such as gluten-free diets and lower carbohydrate diets.

We believe all these programs, together with overall operational improvements, resulted in increased store sales, customer count and average transaction size nationwide in fiscal 2003. Strikes by grocery store workers in conventional grocery stores in Missouri in mid-2003 and in southern California commencing in October 2003 and continuing through February 2004 resulted in increased sales and customer counts in our 17 Henry’s Market and five Wild Oats Natural Marketplace stores in those regions. We expect that in southern California, like our experience in Missouri after that strike ended, we will retain some increased business in the 22 affected stores. It is possible that in 2004, other conventional grocery store strikes in other areas of the country may occur as area labor contracts expire and negotiations stall over issues of pay and health care costs. We have developed strategies to service conventional customers during labor strikes, including modification of some product mix and increased customer service, with the goal of customer retention.

Store format and new store growth. We operate in one retail grocery operating segment with two store formats: the natural foods supermarket, under the Wild Oats Natural Marketplace name nationwide and Capers Community Market in Canada; and the farmers market formats, under Henry’s Marketplace in southern California and Sun Harvest in Texas. Both formats emphasize natural and organic products with a wide selection of products in a full-service environment. The formats share a core demographic customer profile. Many of the support services to the stores are provided centrally from our Boulder, Colorado location. All of our stores, regardless of format, purchase from the same primary distributor based on centralized negotiations, merchandising and marketing strategies. Perishables for all of our stores in the western United States are supplied by our new distribution facility.  Distinguishing characteristics of the formats are:

CHARACTERISTICS OF FORMAT TYPES
Natural Foods Supermarket Format	Farmers Market Format
Full range of products, with perishables emphasis	Emphasis on produce
All organic and natural products	Mostly natural products, with a regional mix of    conventional and organic produce
20,000 to 35,000 square feet in size	15,000 to 26,000 square feet in size
Suburban and regional locations	Historically neighborhood locations
Target shopper is interested in health and wellness, customer service and an upscale shopping experience	Target shopper is price conscious and seeks  freshness, value and authenticity

In 2001 and 2002, we focused on redesigning both of our store format prototypes to increase the navigability of the stores, emphasize certain departments and expand perishable departments. The following table shows the new prototype store openings in fiscal 2003 and through March 1, 2004 by brand and format:

STORE OPENINGS BY BRAND AND FORMAT FOR FISCAL 2003 AND THROUGH MARCH 1, 2004
Wild Oats Natural Marketplace	Henry’s Marketplace
Portland, Maine	Costa Mesa, California
Louisville, Kentucky	Chino Hills, California
Lexington, Kentucky
Franklin, Tennessee (relocation)
SW Denver, Colorado
Park City, Utah
Colorado Springs, Colorado

At December 27, 2003, we had 103 stores located in 25 states and Canada, as compared to 99 stores in 23 states and Canada as of the end of fiscal 2002, and 107 stores in 23 states and Canada as of the end of fiscal 2001. A summary of store openings, acquisitions, closures and sales is as follows:

	TOTAL STORE COUNT
	Fiscal Year Ending		Period EndingMarch 1,
	2002	2003	2004
Store count at beginning of period	107	99	103
Stores opened	1	8	1
Stores closed	(5)	(4)	(1)
Stores sold	(4)		(1)
Store count at end of period	99	103	102

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. In fiscal 2003 and through the date of this report, we have closed five under-performing stores in Tucson and Phoenix, Arizona; Irvine and Los Angeles, California; and Nashville, Tennessee; and sold one store which did not fit our real estate strategy or formats in New York, New York. Of the closed stores, one lease has terminated, two locations have been sublet and one is being remodeled for opening as a farmers market format store. We have also consolidated the operations of two warehouse facilities into our new Riverside, California distribution center. In first half of 2004, we plan to close the third warehouse facility as a part of the consolidations.

We are continuing to execute on our real estate strategy, which is focused on adding stores in those existing markets with proven past performance, and in locations in those markets that are defensible from a competitive standpoint, as well as adding selected new markets on a strategic basis. We have identified strategic markets for expansion of our farmers market format outside of southern California and will be opening the first of the new farmers market stores in Arizona in 2004. To the date of this report we have signed leases or letters of intent for 30 new sites opening in fiscal 2004 and fiscal 2005, including 15 Wild Oats locations selected for the excellence of the projects, the position in new segments of existing markets (Indiana, Nebraska and Ohio) or in strategic new markets and their defensibility from competitive attack, and 18 Henry’s Marketplace locations in easily accessible and highly visible locations in densely populated metropolitan Los Angeles and San Diego, California and our newest expansion market for Henry’s in metropolitan Phoenix, Arizona. We anticipate opening 15 new stores in fiscal 2004 in the following stateslocations: metropolitan Phoenix, Arizona; metropolitan San Diego and Los Angeles, California; Colorado Springs (already open) and Superior, Colorado; Indiana; Nebraska; Ohio; metropolitan Portland, Oregon and Salt Lake City, Utah.

We currently have an inventory of 11 vacant sites comprising closed store and office locations and excess unoccupied space acquired during acquisitions or other leasing transactions, for which we have rent obligations; appropriate accruals have been made for such obligations. In fiscal 2003, we sublet or negotiated the termination of six excess properties from our inventory of vacant sites, and we added four store sites that were closed in fiscal 2003 to our inventory, of which two have been sublet. 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 February of 2003, we completed a refinancing of $75.0 million with a group of banks led by the lead bank in our former credit facility. In December of 2003, we expanded the existing facility under its terms by $20 million and added one new lender. As of the end of fiscal 2003, we had $30.2 million in total borrowings outstanding under the credit facility - $12.9 million less than was outstanding at the end of fiscal 2002. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources." The expansion of the credit facility, together with cash generated from operations, ensures that we have sufficient capital resources to fund our projected new store growth over the next several years.

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

• Store remodels

• Store closures

• Our ability to capitalize on distribution efficiencies and execute operating plans

• Changes in consumer preferences for natural foods and products

• Availability of produce and other seasonal merchandise

• Labor unrest in area grocery stores.

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 pricing of certain produce items.

Comparable store sales chain-wide increased by 2.4% in fiscal 2003, as compared to 5.2% in fiscal 2002. Due to nationwide operational improvements and marketing strategies which were evidenced by a strengthening of comparable store sales in all markets in which we operate, and the continuing southern California conventional grocery store strikes already mentioned, comparable store sales for the fourth quarter of fiscal 2003 increased to 9.9%, as compared to 0.8% in the third quarter of fiscal 2003, and 2.9% in the fourth quarter of fiscal 2002. Without the fourth quarter increase in comparable store sales attributable to the positive impact of the southern California grocery store strike on 22 of our stores, estimated comp store sales for the fourth quarter of fiscal 2003 would have been 2.2%.

Pre-opening expenses. Pre-opening expenses include labor, rent, advertising, utilities, supplies and certain other costs incurred prior to a store’s opening. 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 a result of increased marketing and training costs, our pre-opening expenses have increased to $300,000 to $400,000 per natural foods supermarket store, and $250,000 to $350,000 per farmers market store, depending on whether the store is the first in a geographic area, the date of rent commencement negotiated under the lease, and the extent of grand opening advertising and staff training activities.

Restructuring and Asset Impairment Activity. During fiscal 2003, due to changes in facts and circumstances as well as certain decisions made by management relating to our operations, estimates of prior restructuring and asset impairment charges were revised, resulting in net restructuring and asset impairment expense/(income) of $855,000, $134,000, ($145,000), and ($1,736,000), for the fourth, third, second, and first quarters of fiscal 2003, respectively.

Critical Accounting Policies and Estimates

Our discussion and analysis of our 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:

• Goodwill valuation
• Asset impairment charges
• Restructuring charges and store closing costs
• Inventory valuation and reserves
• Self-insurance reserves
• Reserves for contingencies and litigation

We believe the following critical accounting policies affect our most significant judgments and estimates used in the preparation of our consolidated financial statements:

Goodwill. Goodwill consists of the excess cost of acquired companies over the sum of the fair market value of their underlying tangible and identifible intangible assets acquired and liabilities assumed. Prior to 2002, goodwill was recorded at the store-level, and amortized over 40 years. With adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", we record goodwill at the enterprise level. It is no longer amortized but is tested for impairment annually, or more frequently if certain indicators of impairment exist. Our annual evaluation for impairment requires management to exercise a high degree of judgment in developing assumptions and fair value estimates used in the calculation, which have the potential of significantly impacting the results.

Impairment of Long-Lived Assets. We monitor the carrying value of our long-lived assets, including finite-lived intangible assets, for potential impairment whenever changes in circumstances indicate a potential for impairment may exist. The triggering events for evaluations of finite lived intangible assets include a significant decrease in the market value of an asset, acquisition and construction costs in excess of budget, or current store operating losses combined with a history of losses or a projection of continuing losses. If an impairment is identified, based on undiscounted future cash flows, management compares the asset’s future cash flows, discounted to present value using a risk-adjusted discount rate, to its current carrying value and records a provision for impairment as appropriate. With respect to equipment and leasehold improvements associated with closed stores, the value of these assets is adjusted to reflect recoverable values estimated based on our previous efforts to dispose of similar assets, with consideration for current economic conditions.

Restructuring and Asset Impairment Costs. We plan to complete store closures or sales within a one-year period following the commitment date. Costs related to store closures and sales are reflected in the income statement as "Restructuring and Asset Impairment Charges." For stores we intend to sell, we actively market the stores to potential buyers. Stores held for disposal are reduced to their estimated net realizable value. Prior to 2003, when we commited to close a store, a lease-related liability was recorded for the present value of the estimated remaining non-cancelable lease payments after the anticipated closing date, net of estimated subtenant income, or for estimated lease settlement costs. In addition, we recorded a liability for costs to be incurred after the store closing which are required under leases or local ordinances for site preservation during the period before lease termination. The value of equipment and leasehold improvements related to a closed store was reduced to reflect recoverable values based on our previous efforts to dispose of similar assets and current economic conditions. In accordance with the new requirements of SFAS No. 146 (See "Notes to Consolidated Financial Statements – Note 1 – Organization and Summary of Significant Accounting Policies -New Accounting Pronouncements" for a discussion of SFAS No. 146), as of fiscal 2003, we recognized such lease related costs at the time of the actual store closing. As of the date of the commitment to close or relocate a store, depreciation of store assets is accelerated over the remaining months of operation as necessary in order to bring their net carrying cost down to net realizable value as of the date of closure

Severance costs incurred in connection with store closings are recorded when the employees have been identified and notified of the termination benefits to be made to the employees.

Lease-related liabilities and the recoverability of assets to be disposed of are reviewed quarterly, and changes in previous estimates are reflected in operations. Significant cash payments associated with closed stores relate to ongoing payments of rent, common area maintenance, insurance charges, and real property taxes as required under continuing lease obligations.

Inventories. Store inventories are valued principally at the lower of cost or market, with cost primarily determined under the retail method on a first-in, first-out (FIFO) basis. FIFO cost is determined using the retail method for approximately 80% of inventories and using the item cost method for highly perishable products representing approximately 20% of inventories. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are determined by applying a cost-to-retail ratio for various categories of similar items to the retail value of inventories. Inherent in the retail inventory method calculations are certain management judgments and estimates, including shrinkage, which could impact the ending inventory valuation at cost as well as the resulting gross margins.

We maintain allowances for excess or unsaleable inventory as a percentage of its gross inventory balance based on historical experience and assumptions about market conditions. If actual market conditions are less favorable than those projected by management, or if we expand our forward buying of inventory, which will increase our inventory levels, then additional inventory write-downs may be required.

Self-Insurance. We are self-insured for certain losses relating to worker’s compensation claims, general liability and employee medical and dental benefits. We have purchased stop-loss coverage in order to limit its exposure to any significant levels of claims. Self-insured losses are accrued based upon our estimates of the aggregate uninsured claims incurred using certain actuarial assumptions followed in the insurance industry and our historical experiences. A high degree of management judgment is required in developing these estimates and assumptions, which have the potential for significantly impacting the required reserve amounts.

Contingencies and Litigation. We maintain reserves for contingencies and litigation based on management’s best estimates of potential liability in the event of a judgment against us, possible settlement costs, as well as existing facts and circumstances. Future adverse changes related to current contingencies and litigation could necessitate additional reserves in the future.

New Accounting Pronouncements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, An Interpretation of ARB 51 ("FIN 46") which was subsequently revised in December 2003 (FIN 46R) The primary objectives of FIN 46R are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46R requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. As of December 27, 2003, the Company was not a party to a VIE; therefore, FIN 46R did not have a material effect on the Company’s financial position or results of operations.

SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, was issued on July 30, 2002. SFAS No. 146 will require companies to recognize costs associated with exit or disposal activities when they occur rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 became effective for the Company on January 1, 2003, and did not have a material impact on the Company’s financial position or results of operations.

On August 15, 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 will be effective for financial statements issued for fiscal years beginning after June 30, 2002. Under SFAS No. 143, an entity shall recognize the cumulative effect of the adoption of SFAS No. 143 as a change in accounting principle. SFAS No. 143 did not have a material effect on the Company’s financial position or results of operations.

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

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments and hedging activities, resulting primarily from decisions reached by the FASB Derivatives Implementation Group subsequent to the original issuance of SFAS No. 133. This Statement is generally effective prospectively for contracts and hedging relationships entered into after June 30, 2003. The Company has not entered into any such agreements since the effective date; therefore, the adoption of SFAS No. 149 has had no impact on the Company.

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

In November 2003, the FASB’s Emerging Issue Task Force (EITF) reached a consensus on EITF No. 03-10, Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers. The consensus required that consideration received by a reseller from a vendor that is a reimbursement by the vendor for honoring the vendor’s sales incentives offered directly to consumers (such as coupons) be recorded as revenue rather than as a reduction of cost of goods sold. The Company has historically accounted for such reimbursements in accordance with EITF 02-16, therefore its adoption will have no impact on the Company’s financial position or results of operations.

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
• Fluctuations in quarterly results of operations
• Impact of merchandising and marketing initiatives on store performance
• Economic conditions
• Construction adjacent to operating stores
• Costs associated with store closings and relocations
• Competition
• Labor issues
• Loss of key management
• Government regulations
• Changes in and performance by suppliers, distributors and manufacturers
• Unavailability of product
• 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. New stores opened prior to 2002 experienced operating losses for the first 12 to 18 months of operation, in accordance with historical trends; stores opened based on our new real estate strategy and using the prototype floor plans in fiscal 2002 and fiscal 2003, based on our rates throughout the year, are projected to incur operating losses for six to 12 months.

We substantially completed the remodeling or remerchandising of 20 of our older stores in fiscal 2003. We plan to complete significant remodels to an additional four stores in fiscal 2004, and to remerchandise a number of 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 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, cash generated from operations, bank debt and equity financing proceeds has funded our capital expenditures. These sources of capital may not be available to us in the future. In addition, our new credit agreement contains limitations on our ability to make capital expenditures that may constrain future growth without additional equity financing. 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, shrink and spoilage, fluctuations in profit margins for discontinued items, as well as other factors mentioned in this section.

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 we continue to pay rent and other carrying costs, substantially more difficult as the markets become saturated with vacant space and market rents decrease below our contractual rent obligations.

Construction on roads and in parking lots and shopping center common areas adjacent to our operating stores is an ongoing and unpredictable variable in the operation of our stores. Such activity historically has negatively impacted our results of operations by reducing customer traffic and lowering sales volumes.

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.

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. 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.

In October of 2003, we announced that due to the parties’ inability to leverage the buying synergies and reach the supply chain efficiencies expected from our primary distribution arrangement with Tree of Life, Inc., the parties had reached agreement to terminate our arrangement. We also announced at that time that we would be exercising a right to convert an existing secondary distribution with UNFI to a primary distribution relationship. In January of 2004, we executed a new five-year primary distribution agreement with UNFI, and we have commenced the process of transititioning our primary ordering to UNFI. We expect that the transition will be substantially completed by the end of the first quarter of 2004; however, delays in the transition process or difficulties in completing the transition may impact sales and operating results.

From time to time, we may experience product shortages due to the impact of adverse weather conditions, such as drought or flood, or disruptions in the supply chain from product shortages, transportation disruptions or other conditions. Our current transition to a new primary distributor in the first quarter of fiscal 2004 may result in product shortages or delivery disruptions. Product shortages may result in a material impact to our sales volume, cost of goods or customer counts.

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 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.

Results of Operations

Our net income for fiscal 2003 was $ 3.6 million, or $ 0.12 per diluted share, compared with a net income of $6.9 million, or $0.26 per diluted share, in fiscal 2002. The following table sets forth, for the periods indicated, certain selected income statement data expressed as a percentage of sales:

FISCAL YEAR	2003	2002	2001
Sales	100.0%	100.0%	100.0%
Cost of goods sold and occupancy costs	70.5	70.2	71.1
Gross profit	29.5	29.8	28.9
Direct store expenses	21.6	21.6	23.3
Store contribution	7.9	8.2	5.6
Selling, general and administrative expenses	6.7	6.0	5.9
Loss on disposal of assets, net	0.2
Pre-opening expenses	0.3	0.2	0.2
Restructuring and asset impairment charges (income)	(0.1)	(0.1)	6.1
Income (loss) from operations	0.8	2.1	(6.6)
Interest income	0.1	0.1	0.1
Interest expense	(0.3)	(0.9)	(1.2)
Income (loss) before income taxes	0.6	1.3	(7.7)
Income tax expense (benefit)	0.2	0.5	(2.8)
Net income (loss)	0.4%	0.8%	(4.9)%

The following table sets forth, for the periods indicated, certain selected income statement data in dollars (in thousands):

FISCAL YEAR	2003	2002	2001
Sales	$969,204	$919,130	$893,179
Gross profit	285,612	274,268	258,548
Direct store expenses	208,908	198,379	207,898
Selling, general and administrative expenses	64,659	55,186	53,131
Pre-opening expenses	2,890	1,897	1,562
Restructuring and asset impairment charges (income), net	(892)	(832)	54,906
Interest income	780	778	990
Interest expense	(2,661)	(8,753)	(10,437)
Income tax expense (benefit)	2,302	4,733	(25,189)
Net income (loss)	3,591	6,909	(43,912)

Year over Year Comparisons of Certain Selected Income Statement Data

The following narrative compares those selected income statement data with material changes from year to year.

Sales. Net sales for the fiscal year ended December 27, 2003, were $969.2 million, an increase of 5.4%, compared with $919.1 million in fiscal 2002. Increases were attributable to the addition of eight new stores in fiscal 2003, despite the closure of four stores during the fiscal year, as we ended the year with total square footage of 2.2 million square feet, which is an increase of 6.6% compared with 2.1 million square feet at the end of 2002, as well as increased store sales at 22 stores positively impacted by labor strikes California during fiscal 2003.

We generated $253.9 million in net sales in the fourth quarter of fiscal 2003, a 14.5% increase from $221.8 million in last year’s fourth quarter. Comparable store sales for the fourth quarter of fiscal 2003 were 9.9%, as compared to 2.9% in the same quarter of 2002. The increase in sales in the fourth quarter of fiscal 2003 can be attributed, in part, to the benefit of the southern California conventional grocery strike, without which, estimated comparable store sales in the fourth quarter were 2.2%, despite continued supply chain issues. Net sales in fiscal 2003 were impacted by a number of factors, including the disruption caused by our SKU reduction program, extensive resets and remodels, the impact of road construction on the ability to easily access a number of our stores in the first half of fiscal 2003 and our inability to leverage certain expected supply chain efficiencies throughout 2003. We expect sales to increase at a slightly faster rate in fiscal 2004, due to operational improvements nationwide, the projected opening of up to 15 new stores in fiscal 2004, improvements in supply chain efficiencies upon completion of our new distributor transition at the end of the first quarter, as well as continued strong sales in the first two months of fiscal 2004 in the 22 southern California stores positively impacted by the conventional grocery store strike.

Sales for the fiscal year ended December 28, 2002 were $919.1 million, an increase of 2.9% as compared to fiscal 2001. The increase was primarily due to the opening of one new store in the second quarter of fiscal 2002, operational improvements implemented throughout fiscal 2002, as well as the rollout in the first half of fiscal 2002 of our new marketing and merchandising program in 30 of our natural foods supermarket format stores.

Gross Profit. Gross profit for the fiscal year ended December 27, 2003 increased 4.1% as compared to fiscal 2002, while gross profit margins declined slightly to 29.5%, compared with 29.8% in fiscal 2002, largely due to $4.1 million in accelerated depreciation for the planned closure or relocation of distribution centers, warehouses and stores, along with certain supply chain issues and planned inventory reduction. We anticipate that gross profit margins will improve slightly in fiscal 2004, due to improvement in supply chain, the expansion of our private label lines and the ramp up of our new perishables distribution center in California.

Gross profit margins for the fiscal year ended December 28, 2002, increased to 29.8% from 28.9% in fiscal 2001 due to more disciplined pricing strategies, a new category management structure, vendor consolidation and the substantial completion of our SKU rationalization program.

Direct Store Expenses. Direct store expenses for the fiscal year ended December 27, 2003, remained constant as a percent of sales in fiscal 2003 as compared to fiscal 2002. Direct store expenses increased as a result of the addition of eight new stores and an overall increase in sales and customer traffic. We anticipate that we will see decreases in direct store expenses as a percent of sales in fiscal 2004 and beyond as a result of the rollout in fiscal 2004 of labor scheduling programs to maximize labor efficiencies and reduce overstaffing. On an absolute basis, we expect direct store expenses to increase in fiscal 2004 with the addition of a projected 15 new stores.

Direct store expenses for the fiscal year ended December 28, 2002, decreased to 21.6% from 23.3% in 2001, as a result of better expense management at store-level, as well as the centralization of certain non-retail contracts for items such as supplies, maintenance, in-store music, linens and other service contracts

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the fiscal year ended December 27, 2003, increased 17.2% as compared to fiscal 2002. The increases are attributable to costs to improve information systems, headcount increases to continue to build infrastructure to support new store growth plans, as well as costs incurred to audit and amend certain of our benefit plans. Many of these expenditures will not be repeated in 2004, and

we anticipate that the benefit plans audit will be concluded during the second fiscal quarter of 2004. We expect that selling, general and administrative expenses will remain flat in absolute dollars and decrease slightly as a percentage of sales in fiscal 2004.

Selling, general and administrative expenses for the fiscal year ended December 28, 2002, increased 3.8% as compared to fiscal 2001. The increases in fiscal 2002 over fiscal 2001 are attributable to investments in information systems to support centralized purchasing and pricing, store-level signage production and a new data warehouse, as well as increases in advertising and merchandising expenses related to the implementation of our marketing and merchandising program and expenses for expanded infrastructure at our headquarters to support new store growth and centralized purchasing and pricing.

Loss on Disposal of Assets. As a result of the significant store closings, remodels and resets, the Company undertook a review of all fixtures and equipment in its stores, offices, and support facilities, including a physical inventory in conjunction with an asset tagging exercise. The Company completed the review and recorded in fiscal 2003 a $2.1 million loss on disposal of fixtures and equipment. Loss on disposal amounts for prior years relate to assets disposed of in the normal course of business and have been relatively immaterial.

Pre-Opening Expenses. Pre-opening expenses for the fiscal year ended December 27, 2003, increased 52.3% as compared to fiscal 2002, primarily as a result of the increase in new store openings in fiscal 2003 as compared to fiscal 2002. As part of increased marketing and training efforts, we anticipate that pre-opening expenses will average $350,000 per new store across both formats, and pre-opening expenses will increase in absolute dollars in fiscal 2004 as we open 15 new stores, compared to eight new store openings in 2003.

Pre-opening expenses for the fiscal year ended December 28, 2002, increased 21.4% as compared to fiscal 2001 but remained constant as a percentage of sales. The increase in pre-opening expenses was attributable to an overall increase in advertising and marketing expenditures per store.

Restructuring and Asset Impairment Charges (Income) – Fiscal 2003. Restructuring and asset impairment income in fiscal 2003 was $892,000, as compared to $832,000 in fiscal 2002, and expense in fiscal 2001 of $54.9 million. The table on the following page summarizes the components of restructuring and asset impairment charges and income for fiscal years 2003, 2002, and 2001, respectively, by quarter (in thousands):

	Fiscal 2001					Fiscal 2002				Fiscal 2003
Components of Charge	2nd QTR	3rd QTR	4th QTR	Total	1st QTR	2nd QTR	3rd QTR	4th QTR	Total	1st QTR	2nd QTR	3rd QTR	4th QTR	Total
Insurance proceeds received for impaired assets previously written off													$ (250)	$ (250)
Gain on sale of assets					$(253)		$ (85)	$ (130)	$ (468)
Change in estimate related to fixed asset impairment	$ 1,498		$(1,645)	$ (147)
Change in estimate related to lease-related liabilities for sites previously identified for closure or sale	15,923		(11,188)	4,735	93	$(678)	(100)	(3,437)	(4,122)	$(1,295)	$1,933	$ (612)	1,140	1,166
Change in estimate related to lease-related liabilities for sites previously identified for closure that were closed or disposed of during the quarter					(761)				(761)	(441)	(2,195)	70	(150)	(2,716)
Lease-related liabilities for stores identified to be closed or sold during the period	10,228	$ 108	3,700	14,036			5	3,552	3,557
Severance for employees	2,511		155	2,666	269	142		9	420		117		115	232
Fixed asset impairments	24,673	668	8,275	33,616		536	6		542			676		676
TOTAL	$ 54,833	$ 776	$ (703)	$ 54,906	$(652)	$ 0	$(174)	$ (6)	$ (832)	$(1,736)	$ (145)	$ 134	$ 855	$ (892)

During the fourth quarter of fiscal 2003, we recorded restructuring and asset impairment expense of $855,000. Details of the significant components are as follows:

• Change in estimate for a site previously identified for closure that was closed during the fourth quarter ($150,000 of restructuring income). During the fourth quarter, we closed a store previously identified for closure in Tucson, Arizona and negotiated the early termination of its lease effective December 2003. Therefore, we reversed the remaining lease-related liabilities previously recorded for the Tucson location, recognizing $150,000 in restructuring income.

• Changes in estimate related to lease-related liabilities for sites previously identified for closure ($1,140,000 in restructuring expense). During the fourth quarter, we secured a viable subtenant for a location in Los Angeles, California resulting in restructuring income of $375,000. Also, during the quarter, we determined that additional time will be needed to dispose of certain lease obligations for vacant sites in Nashville, Tennessee and Pinecrest, Florida, resulting in restructuring expense of $213,000. Based on a current assessment of changing real estate market conditions in the area as well as undesirable site characteristics, we determined the likelihood of disposing of our lease obligations related to certain space adjacent to a store in Fort Collins, Colorado, was remote, and therefore restructuring expense of $597,000 was recorded to adjust the reserve balance to the net present value of the remaining lease payments. In February 2004, the Superior Court of Arizona, Maricopa County upheld a judgment against the Company which resulted in a $705,000 charge to restructuring expense. Based on these changes in facts and circumstances and the related changes in estimates, we adjusted or reversed the remaining lease-related liabilities previously recorded for these locations and recognized net restructuring expense of $1,140,000.

• Insurance settlement received for impaired assets previously written off ($250,000 in asset impairment income). During the fourth quarter, we received $250,000 in insurance proceeds as partial reimbursement for property losses and incremental expenses incurred during the first quarter of 2003 caused by a roof collapse at a support facility in Federal Heights, Colorado. The support facility had been previously identified for closure during the fourth quarter of fiscal 2001, and the carrying value of its fixed assets were written off as an impairment charge at that time. Therefore, we recorded a gain in the amount of the insurance proceeds received of $250,000.

• Severance for employees notified of termination during the fourth quarter ($115,000 restructuring expense). During the fourth quarter, 37 employees were terminated in conjunction with the closing of a store in Tucson, Arizona, a warehouse in San Diego, and a restaurant operating within a store in West Vancouver, British Columbia. The employees were notified of their involuntary termination during the fourth quarter of fiscal 2003. As of December 27, 2003, $31,000 of involuntary termination benefits had been paid to terminated employees.

During the third quarter of fiscal 2003, we recorded a restructuring and asset impairment charge of $134,000. Details of the significant components are as follows:

• Lease-related liabilty for site closed during the third quarter of fiscal 2003 ($70,000 of restructuring expense). During the third quarter of fiscal 2003, we closed a store in Nashville, Tennessee, as part of a relocation to a larger site. Based upon the facts and circumstances, we expected either the lease would be terminated or the space subleased to a viable subtenant within six months from the date of closure, and, as a result, we recognized a restructuring charge of $70,000.

• Changes in estimate related to lease-related liabilities for sites previously identified for closure or sale ($612,000 of restructuring income). During the third quarter of fiscal 2003, we secured a viable subtenant for a location in Memphis, Tennessee. Additional information received in the third quarter resulted in a revision in the net restructuring charges previously recorded for a store in Irvine, California. As a result, we recorded restructuring income of $699,000 to reduce the accrual to the required amount. This was offset by a restructuring charge of $87,000 for the costs associated with restoring a space to its original condition for a location previously included in a restructuring charge. Based on these changes in facts and circumstances and the related changes in estimates, we adjusted or reversed the remaining lease-related liabilities previously recorded for these locations and recognized net restructuring income of $612,000 during the third quarter of fiscal 2003.

• Asset Impairment ($676,000 of asset impairment charges). In addition to the restructuring income described above, management also identified asset impairment charges of $676,000 in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets for two stores held for use. These assets became impaired during the third quarter of fiscal 2003 because the projected cash flows of each store at the time were not sufficient to fully recover the carrying value of the stores’ long-lived assets. In determining whether an impairment exists, we estimate the stores’ future cash flows on an undiscounted basis, and if the cash flows are not sufficient to recover the carrying value, then we use a discounted cash flow based on a risk-adjusted discount rate, to adjust its carrying value of the assets and records a provision for impairment as appropriate. Management believes the weak performance from the stores included in the asset impairment charge was caused by depressed markets and increased competition. We continually reevaluate our stores’ performance to monitor the carrying value of our long-lived assets in comparison to projected cash flows.

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

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

• Severance for employees terminated in the second quarter of fiscal 2003 ($117,000 of restructuring expense). During the second quarter of fiscal 2003, 37 employees were notified of their involuntary termination in conjunction with the closure of two stores in Irvine and Los Angeles, California. As of December 27, 2003, all $117,000 of the involuntary termination benefits had been paid to terminated employees.

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

During the first quarter of fiscal 2003, we recorded restructuring income of $1,736,000. Details of the significant components are as follows:

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

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

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

	RESTRUCTURING STORE COUNT
				Period
	Fiscal Year Ending			Ending
	2001	2002	2003	March 1, 2004
Stores remaining at commencement of period	9	6	3	8
Stores identified in fiscal 2001 for closure or sale	6
Stores identified in fiscal 2002 for closure or sale		6
Stores identified in fiscal 2003 for closure, relocation or conversion			5
Support facilities identified in fiscal 2003 for closure/relocation			4
Identified stores closed or abandoned	(3)	(5)	(4)	(1)
Identified stores sold	(2)	(4)		(1)
Identified support facilities closed				(3)
Reversal of stores identified for closure or sale	(4)
Identified stores and support facilities remaining at period end	6	3	8	3

As of December 27, 2003, four of the stores identified in fiscal 2001 for closure or sale were closed or abandoned and the remaining two stores were removed from our closure or sale list due to changes in facts and circumstances. Of those stores identified in fiscal 2002, all have been sold or closed as of December 27, 2003. Of the five stores and four support facilities identified in fiscal 2003 for closure, relocation, sale, or conversion, one has been relocated as of December 27, 2003, one was sold in January, 2004, four were closed in the first quarter of 2004, two will be closed or relocated during fiscal 2004, and the one store remaining will be closed in fiscal 2005.

Management will decide to close or relocate stores in circumstances where the existing store is under-performing and/or a more desirable location in the same market becomes available. Warehouses and support facilities will be closed, consolidated, or relocated when opportunities arise to reduce overall costs of operations in these facilities, and therefore improve gross profit margins and overall cash flows. We anticipate that we will close up to five additional stores and three warehouses in 2004, all but one of which will be closed upon the expiration of their respective lease terms. Two of the five anticipated store closures involve relocations to other sites. As of the date of this report, we have consolidated the operation of two warehouse facilities into our new Riverside, California distribution center. In the first half of 2004, we plan to close the third warehouse facility as a part of the consolidation. We expect the closure and/or relocation of these stores and warehouses to ultimately result in improved store contributions and cash flows for the Company in the long term. The short term cash flow effects of these closures and/or relocations usually involve some severance costs which, for these 2004 closures, we expect to be minimal as we anticipate that a majority of the employees will accept positions at relocated stores and warehouses or other positions within the Company. Costs for removal of furniture, fixtures, and inventory for these closures are expected to be minimal. The expected non-cash impact on operating results in 2004 due to accelerated depreciation of assets in stores and facilities targeted for closure is expected to be approximately $3.9 million.

Restructuring and Asset Impairment Charges – Fiscal 2002 and Fiscal 2001. Total restructuring and asset impairment expense/(income) recorded in fiscal 2002 and 2001 was ($832,000) and $54.9 million, respectively. See "Notes to Consolidated Financial Statements – Note 12 - Restructuring and Asset Impairment Charges" for details of the significant components of the expense (income).

Interest Income. Interest income for the fiscal year ended December 27, 2003, remained relatively constant as compared to fiscal 2002. Interest income for the fiscal year ended December 28, 2002, decreased 21.4% as compared to fiscal 2001. The decrease was attributable to lower interest rates and reduced levels of invested cash.

Interest Expense. Interest expense for the fiscal year ended December 27, 2003, decreased 69.6% as compared to fiscal 2002, due to an overall decrease in borrowings under our new credit facility, a substantial decrease in our overall borrowing rate under the new credit facility and the expiration in August 2003 of an interest rate swap agreement required by our prior credit facility. Under our Second Amended and Restated Credit Facility, effective February 26, 2003, interest rates decreased from LIBOR plus 5.25% (the rate under our prior credit facility through February 25, 2003) to LIBOR plus 2.25%. We project that interest expense will decrease substantially in fiscal 2004 over fiscal 2003, as a result of the reduction in overall borrowings and the decrease in interest rates resulting from our new credit facility.

Interest expense for the fiscal year ended December 28, 2002, decreased 16.1% as compared to fiscal 2001, due to higher average borrowings in fiscal 2001 and higher swap-related interest rates on the term portion of the credit facility in fiscal 2001.

Income Tax Expense (Benefit). The effective tax rate for the fiscal year ended December 27, 2003 was 39.1% as compared to 40.7% for fiscal 2002 and 36.5% for fiscal 2001. The effective tax rate in 2002 was higher relative to 2003 and 2001 due to the fact that in 2002, the rate was adversely impacted by our inability to utilize foreign tax credits due to net operating losses. In addition, the write-off of certain deferred tax assets having no future taxable benefit negatively impacted the effective tax rate for 2003 by 1.8 percentage points.

As of December 27, 2003, we had a net deferred tax asset of $18.8 million. Therealization of the net deferred tax asset is not assured. We believe it is more likely than not that we will generate sufficient taxable income in the future to realize the full amount of the deferred tax asset,except for certain state net operating loss carry forwards which we believe will not result in a future realizable tax benefit based upon projected taxable income in those states during the carry forward period. Our assessment of the portion of the deferred tax asset we believe to be realizable is based on projections that assume that we can maintain our current store contribution margin. Furthermore, we expect to maintain the sales growth experienced over the past five years that would generate additional taxable income. Uncertainty related to the realization of the deferred tax asset is attributable to the aforementioned risks to our ability to achieve our 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 an adjustment to the valuation allowance is required, it will be recognized as a charge to earnings at that time.

For the fiscal year ended December 28, 2002, we recorded a $4.7 million income tax expense. For the fiscal year ended December 29, 2001, we recorded a $25.2 million income tax benefit, primarily as a result of the loss before taxes of $69.1 million during the period.

Net Income. In fiscal 2003, we generated net income of $3.6 million, or $0.12 per diluted share, compared with net income of $6.9 million or $0.26 per diluted shares in 2002. Supply chain issues were a primary contributor to our decline in net income in the second half of 2003. We are currently in the process of transitioning our primary distribution business to UNFI. Commencing in the first quarter of fiscal 2004, we began the process of transitioning our perishables distribuition in the western region of the country to our new, state-of-the-art distribution center. As part of that transistion, we consolidated two older distribution facilities into the new perishables distribution center, and anticipate the consolidation of a third warehouse facility in the first half of fiscal 2004 in southern California. Disruptions in the transitions mentioned above may impact net income. Both the distributor and warehouse transitions will be completed by the end of the first half of fiscal 2004.

Net income in fiscal 2002 was $6.9 million, or $0.26 per diluted share, as compared to a net loss in fiscal 2001 of $43.9 million, or ($1.80) per diluted share. Net income in fiscal 2002 benefited from decreases in direct store expenses and interest expense. In fiscal 2001, net income was negatively impacted by the recordation of a $54.9 million restructuring and asset impairment charge in the second quarter resulting from a comprehensive review conducted by our new chief executive officer of the business and strategic repositioning efforts of the Company. Net income for fiscal 2001 also was negatively impacted by substantial increases in selling, general and administrative expenses incurred for consulting and professional fees resulting from a comprehensive review of our business and strategic position, severance costs for senior executives and other costs and fees, including advertising and marketing expenses related to the implementation of a major marketing initiative. See "Notes to Consolidated Financial Statements - Note 12 - Restructuring and Asset Impairment Charges" for details of the significant components of the 2001 charge.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements to disclose.

Liquidity and Capital Resources

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

Net cash provided by operating activities was $43.8 million during fiscal 2003 as compared to $34.7 million during fiscal 2002. Increases in cash from operating activities during this period were attributable to overall improvements in working capital levels primarily due in large part to inventory reductions in our existing store base (exclusive of new store inventory). Accounts payable balances as of December 27, 2003 increased to $47.5 million from $34.8 million as of December 28, 2002. This increase was primarily attributable to an increase in construction related payables at the end of 2003, longer average vendor payment terms, and increased sales volume in the fourth quarter of 2003. Additional paid time off benefits offered to employees starting in 2003, as well as a normal increase in workers compensation self insurance reserves resulted in an overall increase in accrued liabilities of $5.1 million as of the fiscal year ended 2003 as compared to fiscal year ended 2002.

Net cash used in investing activities was $31.4 million during fiscal 2003 as compared to $13.4 million during fiscal 2002. The increase is due to an increase in capital expenditures for eight new stores constructed in fiscal 2003.

Net cash used in financing activities was $6.5 million during fiscal 2003 as compared to net cash provided of $28.8 million during fiscal 2002. The change reflects the net proceeds from an equity offering completed in fiscal 2002, net of reductions in our outstanding balance on our credit facility.

We have a net deferred tax asset of $18.8 million on our balance sheet, primarily as a result of the $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 following is a summary of our lease and debt obligations, construction commitments and outstanding letters of credit as of December 27, 2003:

SUMMARY OF OBLIGATIONS AND COMMERCIAL COMMITMENTS

(in thousands)

	PAYMENTS DUE BY PERIOD
	Total	Less than 1 Year	2-3 Years	4-5 Years	After 5 Years
Contractual Obligations:
Long-term debt	$ 30,179		$ 30,179
Capital lease obligations	14	$ 14
Operating leases	385,405	32,597	62,930	$ 56,198	$233,680
Construction commitments	6,605	6,605
Total contractual cash obligations	$422,203	$ 39,216	$ 93,109	$ 56,198	$233,680

	AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
	Total	Less Than 1 Year	2-3 Years	4-5 Years	After 5 Years
Other Commercial Commitments:
Letters of credit	$ 7,312	$ 7,312
Total commercial commitments

Refinancing and Expansion of Credit Facility. In February of 2003, we completed the refinancing of our credit facility with Wells Fargo Bank N.A., our former administrative agent, again acting as lead bank and administrative agent. Our new facility initially had a $75.0 million limit, which was increased to $95.0 million in December with the addition of one new bank to the lending group, and has a three year term with a one-year renewal option. Management believes this facility is adequate for our borrowing needs. Under the new facility, we have the option to increase the total facility to $135.0 million through the addition of new lenders and through the agreement of the current lending group to increase their total commitments.

As part of the new facility, we have given our lenders collateral in the form of cash, equipment and fixtures, inventory and other assets. We have also granted leasehold mortgages in those leasehold interests previously mortgaged to secure our former credit facility, although we have no obligation to provide an interest in any new leaseholds. The new facility contains limitations on capital expenditures and the signing of new leases, although we believe such limitations will not restrict our previously announced growth plans of 15 to 20 stores in fiscal 2004 and 20 to 25 stores in fiscal 2005. The interest rate on the facility is currently either prime plus 1.0% or one-month LIBOR plus 2.25%, at our election, and the rates modify depending on the ratio of average total funded debt, as defined under the credit facility, plus six times rent expense, to EBITDAR for the four fiscal quarter periods then ended, as calculated on our quarterly compliance certificate. Additionally, we are charged a commitment fee on the unused portion of the line ranging from 0.25% to 0.5% based on performance objectives as defined in the credit agreement. We believe that cash generated from operations and available under our credit facility will be sufficient to meet our capital expenditure requirements for the next several years..

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

In accordance with the requirements of our former credit facility and our interest rate risk-management strategy, in September 2000 we entered into a swap agreement to hedge the interest rate on $32.5 million of its borrowings. The swap agreement locks in a one-month LIBOR rate of 6.7% and expired in August 2003. Under our new facility, we are not obligated to enter into any such rate contracts; however, we may choose to do so if we believe such to be appropriate and in line with our risk-management strategy.

Capital Expenditures. We spent approximately $31.7 million during fiscal 2003 for new store construction, development, remodels and other capital expenditures. Our average capital expenditures to open a leased store, including leasehold improvements, equipment and fixtures, have ranged from approximately $2.0 million to $5.0 million historically, excluding inventory costs and initial operating losses. In fiscal 2004, we expect to spend between $50 and $55 million in capital expenditures to construct 15 new stores and complete significant remodels on four additional stores. 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 $2.1 million to $3.9 million in the future; however, our ability to negotiate turnkey leases in the future will result in a substantially lower capital expenditure per store, in return for a slightly higher rent rate over the lease term. Our average capital expenditures to open a farmers market format store are estimated at $1.6 million to $3.0 million in the future. Delays in opening new stores may result in increased capital expenditures and increased pre-opening costs for the site, as well as lower than planned sales for the Company.

The cost of initial inventory for a new store is approximately $300,000 to $600,000 depending on the store format; however, we obtain vendor financing for most of this cost. Pre-opening costs for natural foods supermarket format stores in the future are projected to be $300,000 to $400,000 per store, and pre-opening costs for farmers market format stores are projected to be $250,000 to $350,000, as a result of increased advertising and travel expenses for new stores. All pre-opening costs are expensed as incurred. 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 2004. We believe that cash generated from operations and available borrowings under our existing credit facility will be sufficient to satisfy our capital needs to execute our store growth plans over the next three years.   In the past, we have primarily used cash flows generated from operations, improvements in working capital and equity proceeds to fund store growth and have used any excess cash to reduce debt.  As our store development plan accelerates, we expect that a greater proportion of our capital will funded through borrowings on the line of credit than we have utilized in the past.  We will continually evaluate other sources of capital and will seek those considered appropriate for future acquisition or accelerated store growth opportunities.

Cautionary Statement Regarding Forward-Looking Statements

This Report on Form 10-K 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 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 our cash requirements through the remainder of fiscal 2004, the Company’s expectations for comparable store sales; the impact of changes resulting from the Company’s merchandising, advertising and pricing programs; the expected completion of the Company’s switch to a new primary distributor; expected pre-opening expenses, capital expenditures and expected store closures; 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 Company’s actual results, market performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause differences in results of operations include, but are not limited to, the timing and execution of new store openings, relocations, remodels, sales and closures; the impact of competition; delays in the transition to our primary distributor or changes in product supply or suppliers and supplier performance levels; changes in management information needs; changes in customer needs and expectations; governmental and regulatory actions; general industry or business trends or events; changes in economic or business conditions in general or affecting the natural foods industry in particular; and competition for and the availability of sites for new stores and potential acquisition candidates. The Company undertakes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this Report.

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

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

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

The Company's exposure to interest rate changes is primarily related to its variable rate debt issued under its credit facility. In 2003, the Company refinanced the credit facility and reduced the total commitment available to a $95.0 million revolving line of credit, with a three-year term expiring February 25, 2006. The interest rate on the amended facility is currently either prime plus 1.0% or one-month LIBOR plus 2.25%, at our election, and the rates modify depending on the ratio of average total funded debt, as defined under the credit facility, plus six times rent expense, to EBITDAR for the four fiscal quarter periods then ended, as calculated on our quarterly compliance certificate. Because the interest rate on the facility is variable, based upon the prime rate or LIBOR, the Company's interest expense and net income are affected by interest rate fluctuations. If interest rates were to increase or decrease by 100 basis points, the result, based upon the existing outstanding non-hedged variable rate debt as of December 27, 2003, would be an annual increase or decrease of approximately $302,000 in interest expense and a corresponding decrease or increase of approximately $184,000 in the Company’s net income after taxes.

In September 2000, as required by the Company’s former credit facility, the Company entered into an interest rate swap to hedge its exposure on variable rate debt positions. Variable rates were predominantly linked to LIBOR as determined by one-month intervals. The interest rate provided by the swap fixed one-month LIBOR at 6.7%. %. At December 28, 2002, the notional principal amount of the interest rate swap agreement was $32.5 million, and expired in August 2003. There is no obligation to renew the swap under the refinanced facility. The notional amount is the amount used for the calculation of interest payments that are exchanged over the life of the swap transaction on the amortized principal balance. In fiscal 2003 through its expiration in August of 2003, the loss of $613,000, net of taxes, was reclassified into earnings from other comprehensive income for this cash flow hedge.

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		PAGE
	Report of Management	36
	Report of Independent Auditors	37
	Consolidated Statements of Operations for the Fiscal Years 2003, 2002 and 2001	38
	Consolidated Statements of Comprehensive Income (Loss) for the Fiscal Years 2003, 2002 and 2001	39
	Consolidated Balance Sheets for the Fiscal Years Ended 2003 and 2002	40
	Consolidated Statements of Changes in Stockholders’ Equity for the Fiscal Years Ended 2003, 2002 and 2001	41
	Consolidated Statements of Cash Flows for the Fiscal Years Ended 2003, 2002 and 2001	42
	Notes to Consolidated Financial Statements	43

REPORT OF MANAGEMENT

We are responsible for the preparation and integrity of the consolidated financial statements and all related information appearing in our Annual Report. The consolidated financial statements and notes were prepared in conformity with generally accepted accounting principles appropriate in the circumstances and, accordingly, include certain amounts based on our best judgments and estimates of current conditions and circumstances.

Management maintains a system of accounting and other controls to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and that accounting records are reliable for preparing financial statements. Even an effective internal control system, no matter how well designed, has inherent limitations, including the possibility of circumvention or overriding of controls, and therefore can provide only reasonable assurance with respect to financial statement presentation. The system of accounting and other controls is modified in response to changes in business conditions and operations and recommendations made by the independent accountants.

The Audit Committee of the Board of Directors, which is composed of directors who are not employees, meets periodically with management and the independent accountants to review the manner in which these groups are performing their responsibilities and to carry out the Audit Committee’s oversight role with respect to auditing, internal controls and financial reporting matters. The Audit Committee reviews with the independent accountants the scope and results of the audit. The independent accountants periodically meet privately with the Audit Committee and have access to its individual members.

We engaged PricewaterhouseCoopers LLP, independent accountants, to audit the consolidated financial statements in accordance with generally accepted auditing standards, which include consideration of the internal control structure. The opinion of the independent accountants, based upon their audits of the consolidated financial statements, is contained in this Annual Report.

Perry D. Odak	Edward F. Dunlap
Chief Executive Officer and President	Chief Financial Officer
March 11, 2004	March 11, 2004

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of Wild Oats Markets, Inc.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Wild Oats Markets, Inc. and its subsidiaries (the "Company") at December 27, 2003 and December 28, 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, effective December 30, 2001, the Company changed its method of accounting for goodwill and other intangible assets.

PricewaterhouseCoopers LLP

Denver, Colorado

March 8, 2004

WILD OATS MARKETS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per-share amounts)

FISCAL YEAR	2003	2002	2001
Sales	$ 969,204	$ 919,130	$ 893,179
Cost of goods sold and occupancy costs	683,592	644,862	634,631
Gross profit	285,612	274,268	258,548
Operating expenses:
Direct store expenses	208,908	198,379	207,898
Selling, general and administrative expenses	64,659	55,186	53,131
Loss on disposal of assets, net	2,087	21	477
Pre-opening expenses	2,890	1,897	1,562
Restructuring and asset impairment charges (income), net	(892)	(832)	54,906
Income (loss) from operations	7,960	19,617	(59,426)
Loss on investment			(228)
Loss on early extinguishment of debt	(186)
Interest income	780	778	990
Interest expense	(2,661)	(8,753)	(10,437)
Income (loss) before income taxes	5,893	11,642	(69,101)
Income tax expense (benefit)	2,302	4,733	(25,189)
Net income (loss)	$ 3,591	$ 6,909	$ (43,912)
Net income (loss) per common share:
Basic	$ 0.12	$ 0.26	$ (1.80)
Diluted	$ 0.12	$ 0.26	$ (1.80)
Weighted average number of common shares outstanding	29,851	26,481	24,424
Weighted average number of common shares outstanding assuming dilution	30,258	27,082	24,424

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

WILD OATS MARKETS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands)

FISCAL YEAR	2003	2002	2001
Net income (loss)	$ 3,591	$ 6,909	$ (43,912)
Other comprehensive income (loss):
Foreign currency translation adjustments arising during the period	697	(61)	(530)
Cumulative effect of change in accounting principle (see Note 1), net of tax of $352			(586)
Recognition of hedge results to interest expense during the period, net of tax of $367, $705 and $435 respectively	613	1,176	726
Change in market value of cash flow hedge during the period, net of tax of $12, $208 and $935, respectively	(20)	(348)	(1,561)
Other comprehensive income (loss)	1,290	767	(1,951)
Comprehensive income (loss)	$ 4,881	$ 7,676	$ (45,863)

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

WILD OATS MARKETS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

FISCAL YEAR ENDED	2003	2002
ASSETS
Current assets:
Cash and cash equivalents	$ 17,400	$ 11,367
Inventories (net of reserves of $685 and $886, respectively)	46,621	47,175
Accounts receivable (net of allowance for doubtful accounts of $208 and $338, respectively)	4,038	2,524
Income tax receivable	261	250
Prepaid expenses and other current assets	2,192	2,163
Deferred tax asset	6,340	4,656
Total current assets	76,852	68,135
Property and equipment, net	130,989	122,359
Goodwill, net	106,404	106,404
Other intangible assets, net	6,976	7,415
Deposits and other assets	2,932	3,622
Deferred tax asset	12,438	15,650
	$ 336,591	$ 323,585
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$ 47,529	$ 34,819
Book overdraft	26,727	22,777
Accrued liabilities	42,998	37,943
Current portion of debt and capital leases	14	146
Total current liabilities	117,268	95,685
Long-term debt and capital leases	30,179	43,075
Other long-term obligations	14,058	17,923
	161,505	156,683
Commitments and contingencies (Notes 10 and 11)
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; 30,063,421 and 29,658,660 issued and outstanding, respectively	30	30
Additional paid-in capital	217,400	213,482
Note receivable, related party	(10,815)	(10,200)
Accumulated deficit	(31,777)	(35,368)
Accumulated other comprehensive income (loss)	248	(1,042)
Total stockholders’ equity	175,086	166,902
	$ 336,591	$ 323,585

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

WILD OATS MARKETS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share and per-share amounts)

	Common Stock		Add’l Paid-In Capital	Note Receivable, Related  Party	Retained Earnings (Accumulated Deficit)	Accumulated Other Comp. Income (Loss)	Total Stockholders’ Equity
	Shares	Amount
BALANCE AT DECEMBER 30, 2000	23,147,103	$ 23	$ 149,764		$ 1,635	$ 142	$ 151,564
Stock issued in exchange for note receivable	1,332,649	1	9,286	$ (9,274)			13
Accrued interest on note receivable				(386)			(386)
Issuance of common stock ($3.61 to $3.66 per share), net of issuance costs	152,405		551				551
Common stock options exercised ($3.13 to $9.06 per share), including related tax benefit	134,252	1	1,135				1,136
Net loss					(43,912)		(43,912)
Foreign currency translation adjustment						(530)	(530)
Cumulative effect of change in accounting principle, net of tax						(586)	(586)
Recognition of hedge results to interest expense during the period, net of tax						726	726
Change in market value of cash flow hedge during the period, net of tax						(1,561)	(1,561)
BALANCE AT DECEMBER 29, 2001	24,766,409	25	160,736	(9,660)	(42,277)	(1,809)	107,015
Accrued interest on note receivable				(540)			(540)
Issuance of common stock ($7.91 to $11.50 per share), net of issuance costs	4,641,692	4	50,327				50,331
Common stock options exercised ($3.13 to $12.56 per share), including related tax benefit	250,559	1	2,419				2,420
Net income					6,909		6,909
Foreign currency translation adjustment						(61)	(61)
Recognition of hedge results to interest expense during the period, net of tax						1,176	1,176
Change in market value of cash flow hedge during the period, net of tax						(348)	(348)
BALANCE AT DECEMBER 28, 2002	29,658,660	30	213,482	(10,200)	(35,368)	(1,042)	166,902
Accrued interest on note receivable				(615)			(615)
Issuance of common stock ($8.77 to $9.11 per share), net of issuance costs	88,595		1,186				1,186
Common stock options exercised ($3.13 to $10.86 per share), including related tax benefit	316,166		2,732				2,732
Net income					3,591		3,591
Foreign currency translation adjustment						697	697
Recognition of hedge results to interest expense during the period, net of tax						613	613
Change in market value of cash flow hedge during the period, net of tax						(20)	(20)
BALANCE AT DECEMBER 27, 2003	30,063,421	$ 30	$ 217,400	$ (10,815)	$ (31,777)	$ 248	$ 175,086

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

WILD OATS MARKETS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

FISCAL YEAR	2003	2002	2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ 3,591	$ 6,909	$ (43,912)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization	23,710	21,335	26,284
Loss on disposal of property and equipment	2,087	21	477
Deferred tax expense (benefit)	1,503	4,056	(22,509)
Non-cash restructuring and asset impairment charges (income),   net	(953)	(701)	54,907
Other	(110)	(317)	(52)
Change in assets and liabilities:
Inventories, net	755	6,886	1,120
Receivables, net and other assets	(1,173)	3,966	5,038
Accounts payable	9,941	(6,765)	2,481
Accrued liabilities and other liabilities	4,465	(692)	(1,972)
Net cash provided by operating activities	43,816	34,698	21,862
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(31,731)	(13,678)	(20,082)
Proceeds from sale of property and equipment	346	229	146
Net cash used in investing activities	(31,385)	(13,449)	(19,936)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under line of credit	(13,800)	(69,200)	(1,685)
Net increase in book overdraft	3,949	425	3,849
Proceeds from long term debt	37,879		2,000
Repayments on notes payable, long-term debt and capitalized    leases	(37,107)	(10,798)	(254)
Payment of debt issuance costs	(721)
Proceeds from issuance of common stock, net	3,288	50,822	895
Net cash (used in) provided by financing activities	(6,512)	(28,751)	4,805
Effect of exchange rates on cash	114	29	(348)
Net (decrease) increase in cash and cash equivalents	6,033	(7,473)	6,383
Cash and cash equivalents at beginning of year	11,367	18,840	12,457
Cash and cash equivalents at end of year	$ 17,400	$ 11,367	$ 18,840
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized	$ 3,168	$ 8,549	$ 10,203
Cash paid (received) for income taxes	$ 67	$ (3,473)	$ (7,241)
SUPPLEMENTAL DISCLOSURE OF 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 these consolidated financial statements.

WILD OATS MARKETS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization. Wild Oats Markets, Inc. ("Wild Oats" or the "Company"), headquartered in Boulder, Colorado, owns and operates natural and organic foods supermarkets in the United States and Canada. The Company also operates bakeries, commissary kitchens, and warehouses that supply the retail 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.

Basis of Presentation. Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation. These reclassifications have no impact on net income.

Principles of Consolidation. The Company’s consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.

Fiscal Year. The Company reports its financial results on a 52- or 53-week fiscal year ending on the Saturday closest to December 31. Fiscal years for the consolidated financial statements included herein ended on December 27, 2003, December 28, 2002 and December 29, 2001. Fiscal 2003 , Fiscal 2002 and Fiscal 2001 were 52-week years.

Cash and Cash Equivalents. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and temporary cash investments. At times, cash balances held at financial institutions were in excess of Federal Deposit Insurance Corporation insurance limits. The Company places its temporary cash investments with high-credit quality financial institutions. The Company believes no significant concentration of credit risk exists with respect to these cash investments.

Inventories. Store inventories are valued principally at the lower of cost or market, with cost primarily determined under the retail method on a FIFO basis. FIFO cost is determined using the retail method for approximately 80% of inventories and using the item cost method for highly perishable products representing approximately 20% of inventories. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are determined by applying a cost-to-retail ratio for various categories of similar items to the retail value of inventories. Inherent in the retail inventory method calculations are certain management judgments and estimates, including shrinkage, which could impact the ending inventory valuation at cost as well as the resulting gross margins. Certain other highly perishable inventories are valued primarily at the lower of cost or market, with cost determined on a FIFO basis.

Property and Equipment. Property and equipment are recorded at cost and shown net of accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of machinery and equipment (three to 10 years). Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the asset or the lease term. Eligible internal-use software development costs incurred subsequent to the completion of the preliminary project state are capitalized and amortized over the estimated useful life of the software which is 5 years. Major renewals and improvements are capitalized, while maintenance and repairs are expensed as incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation or amortization are eliminated from the respective accounts and any resulting gains or losses are reflected in operations. Applicable interest charges incurred during the construction of assets are capitalized as one of the elements of cost and are amortized over the assets’ estimated useful lives. All internal direct costs associated with store construction are capitalized. Site specific development costs are capitalized. Development costs related to a potential site subsequently determined to be unfeasible are expensed when the determination is made.

Goodwill. Goodwill consists of the excess cost of acquired companies over the sum of the fair market value of their underlying tangible and identifible intangible assets acquired and liabilities assumed. Prior to 2002, goodwill was recorded at the store-level, and amortized over 40 years. With adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", the Company allocates goodwill to one reporting unit. It is no longer amortized but is tested for impairment annually, or more frequently if certain indicators of impairment exist. The Company’s annual evaluation for impairment was made during the second quarter of 2003 and 2002, with the result being no impairment. This evaluation requires management to exercise a high degree of judgment in developing assumptions and fair value estimates used in the calculation, which have the potential of significantly impacting the results.

Other Intangible Assets. Other intangible assets consist primarily of leasehold interests and liquor licenses. Amortization of leasehold interests is computed on a straight-line basis over the lease term. Liquor licenses are not amortized.

Debt Issuance Costs. Costs related to the issuance of debt are capitalized and amortized to interest expense using the effective interest method over the period the debt is outstanding.

Impairment of Long-Lived Assets. The Company monitors the carrying value of its long-lived assets, including finite lived intangible assets, for potential impairment whenever changes in circumstance indicate a potential for impairment may exist. The triggering events for evaluations of finite lived intangible assets include a significant decrease in the market value of an asset, acquisition and construction costs in excess of budget, or current store operating losses combined with a history of losses or a projection of continuing losses. If an impairment is identified, based on undiscounted future cash flows, the Company compares the asset’s future cash flows, discounted to present value using a risk-adjusted discount rate, to its current carrying value and records a provision for impairment as appropriate. With respect to equipment and leasehold improvements associated with closed stores, the value of these assets is adjusted to reflect recoverable values estimated based on the Company’s previous efforts to dispose of similar assets, with consideration for current economic conditions.

Store Operating Leases. The Company is the lessee of land and buildings under long-term operating leases, which include scheduled increases in minimum rents. These scheduled rent increases are recognized on a straight-line basis over the initial lease terms.

Restructuring and Asset Impairment Costs. The Company plans to complete store closures or sales within a one-year period following the commitment date. Costs related to store closures and sales are reflected in the income statement as "Restructuring and Asset Impairment Charges." For stores the Company intends to sell, the Company actively markets the stores to potential buyers. Stores held for disposal are reduced to their estimated net realizable value. Prior to 2003, when the Company commited to close a store, a lease-related liability was recorded for the present value of the estimated remaining non-cancelable lease payments after the anticipated closing date, net of estimated subtenant income, or for estimated lease settlement costs. In addition, the Company recorded a liability for costs to be incurred after the store closing which are required under leases or local ordinances for site preservation during the period before lease termination. The value of equipment and leasehold improvements related to a closed store was reduced to reflect recoverable values based on the Company’s previous efforts to dispose of similar assets and current economic conditions. In accordance with the new requirements of SFAS No. 146 (see New Accounting Pronouncements later in this note), as of fiscal 2003, the Company recognized such lease related costs at the time of the actual store closing. As of the date of the commitment to close or relocate a store, depreciation of store assets is accelerated over the remaining months of operation as necessary in order to bring their net carrying cost down to net realizable value as of the date of closure.

Severance costs incurred in connection with store closings are recorded when the employees have been identified and notified of the termination benefits to be made to the employees.

Lease-related liabilities and the recoverability of assets to be disposed of are reviewed quarterly, and changes in previous estimates are reflected in operations. Significant cash payments associated with closed stores relate to ongoing payments of rent, common area maintenance, insurance charges, and real property taxes as required under continuing lease obligations.

Pre-Opening Expenses. Pre-opening expenses are recognized as incurred and typically include labor, rent, advertising, utilities, supplies and certain other costs incurred prior to a store’s opening.

Concentration of Risk. Based upon the current distribution agreement (see Note 18 - Change in Primary Distributor), the Company plans to purchase 30% or more of its cost of goods sold from its primary distributor, which during 2003 was Tree of Life, Inc. The Company’s reliance on this supplier can be shifted, over a period of time, to alternative sources of supply, should such changes be necessary. However, if the Company could not obtain products from this supplier for factors beyond its control, the Company’s operations would be disrupted in the short term while alternative sources of product were secured.

Revenue Recognition. Revenue for sales of the Company’s products is recognized at the point of sale to the retail customer. Returns are not significant.  97% of the Company's sales are attributable to the United States, and 3% to Canada.

Cost of Goods Sold and Occupancy Costs. Cost of goods sold includes all product and shipping costs associated with inventory sold during the period, net of their related vendor rebates, credits, and promotional allowances, and occupancy costs. In accordance with EITF 02-16, Accounting By a Customer (Including a Reseller) for Cash Consideration Received from a Vendor, payments from a vendor other than reimbursements for specific services such as advertising, are accounted for as a reduction of the inventory carrying cost and flow through cost of goods sold when the inventory is sold.

Advertising. Advertising is expensed as incurred. Advertising expense was $14.5 million, $13.3 million and $9.3 million for fiscal 2003, fiscal 2002 and fiscal 2001, respectively. These amounts are net of vendor reimbursements received for advertising of $6.3 million, $5.3 million, and $2.6 million for fiscal years 2003, 2002 and 2001, respectively. Beginning in fiscal 2002, certain advertising expenses previously recorded as direct store expenses were recorded as selling, general and administrative expenses. For fiscal 2001, $4.3 million was reclassified on the Consolidated Statements of Operations to conform to current year presentation.

Fair Value of Financial Instruments. The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, short-term trade receivables and payables, approximate their fair values due to the short-term nature of the instruments. The fair value of the Company’s long-term debt approximates its carrying value due to the variable interest rate feature of the instrument.

Derivative Financial Instruments. Prior to August 1, 2003, the Company used an interest rate swap to manage a portion of its interest costs and the risk associated with changing interest rates. As interest rates changed, the differential paid or received was recognized in interest expense of the related period. As of December 27, 2003, the Company had no derivative financial instruments.

Use of Estimates. The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Foreign Currency Translation. The functional currency for the Company’s Canadian subsidiary is the Canadian dollar. Translation into U.S. dollars is performed for assets and liabilities at the exchange rate as of the balance sheet date. Income and expense accounts are translated at average exchange rates for the year. Adjustments resulting from the translation are reflected as a separate component of other comprehensive income. Translation adjustments are not tax-effected as they relate to investments that are permanent in nature.

Self-Insurance. The Company is self-insured for certain losses relating to worker’s compensation claims, general liability and employee medical and dental benefits. The Company has purchased stop-loss coverage in order to limit its exposure to any significant levels of claims. Self-insured losses are accrued based upon the Company’s estimates of the aggregate uninsured claims incurred using certain actuarial assumptions followed in the insurance industry and the Company’s historical experiences. A high degree of management judgment is required in developing these estimates and assumptions, which have the potential for significantly impacting the required reserve amounts.

Earnings Per Share. Earnings per share are calculated in accordance with the provisions of Statement of Financial Accounting Standards ("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 1,120,319, 933,935, and 2,006,215 for the fiscal years ended December 27, 2003, December 28, 2002, and December 29, 2001, respectively, were not included in the earnings per share calculations. A reconciliation of the basic and diluted per-share computations is as follows (in thousands, except per-share data):

FISCAL YEAR	2003	2002	2001
Basic and diluted earnings per common share computation:
Net income (loss)	$ 3,591	$ 6,909	$(43,912)
Net income (loss) per common share:
Basic	$ 0.12	$ 0.26	$ (1.80)
Diluted	$ 0.12	$ 0.26	$ (1.80)
Weighted average number of common shares outstanding	29,851	26,481	24,424
Incremental shares from assumed conversions:
Stock options	407	601
Weighted average number of common shares outstanding assuming dilution	30,258	27,082	24,424

Stock-Based Compensation. At December 27, 2003, the Company has seven stock-based employee compensation plans, which are described more fully in Note 9 – Stock Plans and Options. The Company accounts for those plans in accordance with the intrinsic value based method in APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Some stock-based employee compensation cost is reflected in net income for options issued at a discount as Board of Directors compensation. All other options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant, therefore no other employee compensation cost is reflected in net income. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

FISCAL YEAR	2003	2002	2001
Net income (loss), as reported	$ 3,591	$ 6,909	$ (43,912)
Add: Stock-based employee compensation expense included in reported net income, net of tax	205	133	67
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax	(2,587)	(2,128)	(2,528)
Pro forma net income (loss)	$ 1,209	$ 4,914	$ (46,373)
Earnings (loss) per share:
Basic – as reported	$ 0.12	$ 0.26	$ (1.80)
Basic – pro forma	$ 0.04	$ 0.19	$ (1.90)
Diluted – as reported	$ 0.12	$ 0.26	$ (1.80)
Diluted – pro forma	$ 0.04	$ 0.18	$ (1.90)

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 at the time, in September 2000, the Company entered into a swap agreement to hedge the interest rate on $32.5 million of its borrowings. The swap agreement expired in August 2003.

The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, on December 31, 2000. In accordance with the transition provisions of SFAS No.133, as of December 31, 2000, the Company recorded a net-of-tax cumulative loss adjustment to other comprehensive income totaling $586,000 that relates to the fair value of the previously described cash flow hedging relationship.

On the date that the Company entered into the derivative contract, it designated the derivative as a hedge of the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a "cash flow" hedge). The Company does not enter into derivative contracts for trading or non-hedging purposes. The Company’s swap agreement was designated as a cash flow hedge and was recognized in the balance sheet at its fair value. Changes in the fair value of the Company’s cash flow hedge, to the extent that the hedge was highly effective, was recorded in other comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction through interest expense. Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows being hedged) was recorded in current period earnings.

The Company's policy is to formally document all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value, cash flow, or foreign currency hedges to (1) specific assets and liabilities on the balance sheet or (2) specific firm commitments or forecasted transactions. The Company also formally assesseses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the Company discontinues hedge accounting prospectively, as discussed below.

The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designating the derivative as a hedging instrument is no longer appropriate.

New Accounting Pronouncements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, An Interpretation of ARB 51 ("FIN 46") which was subsequently revised in December 2003 (FIN 46R) The primary objectives of FIN 46R are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46R requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. As of December 27, 2003, the Company was not a party to a VIE; therefore, FIN 46R did not have a material effect on the Company’s financial position or results of operations.

SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, was issued on July 30, 2002. SFAS No. 146 will require companies to recognize costs associated with exit or disposal activities when they occur rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 became effective for the Company on January 1, 2003, and did not have a material impact on the Company’s financial position or results of operations.

On August 15, 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 will be effective for financial statements issued for fiscal years beginning after June 30, 2002. Under SFAS No. 143, an entity shall recognize the cumulative effect of the adoption of SFAS No. 143 as a change in accounting principle. SFAS No. 143 did not have a material effect on the Company’s financial position or results of operations.

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

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments and hedging activities, resulting primarily from decisions reached by the FASB Derivatives Implementation Group subsequent to the original issuance of SFAS No. 133. This Statement is generally effective prospectively for contracts and hedging relationships entered into after June 30, 2003. The Company has not entered into any such agreements since the effective date; therefore, the adoption of SFAS No. 149 has had no impact on the Company.

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

In November 2003, the FASB’s Emerging Issue Task Force (EITF) reached a consensus on EITF No. 03-10, Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers. The consensus required that consideration received by a reseller from a vendor that is a reimbursement by the vendor for honoring the vendor’s sales incentives offered directly to consumers (such as coupons) be recorded as revenue rather than as a reduction of cost of goods sold. The Company has historically accounted for such reimbursements in accordance with EITF No. 02-16, therefore its adoption will have no impact on the Company’s financial position or results of operations.

2. Debt Covenant Compliance and Liquidity

In February of 2003, the Company completed the refinancing of its credit facility with Wells Fargo Bank N.A. The Company’s new facility has a $75.0 million limit, with a three-year term and a one-year renewal option. Under the new credit facility, the Company has the option to increase the total facility to $135.0 million through the addition of new lenders and through the agreement of the current lending group to increase their total commitments. In December 2003, an additional lender was added to the syndicate under the existing terms, increasing the credit facility limit to $95 million.

As part of the new credit facility, the Company gave the lenders collateral in the form of cash, equipment and fixtures, inventory and other assets. The Company has also granted a leasehold mortgage in those leasehold interests previously mortgaged to secure our former credit facility, although it has no obligation to provide an interest in any new leaseholds. The new credit facility contains limitations on capital expenditures and the signing of new leases. The interest rate on the facility is currently either prime plus 1.0% or one-month LIBOR plus 2.25%, at the Company’s election, and the rates modify depending on the ratio of average total funded debt, as defined under the credit facility, plus six times rent expense, to EBITDAR for the four fiscal quarter periods then ended, as calculated on our quarterly compliance certificate. The Company believes that cash generated from operations and available under its credit facility will be sufficient to meet its working capital and capital expenditure requirements in fiscal 2004.

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

3. Property and Equipment

Property and equipment consist of the following (in thousands):

FISCAL YEAR ENDED	2003	2002
Machinery and equipment	$ 103,014	$ 118,109
Leasehold improvements	99,778	88,414
Software	3,390	3,206
Construction in progress	16,880	8,317
	223,062	218,046
Less accumulated depreciation	(92,073)	(95,687)
	$ 130,989	$ 122,359

Depreciation expense related to property and equipment totaled approximately $22.9 million, $20.4 million and $22.7 million in fiscal 2003, fiscal 2002 and fiscal 2001, respectively. Property and equipment includes approximately $439,000 of interest capitalized during fiscal 2003, $129,000 during fiscal 2002 and $291,000 during fiscal 2001. The amounts shown above include $77,000 of machinery and equipment which are accounted for as capitalized leases and which have accumulated amortization of $68,000 at December 27, 2003. As of December 28, 2002, there was $994,000 of machinery and equipment accounted for as capitalized leases which had accumulated amortization of $681,000. Increases in construction related accounts payable of $2.7 million and $425,000 for 2003 and 2002, respectively, are excluded from the statement of cash flows as non-cash items.

As a result of the significant store closings, remodels and resets, the Company undertook a review of all fixtures and equipment in its stores, offices, and support facilities, including a physical inventory in conjunction with an asset tagging exercise. The Company completed the review and recorded a $2.1 million loss on disposal of fixtures and equipment in fiscal 2003.

4. Goodwill and Other Intangible Assets

Goodwill consists of the following (in thousands):

FISCAL YEAR ENDED	2003	2002
Goodwill	$ 117,394	$ 117,394
Less accumulated amortization	(10,990)	(10,990)
	$ 106,404	$ 106,404

Amortization expense related to goodwill was $0, $0 and $3.0 million in fiscal 2003, fiscal 2002 and fiscal 2001, respectively.

Effective December 30, 2001, the Company implemented SFAS No. 142, Goodwill and Other Intangible Assets. Among other things, SFAS No. 142 prohibits the amortization of goodwill and indefinite-lived assets. Implementation of SFAS No. 142 in fiscal 2001 would have resulted in a net loss of $42.0 million for the year and a loss per share basic and diluted of $1.72, which represents a $1.9 million (net of tax) reduction in the Company’s reported net loss for 2001, or an $0.08 reduction in the net loss per share.

Other intangible assets include the following (in thousands):

FISCAL YEAR ENDED	2003	2002
Leasehold interests	$ 9,045	$ 9,045
Less accumulated amortization	(2,240)	(1,724)
Leasehold interests, net	6,805	7,321
Liquor licenses	171	94
	$ 6,976	$ 7,415

Amortization expense related to finite lived intangible assets was $519,000, $477,000 and $426,000 in fiscal 2003, fiscal 2002 and fiscal 2001, respectively.

The estimated amortization of finite lived intangible assets for each of the five fiscal years ending in fiscal 2008 is as follows (in thousands):

	Amortization
Fiscal Year	Expense
2004	$ 487
2005	$ 487
2006	$ 471
2007	$ 467
2008	$ 457

5. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

FISCAL YEAR ENDED	2003	2002
Wages and employee costs	$ 26,114	$ 19,795
Sales and personal property taxes	4,397	2,719
Real estate costs	6,154	7,802
Deferred charges and other accruals	6,333	7,627
	$ 42,998	$ 37,943

6. Long Term Debt

Long-term debt and capital leases outstanding consists of the following (in thousands):

FISCAL YEAR	2003	2002
Capital leases	$ 14	$ 162
Bank line of credit due February 26, 2006, bearing interest at one month LIBOR plus 2.25% (3.375% at December 27, 2003)	30,179
Bank line of credit due August 1, 2003; bearing interest at prime plus 3.25% or one-month LIBOR plus 4.75% (11.4% on $3.7 million, 6.2% on $8.3 million and 7.5% on $2.3 million on December 28, 2002); collateralized by corporate assets		14,236
Bank term debt due August 1, 2003; bearing interest at one-month LIBOR plus 4.75% (11.4% on December 28, 2002); collateralized by corporate assets		28,823
	30,193	43,221
Less current portion	(14)	(146)
	$ 30,179	$ 43,075

The maturities of long-term debt and capital leases are as follows (in thousands):

Fiscal Year Ending
2004	$ 14
2005
2006	30,179
	$ 30,193

Through February 26, 2003, the Company had a $125.0 million credit facility under which borrowing was limited to $115.0 million. The facility had two separate lines of credit, a revolving line of up to $86.2 million and a term loan of up to $28.8 million, each with a three-year term expiring on August 1, 2003. The interest rate on the facility was initially either prime plus 2.25% or one-month LIBOR plus 3.75% at the Company’s election, and the rates increased by 0.5% starting January 1, 2002 and each six months thereafter through January 2003. As of December 28, 2002, there was $14.3 million in borrowings under the revolving loan and $28.8 in borrowings under the term loan. In February 2003, the Company refinanced its credit facility and reduced the total amount of the facility to a revolving line of $75.0 million with a three-year term expiring February 26, 2006, and a one-year renewal at the parties’ option. The amount of the line was increased to $95 million effective December 12, 2003. The interest rate on the facility is currently either prime plus 1.0% or one-month LIBOR plus 2.25% at the Company’s election, and the rates modify depending on the ratio of average total funded debt, as defined under the credit facility, plus six times rent expense, to EBITDAR for the four fiscal quarter periods then ended, as calculated on our quarterly compliance certificate. Additionally, the Company is charged a commitment fee on the unused portion of the line ranging from 0.25% to 0.5% based on performance objectives as defined in the credit agreement. The line of credit has certain financial covenants, including restrictions on the payment of dividends, and is collateralized by the Company’s cash, fixed assets, equipment and leasehold mortgages in certain of its leases. In conjunction with the debt refinancing, the Company incurred a non-cash charge of approximately $186,000 to write off the remaining unamortized debt issuance cost from its prior credit facility and capitalized debt issuance costs of approximately $721,000 in the first quarter of fiscal 2003, to be amortized over the life of the agreement using the effective interest method. In addition, the Company had three letters of credit outstanding as of December 27, 2003 that total $7.3 million and expire in August 2004 ($6.0 million) and November 2004 ($1.3 million).

In September 2000, as required by the Company's former credit facility, the Company entered into an interest rate swap to hedge its exposure on variable rate debt positions. Variable rates were predominantly linked to LIBOR as determined by one-month intervals. The interest rate provided by the swap fixed one-month LIBOR at 6.7%. At December 28, 2002, the notional principal amount of the interest rate swap agreement was $32.5 million, and expired in August 2003. There is no obligation to renew the swap under the refinanced facility. The notional amount is the amount used for the calculation of interest payments that are exchanged over the life of the swap transaction on the amortized principal balance.  Pretax loss amounts reclassified into earnings from other comprehensive income for this cash flow hedge was approximately $1.0 million, $1.9 million and $1.2 million for fiscal 2003, 2002 and 2001, respectively.

7. Income Taxes

Income (loss) before income taxes consists of the following (in thousands):

FISCAL YEAR	2003	2002	2001
Domestic	$ 4,933	$ 11,710	$ (69,370)
Foreign	960	(68)	269
	$ 5,893	$ 11,642	$ (69,101)

Income tax expense (benefit) consists of the following (in thousands):

FISCAL YEAR	2003	2002	2001
Current:
Federal	$ 294		$ (2,604)
State and foreign	505	$ 677	(69)
	799	677	(2,673)
Deferred:
Federal	1,016	4,455	(21,025)
State and foreign	487	(399)	(1,491)
	1,503	4,056	(22,516)
	$ 2,302	$ 4,733	$ (25,189)

The differences between the U.S. federal statutory income tax rate and the Company’s effective tax rate are as follows:

FISCAL YEAR	2003	2002	2001
Statutory tax rate	35.0%	35.0%	(35.0)%
State income taxes (benefit), net of federal   income tax (benefit) expense and valuation   allowance	2.8	3.2	(2.3)
Tax effect of non-deductible goodwill			0.8
Foreign income taxes		3.1
Expired tax attributes	1.8
Other, net	(0.5)	(0.6)
Effective tax rate	39.1%	40.7%	(36.5)%

The effective tax rate for the fiscal years ended December 27, 2003 was 39.1% as compared to 40.7% for fiscal 2002 and 36.5% for fiscal 2001. The effective tax rate in 2002 was higher relative to 2003 and 2001 due to the fact that in 2002, the rate was adversely impacted by our inability to utilize foreign tax credits due to net operating losses. In addition, the writeoff of certain deferred tax assets having no future taxable benefit negatively impacted the effective tax rate for 2003 by 1.8 percentage points.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):

FISCAL YEAR	2003	2002
Deferred tax assets:
Inventory-related	$      248	$      332
Vacation accrual	2,657	2,506
Real estate accruals	4,497	6,768
Net operating loss carry-forward	15,179	16,733
Contribution and credit carry-forward	1,910	1,455
Mark-to-market swap accrual		355
Worker’s Compensation	1,501
Other	580	145
Valuation Allowance	(2,202)	(1,766)
Total deferred tax assets	24,370	26,528
Deferred tax liabilities:
Property-related	(5,592)	(6,222)
Total deferred tax liabilities	(5,592)	(6,222)
Net deferred tax asset	$ 18,778	$ 20,306
Financial statements:
Current deferred tax asset	6,340	4,656
Non-current deferred tax asset	12,438	15,650
Net deferred tax asset	$ 18,778	$ 20,306

During fiscal 2003, fiscal 2002 and fiscal 2001, the Company recognized $280,000, $479,000 and $102,000, respectively, as a tax benefit directly to additional paid-in-capital related to non-compensatory stock plans.

As of December 27, 2003, the Company has net operating losses related to the following tax jurisdictions and expiration periods that are available to offset future taxable income: US federal income tax loss carryforwards of approximately $30.9 million beginning to expire in 2021; various state income tax loss carryforwards of approximately $95.2 million beginning to expire in 2005; and foreign income tax loss carryforwards of approximately $1.6 million beginning to expire in 2005.

The Company has established a valuation allowance for certain state net operating loss carryforwards which the Company believes will not result in a future realizable tax benefit based upon projected taxable income in those states during the carry forward period. In 2003, the Company increased its valuation reserve by $436,000 to reserve for additional state net operating loss carryforwards generated in certain states during 2003. The Company has concluded that a valuation allowance is not required for the remaining net operating loss carryforwards, as it is more likely than not that the Company will be able to realize a tax benefit through the generation of future taxable income.

8. Capital Stock

In September 2002, the Company raised net proceeds of $48.3 million in an offering of the Company’s equity to provide additional liquidity. The Company filed a registration statement on Form S-3 to register 3.25 million shares of the Company’s common stock in connection with such placement, in addition to 1.2 million shares previously registered.

9. Stock Plans and Options

Employee Stock Purchase Plan. In August 1996, the Company’s board of directors approved and adopted an Employee Stock Purchase Plan ("Purchase Plan") reserving 287,307 shares of common stock. The Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code. Under the Purchase Plan, the board of directors may authorize participation by eligible employees, including officers, in periodic offerings. The offering period for any offering will be no more than 27 months. The board authorized an offering commencing on the initial public offering date of October 22, 1996 and ending June 30, 1997, and sequential six-month offerings thereafter.

Employees are eligible to participate in the currently authorized offerings if they have been employed by the Company or an affiliate of the Company incorporated in the United States for at least six months preceding October 22, 1996. Employees can have up to 15% of their earnings withheld pursuant to the Purchase Plan and applied on specified purchase dates (currently the last day of each authorized offering) to the purchase of shares of common stock. The price of common stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the common stock on the commencement date of each offering or the relevant purchase date. As of December 27, 2003, there were approximately $417,000 of payroll deductions of which $397,000 were used to purchase 42,413 shares of common stock on December 31, 2003.

The Board suspended participation in the Purchase Plan effective January 29, 2001, when the available pool of shares was substantially exhausted. The Company obtained shareholder approval in May 2001 to increase the pool of reserved stock by 500,000 shares, and participation was resumed in June 2001.

1996 Equity Incentive Plan. The Company’s Wild Oats Markets, Inc. 1996 Equity Incentive Plan (the "1996 Plan") was adopted by the board of directors in August 1996. As of December 27, 2003, 3,119,919 shares of common stock were reserved for issuance under the 1996 Plan, and options for 672,720 shares were available for grant. The 1996 Plan provides for the grant of incentive stock options to employees (including officers and employee-directors) and nonqualified stock options, restricted stock purchase awards and stock bonuses to employees and directors. The exercise price of options granted under the 1996 Plan is determined by the board of directors, provided that the exercise price for an incentive stock option cannot be less than 100% of the fair market value of the common stock on the grant date and the exercise price for a nonqualified stock option cannot be less than 85% of the fair market value of the common stock on the grant date. Outstanding options generally vest over a period of four years and generally expire 10 years from the grant date.

2001 NonOfficer/NonDirectorEquity Incentive Plan. In 2001 the Company created the Wild Oats Markets, Inc. 2001 Nonofficer/Nondirector Equity Incentive Plan , a nonqualified stock option plan (the "2001 Plan"). As of December 27, 2003, 426,330 shares of common stock were reserved for issuance under the 2001 Plan, and options for 17,244 shares were available for grant. The 2001 Plan provides for the grant of nonqualified stock options to employees of the Company who are not officers or directors. The exercise price of options granted under the 2001 Plan is determined by the board of directors, provided that the exercise price for a nonqualified stock option cannot be less than 85% of the fair market value of the common stock on the grant date. Outstanding options generally vest over four years and generally expire 10 years from the grant date.

Individual Stock Option Plans. Currently a total of five individual nonqualified stock option plans exist. These individual stock option plans were created during 2001 and 2003 as inducements to certain executives to accept offers of employment with the Company. The total amount of shares reserved for issuance and total options granted under the five plans is 490,000 shares. Under each plan, the exercise price of the stock options is determined by the board of directors, provided that the exercise price cannot be less than 85% of fair market value of the common stock on the grant date. Outstanding options vest over a four-year period with an expiration date 10 years from the date of grant.

Fair Values. The fair value of the employees’ purchase rights was estimated using the Black-Scholes model with the following weighted-average assumptions:

FISCAL YEAR	2003	2002	2001
Estimated dividends	None	None	None
Expected volatility	75%	69%	52%
Risk-free interest rate	1.0%	1.2%	1.8%
Expected life (years)	0.5	0.5	0.5
Weighted-average fair value per share	$4.40	$2.74	$2.40

The fair value of each option grant under the Company’s aggregated incentive and nonqualified stock option plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

FISCAL YEAR	2003	2002	2001
Estimated dividends	None	None	None
Expected volatility	75%	69%	52%
Risk-free interest rate	2.47%	3.02%	4.55%
Expected life (years)	4.1	4.2	4.8
Weighted-average fair value per share	$5.92	$5.94	$4.02

The fiscal 2003, fiscal 2002 and fiscal 2001 weighted-average grant date per share fair values and weighted-average exercise prices of options granted equal to and below market value on the date of grant are as follows:

	Number of Options	Weighted Average Fair Value	Weighted Average Exercise Price
Options granted below market value	112,890	$ 6.10	$ 8.79
Options granted equal to market value	524,008	$ 5.88	$ 10.25
Total options granted fiscal 2003	636,898	$ 5.92	$ 9.99
Options granted below market value	105,502	$ 6.48	$ 9.35
Options granted equal to market value	583,225	$ 5.84	$ 10.67
Total options granted fiscal 2002	688,727	$ 5.94	$ 10.47
Options granted below market value	166,095	$ 4.29	$ 6.86
Options granted equal to market value	2,060,370	$ 4.00	$ 8.13
Total options granted fiscal 2001	2,226,465	$ 4.02	$ 8.04

A summary of the status of the Company’s aggregated incentive and nonqualified stock options plans as of the 2003, 2002 and 2001 fiscal year ends and changes during the years ending on those dates is presented below:

	Number of Options	Weighted Average Exercise Price
Outstanding as of December 30, 2000	2,399,829	$ 12.94
Granted	2,226,465	$ 8.04
Forfeited	(1,136,109)	$ 11.36
Exercised	(134,252)	$ 6.57
Outstanding as of December 29, 2001	3,355,933	$ 10.36
Granted	688,727	$ 10.47
Forfeited	(362,459)	$ 11.90
Exercised	(250,765)	$ 7.66
Outstanding as of December 28, 2002	3,431,436	$ 10.30
Granted	636,898	$ 9.99
Forfeited	(405,883)	$ 11.70
Exercised	(316,166)	$ 7.90
Outstanding as of December 27, 2003	3,346,285	$ 10.30

The following table summarizes information about incentive and nonqualified stock options outstanding and exercisable at December 27, 2003:

OPTIONS OUTSTANDING				OPTIONS EXERCISABLE
			Weighted-		Weighted-
Range Of		Remaining	Average		Average
Exercise	Number	Contractual	Exercise	Number	Exercise
Prices	Outstanding	Life	Price	Exercisable	Price
$2.65 – 5.30	54,670	4.1 years	$4.32	41,138	$4.34
$5.30 – 7.95	703,252	6.4	$7.25	529,731	$7.13
$7.95 – 10.60	1,546,668	7.6	$9.31	920,460	$9.22
$10.60 – 13.25	673,115	8.1	$11.16	266,075	$11.21
$13.25 – 15.90	39,572	4.3	$14.96	39,572	$14.96
$15.90 – 18.55	132,830	5.0	$17.01	121,951	$17.03
$18.55 – 21.20	81,195	5.0	$19.83	72,168	$19.76
$21.20 – 23.85	69,959	5.7	$22.24	54,716	$22.25
$23.85 – 26.50	45,024	5.5	$26.50	35,989	$26.50
	3,346,285	7.1	$10.30	2,081,800	$10.42

At December 27, 2003, 672,720 shares were available for future grant under the Incentive Plan, and 17,244 shares were available for future grant under the Nonqualified Plan. At December 27, 2003, December 28, 2002 and December 29, 2001, options for 2,081,800, 1,581,424 and 1,011,008 shares with weighted average exercise prices of $10.42, $10.79 and $12.07, respectively, were exercisable.

10. Litigation

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

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 an aggregate $536,000 in damages and attorneys’ fees. The Company’s appeal of judgment was denied in the first quarter of fiscal 2004, and the Company has filed a motion for reconsideration. The Company plans to seek certification of the decision to the Arizona Supreme Court. The Company has recognized a charge to restructuring expense during the fourth quarter of 2003 in the amount of $705,000, including estimated attorney’s fees and estimated interest accrued on the judgment.

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 claims that Alfalfa’s Inc., our predecessor on interest, breached a lease in 1995 related to certain property in Seattle, Washington. After trial in fiscal 2002, a jury awarded $0 in damages to the plaintiffs, and the Company was subsequently awarded $190,000 in attorneys’ fees. The plaintiff appealed and the matter has been remanded to the trial court.

In September 2002, the Company filed suit against Michael Gilliland and Elizabeth Cook, former officers and directors and greater than 5% stockholders of the Company, together with two individuals and three limited liability corporations, for a temporary restraining order and damages related to a breach of Mr. Gilliland’s noncompetition covenant, contained in his 1996 employment agreement, arising from the opening of a competitive grocery store in New Mexico. The lawsuit is captioned Wild Oats Markets, Inc. v. Michael C. Gilliland, Elizabeth C. Cook, Mark R. Clapp; Patrick Gilliland, Westside Farmer’s Market LLC, Westside Liquors LLC and Milagro Cafe LLC. Mr. Gilliland and Ms. Cook have counterclaimed, claiming that Ms. Cook was entitled to severance payments, and that both were undercompensated in the receipt of option grants. After a hearing, the court issued a temporary restraining order against Mr. Gilliland, prohibiting him from engaging in the operation of the competing grocery store. The temporary restraining order was subsequently vacated at the Company’s request and the Company dropped its claims for injunctive relief as it did not believe the injunctive relief granted made any material difference in Mr. Gilliland’s behavior. The Company discontinued severance payments made to Mr. Gilliland based on his material breach of his employment contract. The Company continues to pursue its suit for damages. A related suit was filed against Mr. Gilliland and his brother, Patrick Gilliland, for misappropriation of trade secrets and insider trading related to Patrick Gilliland’s postings on a financial chat board that he was receiving and trading upon confidential information of the Company. The Company has filed a motion to have the two suits consolidated in Boulder County District Court in March 2004.

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.

11. Commitments and Contingencies

The Company has numerous operating leases related to facilities and store equipment. These leases generally contain renewal provisions at the option of the Company. Total rental expense (consisting of minimum rent and contingent rent) under these leases was $39.1 million, $37.2 million and $37.6 million during fiscal 2003, fiscal 2002 and fiscal 2001, respectively.

Future minimum lease payments under noncancelable operating leases as of December 27, 2003 are summarized as follows (in thousands):

FISCAL YEAR
2004	$   32,597
2005	32,124
2006	30,806
2007	29,465
2008	26,733
Thereafter	233,680
Total minimum lease payments	$ 385,405

Minimum rentals for operating leases do not include contingent rentals that may become due under certain lease terms that provide that rentals may be increased based on a percentage of sales. During fiscal 2003, fiscal 2002 and fiscal 2001, the Company paid contingent rentals of $1,075,000, $949,000 and $734,000, respectively.

Included in the $385.4 million of minimum lease payments is $18.9 million, which is related to lease costs for closed stores. The Company is actively working to defease these payments through assignments, subleases or terminations of the lease obligations.

As of December 27, 2003, the Company had commitments under construction contracts totaling $6.6 million. The Company is self-insured for certain losses relating to worker’s compensation claims, general liability, and employee medical and dental benefits. The Company has purchased stop-loss coverage in order to limit its exposure to any significant levels of claims. Self-insured losses are accrued based upon the Company’s estimates of the aggregate uninsured claims incurred using certain actuarial assumptions followed in the insurance industry and the Company’s historical experiences. If the Company experiences an increase in claims, if actuarial assumptions are inaccurate, or insurance industry costs increase beyond current expectations, then additional reserves may be required.

12. Restructuring and Asset Impairment Charges (Income)

Fiscal 2003

During the fourth quarter of fiscal 2003, the Company recorded restructuring and asset impairment expense of $855,000 consisting of the following components:

Change in estimate related to lease-related liabilities for a site previously identified for closure that was closed during the fourth quarter of fiscal 2003	$ (150,000)
Changes in estimate related to lease-related liabilities for sites previously identified for closure	1,140,000
Insurance settlement received for impaired assets previously written off	(250,000)
Severance for employees notified of termination during the fourth quarter	115,000
Total restructuring and asset impairment expense	$ 855,000

Details of the significant components are as follows:

• Change in estimate for a site previously identified for closure that was closed during the fourth quarter ($150,000 of restructuring income). During the fourth quarter, the Company closed a store previously identified for closure in Tucson, Arizona and negotiated the early termination of its lease effective December 2003. Therefore, the Company reversed the remaining lease-related liabilities previously recorded for this location, recognizing $150,000 in restructuring income.

• Changes in estimate related to lease-related liabilities for sites previously identified for closure ($1,140,000 in restructuring expense). During the fourth quarter, the Company secured a viable subtenant for a location in Los Angeles, California resulting in restructuring income of $375,000. Also, during the quarter, the Company determined that additional time will be needed to dispose of certain lease obligations for vacant sites in Nashville, Tennessee and Pinecrest, Florida, resulting in restructuring expense of $213,000. Based on a current assessment of changing real estate market conditions in the area as well as undesirable site characteristics, during the quarter the Company determined the likelihood of disposing of its lease obligations related to certain space adjacent to a store in Fort Collins, Colorado was remote, and therefore restructuring expense of $597,000 was recorded to adjust the reserve balance to the net present value of the remaining lease payments. As discussed more fully in Note 10 - Litigation, in February 2004, the Superior Court of Arizona, Maricopa County upheld a judgment against the Company that arose from the closure of a Phoenix, Arizona store in 1998 and as a result a $705,000 charge to restructuring expense was recorded. Based on these changes in facts and circumstances and the related changes in estimates, we adjusted or reversed the remaining lease-related liabilities previously recorded for these locations and recognized net restructuring expense of $1,140,000.

• Insurance settlement received for impaired assets previously written off ($250,000 in asset impairment income).During the fourth quarter, the Company received $250,000 in insurance proceeds as partial reimbursement for property losses and incremental expenses incurred during the first quarter of 2003 caused by a roof collapse at a support facility in Federal Heights, Colorado. The support facility had been previously identified for closure during the fourth quarter of fiscal 2001, and the carrying value of its fixed assets were written off as an impairment charge at that time. Therefore, the Company recorded a gain in the amount of the insurance proceeds received of $250,000.

• Severance for employees notified of termination during the fourth quarter ($115,000 restructuring expense).During the fourth quarter, 40 employees were terminated in conjunction with the closing of a store in Tucson, Arizona, a warehouse in San Diego, California and a restaurant operating within a store in West Vancouver, British Columbia. The employees were notified of their involuntary termination during the fourth quarter of fiscal 2003. As of December 27, 2003, $57,000 of involuntary termination benefits had been paid to terminated employees.

During the third quarter of fiscal 2003, the Company recorded a restructuring and asset impairment charge of $134,000 consisting of the following components:

Lease-related liability for site closed during the third quarter of fiscal 2003	$ 70,000
Changes in estimate related to lease-related liabilities for sites previously identified for closure or sale	(612,000)
Total restructuring income	(542,000)
Asset impairment charges	676,000
Total Restructuring and Asset Impairment Charge	$ 134,000

Details of the significant components are as follows:

• Lease-related liabilty for site closed during the third quarter of fiscal 2003 ($70,000 of restructuring expense). During the third quarter of fiscal 2003, the Company closed a store in Nashville, Tennessee, as part of a relocation to a larger site. Based upon the facts and circumstances, the Company expected either the lease would be terminated or the space subleased to a viable subtenant within six months from the date of closure, and therefore, recognized a restructuring charge of $70,000.

• Changes in estimate related to lease-related liabilities for sites previously identified for closure or sale ($612,000 of restructuring income). During the third quarter of fiscal 2003, the Company secured a viable subtenant for a location in Memphis, Tennessee. Also, additional information received in the third quarter resulted in a revision in the net restructuring charges previously recorded for a store in Irvine, California. As a result, the Company recorded restructuring income of $699,000 to reduce the accrual to the required amount. This was offset by a restructuring charge of $87,000 for the costs associated with restoring a space to its original condition for a location previously included in a restructuring charge. Based on these changes in facts and circumstances and the related changes in estimates, the Company adjusted or reversed the remaining lease-related liabilities previously recorded for these locations and recognized net restructuring income of $612,000 during the third quarter of fiscal 2003.

In addition to the restructuring income described above, management also identified asset impairment charges of $676,000 in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets for two stores held for use. These assets became impaired during the third quarter of fiscal 2003 because the projected cash flows of each store at the time were not sufficient to fully recover the carrying value of the stores’ long-lived assets. In determining whether an impairment exists, the Company estimates the stores’ future cash flows on an undiscounted basis, and if the cash flows are not sufficient to recover the carrying value, then the Company uses a discounted cash flow based on a risk-adjusted discount rate, to adjust its carrying value of the assets and records a provision for impairment as appropriate. The Company believes the weak performance from the stores included in the asset impairment charge was caused by depressed markets and increased competition. The Company continually reevaluates its stores’ performance to monitor the carrying value of its long-lived assets in comparison to projected cash flows.

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

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

Details of the significant components are as follows:

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

• Severance for employees terminated in the second quarter of fiscal 2003 ($117,000 of restructuring expense). During the second quarter of fiscal 2003, 37 employees were notified of their involuntary termination in conjunction with the closure of two stores in Irvine and Los Angeles, California. As of December 27, 2003, all $117,000 of the involuntary termination benefits had been paid to terminated employees.

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

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

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

Details of the significant components are as follows:

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

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

Fiscal 2002

During the fourth quarter of fiscal 2002, the Company recorded restructuring and asset impairment income of $6,000 consisting of the following components:

Gain on sale of assets during the fourth quarter of fiscal 2002	$ (130,000)
Change in estimate related to lease-related liabilities for sites previously identified for closure or sale	(3,437,000)
Lease-related liabilities for three additional stores identified during the fourth quarter of fiscal 2002 to be closed or sold by the end of fiscal 2003	3,552,000
Severance for employees terminated during the fourth quarter of fiscal 2002	9,000
Total restructuring and asset impairment income	$ (6,000)

Details of the significant components are as follows:

• Gain on sale of assets during the fourth quarter of fiscal 2002 ($130,000 of asset disposal income). During the fourth quarter of fiscal 2002, the Company sold a liquor license for a closed location in Mission Viejo, California for a higher price than originally estimated. Additionally, the Company received an insurance settlement for a claim relating to the location in Madison, New Jersey, where the assets had previously been written off. Therefore, the Company recognized asset disposal income of $130,000 during the fourth quarter of fiscal 2002.

• Change in estimate related to lease-related liabilities for sites previously identified for closure or sale ($3.4 million of restructuring income). During the fourth quarter of fiscal 2002, the Company negotiated the early termination of leases in West Hollywood, California and San Antonio, Texas. The Company also secured viable subtenants for locations in Vancouver, Washington and Boulder, Colorado. Additional information received in fiscal 2002 resulted in a revision in the total rent allocated to one vacant location in Albuquerque, New Mexico, previously included within a restructuring charge; therefore, the Company revised the estimate for future lease obligations. Based on these changes in facts and circumstances and the related changes in estimates, the Company adjusted or reversed the remaining lease-related liabilities previously recorded for these locations and therefore recognized restructuring income of $3.4 million during the fourth quarter of fiscal 2002.

• Lease-related liabilities for three additional stores identified during the fourth quarter of fiscal 2002 to be closed or sold by the end of fiscal 2003 ($3.6 million of restructuring expense). During the fourth quarter of fiscal 2002, the Company decided to close or sell three additional locations due to lower than anticipated operational performance. The lease-related liabilities for these locations represent the Company’s estimate to dispose of these lease obligations based on current disposition efforts, and is attributable to deteriorating real estate markets in certain regions, existing lease obligations at above-market rates, and unattractive site characteristics. The charge for exit costs assumes, based on the Company’s current results at disposition efforts, that the Company will be successful in disposing of these long-term lease obligations within the next five years. Facts and circumstances can change in the future with respect to the above attributes affecting the ultimate resolution of these exit costs. The Company will make appropriate adjustments to the restructuring liabilities contemporaneous with the change in facts and circumstances.

• Severance for employees terminated during the fourth quarter of fiscal 2002 ($9,000 of restructuring expense). During the fourth quarter of fiscal 2002, two employees were terminated with the sale of one Vitamin Expo location during the fourth quarter of fiscal 2002. The employees were notified of their involuntary termination during the fourth quarter of fiscal 2002. As of December 27, 2003, all $9,000 of involuntary termination benefits had been paid to terminated employees.

During the third quarter of fiscal 2002, the Company recorded restructuring and asset impairment income of $174,000 consisting of the following components:

Gain on sale of assets for a site sold during the third quarter of fiscal 2002	$ (85,000)
Change in estimate related to lease-related liabilities for sites previously identified for closure or sale	(100,000)
Fixed asset impairments for one additional store identified and closed in the third quarter of fiscal 2002	6,000
Lease-related liabilities for one additional store identified and closed in the third quarter of fiscal 2002	5,000
Total restructuring and asset impairment income	$ (174,000)

Details of the significant components are as follows:

• Gain on sale of assets for a site sold during the third quarter of fiscal 2002 ($85,000 of asset disposal income). During the third quarter of fiscal 2002, the Company sold a closed kitchen facility in Santa Fe, New Mexico for a higher price than originally estimated. Therefore, the Company recognized asset disposal income of $85,000 during the third quarter of fiscal 2002.

• Change in estimate related to lease-related liabilities for sites previously identified for closure or sale ($100,000 of restructuring income). During the third quarter of fiscal 2002, the Company negotiated the early termination of a lease in Tempe, Arizona. During the third quarter of fiscal 2002, the Company also terminated lease obligations for a site in Denver, Colorado. Based on these changes in facts and circumstances and the related changes in estimates, the Company reversed the remaining lease-related liabilities previously recorded for these locations and therefore recognized restructuring income of $100,000 during the third quarter of fiscal 2002.

• Fixed asset impairments for one additional store identified and closed in the third quarter of fiscal 2002 ($6,000 of asset impairment expense). During the third quarter of fiscal 2002, the Company decided to close one small vitamin store operated under the "Vitamin Expo" tradename as part of brand consolidation. The assets were disposed by the end of fiscal 2002.

• Lease-related liabilities for one additional store identified and closed in the third quarter of fiscal 2002 ($5,000 of restructuring expense). During the third quarter of fiscal 2002, the Company exercised the right of early lease termination with 90 days’ notice to the landlord for a small vitamin store in El Paso, Texas. The lease-related liabilities for this location represent the remaining lease cost through termination in the fourth quarter of fiscal 2002.

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

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 and asset impairment charge	$ -

Details of the significant components are as follows:

• Fixed asset impairments for sites previously identified for closure or sale ($35,000 of asset impairment expense). During the second quarter of fiscal 2002, the Company determined that certain fixed assets were not compatible with the Company’s new store design. Due to the implementation of 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 asset impairment charge of approximately $170,000 during the second quarter of fiscal 2002. The assets were fully disposed by the end 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 in 2001; therefore, the Company reversed $135,000 of asset impairment expense during the second quarter of fiscal 2002.

• 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. 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 asset impairment 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 were disposed during the third quarter of fiscal 2002.

• Fixed asset impairments for store construction project discontinuation ($370,000 of asset impairment 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 asset 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 December 27, 2003, all $142,000 of the involuntary termination benefits had been paid to terminated employees.

During the first quarter of fiscal 2002, the Company recorded restructuring and asset impairment 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 a 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 and asset impairment income	$ (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, 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 a site sold during the first quarter of fiscal 2002 ($253,000 of asset disposal 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 therefore recognized asset disposal 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 the remaining lease obligations of the site and therefore recognized a restructuring charge of $93,000 during the first quarter of fiscal 2002. There was a related change in estimate during the third quarter of fiscal 2002 following the negotiation of an early lease termination that resulted in the recognition of $91,000 in restructuring income.

• 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 December 27, 2003, all $269,000 of the involuntary termination benefits had been paid to terminated employees.

Fiscal 2001

As a result of hiring a new chief executive officer just prior to the beginning of the second quarter of fiscal 2001 and a comprehensive review conducted by the new chief executive officer of the business and strategic repositioning efforts of the Company during the second quarter of fiscal 2001, management identified and committed to a restructuring plan during the second quarter of fiscal 2001 and recorded a restructuring and asset impairment charge of $54.9 million (such asset impairments were recorded in accordance with SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for Assets to be Disposed of). The significant components of the charge are as follows:

Change in estimate related to fixed asset impairments for previously identified sites held for disposal	$ 1.5 million
Change in estimate related to lease-related liabilities for previously identified sites for closure	15.9 million
Fixed asset impairments for three additional stores identified in the second quarter of fiscal 2001 to be abandoned, closed, or sold by the end of fiscal 2001	1.8 million
Lease-related settlements for three additional stores identified in the second quarter of fiscal 2001 to be abandoned, closed, or sold by the end of fiscal 2001	(0.4 million)
Fixed asset impairments for subleased properties identified during the second quarter of fiscal 2001	1.7 million
Lease-related liabilities for subleased properties identified during the second quarter of fiscal 2001	10.0 million
Fixed asset impairments for regional and departmental office closures and consolidations during the second quarter of fiscal 2001	3.0 million
Fixed asset impairments for store construction project discontinuation	2.3 million
Lease-related liabilities for store construction project discontinuation	0.6 million
Severance for employees terminated during the second quarter of fiscal 2001	2.5 million
Total	$ 38.9 million

Details of the significant components of the charge are as follows:

• Change in estimate related to fixed asset impairments for previously identified sites held for disposal ($1.5 million). During the second quarter of fiscal 2001, 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 and disposed of the assets during the second quarter of fiscal 2001.

• Change in estimate related to lease-related liabilities for previously identified sites for closure ($15.9 million). During the second quarter of fiscal 2001, the Company determined that additional periods of time were necessary to dispose of certain lease obligations. This determination was driven by results of current disposition efforts by the Company, and is attributable to deteriorating real estate markets in certain regions, existing lease obligations at above-market rates, and unattractive site characteristics. The charge for exit costs assumes, based on the Company’s current results of disposition efforts, that the Company will be successful in disposing of these long-term lease obligations within the next five years. Facts and circumstances can change in the future with respect to the above attributes affecting the ultimate resolution of these exit costs. The Company will make appropriate adjustments to the restructuring liabilities contemporaneous with the change in facts and circumstances.

• Fixed asset impairments for three additional stores identified in the second quarter of fiscal 2001 to be abandoned, closed, or sold by the end of fiscal 2001 ($1.8 million). During the second quarter of fiscal 2001, the Company became involved in litigation filed by the landlord of a site under construction. The Company decided not to proceed with the opening of the store and consequently abandoned the site and the related fixed assets (leasehold improvements) totaling $1.5 million during the second quarter of fiscal 2001. Additionally, the fixed assets of two other stores that were scheduled to be closed by the end of fiscal 2001 comprised the remaining $300,000 of the charge.

• Fixed asset impairments for subleased properties identified during the second quarter of fiscal 2001 ($1.7 million). These asset impairments relate to leasehold improvements made by the Company in subleased properties for specific subtenants. During the second quarter of fiscal 2001, certain subtenants either vacated the improved properties without prior notice or gave notice to the Company that they planned to vacate the properties shortly, and certain other subtenants were in financial distress and in one case, had filed for bankruptcy protection. The Company determined that it could not recover the carrying value of these build-to-suit leasehold improvements and therefore recognized an impairment charge. Certain of these assets were disposed of during the second quarter of fiscal 2001 and the remainder of which were disposed of by the end of fiscal 2001.

• Lease-related liabilities for subleased properties identified during the second quarter of fiscal 2001 ($10.0 million). During the second quarter of fiscal 2001, certain subtenants either vacated the improved properties without prior notice or gave notice to the Company that they planned to vacate the properties shortly. The Company also was informed in the second quarter that certain other subtenants were in financial distress and in one case, had filed for bankruptcy protection. The lease-related liabilities represent the Company’s estimate to dispose of these lease obligations based on current disposition efforts by the Company, and is attributable to deteriorating real estate markets in certain regions, existing lease obligations at above-market rates, and unattractive site characteristics. The charge for exit costs assumes, based on the Company’s current results of disposition efforts, that the Company will be successful in disposing of these long-term lease obligations within the next five years. Facts and circumstances can change in the future with respect to the above attributes affecting the ultimate resolution of these exit costs. The Company will make appropriate adjustments to the restructuring liabilities contemporaneous with the change in facts and circumstances.

• Fixed asset impairments for regional and departmental office closures and consolidations during the second quarter of fiscal 2001 ($3.0 million). As part of the Company’s reorganization during the second quarter of fiscal 2001, the Company reduced its regional offices from 11 to five offices, and eliminated much of its construction department. In conjunction with these modifications to regional and departmental structures, the Company determined that it could not recover the carrying value of the fixed assets used by certain regional and departmental offices and the construction department and therefore recognized an impairment charge and disposed of the assets during the second quarter of fiscal 2001.

• Fixed asset impairments for store construction project discontinuation ($2.3 million). During the second quarter of fiscal 2001, the Company determined that a new store design was required and construction of new stores and expansion and remodel activities at existing 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 2001.

• Severance for employees terminated during the second quarter of fiscal 2001 ($2.5 million). During the second quarter of fiscal 2001, 104 of the Company’s 9,000 employees were terminated as part of the Company’s restructuring plan. The terminated employee groups were regional store support, construction and new store development, and corporate office personnel. As of December 27, 2003, all of the $2.5 million of involuntary termination benefits had been paid to terminated employees.

In addition to the $38.9 million of restructuring charges described above, management has also identified asset impairment charges of $15.9 million in accordance with the provisions of SFAS No. 121 related to five stores held for use. The assets became impaired in the second quarter of fiscal 2001 because the projected future cash flows of each store at that time were not sufficient to fully recover the carrying value of the stores’ long-lived assets. In determining whether an impairment exists, the Company estimates the store’s future cash flows on an undiscounted basis, and if the cash flows are not sufficient to recover the carrying value, then the Company uses a discounted cash flow based on a risk-adjusted discount rate, to adjust its carrying value of the assets and records a provision for impairment as appropriate. The Company believes the weak performance from the stores included in the asset impairment charge was caused by significant budget overruns in construction (one store), poor site location (two stores) or insufficient advertising in new regional markets (two stores). The Company continually reevaluates its stores’ performance to monitor the carrying value of its long-lived assets in comparison to projected cash flows. Elements that could contribute to impairment of long-lived assets include new competition, overruns in construction costs, or poor operating results caused by a variety of factors, including improper site selection, insufficient advertising, or changes in local, regional or national economies. There is no assurance that in the future, additional long-lived assets will not be deemed impaired.

After a comprehensive review of its support facilities was completed by management during the third quarter of fiscal 2001, the Company determined that the operations of certain support facilities should be eliminated. As a result, in the third quarter of fiscal 2001, the Company recorded a restructuring and asset impairment charge of $776,000 resulting primarily from the closure of three support facilities: a bakery in Tucson, Arizona, and two commissary kitchens in Los Angeles, California and Santa Fe, New Mexico.

During the fourth quarter of fiscal 2001, the Company recorded restructuring income of $5.7 million 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 fourth quarter of fiscal 2001 and the first quarter of fiscal 2002	$ (10.1 million)
Change in estimate related to fixed asset impairments for four stores previously identified for closure or sale	(1.6 million)
Change in estimate related to lease-related liabilities for four stores previously identified for closure or sale	(1.1 million)
Fixed asset impairments for three additional stores and one support facility identified during the fourth quarter of fiscal 2001	3.3 million
Lease-related liabilities for three additional stores and one support facility identified during the fourth quarter of fiscal 2001	3.6 million
Severance for employees terminated during the fourth quarter of fiscal 2001	0.2 million
Total restructuring income	$ (5.7 million)

• 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 fourth quarter of fiscal 2001 and the first quarter of fiscal 2002 ($10.1 million of restructuring income). During the fourth quarter of fiscal 2001, the Company sold two stores in San Anselmo and Sacramento, California, in related transactions; the Company subsequently sold two additional stores in Berkeley and Sunnyvale, California, to the same purchaser of the other northern California stores. In conjunction with these transactions, the purchaser assumed the lease-related obligations associated with these stores. 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 $3.7 million during the fourth quarter of fiscal 2001. During the fourth quarter of fiscal 2001 and the first quarter of fiscal 2002, the Company also terminated lease obligations for sites in Madison, New Jersey and Boca Raton, Florida, respectively; 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 $6.4 million during the fourth quarter of fiscal 2001.

• Change in estimate related to fixed asset impairments for four stores previously identified for closure or sale ($1.6 million of restructuring income). Due to changes in facts and circumstances during the fourth quarter of fiscal 2001, the Company determined that four stores previously identified as sites held for disposal would continue to operate in their existing locations. Three of the stores were expected to be closed in conjunction with the Company’s opening of new stores in the respective trade areas; however, during the fourth quarter of fiscal 2001, the Company decided to abandon the new store sites and continue to operate the existing stores. With regard to the fourth store, management decided in the fourth quarter of fiscal 2001 to continue to operate the store in its existing location after completing a competitive analysis of the market area and a reevaluation of the operations of the store in the fourth quarter of fiscal 2001, which showed that the store was achieving acceptable performance levels and demonstrating positive performance trends following the implementation of the Fresh Look program late in the third quarter of fiscal 2001. As a result, the Company reversed the restructuring charge previously recorded for the fixed asset impairments related to these four stores and therefore recognized restructuring income of $1.6 million during the fourth quarter of fiscal 2001.

• Change in estimate related to lease-related liabilities for four stores previously identified for closure or sale ($1.1 million of restructuring income). Due to changes in facts and circumstances during the fourth quarter of fiscal 2001, the Company determined that four stores previously identified as sites held for disposal would continue to operate in their existing locations. Three of the stores were expected to be closed in conjunction with the Company’s opening of new stores in the respective trade areas; however, during the fourth quarter of fiscal 2001, the Company decided to abandon the new store sites and continue to operate the existing stores. With regard to the fourth store, management decided in the fourth quarter of fiscal 2001 to continue to operate the store in its existing location after completing a competitive analysis of the market area and a reevaluation of the operations of the store in the fourth quarter of fiscal 2001, which showed that the store was achieving acceptable performance levels and demonstrating positive performance trends following the implementation of the Fresh Look program late in the third quarter of fiscal 2001. As a result, the Company reversed the restructuring charge previously recorded for the long-term lease obligations related to these four stores and therefore recognized restructuring income of $1.1 million during the fourth quarter of fiscal 2001.

• Fixed asset impairments for three additional stores and one support facility identified in the fourth quarter of fiscal 2001 to be closed or sold by the second quarter of fiscal 2002 ($3.3 million of restructuring expense). During the fourth quarter of fiscal 2001, the Company decided to close two stores in fiscal 2002 following the negotiation of a lease obligation settlement for one store in the fourth quarter of fiscal 2001 and the completion of an operations analysis for the other store, which showed that the intensive Fresh Look marketing and merchandising efforts initiated at the store early in the fourth quarter of 2001 were not improving the store’s sales and profit trends. The Company also decided to close one support facility in the second quarter of fiscal 2002 after determining in the fourth quarter of fiscal 2001 to outsource the operations of the support facility to an identified external food service supplier. The Company determined that it could not recover the carrying value of the fixed assets at these locations and therefore recognized an impairment charge. Certain of these assets were disposed of during the first quarter of fiscal 2002, and the remainder was disposed of by the end of the second quarter of fiscal 2002.

During the fourth quarter of fiscal 2001, the Company also decided to abandon construction of a new store in Kansas City, Missouri, due to location and parking-related issues. 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 fourth quarter of fiscal 2001.

• Lease-related liabilities for three additional stores and one support facility identified during the fourth quarter of fiscal 2001 to be closed or sold by the second quarter of fiscal 2002 ($3.6 million of restructuring expense). During the fourth quarter of fiscal 2001, the Company decided to close two stores in fiscal 2002 following the negotiation of a lease obligation settlement for one store in the fourth quarter of fiscal 2001 and the completion of an operations analysis for the other store, which showed that the intensive Fresh Look marketing and merchandising efforts initiated at the store early in the fourth quarter of 2001 were not improving the store’s sales and profit trends. The Company also decided to close one support facility in the second quarter of fiscal 2002 after determining in the fourth quarter of fiscal 2001 to outsource the operations of the support facility to an identified external food service supplier. The lease-related liabilities for these locations represent our estimate to dispose of these lease obligations based on current disposition efforts, and is attributable to deteriorating real estate markets in certain regions, existing lease obligations at above-market rates, and unattractive site characteristics. The charge for exit costs assumes, based on our current results of disposition efforts, that the Company will be successful in disposing of these long-term lease obligations within the next five years. Facts and circumstances can change in the future with respect to the above attributes affecting the ultimate resolution of these exit costs. The Company will make appropriate adjustments to the restructuring liabilities contemporaneous with the change in facts and circumstances.

During the fourth quarter of fiscal 2001, the Company also decided to abandon construction of a new store in Kansas City, Missouri, due to location and parking-related issues. The Company terminated the lease obligation for $155,000 during the fourth quarter of fiscal 2001.

• Severance for employees terminated during the fourth quarter of fiscal 2001 ($0.2 million). During the fourth quarter of fiscal 2001, 33 employees were terminated in conjunction with the closure of four support facilities during the fourth quarter of fiscal 2001. The employees were notified of their involuntary termination during the fourth quarter of fiscal 2001. As of December 27, 2003, all $155,000 of the involuntary termination benefits had been paid to terminated employees.

In addition to the restructuring charges described above, management also identified asset impairment charges of $5.0 million in accordance with the provisions of SFAS No. 121 related to four stores held for use. These assets became impaired in the fourth quarter of fiscal 2001 because the projected future cash flows of each store at that time were not sufficient to fully recover the carrying value of the stores’ long-lived assets. In determining whether an impairment exists, the Company estimates the store’s future cash flows on an undiscounted basis, and if the cash flows are not sufficient to recover carrying value, then the Company uses a discounted cash flow based on a risk-adjusted discount rate, to adjust its carrying value of the assets and records a provision for impairment as appropriate. The Company believes the weak performance from the stores included in the asset impairment charge were caused by poor site location (two stores) or insufficient advertising in new regional markets (two stores).

Sales and store contribution to profit (sales less cost of goods sold, occupancy costs, and direct store expenses) for the fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001 for stores that were held for disposal are as follows (unaudited, in thousands):

FISCAL YEAR	2003	2002	2001
Sales	$10,562	$24,229	$35,171
Store contribution to profit	$(1,899)	$(1,576)	$(1,979)

The effect of suspending depreciation for assets held for disposal was $0 for fiscal 2003 and approximately $34,000 and $913,000 for the fiscal years ended December 28, 2002 and December 29, 2001, respectively.

Restructuring Activity By Store Count

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

	RESTRUCTURING STORE COUNT
	Fiscal Year Ending
	2001	2002	2003
Stores remaining at commencement of period	9	6	3
Stores identified in fiscal 2001 for closure or sale	6
Stores identified in fiscal 2002 for closure or sale		6
Stores identified in fiscal 2003 for closure, relocation, sale, or conversion			5
Support facilities identified in fiscal 2003 for closure or relocation			4
Identified stores closed or abandoned	(3)	(5)	(4)
Identified stores sold	(2)	(4)
Reversal of stores identified for closure or sale	(4)
Identified stores remaining at period end	6	3	8

As of December 27, 2003, four of the stores identified in fiscal 2001 for closure or sale were closed or abandoned and the remaining two stores were removed from the Company’s closure or sale list due to changes in facts and circumstances. Of those stores identified in fiscal 2002, all have been sold or closed as of December 27, 2003. Of the five stores and four support facilities identified in fiscal 2003 for closure, relocation, sale, or conversion, one has been relocated as of December 27, 2003, one was sold in January, 2004, four were closed in the first quarter of 2004, two will be closed or relocated during the remainder of fiscal 2004, and the one store remaining will be closed in fiscal 2005.

The following table summarizes accruals related to the Company’s restructuring activities during fiscal 2003, fiscal 2002 and fiscal 2001 (in thousands):

	2000
	And	Q2	Q3	Q4	Q4	Q3	Q3	Q4	Q3	Q4
EXIT PLANS	Prior	2001	2001	2001	2002	2002	2002	2002	2003	2003	TOTAL
BALANCE, 12-30-2000	$ 9,879										$ 9,879
New accruals:
Severance		$ 2,511		$ 155							2,666
Lease-related liabilities	5,076	10,458	$108	3,822							19,464
Cash paid – severance		(2,375)		(98)							(2,473)
Cash paid – lease-related liabilities	(6,731)	(492)	(21)								(7,244)
Stock options in lieu of cash	(43)										(43)
Cash received – lease-related liabilities	800										800
BALANCE, 12-29-2001	$ 8,981	$10,102	$ 87	$3,879							$ 23,049
New accruals:
Severance					$ 269	$ 142		$ 9			420
Lease-related liabilities	(1,453)	(3,053)	(19)	(243)			$ 5	3,552			(1,211)
Cash paid – severance		(133)		(57)	(269)	(142)		(9)			(610)
Cash paid – lease-related liabilities	(2,726)	(884)	(68)	(735)			(5)				(4,418)
Note receivable in lieu of cash	375										375
Cash received – lease-related liabilities	459										459
BALANCE, 12-28-2002	$ 5,636	$ 6,032	$	$2,844	$ -	$ -	$ -	$3,552			$ 18,064
New accruals:
Severance	-	-	-	-				166	$ 40	$ 26	232
Lease-related liabilities	1,593	(166)	-	(894)				(2,896)	188		(2,175)
Cash paid – severance	-	(1)	-	-				(147)	-	(26)	(174)
Cash paid - lease-related liabilities	(1,446)	(916)	-	(1,950)				(217)	(47)		(4,576)
BALANCE, 12-27-2003	$ 5,7831	$ 4,9491	$-	$ -				$ 4582	$ 1813	$-	$ 11,371

1The restructuring accrual balance consists of lease related liabilities.

2The restructuring accrual balance consists of lease related liabilities and $18,000 for employee termination benefits.

3The restructuring accrual balance consists of lease related liabilities and $40,000 for employee termination benefits.

As of December 27, 2003, the components of the accruals related to the Company’s restructuring activities are accrued liabilities ($2.8 million) and other long-term obligations ($8.5 million).

13. 401(k) Plan

The Company maintains a tax-qualified employee savings and retirement plan (the "401(k) Plan") covering the Company's employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the lesser of 15% of their annual compensation or the statutorily prescribed annual limit ($12,000 in fiscal 2003) and have the amount of such reduction contributed to the 401(k) Plan. Employees over age 50 may also contribute an additional $2,000 "catch-up" contribution. The 401(k) Plan provides for additional matching contributions to the 401(k) Plan by the Company in an amount determined by the Company prior to the end of each plan year. Total Company contributions during fiscal 2003, fiscal 2002 and fiscal 2001 were approximately $1.3 million, $1.2 million and $1.1 million, respectively. The trustees of the 401(k) Plan, at the direction of each participant, invest the assets of the 401(k) Plan in designated investment options. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code.

In January 2002, the Company was notified by its 401(k) trustee, Advisors Trust Company, that effective April 1, 2002, the trustee would no longer provide trustee services for 401(k) plans. The Company selected a new plan administrator and a new trustee after extensive research and interviews. In the fourth quarter of fiscal 2002, the Company was notified by its new plan administrator that it was selling its business without the Company’s consent (as required by the then-current contract). The Company elected to terminate its contract and selected Milliman USA as its new plan administrator. The plan accounts were transferred to Milliman and Company employees were notified that they would be unable to make withdrawals from or change the investment designations of their accounts until the transfer was completed. The transfer was completed in January 2003. In fiscal 2003, the Company completed an audit of one of the recordkeeping practices of one of its past plan administrators. The Company also amended its 401(k) Plan in fiscal 2003 to modify the eligiblity requirements. In 2003, the Company commenced an audit of 401(k) Plan and expects the results of such audit by the end of the second fiscal quarter of 2004.

14. Stockholder Rights Plan

The Company has a stockholder rights plan having both "flip-in" and "flip-over" provisions. Stockholders of record as of May 22, 1998 received the right ("Right") to purchase a fractional share of preferred stock at a purchase price of $145 for each share of common stock held. In addition, until the Rights become exercisable as described below and in certain limited circumstances thereafter, the Company will issue one Right for each share of common stock issued after May 22, 1998. For the "flip-in provision," the Rights would become exercisable only if a person or group acquires beneficial ownership of 15% (the "Threshold Percentage") or more of the outstanding common stock. Holdings of certain existing affiliates of the Company are excluded from the Threshold Percentage. In that event, all holders of Rights other than the person or group who acquired the Threshold Percentage would be entitled to purchase shares of common stock at a substantial discount to the then-current market price. This right to purchase common stock at a discount would be triggered as of a specified number of days following the passing of the Threshold Percentage. For the "flip-over" provision, if the Company was acquired in a merger or other business combination or transaction, the holders of such Rights would be entitled to purchase shares of the acquiror’s common stock at a substantial discount. In February 2002, the rights plan was amended to remove certain provisions related to continuing control of modification and operation of the rights plan by certain directors.

15. Deferred Compensation Plan

Effective fiscal 1999, the Company maintains a nonqualified Deferred Compensation Plan (the "DCP") for certain members of management. Eligible employees may contribute a portion of base salary or bonuses to the plan annually. The DCP provides for additional matching contributions by the Company in an amount determined by the Company prior to the end of each plan year. Total Company matching contributions to the DCP during fiscal 2003, 2002 and fiscal 2001 were approximately $84,000, $39,000 and $26,000, respectively.

16. Quarterly Information (Unaudited)

The following interim financial information presents the fiscal 2003 and fiscal 2002 consolidated results of operations on a quarterly basis (in thousands, except per-share amounts):

	QUARTER ENDED
	March 29, 2003	June 28, 2003	September 27, 2003	December 27, 2003
Statement of Operations Data:
Sales	$ 235,987	$ 242,248	$ 237,028	$ 253,941
Gross profit	$ 70,859	$ 71,222	$ 68,870	$ 74,661
Net income (loss)	$ 1,440	$ 2,183	$ (861)	$ 829
Basic net income (loss) per common share	$ 0.05	$ 0.07	$ (0.03)	$ 0.03
Diluted net income (loss) per common share	$ 0.05	$ 0.07	$ (0.03)	$ 0.03

	QUARTER ENDED
	March 30, 2002	June 29, 2002	September 28, 2002	December 28, 2002
Statement of Operations Data:
Sales	$ 233,013	$ 236,186	$ 228,102	$ 221,829
Gross profit	$ 67,643	$ 71,428	$ 67,076	$ 68,121
Net income	$ 668	$ 1,498	$ 2,172	$ 2,571
Basic net income per common share	$ 0.03	$ 0.06	$ 0.08	$ 0.09
Diluted net income per common share	$ 0.03	$ 0.06	$ 0.08	$ 0.09

17. Related Party Transactions

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 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 March 2002 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 small receivable related to subtenant rent due from the Foundation, which was paid as part of the March 2002 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 under-performing 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 in March of 2002 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 loan in settlement of certain identified receivables alleged to be due to the Company, and the Company agreed to repayment of the balance of the loan, together with interest at 9% per annum, over a five-month period from cash and proceeds of equity securities.

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

In May 2002, the Company’s Board of Directors amended 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 would entitle Mr. Odak to receive up to 300,000 stock options exercisable for the Company’s common stock. In March 2002, 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, based upon the issuance of 111,269 shares of common stock, the resale of which was registered on Form S-3 filed in April 2002. The stock was issued pursuant to the terms of a settlement agreement between the Company and former directors and co-founders Michael Gilliland and Elizabeth Cook. In August 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 could 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.

As a result of the completion of an equity offering of 4.45 million shares of the Company’s common stock in September 2002, the Company issued options exercisable for 164,211 shares of the Company’s stock to Mr. Odak pursuant to the terms of his employment agreement. An additional 70,000 options, to which Mr. Odak would have been entitled under his employment agreement, were issued to executives of the Company designated by Mr. Odak. The Company also issued an additional 70,000 options to Mr. Odak, provided that the options granted to Mr. Odak are only exercisable as the options granted to the designated executives under the third amendment to Mr. Odak’s employment agreement terminate (as opposed to expire) without exercise. The Company also made a matching grant of 70,000 additional options from the Company’s 1996 Equity Incentive Plan to the same executives. 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 (as opposed to the Company’s matching grant of 70,000 additional options) to the designated executives and Mr. Odak.

In March 2001, Perry D. Odak, the Company’s Chief Executive Officer and President, and a director of the Board, purchased 1,332,649 shares of Common Stock for $6.969 per share for an aggregate purchase price of $9.28 million. Mr. Odak paid $13,326 in cash and executed a full recourse, five-year promissory note for the balance of $9,273,905 to the Company, with interest accruing at 5.5% per annum, compounding semiannually.

As part of Mr. Odak’s employment agreement, the Company agreed to purchase his home in York, Pennsylvania if he was unable to sell it within a specific period of time. In July 2001, the Company arranged for a relocation service to purchase the home from Mr. Odak for $1.6 million. Despite substantial marketing efforts, the relocation service was unable to sell the house for a reasonable price. In November 2002, Mr. Odak offered to repurchase the house for the original $1.6 million he had received. At December 28, 2002, Mr. Odak had remitted $1.35 million to the Company as partial consideration to fund the purchase and the remaining funds were funded by Mr. Odak’s fiscal 2002 bonus of $250,000 to which he was contractually entitled. On March 6, 2003, the Company remitted the $1.6 million to the relocation service.

In September 2002, the Company filed suit against Michael Gilliland and Elizabeth Cook, former officers and directors and greater than 5% stockholders of the Company, together with two individuals and three limited liability corporations, for a temporary restraining order and damages related to a breach of Mr. Gilliland’s non-competition covenant, contained in his 1996 employment agreement, arising from the opening of a competitive grocery store in New Mexico. The lawsuit is captioned Wild Oats Markets, Inc. v. Michael C. Gilliland, Elizabeth C. Cook, Mark R. Clapp; Patrick Gilliland, Westside Farmer’s Market LLC, Westside Liquors LLC and Milagro Cafe LLC. Mr. Gilliland and Ms. Cook have counterclaimed, claiming that Ms. Cook was entitled to severance payments, and that both were under-compensated in the receipt of option grants. After a hearing, the court issued a temporary restraining order against Mr. Gilliland, prohibiting him from engaging in the operation of the competing grocery store. The temporary restraining order was subsequently vacated at the Company’s request and the Company dropped its claims for injunctive relief as it did not believe the injunctive relief granted made any material difference in Mr. Gilliland’s behavior. The Company discontinued severance payments made to Mr. Gilliland based on his material breach of his employment contract. The Company continues to pursue its suit for damages. A date for trial of the remaining claims has not been set. A related suit was filed against Mr. Gilliland and his brother, Patrick Gilliland, for misappropriation of trade secrets and insider trading related to patrick Gilliland’s postings on a financial chat board that he was receiving and trading upon confidential information of the Company.

Mark R. Retzloff is a current member of the Company’s Board of Directors, and sits on its Real Estate Committee. Mr. Retzloff is Chairman of Rudi’s Bakery, Inc., which derives more than 5% of its total revenues from sales of bread products to the Company.

18. Change in Primary Distributor

During fiscal 2002, the Company changed its primary distributor from UNFI to Tree of Life, Inc. ("TOL"). A transition fee is referenced in the Company’s June 2002 distribution agreement with TOL. In the second, third and fourth quarters of fiscal 2002, the Company used a portion of the transition fee to offset the transition costs incurred during the transition of the Company’s primary distribution relationship to TOL. 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. The portion of the transition support fee used to defray transition expenses incurred had no material impact on the Company’s results of operations for the twelve months ended December 28, 2002.

During the fourth quarter of 2003, the Company and TOL agreed to terminate their primary distribution relationship, and in January 2004, the Company signed a five year primary distribution agreement with UNFI. The transition to UNFI is expected to be fully completed by no later than April 1, 2004. The agreement states that UNFI will pay the Company a conversion fee to cover the costs of the transition to UNFI, which is payable over the period of the contract, subject to the Company meeting certain minimum purchase requirements.

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND FINANCIAL DISCLOSURE

On January 30, 2004, PricewaterhouseCoopers LLP declined to stand for reelection as the independent accountants of the Company. The reports of PricewaterhouseCoopers LLP on the financial statements for the past two fiscal years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with its audits for the two most recent fiscal years and through January 30, 2004, there have been no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or audit scope or procedure, which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make reference thereto in their report on the financial statements for such years. During the two most recent fiscal years and through the date of this Report, there have been no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)). The Company requested and PricewaterhouseCoopers LLP furnished a letter addressed to the SEC stating that it agrees with the above statements. A copy of such letter, dated February 6, 2004, was filed as Exhibit 16 to the Report dated January 30, 2004 on Form 8-K, reported under Item 4, "Changes in Registrant’s Accountants".

Item 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in the Exchange Act Rule 13a-14 under supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report based. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings.

Changes in Internal Control Over Financial Reporting. During the fiscal year ended December 27, 2003, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART III.

Item 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information included under the captions "Election of Directors" and "Executive Compensation-Management-Executive Officers" in our definitive Proxy Statement in connection with the Annual Meeting of stockholders to be held May 6, 2004, to be filed with the Commission on or before April 1, 2004, is incorporated herein by reference.

Item 11.

EXECUTIVE COMPENSATION

The information included under the caption "Executive Compensation" in our definitive Proxy Statement in connection with the Annual Meeting of stockholders to be held May 6, 2004, to be filed with the Commission on or before April 1, 2004, is incorporated herein by reference.

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information included under the caption "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in our definitive Proxy Statement in connection with the Annual Meeting of stockholders to be held May 6, 2004, to be filed with the Commission on or before April 1, 2004, is incorporated herein by reference.

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information included under the caption "Directors and Executive Officers - Certain Transactions" in our definitive Proxy Statement in connection with the Annual Meeting of stockholders to be held May 6, 2004, to be filed with the Commission on or before April 1, 2004, is incorporated herein by reference.

Item 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information included under the caption "Principal Accountant Fees and Services" in our definitive Proxy Statement in connection with the Annual Meeting of stockholders to be held May 6, 2004, to be filed with the Commission on or before April 1, 2004, is incorporated herein by reference.

PART IV.

Item 15.

EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT

SCHEDULES AND REPORTS ON FORM 8-K

(a)	Financial Statements and Financial Statement Schedule. The following are filed as a part of this Report on Form 10-K:
	(1)	Report of Management
		Report of Independent Auditors
		Consolidated Statements of Operations
		Consolidated Balance Sheets
		Consolidated Statements of Changes in Stockholders’ Equity
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
	(2)	Financial Statement Schedules – No schedules are required.
(b)	Reports on Form 8-K. The Company filed the following reports on Form 8-K during fiscal 2003:
	(1)	Report dated February 3, 2003; filed on Form 8-K, reported under Item 5, "Other Events," announcing change in Board membership.
	(2)	Report dated February 26, 2003; filed on Form 8-K, reported under Item 5, "Other Events," announcing fourth quarter 2002 and fiscal 2002 financial results.
	(3)	Report dated May 9, 2003; filed on Form 8-K, reported under Item 5, "Other Events," announcing addition of Board member.
	(4)	Report dated May 13, 2003; filed on Form 8-K, under Item 12, "Results of Operations and Financial Condition" regarding Registrant’s results of operations and financial condition for the period ended March 29, 2003.
	(5)	Report dated August 7, 2003; filed on Form 8-K, under Item 12 "Results of Operations and Financial Conditions" regarding Registrant’s results of operations and financial condition for the period ended June 28, 2003.
	(6)	Report dated October 29, 2003; filed on Form 8-K, under Item 12 "Results of Operations and Financial Conditions" regarding Registrant’s results of operations and financial condition for the period ended September 27, 2003.
	(7)	Report dated November 4, 2003; filed on Form 8-K, under Item 12 "Results of Operations and Financial Conditions" regarding Registrant’s results of operations and financial condition for the period ended September 27, 2003.
(c)	Exhibits. The following exhibits to this Form 10-K are filed pursuant to the requirements of Item 601 of Regulation S-K:
	Exhibit
	Number	Description of Document
	3(i).1.(a)**	Amended and Restated Certificate of Incorporation of the Registrant. (1)
	3(i).1.(b)**	Certificate of Correction to Amended and Restated Certificate of Incorporation of the Registrant. (1)
	3(i).1.(c)**	Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant. (2)
	3(ii).1**	Amended and Restated By-Laws of the Registrant. (1)
	4.1**	Reference is made to Exhibits 3(i). through 3(ii).1.
	4.2**	Specimen stock certificate. (3)
	4.3**	Rights Agreement dated May 22, 1998 between Registrant and Norwest Bank Minnesota. (10)
	4.4**	Amendment No. 1 to Rights Agreement dated February 26, 2002 between Registrant and Wells Fargo Bank, N.A. (5)
	10.1**	Form of Indemnity Agreement between the Registrant and its directors and executive officers, with related schedule. (3)

Exhibit
Number	Description of Document
10.2#**	1996 Equity Incentive Plan, including forms of Options granted to employees and non-employee directors thereunder. (3)
10.3#**	Amendment to 1996 Equity Incentive Plan. (4)
10.4#**	Second Amendment to 1996 Equity Incentive Plan. (5)
10.5#**	1996 Employee Stock Purchase Plan. (3)
10.6#**	Amendment to 1996 Employee Stock Purchase Plan. (5)
10.7#**	1993 Stock Option Plan. (3)
10.8#**	1991 Stock Option Plan. (3)
10.9#**	Employee Stock Ownership Plan. (3)
10.10#**	Wild Oats Markets, Inc. Deferred Compensation Plan. (6)
10.11#**	Employment Agreement dated March 6, 2001 between Perry D. Odak and the Registrant. (7)
10.12#**	Amendment to Employment Agreement dated March 6, 2001 between Perry D. Odak and the Registrant. (5)
10.13#**	Stock Purchase Agreement dated March 6, 2001 between Perry D. Odak and the Registrant. (7)
10.14#**	Stephen Kaczynski Equity Incentive Plan. (8)
10.15#**	Employment Agreement dated April 24, 2001 between Stephen A. Kaczynski and the Registrant. (8)
10.16#**	Employment Agreement dated May 21, 2001 between Bruce Bowman and the Registrant. (8)
10.17#**	Amendment to Employment Agreement dated May 21, 2001 between Bruce Bowman and the Registrant. (5)
10.18#**	Bruce Bowman Equity Incentive Plan. (8)
10.19#**	David Clark Equity Incentive Plan. (11)
10.20#**	Edward F. Dunlap Equity Incentive Plan. (5)
10.21#+	Gary Rawlings Equity Incentive Plan.
10.22#**	Employment Agreement dated December 17, 2001 between Edward F. Dunlap and the Registrant. (5)
10.23#**	Severance Agreement dated November 7, 2002 between Bruce Bowman and the Registrant.
10.24#**	Severance Agreement dated November 7, 2002 between Freya Brier and the Registrant.
10.25#**	Severance Agreement dated November 7, 2002 between Edward Dunlap and the Registrant.
10.26#**	Severance Agreement dated November 7, 2002 between Stephen Kaczynski and the Registrant.
10.27#**	Severance Agreement dated November 7, 2002 between Peter Williams and the Registrant. (12)
10.28#+	Severance Agreement dated June 2, 2003 between David B. Clark and the Registrant. (11)
10.29**	Wild Oats Markets, Inc. 2001 Nonofficer/Nondirector Equity Incentive Plan. (5)
10.30**	Amended and Restated Stockholders Agreement among the Registrant and certain parties named therein dated August 1996. (3)
10.31**	Registration Rights Agreement between the Registrant and certain parties named therein dated July 12, 1996. (3)
10.32#**	Second Amendment to Employment Agreement between Wild Oats Markets, Inc. and Perry D. Odak, dated June 19, 2002. (9)
10.33#**	Third Amendment to Employment Agreement between Wild Oats Markets, Inc. and Perry D. Odak, dated August 7, 2002. (9)
10.34**	Assignment of Kaczynski Employment Agreement, dated June 29, 2002, between Registrant and Sparky, Inc. (9)

Exhibit
Number	Description of Document
10.35**	Assignment of Dunlap Employment Agreement, dated June 29, 2002, between Registrant and Wild Oats Financial, Inc. (9)
10.36**	Second Amended and Restated Credit Agreement dated as of February 26, 2003, among Registrant, the lenders named therein and Wells Fargo Bank National Association, as Administrative Agent. Portions have been omitted pursuant to a request for confidential treatment. (12)
10.37+	Joinder Agreement dated as of December 12, 2003, among Bank of America, N.A., to the Second Amended and Restated Credit Agreement among Registrant, the lenders named therein and Wells Fargo Bank National Association, Registrant and Wells Fargo.
10.38+	Agreement for Distribution of Product between Wild Oats Markets, Inc. and United Natural Foods, Inc. dated January 9, 2004. Portions have been omitted pursuant to a request for confidential treatment.
10.39+	Memorandum of Understanding between Tree of Life, Inc. and Wild Oats Markets, Inc. dated November 19, 2003.  Portions have been omitted pursuant to a request for confidential treament.
21.1+	List of subsidiaries.
23+	Consent of PricewaterhouseCoopers LLP, independent auditors.
31.1+	CEO Certification under Section 302 of Sarbanes-Oxley Act of 2002
31.2+	CEO Certification under Section 302 of Sarbanes-Oxley Act of 2002
32.1+	CEO Certification under Section 906 of Sarbanes-Oxley Act of 2002
32.2+	CEO Certification under Section 906 of Sarbanes-Oxley Act of 2002

_________________________________________

#	Management Compensation Plan.
**	Previously filed.
+	Included herewith.
(1)	Incorporated by reference from the Registrant’s Form 10-K for the year ended December 28, 1996 (File No. 0-21577).
(2)	Incorporated by reference from the Registrant’s Amendment No. 2 to the Registration Statement on Form S-3 filed with the Commission on November 10, 1999 (File No. 333-88011).
(3)	Incorporated by reference from the Registrant’s Registration Statement on Form S-1 (File No. 333-11261) filed on August 30, 1996.
(4)	Incorporated by reference from the Registrant’s Registration Statement on Form S-8 (File No. 333-66347) filed on October 30, 1998.
(5)	Incorporated by reference from the Registrant’s Form 10-K for the year ended December 28, 1996 (File No. 0-21577).
(6)	Incorporated by reference from the Registrant’s Amendment No. 2 to the Registration Statement on Form S-3 filed with the Commission on November 10, 1999 (File No. 333-88011).
(7)	Incorporated by reference from the Registrant’s Registration Statement on Form S-1 (File No. 333-11261) filed on August 30, 1996.
(8)	Incorporated by reference from the Registrant’s Registration Statement on Form S-8 (File No. 333-66347) filed on October 30, 1998.
(9)	Incorporated by reference from the Registrant’s Form 10-Q for the period ended June 29, 2002 (File No. 0-21577).
(10)	Incorporated by reference from the Registrant’s Form 8-K filed on May 5, 1998 (File No. 0-21577).
(11)	Incorporated by reference from the Registrant’s Form 10-Q for the period ended June 28, 2003 (File No. 0-21577).
(12)	Incorporated by reference from the Registrant’s Form 10-K for the year ended December 28, 2002 (File No. 0-21577).

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	Wild Oats Markets, Inc.
	(Registrant)
Date: March 11, 2004	By: /s/ Edward F. Dunlap
	Edward F. Dunlap
	Executive Officer and Chief Financial Officer
	(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURE	TITLE	DATE
/s/ Perry D. Odak	Chief Executive Officer,	March 8, 2004
	President and Director
/s/ Edward F. Dunlap	Chief Financial Officer	March 11, 2004
/s/ John A. Shields	Chairman	March 5, 2004
/s/ David M. Chamberlain	Vice Chairman	March 5, 2004
/s/ Stacey Bell	Director	March 8, 2004
/s/ Brian K. Devine	Director	March 4, 2004
/s/ David Gallitano	Director	March 5, 2004
/s/ Mark A. Retzloff	Director	March 8, 2004
/s/ Ann-Marie Austin-Stephens	Director	March 9, 2004

EX-10.21

WILD OATS MARKETS, INC.

GARY RAWLINGS EQUITY INCENTIVE PLAN

1. PURPOSES

(a) The purpose of the Plan is to induce Gary Rawlings ("Executive" or "Optionee") to enter into an employment arrangement with Wild Oats Markets, Inc. as Vice President, Marketing, 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 40,000 shares of the Common Stock. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full (or vested in the case of Restricted Stock), the stock not acquired under such Stock Award shall cease to be subject to the Plan.

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

5. ELIGIBILITY

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

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

6. OPTION PROVISIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

7. RESERVED

8. CANCELLATION AND RE-GRANT OF OPTIONS

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

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

9. COVENANTS OF THE COMPANY

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

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

10. USE OF PROCEEDS FROM STOCK

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

11. MISCELLANEOUS

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

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

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

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

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

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

12. ADJUSTMENTS UPON CHANGES IN STOCK

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

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

13. AMENDMENT OF THE PLAN AND STOCK AWARDS

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

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

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

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

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

14. TERMINATION OR SUSPENSION OF THE PLAN

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

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

15. EFFECTIVE DATE OF PLAN.

This Plan shall become effective on November 24, 2003.

WILD OATS MARKETS, INC.

NON-QUALIFIED STOCK OPTION

OPTION AGREEMENT

GARY RAWLINGS, Optionee:

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

The details of your Options are as follows:

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

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

NUMBER OF SHARES (INSTALLMENT)

DATE OF EARLIEST EXERCISE (VESTING)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dated the ___ day of ____________, 2003.

Very truly yours,

WILD OATS MARKETS, INC.

By ___________________________________

Duly authorized on behalf of the Board of Directors

The undersigned:

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

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

___________________________________________________

Optionee

Address: ___________________________________________

___________________________________________

ATTACHMENTS:

Attachment 1 – Gary Rawlings Equity Incentive Plan

Attachment 2 – Form of Notice of Exercise

NOTICE OF EXERCISE

Date of Exercise

Wild Oats Markets, Inc.

3375 Mitchell Lane

Boulder, CO 80301

Ladies and Gentlemen:

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

Type of option (check one) Incentive Nonstatutory

Stock option dated:

Number of shares as to which

option is exercised:

Certificates to be issued in

name of: _____________________

Total exercise price: $

Cash payment delivered herewith: $

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

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

Very truly yours,

_________________________________

EX-10.37

JOINDER AGREEMENT

THIS JOINDER AGREEMENT (this "Agreement"), dated as of December 12, 2003, is executed by BANK OF AMERICA, N.A., a national banking association ("Additional Lender"), in favor of the parties to the Credit Agreement referred to in Recital A below.

RECITALS

A. Pursuant to a Second Amended and Restated Credit Agreement, dated as of February 26, 2003 (as amended, supplemented or otherwise modified in accordance with its terms from time to time, the "Credit Agreement"), by and among (1) Wild Oats Markets, Inc., a Delaware corporation (the "Borrower"), (2) each of the financial institutions currently listed in Schedule I to the Credit Agreement (collectively, the "Lenders"), and (3) Wells Fargo Bank, National Association, a national banking association, as L/C Issuer, Swing Line Lender and administrative agent for the Lenders (in such capacity as administrative agent, the "Administrative Agent"), the Lenders have agreed to extend certain credit facilities to the Borrower upon the terms and subject to the conditions set forth therein.

B. Additional Lender will become a party to the Credit Agreement with certain rights and obligations thereunder and under the other Credit Documents upon the terms and subject to the conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Additional Lender hereby agrees as follows:

1. Definitions. Capitalized terms used but not defined in this Agreement shall have the meanings set forth in the Credit Agreement.

2. Agreement to be Bound By Credit Agreement. Effective on the Effective Date (as defined in Section 3 below), Additional Lender hereby (a) accepts and assumes all rights and obligations under the Credit Documents of a Lender with the Commitment set forth on Attachment 1 hereto, including the portion of Revolving Loans and participations in the Letters of Credit outstanding on the Effective Date and commitments to purchase participations in Letters of Credit that are attributable to such Commitment (the "Assumed Rights and Obligations"), (b) agrees to be bound by the Credit Agreement as it would have been if it had been an original Lender party thereto, and (c) agrees to perform in accordance with their terms all of the obligations which are required under the Credit Documents to be performed by it as a Lender. Additional Lender appoints and authorizes Administrative Agent to take such actions as agent on its behalf and to exercise such powers under the Credit Documents as are delegated to Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto.

3. Effectiveness. Subject to receipt by Administrative Agent of the payments described in Section 4, this Agreement shall become effective on December 12, 2003 (the "Effective Date").

4. Payments on Effective Date. In consideration of the Assumed Rights and Obligations, the following payments shall be made on the Effective Date:

(a) Additional Lender shall pay to Administrative Agent for distribution to each other Lender: (i) the principal amount of the Revolving Loans made by such other Lender pursuant to the Credit Agreement and outstanding on the Effective Date that are greater than such other Lender’s Proportionate Share of all Revolving Loans as determined on the Effective Date, and (ii) the amount of all L/C Credit Extensions for which such other Lender has reimbursed L/C Issuer that are outstanding on the Effective Date and are greater than such other Lender’s Proportionate Share of all L/C Credit Extensions as determined on the Effective Date; and

(b) Borrower shall pay to Administrative Agent for distribution to Additional Lender a fee equal to 0.75% of the amount set forth on Attachment 1 hereto under the heading "Commitment".

5. Allocation and Payment of Interest and Fees. Administrative Agent shall pay to Additional Lender all interest, commitment fees and other amounts that are paid by or on behalf of Borrower pursuant to the Credit Documents and are attributable to the Assumed Rights and Obligations, that accrue on and after the Effective Date.

6. Representations and Warranties. Additional Lender represents and warrants to Administrative Agent and the other Lenders as follows:

(a) It has full power and authority, and has taken all action necessary, to execute and deliver this Agreement and to fulfill its obligations under, and to consummate the transactions contemplated by, this Agreement.

(b) The making and performance of this Agreement and all documents required to be executed and delivered by it hereunder do not and will not violate any law or regulation applicable to it.

(c) This Agreement has been duly executed and delivered by it and constitutes its legal, valid and binding obligation, enforceable in accordance with its terms.

(d) All approvals, authorizations or other actions by, or filings with, any Governmental Authority necessary for the validity or enforceability of its obligations under this Agreement have been made or obtained.

(e) Additional Lender has made and shall continue to make its own independent investigation of the financial condition, affairs and creditworthiness of Borrower and any other Person obligated under the Credit Documents (collectively, "Credit Parties"), and the value of any collateral now or hereafter securing any of the obligations, indebtedness, liabilities or undertakings under the Credit Documents ("Collateral"), in connection with its assumption of the Assumed Rights and Obligations.

(f) Additional Lender has received a copy of the Credit Documents and such other documents, financial statements and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Agreement.

7. No Responsibility by Administrative Agent or Other Lenders. Neither Administrative Agent nor any other Lender makes any representation or warranty or assumes any responsibility to Additional Lender for:

(a) the execution (by any party other than such party), effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of the Credit Documents or for any representations, warranties, recitals or statements made in the Credit Documents or in any financial or other written or oral statement, instrument, report, certificate or any other document made or furnished or made available to Additional Lender by such party or by or on behalf of any Credit Party in connection with the Credit Documents and the transactions contemplated thereby;

(b) the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained in any of the Credit Documents or as to the existence or possible existence of any Default or Event of Default under the Credit Documents, but this shall not relieve Administrative Agent of any obligation under the Credit Agreement to deliver notice of such Default or Event of Default; or

(c) the accuracy or completeness of any information provided to Additional Lender, whether by such party or by or on behalf of any Credit Party.

Neither Administrative Agent nor any other Lender shall have any initial or continuing duty or responsibility to make any investigation of the financial condition, affairs or creditworthiness of any of the Credit Parties, or the value of any Collateral, in connection with Additional Lender’s assumption of the Assumed Rights and Obligations or to provide Additional Lender with any credit or other information with respect thereto, whether coming into its possession before the date hereof or at any time or times thereafter, except as otherwise expressly provided in the Credit Agreement.

8. Foreign Withholding. On or before the Effective Date, Additional Lender shall comply with the provisions of Subparagraph 2.12(b) of the Credit Agreement.

9. General.

(a) This Agreement constitutes the entire understanding with respect to the subject matter hereof and supersedes all prior and current understandings and agreements, whether written or oral.

(b) No term or provision of this Agreement may be amended, waived or terminated orally, but only by an instrument signed by Additional Lender, Borrower, Administrative Agent and L/C Issuer.

(c) This Agreement may be executed in one or more counterparts. Each set of executed counterparts shall be an original. Executed counterparts may be delivered by facsimile transmission.

(d) This Agreement shall be binding upon and inure to the benefit of Additional Lender and the other parties to the Credit Agreement and their respective successors and assigns. Additional Lender may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of Borrower, Administrative Agent, L/C Issuer and the Required Lenders. The preceding sentence shall not limit the right of Additional Lender to grant to others assignments of or participations in all or part of the Assumed Rights and Obligations to the extent permitted by the terms of the Credit Documents.

(e) All payments by or to Additional Lender hereunder shall be made in United States Dollars, in immediately available funds. Payments by Additional Lender hereunder shall be made to Administrative Agent to the address or account specified in the Credit Agreement. Payments to Additional Lender shall be made to the address or account specified on Attachment 1 to this Agreement. The address of Additional Lender for notice purposes under the Credit Agreement shall be as specified on Attachment 1 to this Agreement.

(f) If any provision of this Agreement is held invalid, illegal or unenforceable, the remaining provisions hereof will not be affected or impaired in any way.

(g) Additional Lender shall bear its own expenses in connection with the preparation and execution of this Agreement.

(h) This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado.

IN WITNESS WHEREOF, Additional Lender has executed this Agreement as of the date first above written.

ADDITIONAL LENDER:  

BANK OF AMERICA, N.A.

By:  /s/ Michael R. Chryssikos

Printed Name: Michael R. Chryssikos

Title: Vice President

ACKNOWLEDGED AND AGREED:

BORROWER:

WILD OATS MARKETS, INC.

By: /s/ Freya Brier

Printed Name: Freya Brier

Title: Vice President, Legal

ADMINISTRATIVE AGENT: WELLS FARGO BANK, NATIONAL
ASSOCIATION, as Administrative Agent

By:  /s/ Marc Rosenberg

Printed Name: Marc Rosenberg

Title: Vice President

L/C ISSUER: WELLS FARGO BANK, NATIONAL ASSOCIATION, as L/C Issuer

By: /s/ Marc Rosenberg

Printed Name: Marc Rosenberg

Title: Vice President

SWING LINE LENDER: WELLS FARGO BANK, NATIONAL ASSOCIATION, as Swing Line Lender

By: /s/ Marc Rosenberg

Printed Name: Marc Rosenberg

Title: Vice President

ATTACHMENT 1 TO

JOINDER AGREEMENT

Lender	Commitment	Proportionate Share
Bank of America, N.A.	$20,000,000	21.052631579%
Applicable Lending Office and Address for Notices:
Credit Matters: Bank of America, N.A. 700 Louisiana Street, 7th Floor Houston, TX 77002 Attention: Mike Chryssikos Tel. No.: (713) 247-7153 Fax No.: (713) 247-7748 E-Mail: mike.chryssikos@bankofamerica.com Operations/Administration: Bank of America, N.A. 700 Louisiana, 7th Floor Houston, TX 77002 Attention: Patty Breiner Tel. No.: (713) 247-7552 Fax No.: (713) 247-7748 E-Mail: patty.breiner@bankofamerica.com Wiring Instructions: Bank of America, N.A. 1201 Main Street Dallas, TX ABA Number: 111000025 Account Name: Loan Operations Account Number: 0180019828 Reference: Wild Oats Markets, Inc.

EX-10.38

***CONFIDENTIAL TREATMENT REQUESTED**

ATTACHMENT 2

Attached to March 10, 2004 Letter to the Securities and Exchange Commission

AGREEMENT FOR DISTRIBUTION OF PRODUCTS

This Agreement for Distribution of Products, dated January 9, 2004, is between Wild Oats Market, Inc. ("WO") and United Natural Foods, Inc. and its subsidiaries and affiliates (collectively "UNFI").

RECITALS

A. WO operates certain retail supermarket stores in the United States which are primarily engaged in the sale of natural and organic products (the "Stores").

B. The parties desire to enter into an agreement pursuant to which UNFI shall provide, sell and distribute to WO, its Stores and wholesale locations, and WO shall buy, the goods and services specified below on the terms set forth below.

AGREEMENT

For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Agreement Term. (a) The Agreement shall have an initial term of five years (the "Term") commencing as of the date hereof (the "Commencement Date").

(b) After the expiration of the initial Term, the Term shall be automatically renewed for successive two-year periods unless either party gives notice to the other not less than 180 days prior to the end of the initial or any renewal Term.

2. Distribution Arrangement. (a) Commencing April 1, 2004 (the "Effective Date"), UNFI shall be the primary wholesale distributor to WO of WO selected (i) specialty grocery items, (ii) natural and organic packaged grocery products, (iii) frozen products (including certain grocery and meat), (iv) bulk products, (v) vitamins, supplements, body care and other health and beauty aid products and (vi) dairy products (but excluding produce, meat, seafood, cheese, food service products, mercantile and other categories not specifically identified above) either (A) not purchased directly from manufacturers or (B) for which WO currently does not have an existing contractual obligation to purchase which continues after the Effective Date (the "Products"), for all WO Stores, and all such new Stores acquired or opened by WO during the Term, subject to the limitations set forth below. Produce and alcoholic beverages are not included in Products for the purposes of this Agreement.

(b) "Primary" for purposes of this Agreement shall be defined as purchasing from UNFI and its affiliates (i) a minimum of [CONFIDENTIAL](1) in Products and (ii) a majority, in the aggregate by region, of the Natural and Organic Products carried by the Stores (as defined in the Product Standards set forth on Exhibit A attached hereto) purchased in the various categories under 2(a) above, with (i) and (ii) calculated inclusive of orders for Products that are out of stock, during each 12-month period of the Term, commencing as of the Effective Date.

(1)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

***CONFIDENTIAL TREATMENT REQUESTED**

(c) WO will purchase, and UNFI will sell Products at net prices, quantities and upon the other terms and conditions set forth herein.

3. Products. (a) Authorized List. (a) WO has provided to UNFI an Authorized Product List ("APL"), DC by DC, which, as modified from time to time, will be the complete list of the only Products authorized to be distributed to the Stores by UNFI. WO shall have the obligation to purchase, on a monthly basis, not less than (i) [CONFIDENTIAL](2) per DC for grocery, chilled and frozen Products, and (ii) [CONFIDENTIAL](3) cases per DC for repack, health and beauty Products (including all body care Products) and vitamins, minerals, supplements and homeopathic remedies (the "Velocity Requirement") of each Product on the APL which is carried by UNFI solely for distribution to WO Stores, exclusive of Private Label Products (the "Exclusive Products"). Notwithstanding the foregoing, the parties agree that the Velocity Requirement for Products purchased by WO from the New Oxford, PA and Chesterfield, NH DCs shall be established by the parties six months after the Effective Date, based upon a review of WO’s purchasing volumes and Product velocities during the first six months’ purchasing from such DCs. Calculation whether a Product meets the Velocity Requirement shall include all orders placed by WO, including those not filled as a result of manufacturer or UNFI out-of-stocks ("OOS").

(b) WO shall have final determination of items on the APL; provided, however, that the following Products shall not be included within the APL without UNFI’s consent, not to be unreasonably withheld, conditioned or delayed: (i) Products that do not meet the product standards set forth on Exhibit A (the "Product Standards"); or (ii) SKUs of Exclusive Products and WO Private Label in excess of [CONFIDENTIAL](4) (the "Exclusive/PL Product SKU limit").

(c) APL Additions and Deletions.

(i) WO may require the addition of Products to the APL upon written notice to UNFI specifying the Products to be added, the Stores designated to purchase such Products and the estimated weekly purchases of the Products by the designated Stores; provided, however, that Products will not be added to the APL without UNFI’s consent, not to be unreasonably withheld: (i) if the Products do not meet the Product Standards; (ii) if the Exclusive/PL Product SKU limit will be exceeded; and (iii) until adequate inventory of the Product shall be available in all UNFI servicing divisions, as determined by UNFI, based on the estimated weekly purchases provided by WO. At the time WO gives notice to UNFI adding Products to the APL, UNFI shall notify WO if the added Products will be Exclusive Products. Notwithstanding the foregoing, all Products identified for addition to the APL that do not require consent pursuant to the criteria set forth above shall be added to the APL within 21 days after receipt of written notice of their addition from WO. If UNFI does not have such new Products available for distribution to WO Stores within 21 days after addition to the APL for other than Force Majeure events, WO may include orders of the new Products for purposes of the calculation under Section 14 (Out of Stock Calculation) below and such other obligations of UNFI hereunder regarding delivery of Products.

(2) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

(3)  Ibid.

(4)  Ibid.

***CONFIDENTIAL TREATMENT REQUESTED**

(ii) WO shall designate those Stores to purchase any item added to the APL in the notice described in (c)(i) above.

(iii) [CONFIDENTIAL](5),:

(1) [CONFIDENTIAL](6), or

(2) [CONFIDENTIAL](7),

WO shall have no obligation to purchase any of the foregoing Products which are deleted from the APL at UNFI’s request for reasons other than a failure of such Products to meet the Velocity Requirement, unless WO agrees to such purchase.

(iv) If either party requests deletion from the APL of any Product and the other party agrees to deletion of such item, there shall be a 60-day notice period, after agreement of the parties as to deletion, prior to the actual deletion of the Product from the APL. Unless the deletion is made by UNFI for Products failing to meet the Velocity Requirement or because of excessive manufacturer OOS (as determined by UNFI based upon historic information), the requesting party shall indemnify the other party from the costs of the return to the manufacturer or failure to pay by the manufacturer of: (A) any bill backs (manufacturer direct rebate) or charge back issued by UNFI (contribution by the manufacturer to any ad costs, funds or campaigns for such Product); (B) coupons or rain checks issued by manufacturer or WO or UNFI; and (C) store credits (credits for damaged goods, out of stock Product, demonstration costs agreed to by the manufacturer) issued for the deleted Product; provided that, so long as the deleted Product is not an Exclusive Product, if the deleted Products are sold, or a sale is arranged, within 90 days to another customer, then the requesting party shall not have any indemnification or reimbursement obligation as specifically enumerated above under this Section 3(c)(iv) for the items identified above related to those deleted Products that have been sold.

(5)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

(6)  Ibid

(7)  Ibid.

***CONFIDENTIAL TREATMENT REQUESTED**

(d) Private Label Products.

(i) [CONFIDENTIAL](8)

(ii) UNFI will carry any WO Private Label Products requested by WO, provided that each WO Private Label Product sells well enough to turn one inventory turn: (A) [CONFIDENTIAL](9) for Products which are imported from outside of the continental United States, and (B) [CONFIDENTIAL](10) for Products which are shipped from manufacturers within the continental United States. At the end of the inventory turn periods specified in (A) and (B) above, UNFI shall notify WO of the amount of inventory of any Product not meeting the turn periods, and [CONFIDENTIAL](11). WO shall use its best efforts to sell through inventory remaining beyond the turn periods within CONFIDENTIAL](12) after the end of the applicable turn period (the "Sell Through Period") or may elect to have the inventory "plussed out" (shipped) to the Stores on a logistics schedule supplied by WO. If inventory not moving within the turn periods remains in the DCs for more than [CONFIDENTIAL](13) after the end of the turn periods, [CONFIDENTIAL](14). To the extent a Private Label Product does not sell within the foregoing turn periods, the parties shall review the Product on a case-by-case basis, and shall mutually determine whether to remove it from the APL. UNFI shall hold the inventories of WO Private Label in the three DCs listed on Exhibit C hereto, and in additional DCs as Private Label Product velocity may warrant. "WO Private Label Products" shall mean those products that Wild Oats offers from time to time in its Stores under Wild Oats’ proprietary labels (including "Wild Oats", "Henry’s", "Sun Harvest" and such other tradenames or marks used by WO from time to time). UNFI covenants not to sell, and to take commercially reasonable efforts to prevent the sale of any WO Private Label Products by UNFI to any distribution network, stores, or persons not approved in advance by WO. UNFI agrees to fully cooperate with WO in any investigation and litigation originated by WO over such unauthorized sales. UNFI shall bear the cost of retrieval of any WO Private Label Product sold in unauthorized sales by UNFI.

4. Pricing. (a) Pricing of Products. Commencing as of the Commencement Date, during the Term the UNFI pricing for Products shall be as follows:

(i) As to all Products other than WO Private Label Products, [CONFIDENTIAL](15); and

(8)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

(9)  Ibid.

(10)  Ibid.

(11)  Ibid.

(12)  Ibid.

(13)  Ibid.

(14)  Ibid.

(15)  Ibid.

***CONFIDENTIAL TREATMENT REQUESTED**

(ii) As to WO Private Label Products, [CONFIDENTIAL](16)

(b) At the end of each of WO’s fiscal quarters, [CONFIDENTIAL](17)

(iii) For purposes of this Agreement, "Cost" shall be defined as [CONFIDENTIAL] (18)

(iv) In the event of a partial Fiscal Quarter based on the Commencement Date or remaining at the end of the term hereof (whether by early termination or normal expiration of the term of this Agreement), the Quarterly Run Rate Volume shall be pro rated based on the percentage of the Fiscal Quarter at the Commencement Date or remaining at the end of the term of the Agreement.

(v) If there has been a Force Majeure event during any Fiscal Quarter that materially affects WO’s ability to purchase or UNFI’s ability to sell Products, the Quarterly Run Rate Volume shall not be reduced, but the [CONFIDENTIAL](19) minimum purchase level referenced under Section 2(b) above for any calendar year shall be reduced by an amount based on the purchases from those Stores impacted by the Force Majeure event from other distributors, or estimated purchases in the event the Stores are unable to operate and the length of time that the Force Majeure event continues to disrupt operations at such Stores or DCs.

(c) Modification of Pricing.

(i) The parties agree to meet semiannually to review the freight delivery charges to the Stores as set forth in Exhibit E and, upon mutual agreement based on a modification in freight charges, shall modify the inbound freight charges as a component of Product cost.

(ii) UNFI may only increase the prices for Products referenced in this Section 4 if there is an actual per item price increase from the manufacturer. Price increases shall only be effective after [CONFIDENTIAL](20) electronic notification to WO. UNFI shall reduce or increase the prices for Products if there is an actual per item price decrease or increase, as applicable, from the manufacturer in accordance with manufacturer deal periods. Price decreases shall be effective within [CONFIDENTIAL](21) from the reduction in pricing by the manufacturer to UNFI. All published vendor deals (advertised to wholesalers and retailers), pricing and promotional discounts, will be passed dollar for dollar directly to WO as and when received by UNFI as a reduction in pricing subject to vendor performance requirements being met. Notwithstanding the foregoing, UNFI’s or WO’s new item set up discounts and policies will be mutually supported.

(16)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

(17)  Ibid.

(18)  Ibid.

(19)  Ibid.

(20)  Ibid.

(21)  Ibid.

***CONFIDENTIAL TREATMENT REQUESTED**

(iii) WO may negotiate scan downs or off-invoice receiving allowances with manufacturers pursuant to which WO receives a rebate from the manufacturer based upon actual sales of goods. [CONFIDENTIAL](22). The total number of scan-downs per month that can be negotiated by WO shall not exceed [CONFIDENTIAL](23). The payment shall be accompanied by a copy of the manufacturer bill back documents sent to the manufacturer as part of the scan down or off-invoice arrangement.

(d) Freight Costs to the Stores.

(i) WO shall pay a freight charge for delivery of Product from each UNFI distribution center to the Stores. The freight charge shall be a percentage, as set forth on Exhibit E to this Agreement, of Product Cost. Freight will be shown separately on each Product invoice from the cost of the Product delivered. WO shall be under no obligation to pay higher net freight costs that result from UNFI’s election to close any distribution centers that were operating on the date of this Agreement, and any increase in freight charges resulting from such closure or reassignment of more Stores to other DCs shall be the responsibility of UNFI. In the event that federal or state regulations regarding hours of service for drivers are implemented that result in substantial increases in freight costs over those costs represented by the percentages set forth on Exhibit E, the parties shall review the actual costs and make such adjustments to Exhibit E to cover the incremental cost increases allocated to WO’s business as a result of such implementation.

(ii) In the event that fuel costs average in excess of [CONFIDENTIAL](24) over the prior three-month period, UNFI shall be entitled to charge WO a surcharge for fuel used in delivery of Product equal to the actual average and [CONFIDENTIAL](25), and such surcharge shall be charged for the following three-month period as set forth on Exhibit F attached hereto.

(e) Inclusions of Items on Invoices. WO shall send its suggested specific Storeretail pricing for the Products to UNFI in a mutually agreeable format at mutually agreed times. UNFI will print such pricing on all appropriate WO documents. The mechanics of such arrangement are set forth in Exhibit G attached to this Agreement. Each invoice from UNFI for Product delivered to the Stores shall show the cost of the item per unit specified, the freight costs and, to the extent UNFI’s computer systems may include such information, the retail price at which WO sells the Product and margin received at such price, as reflected in WO’s data. UNFI shall have no liability to WO hereunder for loss arising out of errors in WO’s data.

(22)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

(23)  Ibid.

(24)  Ibid.

(25)  Ibid.

***CONFIDENTIAL TREATMENT REQUESTED**

(f) Conflict with Purchase Orders and Other Documents. The terms and conditions of the Agreement shall govern any purchase order and shall supersede any additional or contrary terms set forth in any WO purchase order or any UNFI acceptance, confirmation, invoice or other similar document.

(g) Cross-Dock Billing. UNFI will, from time to time, and based on UNFI space availability, ship non-APL Product, for pallet and shipper displays only, on a cross-dock basis (as opposed to "bill to, ship to") for WO. UNFI shall charge WO [CONFIDENTIAL](26) shipped on a cross-dock basis, and [CONFIDENTIAL](27). UNFI shall not unreasonably withhold its consent to cross-dock arrangements established by WO, based on space availability per DC. WO shall give UNFI 45-day prior notice of any proposed cross-dock arrangement. Within 15 days prior to the actual shipment pursuant to the cross dock arrangement, WO shall provide the weight, volume and pallet count of the cross-docked Products per Store. All cross-docked Products received from the manufacturer shall be accompanied by a bill of lading, shall identify that the shipment is for WO, and shall identify the Store to which the Product is to be shipped. UNFI shall deliver the cross-docked Products on the next scheduled shipment to the Store, space permitting but, as to Wild Oats Stores only (not as to Henry’s or Sun Harvest Stores) shall not ship cross-docked Products in the first week of any WO promotional period.

5. Placement of Personnel and Equipment. (a) On Site Personnel. UNFI shall commit to providing, at its cost, the following personnel at WO Headquarters in Boulder, Colorado, during the Term of this Agreement: [CONFIDENTIAL](28). In addition, UNFI will provide [CONFIDENTIAL](29).

(b) Transition Personnel. As part of the transition of distribution purchasing from WO’s current primary distributor to UNFI, UNFI and WO recognize that certain existing shelf tags for certain items on the APL must be replaced. [CONFIDENTIAL](30). The timetable for the completion of all retagging, and the process by which retagging will proceed, will occur over a nine-month period on a timetable mutually agreeable to the parties.

(c) Replacement of Personnel. All personnel supplied by UNFI under (a) and (b) above shall be reasonably satisfactory to WO. If WO requests the replacement of any UNFI personnel for any non-discriminatory reason, UNFI shall use commercially reasonable efforts to promptly replace such individuals with new, competent personnel reasonably satisfactory to WO.

(26)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

(27)  Ibid.

(28)  Ibid.

(29)  Ibid.

(30)  Ibid

***CONFIDENTIAL TREATMENT REQUESTED**

(d) Electronic Ordering Equipment. As part of the retagging process of existing Stores, UNFI shall loan to each Store three electronic store order units, and shall train all department managers, the scanning coordinator and the designated person for order placement at Store level on the use of the equipment. Upon full implementation of WO’s backdoor receiving project, WO shall return to UNFI two of the three electronic ordering units provided by UNFI at each Store. Any malfunctioning units shall be repaired or replaced, at UNFI’s sole election, within 72 hours after UNFI’s receipt of notification by WO, provided that WO shall provide UNFI with specific information as to any malfunctioning. WO shall be responsible for malfunctioning caused by the gross negligence of WO employees. UNFI shall provide three, or more based on Store size if requested by WO, units to each new Store, and shall train the aforesaid new Store personnel in the use of the equipment, within 21 days prior to the opening of the new Store; provided that WO shall have given UNFI 90 days’ prior written notice of new Store openings to facilitate the programming of the equipment and the training of personnel and WO makes such personnel available to UNFI at mutually agreed upon dates, times and places. WO is currently testing and plans to implement in the future a new order taking technology as part of its back door receiving program.

(e) [CONFIDENTIAL](31)

6. Product Quantity: (a) Quantities. UNFI agrees to sell to WO and supply WO with APL Products, throughout the Term of the Agreement, in the quantities ordered by WO in its sole discretion. The parties have established two [CONFIDENTIAL](32)   minimum order quantities for each Store based on Store volume, frequency of delivery, etc., as set forth on Exhibit H attached hereto. The parties shall review the schedule semi-annually and shall move Stores’ minimum order quantities from one order quantity category to the other based on market conditions and competitive impacts. WO may be charged a [CONFIDENTIAL](33) charge for deliveries not meeting the minimum order requirement size.

(b) Shipment of Booked Orders. If WO has (i) pre-ordered specified quantities of Product for a promotional event and has given UNFI 45 days notice, or (ii) completed a forward buy negotiation with a manufacturer for Product meeting the requirements set forth in (c) below, and UNFI has accepted the orders, UNFI shall deliver the booked quantities of Products to the WO Stores per WO’s Product orders. For inventory not falling within the definitions of (i) and (ii) above, if UNFI has stocking issues, UNFI will ship all customers on an equal first come, first serve basis.

(c) [CONFIDENTIAL](34) .

(31)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

(32)  Ibid.

(33)  Ibid.

(34)  Ibid.

***CONFIDENTIAL TREATMENT REQUESTED**

7. UNFI Covenants Concerning Facilities; Delivery Standards.

(a) Standards for Facilities. UNFI warrants and covenants that all UNFI participating distribution centers will be maintained and operated in all material respects in accordance with UNFI warehousing and delivery standards, which will be available for review upon request by WO. WO may inspect the physical plant of any distribution center during normal business hours upon reasonable advance notice to the designated UNFI personnel, but shall not impair or impede the business operations of the center. With WO’s consent, not to be unreasonably withheld, UNFI shall have the right to move service for groups of Stores from one facility to another, provided the new facility has the ability to adequately service the Stores, UNFI has given WO at least 60 days notice of the proposed modification and obtained WO’s consent, such move shall not result in an incremental increase in cost to WO, and the parties have had the opportunity to prepare and implement a plan for transition to the new DC.

(b) Covenants for Delivery. UNFI shall:

(i) receive and process WO orders only from the WO Stores or designated home office personnel and no other WO personnel or manufacturers, brokers or other third parties. Notwithstanding anything to the contrary, UNFI shall be entitled to rely upon the list of authorized persons in accepting orders from personnel identifying themselves as on such list. If orders are transmitted by MSI, then UNFI may rely upon orders received from a Store; and

(ii) at UNFI’s election, transport ordered Product on UNFI fleet or WO approved carriers to individual Stores. UNFI shall comply with any regional or national, as applicable, limitations or guidelines regarding deliveries (e.g., municipal, residential or property owner imposed restrictions on delivery hours, parking of trucks, unacceptable levels of noise in residential areas, etc.) of which WO has provided notice.

(iii) maintain adequate stock at each DC to meet WO Store requirements on an individual store basis [CONFIDENTIAL](35).

(c) Delivery Windows. Exhibit I sets forth the following information per Store: (a) estimated shipment volumes per delivery location; (b) municipal, residential or property owner imposed restrictions on delivery hours, parking of trucks, delivery routes, curfews, noise ordinances, lease covenants, neighborhood covenants and operating hours. In the event of changes in these restrictions, WO shall provide updated information and the parties shall evaluate such information and make such scheduling changes as necessary to comply with any restrictions so imposed. UNFI will apply its routing system to prepare a routing and constraint analysis, taking into account, in order of priority, (a) Store delivery restrictions such as curfews, ordinances, neighborhood covenants, landlord regulations, (b) WO desired delivery times, (c) UNFI’s route departure schedule, (d) UNFI warehouse and transportation operating constraints such as shift schedules. The routing schedule

(35)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

***CONFIDENTIAL TREATMENT REQUESTED**

(the "Delivery Schedule") adopted based on the routing and constraint analysis will define the following: (1) each Store’s days of delivery per week, (2) the hours of the delivery window for each store delivery, (3) delivery days and delivery windows per day for special promotional events, and (4) delivery days and delivery windows for holiday week shipments. After the initial development of the Delivery Schedule, a designated WO employee and UNFI will meet monthly, if requested by WO or UNFI, or quarterly, if no monthly meetings are held, to review the Schedule and make any necessary modifications. [CONFIDENTIAL](36).

(d) Code Date Policy; Inventory Management. Products shall be distributed to WO Stores in compliance with the Code Date Policy attached as Exhibit J to this Agreement related to the minimum number of days prior to expiration of the final code date, for perishable Products, under which such Products will be accepted upon delivery to the Stores. Product delivered with less than the minimum code date shall be deemed an out-of-stock for purposes of performance hereunder. UNFI agrees to deliver all Product (including WO Exclusive and Private Label Product) on a "first-in, first-out" inventory management basis, to ensure proper inventory turns and maximize available Product Code Dates.

(e) Quality Standards. Products will be delivered palletized and shrink-wrapped and meet WO's Quality Standards as to damage, rodent or insect presence, and other quality standards attached as Exhibit K to this Agreement. The parties will comply with the mutually agreeable pallet exchange program described on Exhibit L. In the event that any Product is recalled or withdrawn (the "Recalled Product"), UNFI will use its personnel (or a third party retrieval service if UNFI reasonably believes the recall or withdrawal will be achieved faster, at less expense or more efficient) to remove any Recalled Product from the WO Stores and shall dispose of or return any Recalled Products as required. In addition to the foregoing responsibilities, UNFI shall use its reasonable commercial efforts to cooperate with WO in removing the Recalled Product that UNFI has delivered from the WO Stores and replenishing the Store with replacement Products.

(f) Store Receiving. All Product shipments by UNFI to the Stores must be evidenced by an invoice, in the form attached hereto as Exhibit G. Shipments of Product shall be acknowledged as received by execution by Store personnel of the delivered invoice (a copy of which shall be left with the Store). WO will not be responsible for paying any invoice for a shipment not complying with the foregoing conditions of receipt.

(g) Passage of Title and Risk of Loss. Title and risk of loss shall pass upon delivery to WO Stores when delivered by UNFI fleet. Risk of loss upon delivery by independent carriers shall be governed by such arrangements as are made between UNFI, WO and the independent carrier at the time of shipment.

(36)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC..

***CONFIDENTIAL TREATMENT REQUESTED**

8. Certain Wild Oats Ordering Responsibilities. (a) WO shall place phone orders only by designated WO personnel. To enable timely delivery of Products, WO shall place orders in a timely manner in accordance with Exhibit M. WO shall give UNFI a minimum 45-day written lead time on promotion orders. No third party orders will be honored by UNFI.

(b) The parties agree to establish an electronic data interchange capability ("EDI")between WO and UNFI in a mutually agreed upon format by December 31, 2004. The EDI shall be used both for the placement of orders and the movement of other data used in the ordering and payment for Products.

(c) The average minimum order size for each Store delivery shall be as set forth on Exhibit H per Store per placed order (inclusive of OOS and Private Label Product, whether caused by the manufacturer, UNFI or promotional OOS, that is ordered but not delivered). Any order placed of less than the minimum order size shall incur [CONFIDENTIAL](37).

(d) To the extent that WO forecasts Product sales for a WO promotion (other than WO Private Label promotions), and the Stores do not order the aggregate amount forecasted to UNFI, then within [CONFIDENTIAL](38) following completion of the promotion, UNFI shall notify WO of the amount of promotional Product remaining in inventory, and shall commence charging WO a pallet charge of [CONFIDENTIAL](39) for any of such inventory remaining at the DCs on the [CONFIDENTIAL](40) after completion of the promotion. WO shall use its best efforts to sell through the remaining promotional inventory within [CONFIDENTIAL](41) after completion of the promotion or may elect to have the inventory "plussed out" (shipped) to the Stores on a logistics schedule supplied by WO. If promotional inventory remains in the DCs for more than [CONFIDENTIAL](42) after the completion of the promotion, [CONFIDENTIAL](43). The foregoing shall not apply to purchases of "Wild Buys" as defined in Section 6(c) above.

9. Promotional and Marketing Funds. UNFI will assist WO in the solicitation of vendor funding for new and remodeled Stores and acquired Stores (except as and to the extent excluded under Section 2 above) at levels requested by WO, unless such levels are deemed unreasonable by UNFI.

(37)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

(38)  Ibid.

(39)  Ibid.

(40)  Ibid.

(41)  Ibid.

(42)  Ibid.

(43)  Ibid.

***CONFIDENTIAL TREATMENT REQUESTED**

10. Hold Harmless.

(a) UNFI Indemnity. It is expressly understood and agreed that WO shall not be liable for, and UNFI shall hold WO harmless from, any obligations, claims, demands, losses, costs, damages, suits, judgments, penalties, expenses and liabilities of any kind or nature to a person not a party to this Agreement ("Third Party") arising out of or in connection with this Agreement caused by UNFI’s negligence, willful misconduct or contractual breach, including but not limited to any costs, expenses, court costs and reasonable attorneys’ fees incurred by WO by reason of any defense to any claims or lawsuits to which WO has been named a party.

(b) WO Indemnity. It is expressly understood and agreed that UNFI shall not be liable for and WO shall hold UNFI harmless from any obligations, claims, demands, losses, costs, damages, suits, judgments, penalties, expenses and liabilities of any kind or nature to a Third Party arising out of or in connection with this Agreement caused by WO’s negligence, willful misconduct or contractual breach, including but not limited to any costs, expenses, court costs and reasonable attorneys’ fees incurred by the UNFI by reason of any defense to any claims or lawsuits to which UNFI has been named a party. WO agrees to indemnify UNFI for any loss, cost or damage resulting from any claim brought against UNFI by TOL and relating to WO’s termination of a distribution agreement with TOL.

(c) Third Person Claims. Promptly after a party has received notice of or has actual knowledge of any claim against it covered by Section 10 by a Third Party or the commencement of any action or proceeding by a Third Person with respect to any such claim, such party (sometimes referred to as the "Indemnitee") shall give the other party (sometimes referred to as the "Indemnitor") written notice of such claim or commencement of such action or proceeding; provided, however, that the failure to give such notice will not affect the right to indemnification hereunder with respect to such claim, action or proceeding, except to the extent that the other party has been actually prejudiced as a result of such failure. If the Indemnitor has notified the Indemnitee within thirty (30) days from the receipt of the foregoing notice that it wishes to defend against the claim by the Third Person, then the Indemnitor shall have the right to assume and control the defense of the claim by appropriate proceedings with counsel reasonably acceptable to Indemnitee, provided that the assumption of such defense by the Indemnitor shall constitute an acknowledgment of the obligation to indemnify the Indemnitee hereunder. The Indemnitee may participate in the defense, at its sole expense, of any such claim for which the Indemnitor shall have assumed the defense pursuant to the preceding sentence, provided, however, that counsel for the Indemnitor shall act as lead counsel in all matters pertaining to the defense or settlement of such claims, suit or proceeding other than claims that in Indemnitee’s reasonable judgment could have a material and adverse effect on Indemnitee’s business apart from the payment of money damages. The Indemnitee shall be entitled to indemnification for the reasonable fees and expenses of its counsel for any period during which the Indemnitor has not assumed the defense of any claim. The Indemnitor may not settle any claim without obtaining a release for the benefit of the Indemnitee, unless the consent of the Indemnitee is obtained.

(d) Product Liability. UNFI acknowledges that it generally obtains indemnification agreements from the various manufacturers, vendors or distributors of the Products or other items being sold to WO by UNFI under this Agreement. UNFI agrees to indemnify and hold harmless WO for any liability arising from Products sold to WO by UNFI, without regard to any negligence by UNFI related to such Products. UNFI’s obligation to indemnify WO for any liability arising from any Products sold to WO shall exist regardless of the existence or nonexistence of any such indemnification agreements from Product manufacturers.

***CONFIDENTIAL TREATMENT REQUESTED**

(e) Insurance. UNFI agrees that all material properties and risks of UNFI shall at all times be covered by valid and currently effective insurance policies or binders of insurance or programs of self-insurance in such types and amounts as are consistent with customary practices and standards of UNFI and the industry, but in no event less than $2 million aggregate general liability coverage. WO shall be named as an additional insured and certificates of insurance evidencing the renewal of insurance shall be delivered by UNFI to WO from time to time. WO agrees that all material properties and risks of WO and any third party providing transportation services to WO shall at all times be covered by valid and currently effective insurance policies or binders of insurance or programs of self-insurance in such types and amounts as are consistent with customary practices and standards of companies engaged in businesses and operations similar to those of WO.

11. [CONFIDENTIAL](44)

12. Audits. (a) General. WO and its independent auditors will have the right to perform the following audits of UNFI’s compliance with the terms of the Agreement:

(i) Financial – WO sales data, WO cost data, WO promotions data, and WO discounts, [CONFIDENTIAL](45);

(ii) Quality Assurance - audits of distribution facilities and transportation equipment;

(iii) Freight - freight costs, rates, transportation costs;

(iv) Vendors – invoices from vendors to UNFI.

(b) Cost of Audit: All audits will be performed at WO’s cost, using auditors of its choice, unless any audit of financial compliance discloses an aggregate over-billing to WO or an aggregate underreporting by UNFI under the terms of the Agreement of [CONFIDENTIAL](46) of the total billed/reported, in which case UNFI shall reimburse WO for the reasonable cost of the audit. If any audit shows any overpayment by WO or an underreported amount by UNFI, UNFI shall promptly refund any over-billed amount or credit any underreported amount to WO, plus interest at the rate of 1% per month from the earliest date of error until paid. WO shall provide UNFI promptly with copies of all audits before any adjustment may occur. If any audit shows any under-payment by WO or an over-reported amount to WO, WO shall promptly refund the deficiency or overpayment to UNFI, plus interest at 1% per month from the earliest date of error until paid. Any audit may be done by an audit of a statistically significant sampling of the data being audited, in accordance with generally recognized auditing practices, and such sampling shall be deemed representative of all data in that category.

***CONFIDENTIAL TREATMENT REQUESTED**

(44)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

(45)  Ibid.

(46)  Ibid.

(c) Cooperation. UNFI shall cooperate with WO and its auditors in the performance of all audits by delivering such documents and other information, and making its personnel and facilities available for inspection, as WO shall reasonably request. WO shall provide to UNFI a list of all information required to perform its audit. WO agrees to maintain as confidential any information obtained during any audit regarding any other customer or vendor of UNFI, unless required to disclose such information by subpoena, by process of law, or by rules or regulations of any governmental agency which may require disclosure of information, but only upon first promptly notifying UNFI of such requirement and permitting reasonable opportunity to UNFI to seek a protective order. Any disclosure which, in the legal opinion of outside counsel is nevertheless necessary, shall be made only to the extent necessary and WO shall use its best efforts to obtain confidential treatment of the information.

(d) Any audit under this Section or payments made by UNFI to WO in connection with any audit shall not affect WO’s right to terminate the Agreement, and rights to audit shall survive termination of this Agreement.

(e) In the event of a dispute as to the amount of any adjustment required as a result of any audit, the parties shall use their best reasonable efforts to reach agreement within 15 days, and, failing such agreement, either party may submit the dispute to a nationally recognized accounting firm (the "Auditor"), selected upon mutual agreement of the parties, which shall resolve the dispute within 30 days or as soon thereafter as reasonably practicable. The decision of the Auditor shall be final and binding on the parties. The cost and expense of the Auditor shall be paid one-half by each party. The parties shall make available to the Auditor all relevant books, records and material reasonably requested by the Auditor.

13. Compliance with Laws. (a) Each party covenants and agrees during that it will fully comply with all applicable laws, ordinances, regulations, licenses and permits of or issued by any federal, state or local government entity, agency or instrumentality applicable to its responsibilities hereunder. UNFI agrees that it shall comply with all certification procedures and regulations. Each party shall promptly notify the other party after it becomes aware of any material adverse proposed law, regulation or order that, to its knowledge, may or does conflict with the parties’ obligations under this Agreement. The parties will then use reasonable efforts to promptly decide whether a change may be made to the terms of this Agreement to eliminate any such conflict or impracticability.

(b) Organic Documentation. In connection with any organic Products, UNFI shall take all such actions as required by any federally recognized certifying organization (or as required by law) in order for such Products to be certified as organic, including, without limitation, the maintenance of any required documentation and the taking of the necessary precautions to prevent product compromise. UNFI shall provide all documentation relating to the foregoing to WO at WO’s request.

***CONFIDENTIAL TREATMENT REQUESTED**

14. [CONFIDENTIAL](47)

15. Payment Terms. (a) WO shall pay for all Product purchases, subject to deductions for amounts owed by UNFI to WO hereunder, by wire transfer of immediately available funds to UNFI within [CONFIDENTIAL](48) from the date of the UNFI invoice, which is dated no earlier than the date the Product is shipped to the Store (and a copy of such invoice accompanies the Product). In the event receipt of a shipment is substantially delayed (delay of 24 hours or greater), payment shall be due [CONFIDENTIAL](49) following actual receipt of the shipment. Invoices shall be on a Store by Store basis. A finance charge of [CONFIDENTIAL](50) monthly on any delinquent balance not paid within [CONFIDENTIAL](51) may be assessed monthly.

(b) If UNFI fails to make any payment due hereunder, after 10 days’ prior written notice by WO by the due date specified by WO, and provided that UNFI has not given WO notice of a good faith dispute with the amount due by the due date, WO may, at its election, deduct or offset from any invoice owed to UNFI, those amounts due from UNFI under this Agreement as a reimbursement, payment or credit. WO shall notify UNFI at the time of payment of the deduction or offset.

(c) All monetary obligations under this Agreement will survive termination of the Agreement.

(d) [CONFIDENTIAL](52).

16. Credits.

(a) Product Credit. WO or its Stores may email notification, in accordance with UNFI’s standard notification process, of credits for damaged Product, miss-picks of goods not on the APL and for short-dated/out-of-code Product received on delivery from UNFI in accordance to WO Code Date Policy attached as Exhibit J hereto, provided the total amount of the credit per Store is $25 or greater. The cost of miss-picks received at Store level of Products on the APL shall be debited to WO, assuming WO can use the Products based on the quantity delivered and remaining code dates on such Products. UNFI and WO shall discuss the disposition of miss-picks.

(47)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

(48)  Ibid.

(49)  Ibid.

(50)  Ibid.

(51)  Ibid.

(52)  Ibid.

***CONFIDENTIAL TREATMENT REQUESTED**

(b) Shortage Credit. UNFI will credit WO [CONFIDENTIAL](53) for delivery shortages, calculated on Total Purchases by each Store on a monthly basis, which will be deducted through a credit memo by UNFI issued to each WO Store on a monthly basis. UNFI shall audit shortage levels on a quarterly basis using its internal audit teams, and shall provide the results thereof to WO each quarter. If UNFI’s audit shows a lesser or greater than [CONFIDENTIAL](54) shortage, then the credit shall be decreased or increased, accordingly, to the level shown by audit, effective immediately. The shortage credit shall also be adjusted immediately in the event that any WO audit shows a lower or higher shortage. WO may audit at any time, provided that changes to the shortage credit shall be effected not more frequently than quarterly. WO shall provide a report to UNFI on the results of WO’s audits with the notice of adjustment. Both parties shall audit using audit procedures to be mutually agreed to after good faith negotiation within 60 days after execution of this Agreement. Any disputes regarding audit results shall be resolved using the procedures set forth in Section 12(e) above.

(c) Processing of Credits. UNFI agrees that it shall receive and process credit requests within five business days from receipt of the request from WO by email. WO agrees that it will provide notice of credits to UNFI within 48 hours of Product receipt.

17. Termination Provisions. (a) Either party may terminate this Agreement at the end of any initial or renewal term upon [CONFIDENTIAL](55) or more prior written notice.

(b) WO may terminate the Agreement on immediate written notice (unless otherwise provided below) for cause if:

(i) UNFI fails to make any payment, credit, rebate or other remittance of monetary consideration provided for herein on the date due, other than as to payments regarding which UNFI has given WO notice of good faith dispute, and fails to remedy any delinquent payment, credit, rebate or other remittance within fifteen business days after notice thereof from WO (which failure to cure shall be an event of default), or if such breach occurs more than twice in any calendar year (in which case, for such second breach WO may elect not to provide a cure period);

(ii) [CONFIDENTIAL] (56)

(iii) UNFI breaches any other non-monetary obligations under the Agreement not specifically referenced above in this Section, and fails to cure such breach after 30 days’ prior written notice of breach;

(53)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

(54)  Ibid.

(55)  Ibid.

(56)  Ibid.

***CONFIDENTIAL TREATMENT REQUESTED**

(iv) The results of any audit conducted by WO or UNFI of any data points set forth the Agreement prove deliberate fraud or gross misconduct of UNFI of a nature that is material in either dollar amounts or percentages to total amounts or to the operational units affected, or that could reasonably result in a material impact to the reputation or operational performance of WO. WO may also terminate if it is determined by any regulatory agency, or UNFI publicly announces that any certification given by officers of UNFI relating to internal controls or fraud were materially incorrect. UNFI agrees that notwithstanding the amount of any fraud discovered, UNFI will take prompt steps to rectify any damage caused by the fraud and will implement controls designed to deter such fraud in the future;

(v) Regulatory violations by UNFI where the violations or the corrective action required materially and adversely affect the continued ability of UNFI to perform all or any material portion of the Agreement;

(vi) UNFI [CONFIDENTIAL](57), and UNFI has failed to remedy [CONFIDENTIAL](58), of breach by WO; provided, however, that UNFI shall not be entitled to a cure period upon the second breach of this provision in any running 12-month period and WO may, upon notice to UNFI of such second breach, immediately terminate this Agreement on a nationwide or regional basis;

(vii) The quality of service provided by UNFI is below the level as required herein, and UNFI has failed to remedy service problems within 30 days after written notice of breach by WO. For purposes hereof, quality of service issues shall include, but not be limited to, the following:

(A) UNFI is unable, after 10 days’ written notice and opportunity to cure, to meet regional or national, as applicable, delivery windows to the Stores as set forth in this Agreement, including on Exhibit I attached hereto, as such may be amended by mutual agreement of the parties from time to time, including but not limited to hours and days of delivery, delivery routes, condition of Products, or execution of invoices at the Store, provided it has been given reasonable advance notice of any unusual requirements; or

(B) Products delivered by UNFI fail to meet the quality standards and specifications set forth herein, including Code Date policies, temperature control limits or arrive in damaged, infested, or adulterated conditions, or the BNRs as shown by an audit by either party exceed [CONFIDENTIAL](59).

(57)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

(58)  Ibid.

(59)  Ibid.

***CONFIDENTIAL TREATMENT REQUESTED**

Notwithstanding the foregoing, WO shall not have the right to terminate the Agreement for cause if noncompliance by UNFI with any of the foregoing results from intentional sabotage by WO employees, Force Majeure events (as defined below), or the negligent or intentional acts or omissions of WO. Nothing herein shall prohibit WO from ceasing to purchase Products under Section 2 above without notifying UNFI of a breach hereunder.

(c) UNFI may terminate the Agreement for cause on immediate written notice if:

(i) WO fails to make any payment, credit, rebate or other remittance of monetary consideration provided for herein on the date due, other than payments regarding which WO has given UNFI notice of a good faith dispute, and fails to remedy any delinquent payment within five business days after notice thereof from UNFI (which failure to cure shall be an event of default), or if such breach occurs more than twice in any given calendar year;

(ii) Regulatory violations by WO where the violations or the corrective action required materially and adversely affect the continued ability of WO to perform under the Agreement beyond 30 days;

(iii) WO fails to purchase [CONFIDENTIAL](60) during the Term hereof, commencing as of the Effective Date) during the Term of this Agreement, other than where such failure is caused by Force Majeure or UNFI or manufacturer OOS; and

(iv) WO materially breaches any other non-monetary obligations under the Agreement not specifically referenced above in this Section, and fails to cure such breach after 30 days’ prior written notice of breach;

(v) The results of any audit conducted by UNFI of any data points set forth the Agreement prove deliberate fraud or gross misconduct of WOof a nature that is material in either dollar amounts or percentages to total amounts or to the operational units affected, or that could reasonably result in a material impact to the reputation or operational performance of WO. UNFI agrees that notwithstanding the amount of any fraud discovered, UNFI will take prompt steps to rectify any damage caused by the fraud and will implement controls designed to deter such fraud in the future. UNFI may also terminate if it is determined by any regulatory agency, or WO publicly announces that any certification given by officers of WO relating to internal controls or fraud were materially incorrect.

(d) Not earlier than [CONFIDENTIAL](61), UNFI may give WO notice that UNFI [CONFIDENTIAL](62) from the business relationship evidenced by this

(60)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

(61)  Ibid.

(62)  Ibid.

***CONFIDENTIAL TREATMENT REQUESTED**

Agreement. The parties shall then negotiate in good faith, [CONFIDENTIAL](63) following WO’s receipt of such notice, such modifications of this Agreement as may be necessary to allow UNFI [CONFIDENTIAL](64). If after, [CONFIDENTIAL](65) the parties are unable to reach agreement on modifications sufficient to allow UNFI [CONFIDENTIAL](66), then UNFI may give WO notice of termination of this Agreement [CONFIDENTIAL](67) after WO’s receipt of the termination notice. Such termination right shall not be deemed a default hereunder. [CONFIDENTIAL](68).

(e) Notwithstanding anything to the contrary in this Agreement, the following will apply in a Force Majeure event:

(i) If the Force Majeure event affects, for a period of at least 10 consecutive days, in any material manner the operations in any DC or any region served primarily by one DC, as the case may be, of the party who is not claiming the benefit of the Force Majeure provision (the "Non-Affected Party"), then the Non-Affected Party may on written notice to the Affected Party suspend its obligations hereunder (including without limitation Section 2(a)), other than the payment of sums due unless the Force Majeure event relates to the operation of the banking system, with respect to such DC or region until such time that the Affected Party is able to resume its obligations in full with respect to such DC or region. The parties agree that [CONFIDENTIAL](69) of Buyer.

(ii) In the event that Force Majeure continues for more than 60 consecutive days, and the Affected Party has not provided an acceptable alternative remedy to fully mitigate the disruption, the Non-Affected Party may terminate the Agreement or Definitive Agreement as to the DC or region affected by the Force Majeure event, on 30 days written notice to the Affected Party provided that the Force Majeure event exists on the date of the notice of termination.

18. Representations and Warranties of UNFI. UNFI represents and warrants to WO as follows, and such representations and warranties shall survive the Commencement Date:

(a) Corporate Organization and Authority. UNFI (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is authorized to transact business in each State in which such authority is required by law; and (ii) has the corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted.

(63)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

(64)  Ibid.

(65)  Ibid.

(66)  Ibid.

(67)  Ibid.

(68)  .Ibid.

(69)  Ibid.

***CONFIDENTIAL TREATMENT REQUESTED**

(b) Authorization. UNFI has the corporate power and authority to execute, deliver and perform its obligations under this Agreement and has taken all necessary corporate action to authorize its execution, delivery and performance of this Agreement. This Agreement has been duly executed and delivered on behalf of UNFI and constitutes the legal, valid and binding obligation of UNFI, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors’ rights generally and by general equitable principles (regardless of whether the issue of enforceability is considered in a proceeding in equity or at law).

(c) No Consents; Conflicts. No consent, authorization by, approval of or other action by, and no notice to, or filing or registration with, any governmental authority, agency, regulatory body, lender, lessor, franchisee or other person is required for the execution, delivery or performance of this Agreement by UNFI, other than those that have been obtained and are in full force and effect. The execution, delivery and performance of this Agreement will not result (with or without due notice or lapse of time or both) in any violation or breach of any provision of the charter or by-laws of UNFI, any judgment, decree or order to which UNFI is a party or by which it is bound, any indenture, mortgage or other agreement or instrument to which UNFI is a party or by which it is bound or any statute, rule or regulation applicable to UNFI.

(d) Sufficient Personnel to Perform Obligations. UNFI represents that as of the execution of this Agreement, UNFI has sufficient personnel with adequate training and expertise to perform its obligations as contemplated hereunder in the time frames contemplated herein.

(e) National Organic Standards. UNFI represents that it has adequate processes and systems in place, and has adequately educated its personnel, to comply with all federal, state and local regulations relating to handling and labeling of organic products, including but not limited to the National Organic Standards as promulgated by the U.S. Department of Agriculture and as such applies to UNFI as a handler or processor of organic foods. UNFI acknowledges that WO has placed substantial reliance on UNFI to handle various foods for human consumption so as to not invalidate any "organic" designation of such foods.

(f) Computer Systems. As of the date of this Agreement, UNFI has proper security safeguards in place to ensure the confidentiality of all of WO’s data as contained in UNFI’s computer systems. All such systems will perform without material defect or error in compliance with the performance standards set forth in this Agreement. UNFI has a disaster recovery program in place to ensure that, in the event of a catastrophic destruction of any portion of UNFI’s computer systems, wherever located, UNFI will be able to recover all necessary data to continue to perform its obligations hereunder in substantially the time frames contemplated herein.

(g) Facilities’ Condition and Capacity. All of the DCs participating in this Agreement will be maintained and operated in accordance with UNFI warehousing and delivery standards. Such facilities have the operational systems required to support the obligations of UNFI as set forth in this Agreement, and all such

***CONFIDENTIAL TREATMENT REQUESTED**

facilities have adequate capacity to order, store and deliver Products in accordance with the terms of this Agreement and in the amounts contemplated by WO. All the DCs participating in this Agreement shall have sufficient security measures in place prior to receipt of Products for WO to ensure that such Products are not tampered with or adulterated in any manner, and that all such Products shall be maintained at temperatures and other storage conditions necessary to preserve the freshness and integrity of the Products.

(h) Ownership of UNFI. No entity constituting a competitor to WO, which for purposes of this paragraph includes all conventional and natural food grocery store chains, owns more than a 5% equity interest in UNFI. No such entity has any rights to purchase, through warrants, options, rights of first refusal, preemptive rights or any other legal right or obligation, any equity interest in UNFI which, together with any existing interest, would aggregate more than 5% if fully exercised (other than purchases made on the open market).

(i) Litigation. There is no pending nor, to UNFI’s knowledge, threatened litigation, governmental action, action for injunctive or other equitable relief or other threatened or outstanding claims of any nature which could reasonably (i) interfere with UNFI’s performance of its obligations hereunder, or (ii) have a material or detrimental impact on UNFI’s assets or operations as such exist as of the Effective Date.

(j) Information Provided to Auditors. All information that shall be provided by UNFI to auditors retained by WO shall be provided in the format in which such information is maintained in the normal course of UNFI’s business, and to UNFI’s knowledge, all such information shall be true and correct in all material respects, except as otherwise disclosed to WO and the auditors at the time of disclosure.

19. Representations and Warranties of WO. WO hereby represents and warrants to UNFI as follows, and such representations and warranties shall survive the Commencement Date:

(a) Corporate Organization and Authority. WO (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; and (ii) has the corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted.

(b) Authorization. WO has the corporate power and authority to execute, deliver and perform its obligations under this Agreement and has taken all necessary corporate action to authorize its execution, delivery and performance of this Agreement. This Agreement has been duly executed and delivered on behalf of WO and constitutes the legal, valid and binding obligation of WO, enforceable in accordance with its terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors’ rights generally and by general equitable principles (regardless of whether the issue of enforceability is considered in a proceeding in equity or at law).

***CONFIDENTIAL TREATMENT REQUESTED**

(c) No Consents; Conflicts. No consent, authorization by, approval of or other action by, and no notice to, or filing or registration with, any governmental authority, agency, regulatory body, lender, lessor, franchisee or other person is required for the execution, delivery or performance of this Agreement by WO, other than those that have been obtained and are in full force and effect. The execution, delivery and performance of this Agreement will not result in (with or without due notice or lapse of time or both) any violation or breach of any provision of the charter or by-laws of WO, any judgment, decree or order to which WO is a party or by which it is bound, any indenture, mortgage or other agreement.

(d) Litigation. There is no pending nor, to WO’s knowledge, threatened litigation, governmental action, action for injunctive or other equitable relief or other threatened or outstanding claims of any nature which could reasonably (i) interfere with WO’s performance of its obligations hereunder, or (ii) have a material detrimental impact on WO’s assets or operations as such exist as of the Effective Date.

(e) Computer Systems. As of the date of this Agreement, WO has proper security safeguards in place to ensure the confidentiality of all of UNFI’s data as contained in WO’s computer systems. All such systems will perform without material defect or error in compliance with the performance standards set forth in this Agreement. WO has a disaster recovery program in place to ensure that, in the event of a catastrophic destruction of any portion of WO’s computer systems, wherever located, WO will be able to recover all necessary data to continue to perform its obligations hereunder in substantially the time frames contemplated herein.

(f) Sufficient Personnel to Perform Obligations. As of the execution of this Agreement, WO has sufficient personnel to perform its obligations as contemplated hereunder in timeframes contemplated herein.

(g) Ownership of WO. No entity constituting a competitor to UNFI, which for purposes of this paragraph includes other distributors with gross revenues of more than $100 million, owns more than a 5% equity interest in WO. No such entity has any rights to purchase, through warrants, options, rights of first refusal, preemptive rights or any other legal right or obligation, any equity interest in WO which, together with any existing interest, would aggregate more than 5% if fully exercised (other than purchases made on the open market).

20. Binding Effect. This Agreement is a binding obligation between the parties hereto for the sale by UNFI and purchase by WO for the Products referenced at the prices and other terms set out in or referenced herein, and may be enforced by either party in accordance with its terms. This Agreement supersedes all previous agreements between the parties.

***CONFIDENTIAL TREATMENT REQUESTED**

21. Miscellaneous. (a) Force Majeure. "Force Majeure" events shall be events beyond the reasonable control of a party (and not through the fault or negligence of such party) that make timely performance of an obligation not possible. Without limiting the generality of the foregoing, vehicle breakdowns due to a party’s failure to properly maintain a vehicle, or inclement weather not of unusual severity or in which vehicles similar to those of the party claiming Force Majeure are traveling, do not constitute Force Majeure events. A Force Majeure event is not reasonably foreseeable with the exercise of reasonable care, nor avoidable through the payment of nonmaterial additional sums. In the event of a Force Majeure, the party so affected shall give prompt written notice to the other party of the cause and shall take whatever reasonable steps are necessary to relieve the effect of such cause as rapidly as possible. No finance charge will be assessed on either party for late payments due to Force Majeure events.

(b) Governing Law, etc. Each of the parties hereto irrevocably waives all rights to a trial by jury with respect to any dispute relating to this Agreement, the subject matter hereof or the entering into or termination of this Agreement (a "Dispute"). This Agreement and all actions related hereto shall be governed by, and any dispute shall be resolved in accordance with, the laws of the State of Colorado, excluding its internal choice of law principles.

In the event of any Dispute, such Dispute, if not resolved promptly in the ordinary course between representatives of the parties, shall be submitted for settlement negotiation between the Chief Executive Officer of UNFI and Chief Executive Officer of WO, and if such procedure does not resolve such Dispute within 30 days after a request for such settlement negotiation to the other party, then and only then shall all such Disputes be resolved exclusively by the process of litigation in accordance with this Section. The parties agree that all disputes shall be brought either in Federal District Court for the Southern District of New York, and if Federal District Court is not available to the parties because of a lack of diversity jurisdiction, then in the Supreme Court for the State of New York, County of New York.

(c) Recovery of Fees and Costs. In the event of a dispute, the prevailing party shall be entitled to recovery of reasonable attorneys’ fees and costs (including costs of appeal).

(d) Confidentiality. The parties to this Agreement shall maintain as confidential the specific terms hereof ("Confidential Information"), and shall not disclose such terms to any third party (other than to its own outside legal, accounting, insurance or financial advisors as necessary) without the other party’s prior written consent. "Confidential Information" about a party learned under this Agreement shall not be used during or after the term of this Agreement except in connection

***CONFIDENTIAL TREATMENT REQUESTED**

with the party’s obligations hereunder, and without limiting the foregoing, such information as to WO may not be used by UNFI in connection with the marketing, distribution or sale of UNFI’s products other than to WO. The term "Confidential Information" shall include computer software, source code, object code, hardware configurations and all other information relating to a party, its business and prospects, learned by the other party or disclosed by such party from time to time to the other party in any manner, whether orally, visually or in tangible form (including, without limitation, documents, devices and computer readable media) and all copies, improvements, derivatives and designs thereof, created by either party whether owned by or licensed to such party. The term "Confidential Information" shall also be deemed to include all notes, analyses, compilations, studies, interpretations or other documents prepared by a party that contain, reflect or are based upon the information furnished to such party by the other party pursuant hereto. Confidential Information shall not include any information that:

(i) was in a party’s possession prior to disclosure by the other party hereunder, provided such information is not known by such party to be subject to another confidentiality agreement with or secrecy obligation to the other party;

(ii) was generally known in the grocery industry at the time of disclosure to a party hereunder, or becomes so generally known after such disclosure, through no act of such party;

(iii) has come into the possession of a party from a third party who is not known by such party to be under any obligation to the other party to maintain the confidentiality of such information; or

(iv) was independently developed by a party without the use of any Confidential Information of the other party, to the extent that such independent development is reasonably established by such first party to the other party.

Notwithstanding the foregoing, nothing herein shall prevent the filing of a copy of this Agreement as an exhibit to any filing required by an regulatory agency having jurisdiction over either party, provided that a party required to file a copy hereof shall notify the other party of the filing and request and use its best efforts to obtain confidential treatment of all financial terms of this Agreement prior to the filing thereof. In addition, either party may disclose the terms of this Agreement pursuant to a valid subpoena, provided such party gives the other party reasonable prior notice of the service of any subpoena to permit the other party to seek a protective order, and seeks confidential treatment of all financial terms hereof.

The parties acknowledge and agree that the non-breaching party’s remedy at law is inadequate in the event of any breach or threatened breach by the other party of its agreements set forth in this Section. In the event of such breach or threatened breach, in addition to any other remedy which may be available to the non-breaching party, the non-breaching party shall be entitled to seek, without posting a bond, preliminary or permanent injunctive and/or other equitable relief restraining the breaching party, or any of its agents or employees, from breaching or acting in any manner inconsistent with the conduct or performance required by this Section.

(e) Amendment; Assignment. This Agreement may not be amended or modified except by an instrument in writing signed by an authorized officer of each party. It is agreed that neither party shall transfer or assign this Agreement or any part hereof or any right arising hereunder, by operation of law or otherwise, without the

***CONFIDENTIAL TREATMENT REQUESTED**

prior written consent of the other, which consent will not be unreasonably withheld. A party may reasonably withhold its consent if, in such party's good faith judgment, the proposed assignee: (i) does not have sufficient financial resources or assets to perform its obligations under the Agreement; (ii) does not have sufficient experience or expertise in the distribution and supply of food products in the case of an assignment by UNFI or its direct or indirect parent, or grocery retail business in the case of an assignment by WO, unless the existing operations management personnel prior to the assignment remain in control of the daily operations of the assignor after such assignment; (iii) is engaged in the same business as the non-assigning party; (iv) does not deliver its written commitment to carry out the Agreement at the same level of business being conducted by the assigning party immediately prior to the proposed assignment; or (v) is a competitor of the non-assigning party. This Agreement shall be assigned to and binding upon any purchaser of all or substantially all of the assets of either party hereto.

In the event a party requests such consent to such a transfer, such party shall meet with the other party to provide any information reasonably requested by the other party regarding the proposed transferee. Any purported assignment without consent shall be void and of no force or effect or, at the other party’s option, shall terminate this Agreement. Subject to the foregoing, this Agreement shall be binding on the respective parties and their permitted successors and assigns.

CONFIDENTIAL](70).

(f) Entire Agreement; Survival. This Agreement (and any documents referred to herein or therein) represents the entire agreement and understanding of the parties with respect to the matters set forth herein, and there are no representations, warranties or conditions or agreements (other than implementing invoices, purchase orders and the like necessary to implement this Agreement) not contained herein (or in any documents not referred to herein) that constitute any part hereof or that are being relied upon by any party hereunder. Notwithstanding any termination of this Agreement, all claims arising prior to such termination for any breach of or for any amount due under this Agreement (excluding any such claims that have been satisfied, waived or released prior to such termination) under this Agreement, shall survive such termination, and in addition, the following sections shall survive any such termination: 10, 12 (for not more than 120 days following termination), 14(b), 15, 16, 21(b) – (d) , (f), (g), (i), (j).

(g) Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions shall nevertheless continue in full force without being impaired or invalidated in any way.

(h) Publicity. Both parties shall agree on a joint initial press release on the entering into of this Agreement; provided, however, that either party may issue releases as deemed necessary by their respective securities counsel under applicable laws governing the release of information.

(70)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.

***CONFIDENTIAL TREATMENT REQUESTED**

(i) Notices. Any notices to be given by either party to the other shall be in writing by personal delivery or by mail, registered or certified, postage prepaid with return receipt requested, or by facsimile (only with receipt confirmed). Notices shall be addressed to the parties at the addresses set forth below or to such other address as shall have been so notified to the other party in accordance with this Section. Notices to UNFI shall be addressed to: Steve Townsend, UNFI, 260 Lake Road, Dayville, CT 06241, FAX: 860-779-0746, with a copy, which shall not constitute notice, to E. Colby Cameron, Esq., Cameron & Mittleman LLP, 56 Exchange Terrace, Providence, RI 02903, FAX: 401-331-5787. Notices to WO shall be addressed to: Chief Executive Officer, Wild Oats Markets, Inc., 3375 Mitchell Lane, Boulder, CO 80301-2244, Fax: (303) 402-9920, with a copy to Freya Brier, Esq., General Counsel, Wild Oats Markets, Inc., 3375 Mitchell Lane, Boulder, CO 80301-2244, FAX: (303) 440-7316.

(j) No Third Party Beneficiaries . Nothing in this Agreement, whether expressed or implied, is intended to confer on any person other than the parties to this Agreement or their respective successors or permitted assigns, any rights, remedies, obligations or liabilities.

(k) Alliance. WO and UNFI agree that an objective of the parties is to establish during the Term of this Agreement, a mutually supportive alliance with respect to the Products and the unified supply chain management concept relating to the purchase and sale of the Products which is embodied in the Agreement.

(l) Authority. WO and UNFI each represent and warrant to the other that the individual executing this Agreement has full authority to execute this Agreement, and when executed this Agreement is a binding obligation of the party.

(m) Expenses. Except as otherwise provided herein, all costs and expenses (including legal and accounting fees) incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the party incurring such expense.

(n) Independent Contractors. In all matters relating to this Agreement both parties shall be acting solely as independent contractors and shall be solely responsible for the acts of their respective employees, contractors and agents. Employees, agents or contractors of one party shall not be considered employees, agents or contractors of the other party.

(o) Titles and Headings; Counterparts; Facsimile Signature. The titles and headings to Sections herein are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. This Agreement may be executed in one or more counterparts, all of which will be considered one and the same agreement, and will become a binding agreement when one or more counterparts have been signed by each party and delivered to the other party. Facsimile signatures shall be deemed original signatures for purposes of execution of this document.

***CONFIDENTIAL TREATMENT REQUESTED**

(p) Negotiation of Agreement, Each party and its counsel have cooperated in the drafting and preparation of this Agreement and the documents referred to herein, and any drafts relating thereto shall be deemed the work product of the parties and may not be construed against any party by reason of its preparation. Any rule of law or any legal decision that would require interpretation of any ambiguities in this Agreement against the party that drafted it is of no application and is hereby expressly waived.

Executed as of the date first set forth above.

WILD OATS MARKETS, INC.	UNITED NATURAL FOODS, INC.
By: Freya Brier, Vice President, Legal	By: Steve Townsend, President

EX-10.39

***CONFIDENTIAL TREATMENT REQUESTED***

MEMORANDUM OF UNDERSTANDING

This Memorandum of Understanding, dated November 19, 2003, is between Wild Oats Market, Inc. ("WO") and Tree of Life, Inc. ("TOL").

Recitals.

A. WO and TOL are parties to an Agreement for Distribution of Product dated June 14, 2002 (the "Agreement").

B. The parties have determined that it is in their best interests to terminate the Agreement prior to the expiration of its term, and to effectuate an orderly transition of WO’s primary distribution business.

C. This Memorandum of Understanding sets forth the basic terms of the parties’ understanding regarding the termination of the Agreement and the transition of WO’s primary distribution business from TOL to a third party (the "New Distributor").

For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Meaning. Unless otherwise defined in this Memorandum of Understanding, all capitalized terms herein will carry the same meaning as defined in the Agreement.

2. Commitment to Transition Plan. The parties agreed that an objective of both parties is to establish a transition plan whereby TOL’s conversion from primary distributor to secondary distributor will be completed by no later than March 15, 2004. To carry out the plan, each party agreed to establish a transition team. The names and positions of each party’s team members are set forth on Exhibit A. The teams shall meet promptly and as necessary to work in good faith to develop a detailed transition plan by no later than December 12, 2003. The resulting mutually agreeable plan ("Transition Plan") will be set forth in writing, will incorporate and implement, at a minimum, the terms reached at the parties’ November 19, 2003 meeting, which are contained in Exhibit B, and will be signed by both parties and incorporated herein by attachment hereto as Exhibit C.

3. Secondary Distributorship Agreement. TOL and WO agree to negotiate in good faith the terms of a secondary distributorship relationship. The parties agree that this section shall not create any obligation to enter into any such agreement.

4. Termination of Original Agreement. Subject to the terms and conditions of this Memorandum of Understanding and such additional terms as shall be negotiated hereafter and contained in the Transition Plan, the Agreement will terminate effective no later than March 15, 2004 (the "Termination Date"). The parties will address issues in the Transition Plan that will impact the method and manner of the parties’ transition. In the event of a conflict between the terms of the Agreement and the Transition Plan, the Transition Plan shall control. The parties’ intent is that, except as established in the Transition Plan or in

***CONFIDENTIAL TREATMENT REQUESTED***

this Memorandum of Understanding, TOL shall continue to operate as WO’s primary wholesale distributor of the Products in accordance with Section 2 of the Agreement [CONFIDENTIAL](1) , from and after the date hereof and until [CONFIDENTIAL](2), unless otherwise agreed in the Transition Plan.

5. Mutual Release of Claims. [CONFIDENTIAL](3).

6. Non-Disparagement. Paragraph 24(d) of the Agreement shall continue in full force and effect. [CONFIDENTIAL](4).

7. Non-solicitation. Each party agrees that for [CONFIDENTIAL](5).a period of one year from the date hereof, it will refrain from soliciting and shall not directly or indirectly solicit or recruit the officers and management ("Covered Employees") of the other party, [CONFIDENTIAL](6), to leave the service of that party or solicit, encourage or cause any business opportunity of the other party to modify, terminate, or refrain from entering into or expanding any business relationship between such person or entity and that party. This obligation shall survive the termination of the parties’ Agreement and the Transition Period. The employment of a Covered Employee of one party by the other party following the Covered Employee’s submission of an unsolicited response to a public posting of an available employment position shall be deemed not to violate this section.

8. [CONFIDENTIAL](7).

9. Survival of Provisions of Agreement. The following paragraphs will survive the termination of the Agreement: 3(c), 10, 13 (for not more than 90 days following termination of the Agreement), 14(b), 18 (subject to termination pursuant to this Memorandum), 19(b) (on the final date by the transition team for the cessation of MCBs), 24(b) through (d) inclusive, (g), (i), (j) and (p).

10. Elimination of Certain Requirements during Transition Period. From and after the date hereof, the following provisions contained in the Agreement shall have no further effect, except to the extent stated:

a. Section 6(b)(ii);

b. WO may not add any new Product items under 3(b)(i) to the APL nor shall TOL be obligated to achieve distribution of new items for which it has not received notice from WO past the deadlines provided in the Transition Plan;

c.  [CONFIDENTIAL](8),

d.  [CONFIDENTIAL](9),

e.  As of February 4, 2004, Section 9, all TOL promotional and marketing support and activity shall cease.

(1)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC.
(2)  Ibid.
(3)  Ibid.
(4)  Ibid.
(5)  Ibid.
(6)  Ibid.
(7)  Ibid.
(8)  Ibid.
(9)  Ibid.

***CONFIDENTIAL TREATMENT REQUESTED***

11. Accounts Receivable and Vendor Issues.

a. WO shall continue to pay for all Product purchases and other charges due TOL within terms and in the manner set forth in Section 19 of the Agreement.

b. During the weekly Transition Team meetings, [CONFIDENTIAL](10). of TOL and [CONFIDENTIAL](11). of WO shall confer to review and resolve all outstanding accounts receivable and unresolved vendor issues to the extent not addressed in the Transition Plan. [CONFIDENTIAL](12).

12. Transition of TOL Personnel. TOL shall have the right to transition its personnel from WO’s Boulder facility any time after January 31, 2004, but [CONFIDENTIAL](13), unless released earlier by the Transition Team. TOL shall have the right to transition all other dedicated regional personnel at any time after December 31, 2003.

13. Attorneys’ Fees and Costs. The parties agree that neither party is a "prevailing party" in regards to this Memorandum of Understanding, the Transition Plan, any subsequently executed related agreement or any matter resolved therein and neither party may make any claim or demand pursuant to Section 24(c) of the Agreement for any attorney’s fees or costs arising therefrom.

14. Miscellaneous.

a. Except as expressly provided herein, the Agreement shall remain unmodified and in full force and effect. In the event of a conflict between the terms of the Agreement and this Memorandum or the Transition Plan, this Memorandum or the Transition Plan, as applicable, shall control.

b. This Memorandum may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and will become a binding agreement when one or more counterparts have been signed by each party and delivered to the other party. Facsimile signatures shall be deemed original signatures for purposes of execution of this document.

c. WO and TOL each represent and warrant to the other that the individual executing this Memorandum has full authority to execute this Memorandum, and when executed this Memorandum is a binding obligation of the party.

d. WO and TOL agree that, from the date hereof and any time after the Termination Date, each party shall take such other actions and execute such other documents as are reasonably requested by the other party and consistent with the terms of this Memorandum and the attachments hereto for the purpose of effecting the transactions contemplated by this Memorandum.

(10)  Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC
(11)  Ibid.
(12)  Ibid.
(13)  Ibid.
(14)  Ibid.

***CONFIDENTIAL TREATMENT REQUESTED***

e. Any disputes arising out of or relating to this Memorandum of Understanding, the Transition Plan or the Agreement after the execution date here of shall be submitted to final and binding arbitration before a single arbitrator selected from the American Arbitration Association’s Complex Commercial Arbitration panel and the arbitration shall be conducted in accordance with the American Arbitration Association’s Commercial Dispute rules applicable to Large, Complex Disputes. The parties shall endeavor to mutually agree to the arbitrator, but, in the event they are unsuccessful, the arbitrator shall be selected by the American Arbitration Association. Any such arbitration shall be conducted in New York, New York.

Executed as of the date first set forth above.

WILD OATS MARKETS, INC.	TREE OF LIFE, INC.
By: _/s/ Perry D. Odak_______	By:__/s/ Richard A. Thorne___
Perry D. Odak, President and CEO	Richard A. Thorne,Chairman and CEO
Koninklijke Wessanen, n.v.
By: _/s/__Ad Veenhof____________
Ad Veenhof, Chairman and CEO
AS TO PARAGRAPH 6 ONLY

EX-21.1

Exhibit 21.1

WILD OATS MARKETS, INC.
LIST OF SUBSIDIARIES

Wholly owned subsidiaries of Wild Oats Markets, Inc.:

Wild Oats Markets Canada, Inc. - a British Columbia, Canada corporation
Wild Oats Financial, Inc. - a Nevada corporation

Wholly owned subsidiaries of Wild Oats Financial, Inc.:
Sparky, Inc. - a Nevada corporation
Wild Marks, Inc. - a Nevada corporation

Wild Oats of Massachusetts, Inc. - a Massachusetts corporation
Wild Oats of Texas, Inc. - a Texas corporation

EX-23

Exhibit 23

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-20539, No. 333-66347, No. 333-38346, No. 333-64054, No. 333-72466 and No. 333-100309) and Form S-3 (No. 333-88011) of Wild Oats Markets, Inc. of our report dated March 8, 2004, relating to the financial statements, which appears in this Annual Report on Form 10-K.

/s/  PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Denver, Colorado

March 8, 2004

EX-31.1

Exhibit 31.1

Certification of CEO Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

	I, Perry D. Odak, Chief Executive Officer of Wild Oats Markets, Inc., certify that:
1.	I have reviewed this annual report on Form 10-K for the period ended December 27, 2003, of Wild Oats Markets, Inc. (the "Registrant");
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for the periods presented in this annual report;
4.	The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	c)	Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s fourth fiscal quarter that has materially affected, or is likely to materially affect, the Registrant’s internal control over financial reporting.
5.	The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
	Date: March 11, 2004
	/s/ Perry D. Odak
	Perry D. Odak, Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of CFO Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

	I, Edward Dunlap, Chief Financial Officer of Wild Oats Markets, Inc., certify that:
1.	I have reviewed this annual report on Form 10-K for the period ended December 27, 2003, of Wild Oats Markets, Inc. (the "Registrant");
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for the periods presented in this annual report;
4.	The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; and
	b)	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	c)	Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s fourth fiscal quarter that has materially affected, or is likely to materially affect, the Registrant’s internal control over financial reporting; and
5.	The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
	Date: March 11, 2004
	/s/ Edward Dunlap
	Edward Dunlap, Chief Financial Officer

EX-32.1

Exhibit 32.1

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 Annual Report of Wild Oats Markets, Inc. (the "Company") on Form 10-K for the period ended December 27, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Perry D. Odak, as Chief Executive Officer of the Company hereby certifies, pursuant to 18 U.S.C. 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

March 11, 2004

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.

A signed original of this written statement required by Section 906 has been provided to Wild Oats Markets, Inc. and will be retained by Wild Oats Markets, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

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 Annual Report of Wild Oats Markets, Inc. (the "Company") on Form 10-K for the period ended December 27, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Edward F. Dunlap, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. 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

March 11, 2004

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.

A signed original of this written statement required by Section 906 has been provided to Wild Oats Markets, Inc. and will be retained by Wild Oats Markets, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.