TABLE OF CONTENTS





The following items
were the subject of a
Form 12b-25 and
are included herein:
6, 7, 7A, 8 and 9A.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K/A

(Amendment No. 2)

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 1, 2005

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 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 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. o



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 and non-voting common stock of
the registrant held by non-affiliates of the registrant based on the closing price at
which such stock was sold as reported by NASDAQ National Market on June 25, 2004 was
approximately $156,871,356. For purposes of this calculation, executive officers,
directors and 5% or greater stockholders are deemed to be affiliates of the registrant.



As of February 26, 2005, the registrant had outstanding 28,560,698
shares of common stock, par value $.001 per share.





DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Registrant's Annual
Meeting of Stockholders to be held on May 17, 2005, have been incorporated by reference
into Part III of this report.



---

EXPLANATORY NOTE



Amendment No. 1 on Form 10-K/A to the Registrant's Annual Report on
Form 10-K for the year ended January 1, 2005, filed with the Securities and Exchange
Commission ("SEC") on April 1, 2005, includes Items 6, 7, 7A, 8 (including our
restated Consolidated Statements of Operations, Comprehensive Income (Loss), Changes in
Stockholders' Equity and Cash Flows and related disclosures for the fiscal years 2003 and
2002, and the Consolidated Balance Sheets and related disclosures for fiscal years ended
2003, and the reports of independent registered public accounting firms), 9A, 9B and the
principal executive officer and principal financial officer certifications pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, and the certifications by the principal
executive officer and principal financial officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. See "Notes to Consolidated Financial Statements 
Note 2  Restatement of Financial Statements."



The restatements presented herein correct errors in applying generally
accepted accounting principles related to lease accounting. Specifically, corrections were
made to the Company's accounting for (1) amortization of leasehold improvements and
leasehold interests, (2) straight-line rent expense, (3) tenant improvement allowances,
(4) sale leaseback transactions, and (5) classification of leases as capital or operating
in accordance with Statement of Financial Accounting Standards ("SFAS") 13, Accounting
for Leases.Additionally, a restatement has been made to correct a restructuring
reserve error related to one closed store between interim periods in fiscal 2003, as
discussed in Note 2.



Neither Amendment No. 1 on Form 10-K/A, nor Amendment No. 2 on Form 10-K/A reflects
events occurring after the filing of the Annual Report on Form 10-K filed on March 17,
2005, nor do they modify or update the disclosures presented therein, except with regard
to Amendment No. 1, to reflect the modifications as described therein and to modify Item
9B "Other Events", and with regard to Amendment No. 2, to reflect clerical
corrections made to conform Note 2 to the Consolidated Financial Statements, to the
Consolidated Statement of Cash Flows for Fiscal Years Ended  2003 and 2002, and to
include an updated Exhibit List. Refiled for convenience of reference find all Items, as
filed on March 17, 2005 on Form 10-K, and as filed on April 1, 2005 on Form 10-K/A
(Amendment No. 1) for the fiscal year ended January 1, 2005.

---





TABLE OF CONTENTS



|PART I.   |  |                                                                                                                  | PAGE
|--------- |  | ---------------------------------------------------------------------------------------------------------------- | ----
|          |  |                                                                                                                  |     
|Item 1.   |  | Business                                                                                                         | 4   
|          |  |                                                                                                                  |     
|Item 2.   |  | Properties                                                                                                       | 9   
|          |  |                                                                                                                  |     
|Item 3.   |  | Legal
    Proceedings                                                                                            | 11  
|          |  |                                                                                                                  |     
|Item 4.   |  | Submission of Matters to a
    Vote of Security Holders                                                          | 11  
|          |  |                                                                                                                  |     
|PART II.  |  |                                                                                                                  |     
|          |  |                                                                                                                  |     
|Item 5.   |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
    Purchases of Equity Securities | 12  
|          |  |                                                                                                                  |     
|Item 6.   |  | Selected Financial Data                                                                                          | 13  
|          |  |                                                                                                                  |     
|Item 7    |  | Management's Discussion and
    Analysis of Financial Condition and Results of Operations                        | 14  
|          |  |                                                                                                                  |     
|Item 7A.  |  | Quantitative and
    Qualitative Disclosures About Market Risk                                                   | 28  
|          |  |                                                                                                                  |     
|Item 8    |  | Financial Statements
    and Supplementary Data                                                                  | 28  
|          |  |                                                                                                                  |     
|Item 9.   |  | Changes in and
    Disagreements with Accountants on Accounting and Financial Disclosure                         | 67  
|          |  |                                                                                                                  |     
|Item 9A.  |  | Controls
    and Procedures                                                                                      | 67  
|          |  |                                                                                                                  |     
|Item 9B.  |  | Other
    Information                                                                                            | 68  
|          |  |                                                                                                                  |     
|PART III. |  |                                                                                                                  |     
|          |  |                                                                                                                  |     
|Item 10.  |  | Directors and
    Executive Officers of the Registrant                                                           | 69  
|          |  |                                                                                                                  |     
|Item 11.  |  | Executive Compensation                                                                                           | 69  
|          |  |                                                                                                                  |     
|Item 12.  |  | Security Ownership
    of Certain Beneficial Owners and Management and Related Stockholder Matters               | 69  
|          |  |                                                                                                                  |     
|Item 13.  |  | Certain
    Relationships and Related Transactions                                                               | 69  
|          |  |                                                                                                                  |     
|Item 14.  |  | Principal Accountant Fees
    and Services                                                                       | 69  
|          |  |                                                                                                                  |     
|PART IV.  |  |                                                                                                                  |     
|          |  |                                                                                                                  |     
|Item 15.  |  | Exhibits, Financial Statements and Financial Statements Schedules                                                | 70  
|          |  |                                                                                                                  |     







PART I.

Item 1.

BUSINESS





Who We Are

Wild Oats Markets, Inc. ("Wild Oats", "we",
"us" and "our") is one of the largest natural foods supermarket chains
in North America. As of February 26, 2005, we operated 108 natural foods stores in 24
states and British Columbia, Canada under several names, including:



- Wild Oats Natural Marketplace (nationwide)
- Henry's Farmers Market (southern California and Phoenix, Arizona)
- Sun Harvest Farms (Texas)
- Capers Community Market (British Columbia, Canada)



We are dedicated to providing a broad selection of natural, organic and
gourmet foods, environmentally friendly household products and 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
broad 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. We believe that
industry data that states that the natural products industry currently comprises less than
5% of the total grocery industry suggests significant potential for us to continue to
expand our customer base.







A Recap of 2004



Wild Oats' sales grew from $969.2 million in 2003 to $1.048
billion in fiscal 2004, an overall sales growth of 8.1%. Our improvements in sales
resulted in part from the addition of 12 new stores during fiscal 2004, for a total net
increase in stores (after closures and sales) of five new stores. We increased sales and
average transaction size nationwide in fiscal 2004. Strikes by grocery store workers in
conventional grocery stores in southern California commencing in October 2003 and
continuing through February 2004 resulted in increased sales and customer counts in our 17
Henry's Farmers Market and five Wild Oats Natural Marketplace stores in those regions for
the first two months of fiscal 2004. The increased sales resulted in negative comparable
store sales results during the fourth quarter of fiscal 2004 as we lapped the increased
strike-related performance in the same period in 2003. See "Selected Financial
Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations  Year over Year 2004 v. 2003 Comparisons of Certain
Selected Income Statement Data." In 2004, we switched our primary distributor to
United Natural Foods, Inc. ("UNFI") and consolidated our smaller produce
warehouse facilities into a single 241,000 square foot distribution center
("DC") to service our stores located in the western United States.



Fiscal 2004 was a year in which many of the initiatives commenced in
2001 and 2002 were fully implemented. These initiatives included:



- refinement of our growth strategy,
- focus on brand awareness, and
- use of new information technology systems.





Growth Strategy. We continue to focus on growth through new store
development in areas where we already have a market presence. In 2004, we opened 12 new
stores, including two relocations and one format change, in the following cities:
metropolitan Phoenix, Arizona (two stores); Corona, Fullerton and Mission Viejo,
California; Colorado Springs and Superior, Colorado; metropolitan Indianapolis, Indiana;
Omaha, Nebraska; metropolitan Cincinnati, Ohio; metropolitan Salt Lake City, Utah; and
metropolitan Vancouver, Washington. We sold one store that did not fit our business model
in New York, New York; we relocated two stores in each of Colorado Springs, Colorado, and
Vancouver, Washington; and we closed four stores, one of which was re-opened in a new
format in Phoenix, Arizona. In 2004, we added 10% more floor space for a total of 2.45
million square feet. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations  Year over Year 2004 v. 2003 Comparisons of
Certain Selected Income Statement Data."



As a result, as of January 1, 2005, we had 108 stores located in 24
states and Canada, as compared to 103 stores in 24 states and Canada as of the end of
fiscal 2003. A summary of store openings, acquisitions, closures and sales is as follows:



| |                                        |  | TOTAL STORE
    COUNT
| | -------------------------------------- |  | ---------------------
| |                                        |  |                      
| |                                        |  |                      
| |                                        |  |                      
| |                                        |  |                      
| |                                        |  |                      
| | Store count at beginning of
    period |  |                      
| | Stores opened                          |  |                      
| | Stores acquired                        |  |                      
| | Stores closed                          |  |                      
| | Stores sold                            |  |                      
| |                                        |  |                      
| | Store count at end of
    period       |  |                      
| |                                        |  |                      
| |                                        |  |                      

> *Includes the closure of one store in Phoenix, Arizona that was
>     converted to a new format and reopened in 2004.



Brand Awareness. In 2004, we expanded our brand awareness to
include advertising focused on the quality of the food we sell. We introduced our Wild
Oats magazine, which is published and mailed to households surrounding our store and
which emphasizes food quality and provides nutritional information and recipes, as a brand
awareness initiative. Our consumer education campaigns during the last year covering a
number of health issues also built the brand identity and positioned Wild Oats as a
trusted resource for health and wellness information. We provided information regarding
the safety of our meat and seafood in light of increased public concern related to
"Mad Cow" disease and contaminants in farm-raised fish. We launched educational
campaigns to highlight the availability in our stores of products for specific diet
regimes, such as gluten-free diets and a lower carbohydrate diet. We launched the
"Superfoods" program, which included signage, brochures and recipes, to help our
customers identify nutritionally dense foods in our stores, and incorporate these foods in
their diets. We also continued to build brand awareness in 2004 through the introduction
of 581 new and reformulated private label products. Also in 2004, Wild Oats built brand
awareness by initiating an online retailing test of Wild Oats private label grocery
products in the Chicago area with Peapod, a leading U.S. Internet grocer. The test was
very successful and the parties are currently discussing an expansion to other markets
served by Peapod. We are discussing with other retailers the sale of our private label
products, and operation of branded Wild Oats "store-within-a-store" concepts
outside of our traditional retail channel to further build brand awareness. Over the past
several years, we have actively sought to establish and obtain federal protection for
trademarks, including logos and label design architecture, used in conjunction with the
expansion of our private label products, as well as marketing materials used in our
stores. We believe that the redesign of our private label packaging, combined with our
applications for federal trademark protection, supports our efforts to build brand
awareness.





Information Technology Systems. We have invested over $25 million
in information technology since 2002 to provide our stores with common systems and better
tools to control labor and shrink, and so that we can more effectively manage store
receiving, ordering, and sales data. In 2004, we commenced testing of a store receiving
program, implemented a timekeeping and labor scheduling program and implemented a
warehouse management system for our DC.





Natural Products Industry



Retail sales of natural products have grown from $7.6 billion in 1994
to $18.3 billion in 2003, a compound growth rate of approximately 10.3%, and total sales
of natural products (including natural product retailers, mass market retailers,
multi-level marketers and through practitioners, internet and mail order) reached $42.8
billion in 2003, an 8.1% increase over the prior year; while sales growth in the
traditional grocery industry has remained relatively flat over the same period (Natural
Foods Merchandiser, June 2004). 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 natural products and is willing to pay a premium
for such products. Despite the increase in natural foods sales within conventional
supermarkets, we believe that conventional supermarkets still lack the concentration on a
wide variety of natural and organic products and emphasis on service and consumer
education that our 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 quality natural, organic 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.





High product standards. We seek to offer a broad range of products
meeting our product standards throughout our merchandise categories, and emphasize unique
products and brands not typically found in conventional supermarkets. We believe our
product standards are among 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 about 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 Web site and informational databases on
health issues.





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 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.





Multiple store formats. We operate in one operating segment, retail
grocery, with two store formats: natural foods supermarkets, which emphasize gourmet and
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 that
we believe 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.







Products





Overview. We offer our customers a broad selection of unique
products that are natural and organic alternatives to those found in conventional
supermarkets, as well as gourmet and ethnic foods. We generally do not offer well-known
national conventional brands and focus instead on a comprehensive selection of natural
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. We regularly introduce new natural, organic, gourmet and locally grown
products in our stores to differentiate our merchandise selection from 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.



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.





Quality standards. We strive 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, unique regional products; and
- Personal care and household items that are not tested on animals.





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 programs 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, Italian sodas, pasta,
pasta sauces, oils, tuna, frozen products, such as pizza and veggie burgers. In fiscal
2004, we introduced 581 new and reformulated private label products, including a line of
organic pastas and sauces, waffles, and frozen fruits and vegetables, as well as imported
cookies and chocolate truffles, and two new lines of vitamins and supplements. We continue
to expand our private label product offerings and plan to introduce hundreds of additional
private label products in 2005.





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)



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.





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 frequently visit their cluster of stores and are ultimately responsbile for
providing feedback on performance and ensuring 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,





Purchasing and Distribution



We have centralized merchandising departments for each major product
category. These departments identify and 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. We entered into a new primary distribution agreement with
UNFI in January of 2004, after failing to achieve expected buying and distribution
synergies with Tree of Life, our former distributor. The distribution arrangement with
UNFI commenced effective April 1, 2004, and has a five-year term. The transition did not
result in any unusual or unexpected disruptions in product supply. Either party may
terminate the agreement for defaults by the other party of certain provisions of the
agreement. Under the terms of the UNFI 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 have received and will continue to receive, as part of the
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.

In February 2004, we brought on-line a 241,000 square foot DC in
Riverside, California to service our stores located in the western United States. We
believe this facility improves 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. We also distribute certain grocery items from the DC
where cost effective. As we enter new markets, we will evaluate the need for additional
warehouse and distribution facilities. The DC currently delivers produce and/or groceries
to 70 stores and we anticipate adding approximately nine stores to its distribution base
in 2005.



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 evaluate the need for new commissary kitchens as we expand into new markets.
For stores outside the delivery area of our commisary kitchens, the stores' food service
departments produce 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,
television, outdoor and direct mail to gain new customer trial and repeat business. We
introduced television commercials for Wild Oats Natural Marketplace stores in 2004, as
well as new print and outdoor advertising for both Wild Oats and Henry's Farmers Market
formats. During 2004, we launched our Wild Oats magazine that highlights the quality of
food that we offer. We continued our shift in distribution strategy to target consumers
based on demographic information, distributing less often to a smaller, but more targeted
group. Our farmers market format stores primarily use flyers and "weekly
specials" advertising to generate consumer interest and drive customer traffic.







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 management at
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 2004, we
implemented several new systems, including:



- testing of a back-door receiving 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;
- Kronos timekeeping and labor scheduling program; and
- a warehouse management system for our DC, which includes a suite of applications for
    electronic ordering and receiving of product, invoice matching and integration to our
    financial accounting system.



We anticipate that the back-door receiving program, in conjunction with
electronic ordering, which is part of the store replenishment program, will improve
verification of the accuracy of deliveries, increase the efficiency of our warehouse and
in-store receiving departments, and provide more control over inventory costs and store
stock.



The 2005 management information plans will have a continued focus on
improving store and home office efficiency, including the following initiatives:



- a systematic refresh of point of sale systems in older stores to reduce maintenance
    costs, improve cashier productivity, and customer service;
- relocation of the corporate data center to a third-party data center to avoid future
    building costs and ensure continous operations of the Company's critical information
    applications;
- implementation of a hand held ordering system, currently in test, to improve store level
    inventory management; and
- deployment of the EDI to improve operating efficiency at the store and home office
    level.





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 Whole Foods Markets, Inc. in Arizona, California, Colorado, Florida,
Illinois, Kentucky, Massachusetts, Missouri, Nevada, New Jersey, New Mexico, Oregon,
Texas, and Vancouver, British Columbia. 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 in California, and we have only one small chain competitor in
the Phoenix metropolitan market.



Employees



As of February 26, 2005, we employed approximately 4,769 full-time
individuals and 3,988 part-time individuals. Approximately 8,326 of our employees are
engaged at the store-level and 431 are devoted to regional administrative and 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.



All of our store managerial employees participate in an incentive
program that provides periodic payments based on achieving certain store-level performance
targets and operations standards. In addition, we also seek to attract and retain
enthusiastic and dedicated staff members through comprehensive benefits packages,
including discounts on purchases, health and disability insurance, an employee stock
purchase plan and an employer-matching 401(k) plan.





Available Information



Our corporate Internet Web site is http://www.wildoats.com,
("Internet Web site"), 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 Web site at http://www.sec.gov. Additionally, the public may read and copy any
materials we file 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 Web site. We will post on
our Internet Web site 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 stores, including operating, closed and under
construction locations. 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 call for payment of minimum base rent with
additional rent calculated on a percentage of sales over a certain break point. The
majority of leases signed in fiscal 2004 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 February 26, 2005, the
number of natural foods grocery stores that we operate in each state and Canadian province
and the cities in which our stores are located.







|Arizona:                  | Phoenix (3), Scottsdale, Tucson (2)                                                                                                                                                  
|------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Arkansas:                 | Little Rock                                                                                                                                                                          
|California:               | Chino Hills, Corona, Costa Mesa, Escondido,
    Fullerton, Hemet, Laguna Beach, Laguna Niguel, Long Beach, Mission Viejo, Pasadena, San
    Diego (11), Santa Monica (2), Yorba Linda
|Colorado:                 | Boulder (3), Colorado Springs, Denver (8),
    Fort Collins, Superior                                                                                                                
|Connecticut:              | West Hartford, Westport                                                                                                                                                              
|Florida:                  | Fort Lauderdale, Melbourne, Miami, Miami Beach                                                                                                                                       
|Illinois:                 | Evanston, Hinsdale                                                                                                                                                                   
|Indiana:                  | Indianapolis (2)                                                                                                                                                                     
|Kansas:                   | Kansas City (2)                                                                                                                                                                      
|Kentucky:                 | Lexington, Louisville                                                                                                                                                                
|Maine:                    | Portland                                                                                                                                                                             
|Massachusetts:            | Boston (3)                                                                                                                                                                           
|Missouri:                 | Kansas City, St. Louis                                                                                                                                                               
|Nebraska:                 | Omaha (2)                                                                                                                                                                            
|Nevada:                   | Las Vegas (2), Reno                                                                                                                                                                  
|New Jersey:               | Princeton                                                                                                                                                                            
|New Mexico:               | Albuquerque (3), Santa Fe                                                                                                                                                            
|Ohio:                     | Cincinnati (2), Cleveland, Columbus                                                                                                                                                  
|Oklahoma:                 | Tulsa                                                                                                                                                                                
|Oregon:                   | Bend, Portland (6)                                                                                                                                                                   
|Tennessee:                | Franklin, Memphis, Nashville                                                                                                                                                         
|Texas:                    | Austin (2), Corpus Christi, El Paso, McAllen,
    San Antonio (3)                                                                                                                    
|Utah:                     | Park City, Salt Lake City (4)                                                                                                                                                        
|Washington:               | Vancouver                                                                                                                                                                            
|British Columbia, Canada: | Vancouver (2), West Vancouver                                                                                                                                                        





Support Facilities:

We have two office facilities separate from stores, both in Colorado,
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,
each located in either an operating store (Colorado and British Columbia, Canada) or a
closed store location (Arizona). We also have one DC in California.



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 for monetary
damages brought in the Supreme Court of British Columbia, Canada by the representative
plaintiffs on behalf of two groups of claimants - those who claim to have 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 in March
and April, 2002, after handling and/or consuming food products from Capers that were or
might have been contaminated with Hepatitis A. In the fourth quarter of 2003, the action
was certified as a class action by the court. We filed an appeal and a hearing was held in
September 2004. The appeal was denied in October 2004. In December 2004, the plaintiffs
brought a motion for a summary trial of certain issues, and such motion was denied in
January 2005. We intend to vigorously defend the suit. We are not able to estimate the
potential outcome of the suit at this time. Our insurers have acknowledged coverage for
defense costs and liability, and we have exhausted our deductible.



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. Plaintiff claimed
damages for diminution of value of the shopping center plus accelerated rent, fees and
attorneys' fees and costs. After trial in November 2001, the judge awarded the plaintiff
an aggregate $536,000 in damages and attorneys' fees. Our appeal of judgment was denied in
the first quarter of fiscal 2004, and we filed a motion for reconsideration, which was
denied. We filed a petition for review with the Arizona Supreme Court, which was denied.
As of the end of fiscal 2004, we have accrued $790,000, which we believe to be adequate to
fully satisfy the judgment, including interest and attorneys' fees.



Auchterlonie, individually and on behalf of all others similarly
situated and the general public, and Roes 1 to 1000 vs. Wild Oats Markets, Inc. and Does 1
through 100, is a purported class action suit brought in August 2004 in the Superior
Court, County of Los Angeles, for payment of overtime and damages relating to alleged
violations of the California Business and Professions Code by a former managerial
employee, on behalf of himself and all other similarly situated California employees,
claiming that store directors at our California stores should have been classified as
non-exempt employees and paid on an hourly basis. Plaintiff also alleges that our
incentive bonus program is illegal based upon deductions for items outside of the
employee's control. We believe that the employee, a former store director, was properly
classified as an exempt employee based upon his job duties, and we intend to vigorously
defend the suit. At this time, we do not have sufficient facts to estimate any potential
damages. The case has been designated non-complex and trial has been scheduled for October
2005.



The Company also is named as defendant in various actions and
proceedings arising in the normal course of business. In all of these cases, we are
denying the allegations and are 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 our 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, RELATED STOCKHOLDER MATTERS

AND ISSUER PURCHASES OF EQUITY SECURITIES



Our 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 2003  |  | $10.75 |  | $7.12 | 
| | Second Quarter 2003 |  | 11.97  |  | 9.19  | 
| | Third Quarter 2003  |  | 12.70  |  | 9.75  | 
| | Fourth Quarter 2003 |  | 12.29  |  | 10.00 | 
| |                     |  |        |  |       | 
| | First Quarter 2004  |  | 15.35  |  | 11.89 | 
| | Second Quarter 2004 |  | 15.37  |  | 11.83 | 
| | Third Quarter 2004  |  | 14.07  |  | 7.47  | 
| | Fourth Quarter 2004 |  | 8.87   |  | 5.67  | 







As of February 26, 2005, Wild Oats' common stock was held by 567
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.







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 number of stores we plan to open or relocate in future periods and
the anticipated performance of such stores; the impact of competition; the sufficiency of
funds to satisfy our cash requirements through the remainder of fiscal 2005; the impact of
changes resulting from our merchandising and marketing programs; our ability to benefit
from past supply chain modifications; expected pre-opening expenses and capital
expenditures; and other statements containing words such as "believes,"
"anticipates," "estimates," "expects," "may,"
"intends" and words of similar import or statements of management's opinion.
These forward-looking statements and assumptions involve known and unknown risks,
uncertainties and other factors that may cause our 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 and closures; new competitive
impacts; changes in product supply or suppliers and supplier performance levels; changes
in management information needs; changes in customer needs and expectations; changes in
government regulations applicable to our business; 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. We undertake 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 6.

SELECTED FINANCIAL DATA

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

The following selected financial data are derived from the consolidated
financial statements of Wild Oats Markets, Inc. (the "Company"). Fiscal years
2000 through 2003 have been restated to reflect adjustments to the original Form 10-K that
are further discussed in "Explanatory Note" in the forepart of this Form 10-K/A
and in "Notes to Consolidated Financial Statements  Note 2 
Restatement of Financial Statements" and in Item 8, "Financial Statements
and Supplementary Data" of this Form 10-K/A. The data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations", the Company's consolidated financial
statements and related notes thereto and other financial information included elsewhere in
this report.



|                                                         |  |               |  | 2003              |  | 2002          |  | 2001(1)       |  | 2000(1)      
|-------------------------------------------------------- |  | ------------- |  | ----------------- |  | ------------- |  | ------------- |  | -------------
|                                                         |  |               |  |                   |  |               |  |               |  |              
|FISCAL
    YEAR                                          |  | 2004          |  | (As
    Restated)
|                                                         |  |               |  |                  
|STATEMENT OF OPERATIONS
    DATA:                        |  |               |  |                   |  |               |  |               |  |              
|Sales                                                    |  | $1,048,164    |  | $
    969,204     |  | $
    919,130 |  | $
    893,179 |  | $
    838,131
|Cost of goods sold and occupancy costs                   |  | 751,314       |  | 683,480           |  | 643,769       |  | 635,615       |  | 582,365      
|                                                         |  |               |  |                   |  |               |  |               |  |              
|Gross profit                                             |  | 296,850       |  | 285,724           |  | 275,361       |  | 257,564       |  | 255,766      
|Direct store expenses                                    |  | 235,425       |  | 208,908           |  | 198,379       |  | 207,898       |  | 187,085      
|                                                         |  |               |  |                   |  |               |  |               |  |              
|Store contribution                                       |  | 61,425        |  | 76,816            |  | 76,982        |  | 49,666        |  | 68,681       
|Selling, general and administrative expenses             |  | 62,454        |  | 64,659            |  | 55,186        |  | 53,131        |  | 36,687       
|Loss (gain) on disposal of assets, net                   |  | 187           |  | 2,087             |  | 21            |  | 477           |  | (306)        
|Pre-opening expenses                                     |  | 5,265         |  | 3,490             |  | 2,737         |  | 2,444         |  | 4,945        
|Restructuring and asset impairment charges (income), net |  | 2,461         |  | (1,259)           |  | (775)         |  | 53,058        |  | 40,128       
|                                                         |  |               |  |                   |  |               |  |               |  |              
|Income (loss) from operations                            |  | (8,942)       |  | 7,839             |  | 19,813        |  | (59,444)      |  | (12,773)     
|Loss on investment                                       |  | -             |  | -                 |  | -             |  | 228           |  | 2,060        
|Loss on early extinguishment of debt                     |  | -             |  | 186               |  | -             |  | -             |  | -            
|Interest expense, net                                    |  | 5,239         |  | 4,966             |  | 11,077        |  | 12,152        |  | 11,534       
|                                                         |  |               |  |                   |  |               |  |               |  |              
|Income (loss) before income taxes                        |  | (14,181)      |  | 2,687             |  | 8,736         |  | (71,824)      |  | (26,367)     
|Income tax expense (benefit)                             |  | 25,838        |  | 1,094             |  | 3,666         |  | (26,229)      |  | (9,611)      
|                                                         |  |               |  |                   |  |               |  |               |  |              
|Net income (loss)                                        |  | $ (40,019)    |  | $ 1,593           |  | $ 5,070       |  | $ (45,595)    |  | $ (16,756)   
|                                                         |  |               |  |                   |  |               |  |               |  |              
|Basic net income (loss) per common share                 |  | $ (1.37)      |  | $ 0.05            |  | $ 0.19        |  | $ (1.87)      |  | $ (0.73)     
|                                                         |  |               |  |                   |  |               |  |               |  |              
|Weighted average number of common shares outstanding     |  | 29,219        |  | 29,851            |  | 26,481        |  | 24,424        |  | 23,090       
|                                                         |  |               |  |                   |  |               |  |               |  |              
|Diluted net income (loss) per common share               |  | $ (1.37)      |  | $ 0.05            |  | $ 0.19        |  | $ (1.87)      |  | $ (0.73)     
|                                                         |  |               |  |                   |  |               |  |               |  |              
|Weighted average number of common shares outstanding     |  | 29,219        |  | 30,258            |  | 27,082        |  | 24,424        |  | 23,090       
|                                                         |  |               |  |                   |  |               |  |               |  |              
|Number of stores at end of period                        |  | 108           |  | 103               |  | 99            |  | 107           |  | 106          
|BALANCE SHEET DATA:                                      |  |               |  |                   |  |               |  |               |  |              
|Working capital deficit                                  |  | $ (24,936)    |  | $ (35,558)        |  | $ (25,541)    |  | $ (25,481)    |  | $ (16,302)   
|Total assets                                             |  | $
    405,560 |  | $
    373,428     |  | $
    361,454 |  | $
    393,206 |  | $
    409,488
|Long-term debt (including capitalized leases)            |  | $
    148,675 |  | $ 64,042          |  | $ 77,217      |  | $
    146,672 |  | $
    146,835
|Stockholders' equity                                     |  | $
    101,101 |  | $
    162,373     |  | $
    156,187 |  | $ 98,139      |  | $
    144,371

__________________

(1)   This information previously provided has been restated for
corrections to the Company's lease accounting as discussed in Note 2, "Restatement of
Financial Statements."  The impact of the restatement increases the previously
reported net loss by $1.7 million and $1.7 million, and increases the basic and fully
diluted net loss per share by $.07 and $.08 for 2001 and 2000, respectively.  The
cumulative effect of these changes is to increase accumulated deficit by $5.5 million as
if the beginning of fiscal 2000.



Item 7.



MANAGEMENT'S DISCUSSION
AND ANALYSISOF

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,
execution and success of new store openings, relocations and remodels, the timing of and
liability resulting from sales and closures; amount of time before new stores become
profitable, the timing and impact of promotional and advertising campaigns; the impact of
competition; changes in merchandising strategies, 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."







Introduction



The Executive Overview section of Management's Discussion and
Analysis of Financial Condition and Results of Operationsprovides a broad summary of
the more specific and detailed information disclosed in other sections of this report. The
context that it provides should be viewed as a supplement to, and read in conjunction
with, the details contained elsewhere in this report. As discussed in Notes to
Consolidated Financial Statements - Note 2  Restatement of Financial
Statements, the financial information for fiscal years 2002 and 2003 has been restated
to reflect corrections related to lease accounting. Further, the unaudited quarterly
financial information disclosure discusses the restatement of quarterly information
between two quarters in fiscal 2003 for lease obligation/litigation reserves. As
applicable, Management's Discussion and Analysis of Financial Condition and Results of
Operations has been revised to reflect these changes to prior period financial
information.







Executive Overview



Wild Oats Markets, Inc. is one of the largest natural food supermarket
chains in North America, with 108 stores in 24 states and British Columbia, Canada, as of
February 26, 2005. Our revenues exceeded one billion dollars for the first time in fiscal
year 2004 with net sales of $1.048 billion.



We operate in the retail grocery industry with two store formats: the
natural foods supermarket, under the Wild Oats Natural Marketplace name nationwide and
Capers Community Market name in Canada; and the farmers market format, under the Henry's
Farmers Market name in southern California and Phoenix, Arizona, and the Sun Harvest name
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. We manage support services provided to the stores centrally from our Boulder,
Colorado headquarters. All of our stores, regardless of format, purchase from the same
primary distributor based on centralized negotiations, merchandising and marketing
strategies. Our perishables distribution facility, opened in February 2004, supplies
produce and other perishables for stores in the western United States.



In 2004, we opened 12 new stores in existing markets. We are continuing
to execute on our real estate strategy, which is focused on adding stores in those markets
where: (i) we are the major natural and organic food retailer; (ii) we can obtain
locations that we believe will lead to an increased number of customers without placing
substantial competitive pressure on our existing stores; and (iii) our store locations
intercept a majority of customers and thereby may discourage competitors from placing new
stores in the market. We have identified strategic markets for expansion of our farmer's
market format outside of southern California and opened the first two of the new Henry's
Farmers Market stores in metropolitan Phoenix, Arizona in 2004. We have opened two, and
anticipate opening an additional third Henry's store in the Phoenix metropolitan market in
2005.



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 2004 and through the date of this report, we have closed eight
stores: one store was sold; three stores were relocated; three were closed due to upcoming
lease expirations; and one was closed, remodeled and reopened under a new format. Of the
closed stores, three leases have terminated and three leases have expired. In 2004, we
closed one commissary and two warehouse facilities as a part of certain planned
consolidations into our Riverside, California perishables warehouse.



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 are comparable commencing
the 13th full month of operations); sales per square foot; average basket size;
customer count; inventory turns (how quickly inventory is sold); percentage of total sales
by department; department margins; and staff productivity. In fiscal 2004, 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 Farmers
Market as brand identities, and certain targeted marketing programs in regions where store
performance was below expectations.







Outlook



We intend to continue our real estate 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.



To date in 2005, we have opened four new stores: Wild Oats Natural
Marketplace stores in Scottsdale, Arizona and Salt Lake City, Utah and two Henry's Farmers
Market stores in metropolitan Phoenix, Arizona. We currently have leases and letters of
intent signed for 21 new stores to be opened or relocated in the remainder of 2005 or
2006, including four Wild Oats locations, 15 Henry's Farmers Market locations, and two
Capers Community Markets. The proposed sites are in metropolitan Phoenix, Arizona;
Boulder, Colorado; metropolitan Los Angeles, Palm Springs and San Diego, California;
metropolitan Naples and Tampa, Florida; metropolitan Portland, Oregon; and Vancouver,
British Columbia, Canada. We plan to open up to 12 new stores in 2005. In fiscal 2005, we
expect to spend between $40 million and $45 million in capital expenditures, of which
approximately $21 million will be for new store openings and $11 million will be for
remodels of existing stores.  We expect pre-opening costs for new stores opening in
2005 to increase to $500,000 to $600,000.







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 of
America. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosures of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that 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, and
- Tax valuation allowances



We believe the following critical accounting policies affect our most
significant judgments and estimates used in the preparation of our consolidated financial
statements. There have been no changes in 2004 in the application of these policies:





Goodwill. Goodwill consists of the excess cost of acquired
companies over the sum of the fair market value of their underlying tangible assets
acquired and liabilities assumed. In accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets", goodwill is reviewed for impairment annually at a reporting
unit level, or more frequently if certain indicators of impairment exist. We have one
reporting unit at the enterprise level to which goodwill is allocated. We estimate fair
value utilizing a combination of three different methods, consisting of market
capitalization, discounted future cash flows, and earnings before interest, taxes,
depreciation, amortization and rent ("EBITDAR") multiples, and compare it to the
carrying value of the enterprise for purposes of identifying potential impairment.



The annual review for impairment relies heavily on our ability to
accurately project future cash flows, which in itself, requires the extensive use of
accounting judgment and financial assumptions and estimates. These projections can be
affected by many items that are interdependent on one another and are outside of our
control and ability to predict except at the time of evaluation, such as changes in the
economy, trends affecting the natural and organic food industry, and changing competitive
pressures. Application of alternative assumptions such as evaluating for impairment at a
level of the organization other than enterprise could produce significantly different
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 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 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.



Our review for impairment relies heavily on our ability to accurately
project future cash flows related to our stores and support facilities. Our cash flow
projections look several years into the future and include assumptions about sales growth
and cost trends that could be significantly impacted by changes in the local and national
economy, trends in the natural and organic food industry, local competitive pressures, as
well as the effectiveness of various operational initiatives underway in our stores.





Restructuring and store closure costs. We reserve for the present
value of lease-related costs associated with store and support facility closures,
relocations, and sales when the store or facility is closed. The calculation of the lease
related liabilities involves applying a discount rate to the estimation of our remaining
lease obligations, taxes and common area maintenance, net of future estimated subtenant
income. The lease liabilities usually are paid over the lease terms associated with the
closed stores, which have had remaining terms ranging from one month to 25 years. Store
closing liabilities are reviewed each reporting period to ensure that the amounts recorded
reasonably reflect our future obligations associated with closed stores and facilities
based on the most current information available. Adjustments to existing lease related
liabilities are primarily a result of changes in the expected timing or amount of
subtenant income, and are made in the period in which the change in facts and
circumstances, as well as their related impacts, become known and estimatable. Lease
related closure costs and associated severance costs are made in accordance with SFAS No.
146 "Accounting for Costs Associated with Exit of Disposal Activities."
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.



In evaluating the reserves for lease related liabilities, management
considers a number of variables that would affect the marketability of the space such as
recent demand for similar space in the market area, the number of potential subtenants
expressing interest, specific characteristics of the property, any limitations in the use
of the space imposed by the landlord, as well as the creditworthiness of actual
subtenants. The above factors are continuously reevaluated and have a significant impact
on management's assumptions used in estimating the timing and amount of any subtenant
income, and thus the amount of required reserves.





Inventory. Our inventory is stated at the lower of cost or market
on a first-in, first-out basis using the retail method of accounting to determine cost of
sales and inventory for approximately 80% of inventories and using the item cost method
for highly perishable products representing approximately 20% of inventories in our
stores. 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 significantly impact the ending inventory valuation at cost as well
as the resulting gross margins. Physical inventory counts are taken at each location to
ensure that the amounts reflected in the consolidated financial statements are properly
stated as of the end of each reporting period.



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 use a combination of stop-loss insurance and are
self-insured for 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 exposure to any significant claim or levels of claims that would be catastrophic to
our Company. Self-insured losses are accrued based upon estimates of the aggregate
uninsured claims incurred using certain actuarial assumptions followed in the insurance
industry which are based on our industry's experience as well as our historical claims
experience. While we believe that the assumptions and methodology used are appropriate,
the estimated accruals for these liabilities could be significantly affected if actual
loss development and payment patterns vary significantly from the assumptions and
historical trends utilized.



Tax valuation allowances. We utilize the concepts and guidance of
SFAS No. 109, "Accounting for Income Taxes" in assessing the ability to realize
our deferred tax assets. The Company establishes valuation allowances based on historical
taxable income, projected future income, the expected timing of the reversals of existing
temporary differences and the implementation of tax planning strategies. Based on our
analysis, in 2004 we established a full valuation allowance against our net deferred tax
assets because we don't believe we met the more likely than not realizability guidance
under SFAS 109.



When we are able to show a profitable trend (generally 6 to 8 quarters), we will
re-evaluate the need for a valuation allowance using all factors available to us at that
time.





Factors Impacting Results of Operations



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



- The successful opening and operating of new stores, and remodels/remerchandising of
      existing stores,
- Fluctuations in quarterly results of operations and stock price,
- Economic conditions,
- Competition,
- Labor issues,
- Loss of key management,
- Government regulations and
- Changes in and performance by suppliers, distributors and manufacturers.





The successful opening and operating of new stores, and remodels of
existing stores. We plan to continue growing, primarily through the opening of new
stores. In fiscal 2004 and to date in 2005, we have opened 16 new stores. 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 experience operating losses for the first 12 to
18 months of operation, or possibly longer, in accordance with historical trends; although
certain stores are projected to incur operating losses for six to 12 months, and others
are projected to incur losses for greater than 18 months.



We plan to complete significant remodels in up to 10 stores in fiscal
2005, and to remerchandise a number of smaller, older stores to implement 2005
merchandising strategies. 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.
Changes in merchandising and marketing strategies may also impact an individual store and
overall Company results.



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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources."





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



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.





Economic conditions. 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.





Competition. We compete with multi-unit and independent natural
foods, specialty 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.





Loss of key management. 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. Our continued success also is dependent on our ability to attract and retain
qualified executives to meet our future growth needs.





Government regulations. We are subject to a myriad of laws,
regulations and ordinances at the local, state and national level governing the operation
of our stores and support facilities, and our ability to comply with these laws could
negatively affect our store sales and operations, or could delay the opening of a new
store. Such laws include the following: state and federal wage and hour laws, which may
result in increased minimum wage levels, required payment of overtime to employees
classified as salaried employees and increased benefit costs; National Organic Program
regulations promulgated by the USDA, which may require different handling of certain
products or the exclusion of certain products from the definition of "organic",
each of which could limit product supply, increase costs or reduce revenues; state and
federal health and sanitation regulations, which may require substantial equipment or
tenant improvement modifications at added expense or increase labor costs and costs of
food handling or impact the ability to supply from commissaries across state lines; local
and state laws restricting the availability of liquor licenses and liquor sales, which may
reduce some stores' sales; and land use and zoning regulations, which may impact hours of
operation, hours when shipments may be received and the ability to provide certain
services or products, which may reduce revenues or increase direct store operating costs.
Implementation of and changes to such laws can have a material impact on our sales volume,
costs of goods and direct store expenses. In addition, from time to time we are audited by
various governmental agencies for compliance with existing laws, and we could be subject
to fines or operational modifications as a result of noncompliance.





Changes in and performance by suppliers, distributors and manufacturers.
In January of 2004, we executed a new five-year primary distribution agreement with UNFI,
and we completed the process of transititioning our primary ordering to UNFI by the end of
the first quarter of 2004. We purchase approximately one third of our total products from
UNFI, and the remainder from small vendors and secondary and tertiary distributors. In
addition, in 2004 we opened a new perishables distribution center in Riverside,
California. At the end of fiscal 2004, 70 of our stores were receiving substantially all
of their produce from our Riverside, California warehouse. Significant disruptions in
operations of our distributors or at our warehouse could materially impact our operations
by disrupting store-level merchandise selection, resulting in reduced sales. Also, 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 competition
for products from other retailers, product shortages and transportation disruptions. These
shortages may result in decreased product selection and increased out-of-stock conditions,
as well as higher product costs, which result in decreased sales or margins.



Results of Operations



Our net loss for fiscal 2004 was $40.0 million, or $(1.37) per diluted
share, compared with net income of $1.6 million, or $0.05 per diluted share, in fiscal
2003. The following table sets forth, for the periods indicated, certain selected income
statement data expressed as a percentage of sales:



| |                                                         |  |         |  | 2003              |  | 2002   | 
| | ------------------------------------------------------- |  | ------- |  | ----------------- |  | ------ | 
| |                                                         |  |         |  |                   |  |        | 
| | FISCAL YEAR                                             |  | 2004    |  | (As
    Restated) | 
| |                                                         |  |         |  |                   | 
| |                                                         |  |         |  |                   |  |        | 
| | Sales                                                   |  | 100.0 % |  | 100.0%            |  | 100.0% | 
| | Cost of goods sold and occupancy costs                  |  | 71.7    |  | 70.5              |  | 70.0   | 
| |                                                         |  |         |  |                   |  |        | 
| | Gross profit                                            |  | 28.3    |  | 29.5              |  | 30.0   | 
| | Direct store expenses                                   |  | 22.5    |  | 21.6              |  | 21.6   | 
| |                                                         |  |         |  |                   |  |        | 
| | Store contribution                                      |  | 5.8     |  | 7.9               |  | 8.4    | 
| | Selling, general and administrative
    expenses        |  | 6.0     |  | 6.7               |  | 6.0    | 
| | Loss on disposal of assets, net                         |  | -       |  | 0.2               |  | -      | 
| | Pre-opening expenses                                    |  | 0.5     |  | 0.4               |  | 0.3    | 
| | Restructuring and asset impairment charges
    (income) |  | 0.2     |  | (0.1)             |  | (0.1)  | 
| |                                                         |  |         |  |                   |  |        | 
| | Income (loss) from operations                           |  | (0.9)   |  | 0.7               |  | 2.2    | 
| | Interest income                                         |  | 0.1     |  | 0.1               |  | 0.1    | 
| | Interest expense                                        |  | (0.6)   |  | (0.6)             |  | (1.3)  | 
| |                                                         |  |         |  |                   |  |        | 
| | Income (loss) before income taxes                       |  | (1.4)   |  | 0.2               |  | 1.0    | 
| | Income tax expense                                      |  | 2.5     |  | 0.1               |  | 0.4    | 
| |                                                         |  |         |  |                   |  |        | 
| | Net income (loss)                                       |  | (3.9)%  |  | 0.2%              |  | 0.6%   | 
| |                                                         |  |         |  |                   |  |        | 
| |                                                         |  |         |  |                   |  |        | 







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





| |                                                              |  |            |  | 2003              |  | 2002      | 
| | ------------------------------------------------------------ |  | ---------- |  | ----------------- |  | --------- | 
| |                                                              |  |            |  |                   |  |           | 
| | FISCAL YEAR                                                  |  | 2004       |  | (As
    Restated) | 
| |                                                              |  |            |  |                   | 
| |                                                              |  |            |  |                   |  |           | 
| | Sales                                                        |  | $1,048,164 |  | $ 969,204         |  | $ 919,130 | 
| | Gross profit                                                 |  | 296,850    |  | 285,724           |  | 275,361   | 
| | Direct store expenses                                        |  | 235,425    |  | 208,908           |  | 198,379   | 
| | Selling, general and administrative
    expenses             |  | 62,454     |  | 64,659            |  | 55,186    | 
| | Pre-opening expenses                                         |  | 5,265      |  | 3,490             |  | 2,737     | 
| | Restructuring and asset impairment charges
    (income), net |  | 2,461      |  | (1,259)           |  | (775)     | 
| | Interest income                                              |  | 1,070      |  | 780               |  | 778       | 
| | Interest expense                                             |  | (6,309)    |  | (5,746)           |  | (11,855)  | 
| | Income tax expense                                           |  | 25,838     |  | 1,094             |  | 3,666     | 
| | Net income (loss)                                            |  | $ (40,019) |  | $ 1,593           |  | $ 5,070   | 
| |                                                              |  |            |  |                   |  |           | 









Year over Year 2004 v. 2003 Comparisons of Certain Selected Income
Statement Data



The following narrative compares those selected income statement data
with material changes from year to year. Aggregate dollar amounts for fiscal 2004 reflect
a 53-week fiscal year, as compared to 52 weeks in fiscal 2003.





Sales. Net sales for the fiscal year ended January 1, 2005, were
$1.048 billion, an increase of 8.1%, compared with $969 million in fiscal 2003. Increases
were attributable to the addition of 12 new stores in fiscal 2004, despite the closure of
seven stores during the fiscal year, as we ended the year with total square footage of 2.5
million square feet, which is an increase of 10% compared with 2.2 million square feet at
the end of 2003. Comparable store sales for fiscal 2004 were 1.36%, as compared to 2.37%
in fiscal 2003. The increase in sales in fiscal 2004 can be attributed to the addition of
new stores in 2004, while the decrease in comparable store sales over 2003 results from
the greater benefit of the southern California conventional grocery strike in the fourth
quarter of 2003 as compared to the smaller impact in the first quarter of 2004. In the
second half of 2004, we increased our promotional activity to drive customer count to
retain some of the customers that came to us during the strike. The positive impact to
sales year over year was offset by the decrease in gross profit percentage. Total sales
increased in 2004 despite supply chain disruptions experienced in the first quarter of
2004 with our former primary distributor, and issues of quality and consistency throughout
2004 in produce distributions from our new California warehouse.





Gross profit. Gross profit consists of sales less costs of goods
sold and store occupancy costs. Occupancy costs include store related depreciation, rent
and utilities. Gross profit for the fiscal year ended January 1, 2005 increased 3.9% to
$296.9 million as compared to $285.7 million in fiscal 2003, while gross profit margins
declined to 28.3%, compared to 29.5% in fiscal 2003, largely due to promotional activity,
such as our Thanksgiving promotion, in selected regions of the country in the second half
of 2004 to attract new customers and retain customers gained during the southern
California conventional grocery strike, and changes to our distribution processes. The
impact of the combined promotional activity and distribution changes is estimated at 30
basis points of the reduction from prior year. Margins, or gross profit percentage,
declined 90 basis points over last year due to the effect of newer stores (defined as
stores open less than 12 months) being a larger percent of our total store base.
Traditionally, our newer stores carry lower margins due to higher shrink and heavy
promotional activity. The impact of accelerated depreciation was approximately $200,000
more during 2004 than 2003, and amounted to a $4.0 million decrease to gross profit during
2004.





Direct store expenses. Direct store expenses include the following:
store payroll, taxes and benefits, store supplies and maintenance, and other
store-specific contract costs. Direct store expenses for the fiscal year ended January 1,
2005, increased as a percent of sales to 22.5% as compared to 21.6% in fiscal 2003. Direct
store expenses increased as a result of the addition of five new stores (net of closed
stores) and an overall increase in sales and same store customer traffic. Our new stores
typically have a higher payroll as a percentage of sales for up to the first 18 months of
operation. In addition to the higher new store payroll percentages, we incurred benefit
cost increases in the self insured areas of health and workers' compensation of over $4
million, along with a $1.0 million charge for the expected cost of remediating our 401(k)
plan, for which we have filed a voluntary compliance plan with the Internal Revenue
Service. We have also changed some of our marketing efforts to store level versus national
level, and the related costs have been reflected as direct store expenses.





Selling, general and administrative expenses. Selling, general and
administrative expenses include the following: corporate and regional administrative
support services, corporate-level purchasing and marketing, and travel. Selling, general
and administrative expenses for the fiscal year ended January 1, 2005, decreased to 6.0%
as a percent of sales in fiscal 2004 as compared to 6.7% in fiscal 2003. The decreases of
$2.2 million and 0.7% are attributable to consolidation of work functions at our
headquarters, continued control and monitoring of administrative costs and a small shift
of marketing emphasis from the national to the store level. These decreases were offset by
increased professional fees related to the Sarbanes-Oxley Act of 2002 and audit costs
related to our audit of past administrative practices in the Company's 401(k) plan.





Loss on disposal of assets. During 2003, as a result of the
significant store closings, remodels and resets, we undertook a review of all fixtures and
equipment in our stores, offices, and support facilities, including a physical inventory
in conjunction with an asset tagging exercise. We completed the review and recorded in
fiscal 2003 a $2.1 million loss on disposal of fixtures and equipment. Losses on disposal
amounts for 2004 and years prior to 2003 relate to assets disposed of in the normal course
of business and were not material.





Pre-opening expenses. Pre-opening expenses include labor, rent,
advertising, utilities, supplies, and certain other costs incurred prior to a store's
opening. Pre-opening expenses for the fiscal year ended January 1, 2005, increased 50.9%
as compared to fiscal 2003, primarily as a result of 12 new store openings in fiscal 2004
as compared to eight in fiscal 2003. Our average pre-opening expense per store increased
as we focused efforts on increasing the knowledge base of the consumer, training our
employees, and changes in our leasing terms. The timing of the store openings in 2005 also
has contributed to the amounts expensed during 2004, as certain pre-opening expense for
the two stores opened at the end of January 2005 were incurred in 2004.



Restructuring and asset impairment charges (income)  fiscal 2004.
Restructuring and asset impairment expense in fiscal 2004 were $2.5 million, as
compared to income of $(1.3) million in fiscal 2003 and $(0.8) million in fiscal 2002. The
following table summarizes the components of restructuring and asset impairment charges
and income for fiscal years 2004, 2003, and 2002, respectively, by year (in thousands):



|                                                                                                                                     |  |             |  | Fiscal 2003       |  | Fiscal 2002
|------------------------------------------------------------------------------------------------------------------------------------ |  | ----------- |  | ----------------- |  | -----------
|                                                                                                                                     |  |             |  |                   |  |            
|Components of Charge                                                                                                                 |  | Fiscal 2004 |  | (as
    restated)
|                                                                                                                                     |  |             |  |                  
|                                                                                                                                     |  |             |  |                   |  |            
|Insurance proceeds received for impaired
    assets previously written off                                                           |  | -           |  | $ (250)           |  | -          
|Gain on sale of assets                                                                                                               |  | -           |  | -                 |  | $ (462)    
|Change in estimate related to lease-related
    liabilities for sites previously identified for closure or sale (includes accretion) |  | $ 104       |  | (2,376)           |  | (4,713)    
|Lease-related liabilities for stores
    identified to be closed or sold during the period                                           |  | 566         |  | 188               |  | 3,531      
|Severance for employees                                                                                                              |  | 754         |  | 232               |  | 420        
|Fixed asset impairments                                                                                                              |  | 1,037       |  | 947               |  | 449        
|                                                                                                                                     |  |             |  |                   |  |            
|                                                                                                                                     |  | $ 2,461     |  | $(1,259)          |  | $(775)     
|                                                                                                                                     |  |             |  |                   |  |            







During fiscal 2004, we recorded restructuring and asset impairment
expense of $2,461. Details of the significant components are as follows (in thousands):

- Estimate for sites identified for closure that were closed during the year ($566 of
      restructuring expense).



- Changes in estimate related to lease-related liabilities for sites identified in
      previous years for closure ($104 in restructuring expense).During 2004, we adjusted
      our estimates of remaining lease liabilities for locations closed in years before fiscal
      2004 due to executed sub-tenancy agreements, changes in marketability or agreements
      reached with landlords that differed from the original estimated lease obligation. In
      addition to the changes cited above, we incurred accretion expense during the year as
      changes in the net present value of future minimum lease payments.





- Severance for employees notified of termination during the year ($754 of restructuring
      expense). During the year, 162 employees were terminated in conjunction with the
      closing of seven stores and a home office restructuring. The terminated employees were
      notified of their involuntary termination up to 60 days before their last day during
      fiscal 2004. As of January 1, 2005, $556 of involuntary termination benefits had been paid
      to terminated employees.



- Fixed Asset Impairments ($1,037 of expense).



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



| |                                                  | RESTRUCTURING
    STORE COUNT
| | ------------------------------------------------ | -----------------------------
| |                                                  |                              
| |                                                  | Period Ending                
| |                                                  |                              
| |                                                  | Feb
    26, 2005             
| |                                                  |                              
| |                                                  |                              
| | Stores remaining at
    commencement of period   | 6                            
| | Stores identified in fiscal
    2002 for closure |                              
| | Stores identified in fiscal
    2003 for closure |                              
| | Stores identified in fiscal
    2004 for closure |                              
| | Support facilities identified
    for closure    |                              
| | Identified stores closed                         | (2)                          
| | Identified stores sold                           |                              
| | Identified support facilities
    closed         |                              
| |                                                  |                              
| | Identified locations remaining
    at period end | 4                            
| |                                                  |                              
| |                                                  |                              







As of December 27, 2003, all six stores identified in fiscal 2002 for
closure have been sold or closed. Of the five stores and four support facilities
identified in fiscal 2003 for closure, one had been relocated as of December 27, 2003, one
store was sold in 2004, and the remainder were closed in 2004. Of the seven stores and two
support facilities identified in 2004 for closure, five stores and the support facilities
remained open as of year-end, with two stores closing before the date of this report.



Management decides 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 those
facilities. The expected non-cash impact on operating results in 2004 due to accelerated
depreciation of assets in stores and facilities targeted for closure was $4.1 million.





Interest income. Interest income for the fiscal year ended January
1, 2005 was $1,070 compared to $780 in fiscal 2003. The increase is directly attributable
to cash on hand increases relating to proceeds from our debenture issuance.





Interest expense. Interest expense for the fiscal year ended
January 1, 2005 increased to $6,309 or 9.8% as compared to fiscal 2003. The increase over
2003 is due to average borrowings increasing from the debenture offering completed in June
2004.





Income tax expense. The effective tax rate for the fiscal year
ended January 1, 2005 was 182.2% as compared to 40.7% for fiscal year 2003. The increase
in the effective rate is due to the Company's conclusion that a valuation allowance was
needed in 2004 against the deferred tax assets. The valuation allowance was recorded as a
result of the Company's analysis of the facts and circumstances, including an evaluation
of its pre-tax income and losses for the historical periods, which led the Company to
conclude that it could no longer forecast future U.S. taxable income under the "more
likely than not" standard required by SFAS No. 109, "Accounting for Income
Taxes."



As of January 1, 2005, we had a net deferred tax asset of $0.4 million
compared to net deferred tax assets of $26.4 million for the fiscal year ending December
27, 2003.





Net income (loss). In fiscal 2004, we generated a net loss of $40.0
million, or $(1.37) per diluted share, compared with net income of $1.6 million or $0.05
per share in fiscal 2003. Aside from the tax valuation allowance described above, the loss
resulted from disruptions caused by our prior distributor arrangement, which was
terminated at the end of the first quarter, additional disruptions throughout the year
resulting from the transition of 70 stores' produce distribution to our new distribution
facility, lower projected performance by certain new stores opened in 2004, and increased
merchandising and marketing expenditures to combat increased competition in selected
regions and drive customer traffic. In the first quarter of fiscal 2004, we transitioned
our perishables distribution in the western region of the country to our new distribution
center, completed the consolidation of a third warehouse facility in the first half of
fiscal 2004 in southern California, and transitioned to a new primary distributor.





Year over Year 2003 v. 2002



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 4.5% 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.



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.





Gross profit. Gross profit for the fiscal year ended December 27,
2003 increased 3.8% as compared to fiscal 2002; while gross profit margins declined
slightly to 29.5%, compared with 30.0% in fiscal 2002, largely due to $3.8 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
reductions.





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.





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.





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. Losses
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 27.5% as compared to fiscal 2002, primarily as a result
of the increase in new store openings in fiscal 2003 as compared to fiscal 2002.





Restructuring and asset impairment charges (income). Restructuring
and asset impairment income in fiscal 2003 were $(1.3) million, as compared to $(0.8)
million in fiscal 2002. The table on page 21 summarizes the components of restructuring
and asset impairment charges and income for fiscal years 2004, 2003 and 2002,
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 expense. Interest expense for the fiscal year ended
December 27, 2003, decreased 51.5% 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%.





Income tax expense. The effective tax rate for the fiscal year
ended December 27, 2003 was 40.7% as compared to 42.0% for fiscal 2002. The effective tax
rate in 2003 was higher relative to 2002, due to an increase in taxable income from our
Canadian subsidiary and an increase of 0.7% of state income taxes as a percentage of the
increased rate.





Net income (loss). In fiscal 2003, we incurred net income of $1.6
million, or $0.05 per diluted share, compared with net income of $5.1 million or $0.19 per
diluted share in 2002. Supply chain issues were a primary contributor to our decline in
net income in the second half of 2003.





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,
bank indebtedness, and the sale of convertible debt or equity. Primary uses of cash have
been the financing of new store development through leases and capital expenditures
remodels, acquisitions and repayment of debt.



Net cash provided by operating activities was $16.6 million during
fiscal 2004. The generation of cash from operations consisted of the net loss of $40.0
million with adjustments for depreciation and amortization, deferred taxes, non-cash
restructuring charges and other items that reconcile net income to cash, as well as
increases in inventories and receivables offset by increases to accounts payable, accrued
liabilities and other liabilities.



We expect the closure and/or relocation of four stores and support
facilities in 2005 to ultimately result in improved store contributions and cash flows for
the Company. The short term cash flow effects of these closures and/or relocations usually
involve some severance costs which, for these 2005 closures, we expect to be minimal as we
anticipate that a majority of the employees will accept positions at relocated stores and
support facilities or other positions within the Company. Costs for removal of furniture,
fixtures, and inventory for these closures are expected to be minimal.



Net cash used in investing activities was $59.2 million during fiscal
2004, which consisted primarily of purchases of property and equipment for our new stores
and remodeled locations, as well as investments in information technology. We received
$115 million in proceeds from our convertible debt issuance, which is shown as a financing
activity, and utilized a portion of the cash raised to invest in short term investments.
We had cash proceeds from the sale of some of those short term investments along with
property and equipment.



We spent approximately $49.2 million during 2004 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. 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. 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. 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.



Net cash used in financing activities was $55.5 million during fiscal
2004. The influx of cash was the direct result of our convertible debt financing in June
of 2004 along with proceeds from the issuance of common stock from employee option
exercises and issuances of common stock through the employee stock purchase plan. These
cash inflows were offset by outflows for the repurchase of outstanding common stock,
currently reflected as treasury stock, the paydown of the line of credit, the payment of
debt issuance costs, an increase in our overdraft balance, and repayments of capital lease
obligations.





Contingent convertible senior debentures. In June 2004, we issued
$115 million aggregate principal amount of 3.25% Convertible Senior Debentures due May 15,
2034 in a private placement. The debentures bear regular interest at the annual rate of
3.25%, payable semiannually on May 15 and November 15 of each year until May 15, 2011,
after which date, no regular interest will be due. Commencing May 20, 2011 and ending
November 14, 2011, and for any six-month period thereafter, contingent interest will be
due and payable in the amount of 0.25% of the average trading price of the debentures
during a specified period, if the average trading price of the debentures equals or
exceeds 125% of the principal amount of the debentures. We are currently paying an
additional 0.25% in interest due to delays in completing the registration of the
debentures.



The debentures are callable and convertible into our common stock prior
to maturity at the option of the holders under the following circumstances:
(1) during any calendar quarter commencing after June 30, 2004 and before March 31,
2029, if the last reported sale price of our common stock is greater than or equal to 130%
of the conversion price of $17.70 per share; (2) at any time on or after April 1,
2029 if the last reported sale price of our common stock on any date on or after March 31,
2029 is greater than or equal to 130% of the conversion price; (3) subject to certain
limitations, during the five business-day period after any five consecutive trading-day
period in which the trading price per debenture for each day of that period was less than
98% of the product of the conversion rate and the last reported sale price of our common
stock; (4) if we call the debentures for redemption; (5) upon the occurrence of
certain corporate transactions; or (6) if we obtain credit ratings for the
debentures, at any time when the credit ratings assigned to the debentures are below
specified levels. The debentures are initially convertible into 56.5099 shares of our
common stock per $1,000 principal amount, which is equivalent to $17.70 per share, for
total initial underlying shares of 6,498,639. Upon conversion, we have the right to
deliver, in lieu of common stock, cash or any combination of cash and common stock. We
filed a shelf registration statement covering resales of the debentures and the common
stock issuable upon conversion thereof in August 2004, and are currently in the review
phase with the Securities and Exchange Commission.



On or after May 20, 2011, we may redeem for cash some or all of the
debentures at any time and from time to time, for a price equal to 100% of the principal
amount of the debentures plus accrued and unpaid contingent interest, if any. Holders have
the right to require us to repurchase any or all debentures for cash, at a repurchase
price equal to 100% of the principal amount of the debentures, plus accrued and unpaid
interest on: (1) May 15, 2011, May 15, 2014, and May 15, 2024; and (2) the occurrence of
change in control (as defined in the debenture).



The debentures are unsecured and un-subordinated obligations, and rank
equal in priority with all of our existing and future unsecured and un-subordinated
indebtedness and senior in right of payment to all of its subordinated indebtedness. The
debentures will effectively rank junior to any of our secured indebtedness and any of its
indebtedness that is guaranteed by its subsidiaries. Payment of principal and interest on
the debentures will be structurally subordinated to the liabilities of our subsidiaries.





Credit facility. On March 31, 2005, we entered into a five-year
revolving secured credit facility with Bank of America, N.A. (the "B of A
Facility"). Concurrent with the execution of the B of A Facility, we terminated our
existing $95 million credit facility with Wells Fargo Bank N.A. as administrative agent.
The B of A Facility allows borrowings and letters of credit up to a maximum of $40
million, with an option to increase borrowings up to $100 million, subject to a borrowing
base determined by the value of certain inventory, credit card receivables, invested cash
and, at our discretion, mortgaged leaseholds. The B of A Facility is secured by certain of
our assets including, but not limited to, cash, inventory and fixed assets. Borrowings
under the B of A Facility bear interest, at our election, at the prime rate or at LIBOR
plus a margin ranging from 1.00% to 1.50%, depending on the excess borrowing availability
over amounts borrowed. Interest rates are determined quarterly. We are charged a
commitment fee on the unused portion of the Facility. There are no financial covenants,
other than the obligation to maintain a certain percentage of minimum excess availability
(as defined in the agreement) at all times. The B of A Facility requires compliance on a
monthly basis with certain non-financial covenants, including limitations on incurring
additional indebtedness and making investments, the use and disposition of collateral,
changes of control, as well as cash management provisions. We expect that we will be in
compliance with all covenants. We further expect that our cash requirements through the
third quarter of fiscal 2005 will be primarily satisfied from the proceeds of the 2004
debenture issuance as well as cash generated from operations, and thereafter from cash
generated from operations and borrowings under the new credit facility.



Our prior credit facility was entered into in February of 2003, with
Wells Fargo Bank N.A. acting as lead bank and administrative agent (the "Wells
Facility"). The Wells Facility had a $95.0 million limit and a three-year term with a
one-year renewal option.



As part of the Wells Facility, we gave our lenders collateral in the
form of cash, equipment and fixtures, inventory and other assets. We also granted
leasehold mortgages in certain leasehold interests. The Wells Facility required compliance
as of the last day of each fiscal quarter, with certain financial covenants, including the
following: an adjusted leverage ratio (as described below); a fixed charge coverage ratio,
which is the ratio of EBITDAR for the last four fiscal quarters minus certain maintenance
capital expenditures and taxes to fixed charges for the four fiscal quarters; a minimum
stockholders' equity of $125 million plus a portion of cumulative net income, adjusted for
stock issuances and repurchases; a limitation on new leases per fiscal year, and a cap on
capital expenditures per fiscal year. We were also obligated, on a continuous basis, to
maintain a minimum cash balance. In connection with the debenture offering in June 2004,
the Wells Facility was amended to, among other things, (1) increase the maximum allowable
leverage ratio, (2) permit the repurchase of our common stock, within specified limits,
(3) increase the annual limits on capital expenditures and new leases, (4) raise the limit
on the value of acquisitions and divestitures we can make without the consent of the
lending group, and (5) increase the maximum percentage rate to either prime plus 0.1% or
one month LIBOR plus 2.5%. The Wells Facility was subsequently amended in August and
November 2004. As amended, the interest rate on the Wells Facility was either prime plus
1.25% or one-month LIBOR plus 2.75%, at our election, and the rates modified depending on
an adjusted leverage ratio equal to 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. We were
charged a commitment fee on the unused portion of the line based on defined performance
objectives. The outstanding balance on the Wells Facility was repaid in June 2004 from the
proceeds of the debenture issuance. As of January 1, 2005 and as of the date of our
termination of the Wells Facility, there were no outstanding borrowings under the Wells
Facility, and letters of credit outstanding totalled $9.1 million.



As a result of the restatement to correct lease-related accounting
errors described in "Notes to Consolidated Financial Statements  Note 2
 Restatement of Financial Statements",we were in violation of three
financial covenants under the Wells Facility as of January 1, 2005, and would be in
violation in future quarters unless such covenants were amended. We requested and received
waivers of the three covenant violations from the requisite lenders under the Wells
Facility. If we would not have obtained a waiver, or alternatively, an amendment to the
existing covenants, the effect to the Consolidated Financial Statements would have been
such that our outstanding letters of credit, which in aggregate are $9.1 million, would
have required funding with cash, which we could have accomplished with cash on hand.
Therefore, the cash balance would have decreased by $9.1 million and our long-term other
assets balance would have increased by the corresponding $9.1 million.



As of January 1, 2005, we had no off-balance sheet arrangements,
unconsolidated subsidiaries, commitments or guarantees, except as disclosed in the notes
to the consolidated financial statements. Stockholders' equity at January 1, 2005 of
$101.1 million represented 24.9% of total assets. As of January 1, 2005, we had a working
capital deficit of $24.9 million, or an improvement of $13.0 million over fiscal 2003
year-end. The increase in working capital was primarily attritributed to proceeds from the
issuance of our convertible debt, and operational cash flows.



We believe that cash generated from operations, from our 2004 debenture
offering, and available under our new credit facility will be sufficient to satisfy our
budgeted cash requirements through fiscal 2005. 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.



We believe that current cash and cash equivalents, short-term
investments and cash flows from operations will be sufficient to fund necessary capital
expenditures, to provide adequate working capital, and to expand as planned for the
foreseeable future (the next 12 months). There can be no assurance, however, that we will
not require additional financing. There can be no assurance that any additional financing
will be available to us on acceptable terms, or at all, when required. If additional funds
were to be raised through the sale of equity securities or additional convertible debt
instruments, additional dilution to existing shareholders would likely result.



The following is a summary of our lease and debt obligations,
construction commitments and outstanding letters of credit as of January 1, 2005:





AGGREGATE
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

(in thousands)



|                          |  | EXPECTED
    FUTURE CASH PAYMENTS             
|------------------------- |  | ----------------------------------------------
|                          |  |                                               
|                          |  | Total                                         
|                          |  |                                               
|Contractual Obligations:  |  |                                               
|Long-term debt            |  | $ 140,058                                     
|Capital lease obligations |  | 81,295                                        
|Operating leases          |  | 389,931                                       
|Construction commitments  |  | 4,410                                         
|                          |  |                                               
|                          |  | $ 615,694                                     
|                          |  |                                               
|                          |  |                                               
|                          |  |                                               
|                          |  | AMOUNT OF
    COMMITMENT EXPIRATION PER PERIOD
|                          |  |                                               
|                          |  | Total                                         
|                          |  |                                               
|                          |  |                                               
|Commercial Commitments:   |  |                                               
|Letters of credit         |  | $ 9,100                                       
|                          |  |                                               
|                          |  |                                               









Long term debt. During June of 2004, we completed the issuance of
$115 million in convertible debt, at a fixed interest rate of 3.25%, payable
semi-annually. We will be accruing an additional 0.25% monthly for the first three months
of 2005 and 0.50% monthly thereafter in interest, until we complete the registration of
the debentures. We have contemplated the interest in the table above. In addition to the
convertible debentures, our credit facility, which currently has no amounts borrowed
against it, carries a commitment fee for the unused portion of the facility. We have
included the commitment fee in the above schedule.





Capital lease obligations. The number and dollar amount of capital
leases are limited by the B of A Facility and as a business practice. Certain store
locations meet the criteria of capital leases, while other capital leases are for office
equipment and computer hardware.





Operating leases. We lease a majority of our stores and support
facilities under non-cancelable operating leases that expire at various dates through
2024.





Construction commitments. As we prepare to open new stores, capital
assets are ordered yet not delivered as of the year end.





Other obligations. We do not have minimum purchase requirements or
other contractual obligations in our business.





Letters of credit. As of January 1, 2005, we had outstanding
letters of credit for $9.1 million.







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 number of stores we plan to open or relocate in future periods and
the anticipated performance of such stores; the impact of competition; the sufficiency of
funds to satisfy our cash requirements through the remainder of fiscal 2005; the impact of
changes resulting from our merchandising and marketing programs; our ability to benefit
from past supply chain modifications; expected pre-opening expenses and capital
expenditures; and other statements containing words such as "believes,"
"anticipates," "estimates," "expects," "may,"
"intends" and words of similar import or statements of management's opinion.
These forward-looking statements and assumptions involve known and unknown risks,
uncertainties and other factors that may cause our 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 and closures; new competitive
impacts; changes in product supply or suppliers and supplier performance levels; changes
in management information needs; changes in customer needs and expectations; changes in
government regulations applicable to our business; 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. We undertake 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. We employ various
financial instruments to manage certain exposures when practical.



The Company is exposed to foreign currency exchange risk. We own and
operate 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. We do not hedge against this risk because of the small amounts of funds at
risk.



Our exposure to interest rate changes is primarily related to variable
rate debt that would be issued under the Wells or B of A facilities. The interest rate on
the Wells Facility as of January 1, 2005,  is either prime plus 1.25% or one-month
LIBOR plus 2.75%, at our election, and the rates modified 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 Wells Facility is
variable, based upon the prime rate or LIBOR, our interest expense and net income are
affected by interest rate fluctuations. Interest under the newly signed facility is also
based on LIBOR, and therefore 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 January 1, 2005, would be an annual
increase or decrease of zero, as we had no borrowings against the Wells Facility.



In September 2000, as required by our former credit facility, we
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 was 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,
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                                                                                                 
|-------------------------------------------------------- | -----------------------------------------------------------------------------------------------------
|                                                         |                                                                                                      
|                                                         | Reports of
    Independent Registered Public Accounting Firms                                        
|                                                         |                                                                                                      
|                                                         | Consolidated Statements of Operations for Fiscal Years 2004, 2003 and 2002                           
|                                                         |                                                                                                      
|                                                         | Consolidated Statements of
    Comprehensive Income (Loss) for Fiscal Years Ended 2004, 2003 and 2002
|                                                         |                                                                                                      
|                                                         | Consolidated
    Balance Sheets for Fiscal Years 2004 and 2003                                       
|                                                         |                                                                                                      
|                                                         | Consolidated Statements of
    Stockholders' Equity for Fiscal Years Ended 2004, 2003, and 2002      
|                                                         |                                                                                                      
|                                                         | Consolidated Statements of Cash Flows for Fiscal Years Ended 2004, 2003 and 2002                     
|                                                         |                                                                                                      
|                                                         | Notes to Consolidated
    Financial Statements                                                       



---



REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM







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



We have audited the accompanying consolidated balance sheet of Wild
Oats Markets, Inc. as of January 1, 2005, and the related consolidated statements of
operations, comprehensive income (loss), stockholders' equity, and cash flows for the year
ended January 1, 2005. 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 audit.



We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards 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. An
audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Wild Oats
Markets, Inc. at January 1, 2005, and the consolidated results of its operations and its
cash flows for the year ended January 1, 2005, in conformity with U.S. generally accepted
accounting principles.



/s/ Ernst & Young LLP

Denver, Colorado

March 31, 2005



---



REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM







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 the results of their operations and their cash flows for each of the two 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 the standards of the Public Company Accounting Oversight
Board (United States). Those standards 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 2, to the Consolidated Financial Statements, the
Company has restated its financial statements as of and for the years ended December 21,
2003 and December 28, 2002.



/s/ PricewaterhouseCoopers LLP

Denver, Colorado

March 8, 2004, except for

Note 2, as to which date is March 31, 2005



---

WILD OATS MARKETS, INC.

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(In thousands, except per-share amounts)

|FISCAL YEAR                                                                |  | 2004        |  | 2003                          |  | 2002     
|-------------------------------------------------------------------------- |  | ----------- |  | ----------------------------- |  | ---------
|                                                                           |  |             |  |                               |  |          
|                                                                           |  |             |  | (as
    restated, see Note 2)
|                                                                           |  |             |  |                              
|Sales                                                                      |  | $ 1,048,164 |  | $ 969,204                     |  | $ 919,130
|Cost of goods sold and occupancy costs                                     |  | 751,314     |  | 683,480                       |  | 643,769  
|                                                                           |  |             |  |                               |  |          
|Gross profit                                                               |  | 296,850     |  | 285,724                       |  | 275,361  
|                                                                           |  |             |  |                               |  |          
|Operating expenses:                                                        |  |             |  |                               |  |          
|Direct store expenses                                                      |  | 235,425     |  | 208,908                       |  | 198,379  
|Selling, general and administrative expenses                               |  | 62,454      |  | 64,659                        |  | 55,186   
|Loss on disposal of assets, net                                            |  | 187         |  | 2,087                         |  | 21       
|Pre-opening expenses                                                       |  | 5,265       |  | 3,490                         |  | 2,737    
|Restructuring and asset impairment charges (income), net                   |  | 2,461       |  | (1,259)                       |  | (775)    
|                                                                           |  |             |  |                               |  |          
|Income (loss) from operations                                              |  | (8,942)     |  | 7,839                         |  | 19,813   
|                                                                           |  |             |  |                               |  |          
|Loss on early extinguishment of debt                                       |  | -           |  | (186)                         |  | -        
|Interest income                                                            |  | 1,070       |  | 780                           |  | 778      
|Interest expense                                                           |  | (6,309)     |  | (5,746)                       |  | (11,855) 
|                                                                           |  |             |  |                               |  |          
|Income (loss) before income taxes                                          |  | (14,181)    |  | 2,687                         |  | 8,736    
|Income tax expense                                                         |  | 25,838      |  | 1,094                         |  | 3,666    
|                                                                           |  |             |  |                               |  |          
|Net income (loss)                                                          |  | $ (40,019)  |  | $
    1,593                   |  | $ 5,070  
|                                                                           |  |             |  |                               |  |          
|                                                                           |  |             |  |                               |  |          
|Net income (loss) per common share:                                        |  |             |  |                               |  |          
|Basic                                                                      |  | $ (1.37)    |  | $ 0.05                        |  | $ 0.19   
|Diluted                                                                    |  | $ (1.37)    |  | $ 0.05                        |  | $ 0.19   
|                                                                           |  |             |  |                               |  |          
|Weighted average number of common shares outstanding                       |  | 29,219      |  | 29,851                        |  | 26,481   
|                                                                           |  |             |  |                               |  |          
|Weighted average number of common shares
    outstanding assuming dilution |  | 29,219      |  | 30,258                        |  | 27,082   
|                                                                           |  |             |  |                               |  |          
|                                                                           |  |             |  |                               |  |          





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                                                                                                             |  | 2004       |  | 2003                          |  | 2002   
|----------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | ----------------------------- |  | -------
|                                                                                                                        |  |            |  |                               |  |        
|                                                                                                                        |  |            |  | (as restated,
    see Note 2)
|                                                                                                                        |  |            |  |                              
|Net income (loss)                                                                                                       |  | $ (40,019) |  | $ 1,593                       |  | $ 5,070
|                                                                                                                        |  |            |  |                               |  |        
|Other comprehensive income (loss):                                                                                      |  |            |  |                               |  |        
|                                                                                                                        |  |            |  |                               |  |        
|Foreign currency translation adjustments                                                                                |  | 681        |  | 697                           |  | (61)   
|                                                                                                                        |  |            |  |                               |  |        
|Unrealized gain/loss on available-for-sale securities                                                                   |  | 37         |  | -                             |  | -      
|                                                                                                                        |  |            |  |                               |  |        
|Recognition of hedge results to interest expense during the period, net
      of tax of $0, $367 and $705, respectively |  | -          |  | 613                           |  | 1,176  
|                                                                                                                        |  |            |  |                               |  |        
|Change in market value of cash flow hedge during the period, net of tax
      of $0, $12 and $208, respectively         |  | -          |  | (20)                          |  | (348)  
|                                                                                                                        |  |            |  |                               |  |        
|Other comprehensive income                                                                                              |  | 718        |  | 1,290                         |  | 767    
|                                                                                                                        |  |            |  |                               |  |        
|                                                                                                                        |  |            |  |                               |  |        
|Comprehensive income (loss)                                                                                             |  | $ (39,301) |  | $ 2,883                       |  | $ 5,837
|                                                                                                                        |  |            |  |                               |  |        
|                                                                                                                        |  |            |  |                               |  |        





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



---

WILD OATS MARKETS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

|                                                                                                                                                          |               |  | 2003                     
|--------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- |  | -------------------------
|                                                                                                                                                          |               |  |                          
|FISCAL YEAR ENDED                                                                                                                                         | 2004          |  | (as restated, see Note 2)
|                                                                                                                                                          |               |  |                          
|                                                                                                                                                          |               |  |                          
|ASSETS                                                                                                                                                    |               |  |                          
|                                                                                                                                                          |               |  |                          
|Current assets:                                                                                                                                           |               |  |                          
|Cash and cash equivalents                                                                                                                                 | $ 30,671      |  | $ 17,400                 
|Short-term investments                                                                                                                                    | 11,144        |  | -                        
|Inventories (net of reserves of $815 and $685, respectively)                                                                                              | 54,960        |  | 46,621                   
|Accounts receivable (net of allowance for doubtful accounts of $153 and
      $208, respectively)                                                         | 3,860         |  | 4,038                    
|Prepaid expenses and other current assets                                                                                                                 | 5,741         |  | 5,438                    
|Deferred tax asset                                                                                                                                        | -             |  | 12,795                   
|                                                                                                                                                          |               |  |                          
|Total current assets                                                                                                                                      | 106,376       |  | 86,292                   
|                                                                                                                                                          |               |  |                          
|Property and equipment, net                                                                                                                               | 177,830       |  | 157,444                  
|Goodwill, net                                                                                                                                             | 106,084       |  | 106,404                  
|Other intangible assets, net                                                                                                                              | 6,491         |  | 6,707                    
|Deposits and other assets                                                                                                                                 | 8,361         |  | 2,932                    
|Deferred tax asset                                                                                                                                        | 418           |  | 13,649                   
|                                                                                                                                                          |               |  |                          
|                                                                                                                                                          | $
    405,560 |  | $
    373,428            
|                                                                                                                                                          |               |  |                          
|                                                                                                                                                          |               |  |                          
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                      |               |  |                          
|                                                                                                                                                          |               |  |                          
|Current liabilities:                                                                                                                                      |               |  |                          
|Accounts payable                                                                                                                                          | $ 54,428      |  | $ 50,514                 
|Book overdraft                                                                                                                                            | 23,325        |  | 26,727                   
|Accrued liabilities                                                                                                                                       | 53,154        |  | 44,316                   
|Current portion of debt, capital leases and financing obligations                                                                                         | 405           |  | 293                      
|                                                                                                                                                          |               |  |                          
|Total current liabilities                                                                                                                                 | 131,312       |  | 121,850                  
|                                                                                                                                                          |               |  |                          
|Long-term debt, capital leases and financing
    obligations                                                                                              | 148,675       |  | 64,042                   
|Other long-term obligations                                                                                                                               | 24,472        |  | 25,163                   
|                                                                                                                                                          |               |  |                          
|                                                                                                                                                          | 304,459       |  | 211,055                  
|                                                                                                                                                          |               |  |                          
|Commitments and contingencies (Note 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; 30,466,701
      and 30,063,421 issued; 28,488,901 and 30,063,421 outstanding, respectively | 30            |  | 30                       
|Treasury stock, at cost: 1,977,800 shares as of January 1, 2005                                                                                           | (24,999)      |  | -                        
|Additional paid-in capital                                                                                                                                | 221,029       |  | 217,400                  
|Note receivable, related party                                                                                                                            | (11,416)      |  | (10,815)                 
|Accumulated deficit                                                                                                                                       | (84,509)      |  | (44,490)                 
|Accumulated other comprehensive income                                                                                                                    | 966           |  | 248                      
|                                                                                                                                                          |               |  |                          
|Total stockholders' equity                                                                                                                                | 101,101       |  | 162,373                  
|                                                                                                                                                          |               |  |                          
|                                                                                                                                                          | $
    405,560 |  | $
    373,428            
|                                                                                                                                                          |               |  |                          
|                                                                                                                                                          |               |  |                          



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

---

WILD OATS MARKETS, INC.

CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY

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

|                                                                                      |  |              |  |                    |  |            |                     | Add'l
    Paid-In
    Capital |                      |            |  |            |  | Accumulated
    Other Comp.
    Income(Loss)
|------------------------------------------------------------------------------------- |  | ------------ |  | ------------------ |  | ---------- | ------------------- | ----------------------------- | -------------------- | ---------- |  | ---------- |  | --------------------------------------------
|                                                                                      |  | Common Stock |  | Treasury
    Stock |  |            | Note
    Receivable |                               | (Accum.
    Deficit) |           
|                                                                                      |  | Shares       |  | Amount             |  | Amount     |                     |                               |                      |           
|                                                                                      |  |              |  |                    |  |            |                     |                               |                      |            |  |            |  |                                             
|Balance, December 29, 2001
    (previously reported)                                  |  | 24,766,409   |  | $ 25               |  | $  
     - |                     | $ 160,736                     |                      | $ (9,660)  |  | $ (42,277) |  | $ (1,809)                                   
|Cumulative prior years
    adjustment (Note 2)                                        |  | -            |  | -                  |  | -          |                     | -                             |                      | -          |  | (8,876)    |  | -                                           
|                                                                                      |  |              |  |                    |  |            |                     |                               |                      |            |  |            |  |                                             
|Balance at December 29, 2001
    (as restated, see Note 2)                            |  | 24,766,409   |  | 25                 |  | -          |                     | 160,736                       |                      | (9,660)    |  | (51,153)   |  | (1,809)                                     
|Accrued interest on note
    receivable                                               |  |              |  |                    |  |            |                     |                               |                      | (540)      |  |            |  |                                             
|Issuance of common stock ($7.91
    to $11.50 per share), net of issuance costs       |  | 4,641,692    |  | 4                  |  | -          |                     | 50,327                        |                      | -          |  | -          |  | -                                           
|Common stock options exercised
    ($3.13 to $12.56 per share), including tax benefit |  | 250,559      |  | 1                  |  | -          |                     | 2,419                         |                      | -          |  | -          |  | -                                           
|Net income (as restated, see
    Note 2)                                              |  | -            |  | -                  |  | -          |                     | -                             |                      | -          |  | 5,070      |  | -                                           
|Foreign currency translation
    adjustment                                           |  | -            |  | -                  |  | -          |                     | -                             |                      | -          |  | -          |  | (61)                                        
|Recognition of hedge results to
    interest expense during the period, net of tax    |  | -            |  | -                  |  | -          |                     | -                             |                      | -          |  | -          |  | 1,176                                       
|Change in market value of cash
    flow hedge during the period, net of tax           |  | -            |  | -                  |  | -          |                     | -                             |                      | -          |  | -          |  | (348)                                       
|                                                                                      |  |              |  |                    |  |            |                     |                               |                      |            |  |            |  |                                             
|Balance at December 28, 2002
    (as restated, see Note 2)                            |  | 29,658,660   |  | 30                 |  |            |                     | 213,482                       |                      | (10,200)   |  | (46,083)   |  | (1,042)                                     
|Accrued interest on note
    receivable                                               |  |              |  |                    |  |            |                     |                               |                      | (615)      |  |            |  |                                             
|Issuance of common stock ($8.77
    to $9.11 per share), net of issuance costs.       |  | 88,595       |  | -                  |  | -          |                     | 1,186                         |                      |            |  |            |  |                                             
|Common stock options exercised
    ($3.13 to $10.86 per share), including tax benefit |  | 316,166      |  |                    |  | -          |                     | 2,732                         |                      |            |  |            |  |                                             
|Net income (as restated, see
    Note 2)                                              |  | -            |  | -                  |  | -          |                     |                               |                      |            |  | 1,593      |  |                                             
|Foreign currency translation
    adjustment                                           |  | -            |  | -                  |  | -          |                     |                               |                      |            |  |            |  | 697                                         
|Recognition of hedge results to
    interest expense during the period, net of tax    |  | -            |  | -                  |  | -          |                     |                               |                      |            |  |            |  | 613                                         
|Change in market value of cash
    flow hedge during the period, net of tax           |  | -            |  | -                  |  | -          |                     |                               |                      |            |  |            |  | (20)                                        
|                                                                                      |  |              |  |                    |  |            |                     |                               |                      |            |  |            |  |                                             
|Balance at December 27, 2003
    (as restated, see Note 2)                            |  | 30,063,421   |  | 30                 |  | -          |                     | 217,400                       |                      | (10,815)   |  | (44,490)   |  | 248                                         
|Accrued interest on note
    receivable                                               |  | -            |  | -                  |  |            |                     |                               |                      | (601)      |  |            |  |                                             
|Issuance of common stock ($9.37
    to $10.92 per share), net of issuance costs.      |  | 76,676       |  | -                  |  |            |                     | 771                           |                      |            |  |            |  |                                             
|Common stock options exercised
    ($4.25 to $12.56 per share)                        |  | 326,604      |  | -                  |  |            |                     | 2,858                         |                      |            |  |            |  |                                             
|Net loss                                                                              |  | -            |  | -                  |  |            |                     |                               |                      |            |  | (40,019)   |  |                                             
|Foreign currency translation
    adjustment                                           |  | -            |  | -                  |  |            |                     |                               |                      |            |  |            |  | 681                                         
|Purchase of outstanding shares                                                        |  | (1,977,800)  |  | -                  |  | $ (24,999) |                     |                               |                      |            |  |            |  |                                             
|Unrealized gain on
    available-for-sale securities                                  |  | -            |  | -                  |  |            |                     |                               |                      |            |  |            |  | 37                                          
|                                                                                      |  |              |  |                    |  |            |                     |                               |                      |            |  |            |  |                                             
|Balance at January 1, 2005                                                            |  | 28,488,901   |  | $ 30               |  | $ (24,999) |                     | $ 221,029                     |                      | $ (11,416) |  | $ (84,509) |  | $ 966                                       
|                                                                                      |  |              |  |                    |  |            |                     |                               |                      |            |  |            |  |                                             
|                                                                                      |  |              |  |                    |  |            |                     |                               |                      |            |  |            |  |                                             



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                                                                                  |            | 2004 |                               | 2003 |           | 2002
|-------------------------------------------------------------------------------------------- | ---------- | ---- | ----------------------------- | ---- | --------- | ----
|                                                                                             |            |      |                               |      |           |     
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                        |            |      | (as
    restated, see Note 2)
|                                                                                             |            |      |                              
|Net income (loss)                                                                            | $ (40,019) |      | $ 1,593                       |      | $ 5,070  
|Adjustments to reconcile net income (loss) to
    net cash provided by operating activities: |            |      |                               |      |          
|Depreciation and amortization                                                                | 27,917     |      | 27,851                        |      | 24,653   
|Loss on disposal of property and equipment                                                   | 187        |      | 2,087                         |      | 21       
|Income tax benefit from employee option exercises                                            | -          |      | 238                           |      | 479      
|Deferred tax expense                                                                         | 26,851     |      | 295                           |      | 2,942    
|Non-cash restructuring and asset impairment charges (income), net                            | 2,461      |      | (1,099)                       |      | (824)    
|Interest on related party note                                                               | (601)      |      | (615)                         |      | (540)    
|Stock compensation                                                                           | 710        |      | 392                           |      | 240      
|Change in assets and liabilities:                                                            |            |      |                               |      |          
|Inventories, net                                                                             | (8,223)    |      | 755                           |      | 6,886    
|Receivables, net and other assets                                                            | (1,831)    |      | (855)                         |      | 4,293    
|Accounts payable                                                                             | 3,844      |      | 10,001                        |      | (6,869)  
|Accrued liabilities and other liabilities                                                    | 5,301      |      | 5,743                         |      | (1,068)  
|                                                                                             |            |      |                               |      |          
|Net cash provided by operating activities                                                    | 16,597     |      | 46,386                        |      | 35,283   
|                                                                                             |            |      |                               |      |          
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                        |            |      |                               |      |          
|Capital expenditures                                                                         | (49,105)   |      | (34,062)                      |      | (14,169) 
|Purchase of short-term investments                                                           | (26,797)   |      | -                             |      | -        
|Sale of short-term investments                                                               | 15,653     |      | -                             |      | -        
|Proceeds from sale of property and equipment                                                 | 1,012      |      | 346                           |      | 229      
|                                                                                             |            |      |                               |      |          
|Net cash used in investing activities                                                        | (59,237)   |      | (33,716)                      |      | (13,940) 
|                                                                                             |            |      |                               |      |          
|CASH FLOWS FROM FINANCING
    ACTIVITIES:                                                    |            |      |                               |      |          
|Net repayments under line of credit                                                          | (30,179)   |      | (13,800)                      |      | (69,200) 
|Net (decrease) increase in book overdraft                                                    | (3,402)    |      | 3,949                         |      | 425      
|Proceeds from long term debt                                                                 | 115,150    |      | 37,879                        |      | -        
|Repayments on notes payable, long-term debt
    and capitalized leases                       | (226)      |      | (37,346)                      |      | (10,892) 
|Payment of debt issuance costs                                                               | (3,717)    |      | (721)                         |      | -        
|Proceeds from issuance of common stock, net                                                  | 2,858      |      | 3,288                         |      | 50,822   
|Repurchase of common stock                                                                   | (24,999)   |      | -                             |      | -        
|                                                                                             |            |      |                               |      |          
|Net cash (used in) provided by financing activities                                          | 55,485     |      | (6,751)                       |      | (28,845) 
|                                                                                             |            |      |                               |      |          
|Effect of exchange rates on cash                                                             | 426        |      | 114                           |      | 29       
|                                                                                             |            |      |                               |      |          
|Net (decrease) increase in cash and cash
    equivalents                                     | 13,271     |      | 6,033                         |      | (7,473)  
|Cash and cash equivalents at beginning of year                                               | 17,400     |      | 11,367                        |      | 18,840   
|                                                                                             |            |      |                               |      |          
|Cash and cash equivalents at end of year                                                     | $ 30,671   |      | $ 17,400                      |      | $ 11,367 
|                                                                                             |            |      |                               |      |          
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
    INFORMATION:                                        |            |      |                               |      |          
|Cash paid for interest, net of amounts
    capitalized                                       | $ 2,108    |      | $ 3,168                       |      | $ 8,549  
|                                                                                             |            |      |                               |      |          
|Cash paid (received) for income taxes                                                        | $ 161      |      | $ 67                          |      | $ (3,473)
|                                                                                             |            |      |                               |      |          
|                                                                                             |            |      |                               |      |          
|SUPPLEMENTAL DISCLOSURE OF NON-CASH
    INVESTING AND FINANCING ACTIVITIES:                  |            |      |                               |      |          
|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 restated to conform to appropriate accounting guidance
related to leases. See Note 2 for further discussion. Certain amounts in the prior years'
financial statements have been reclassified to conform to the current year presentation.
These reclassifications had no impact on net income (loss) or cash flows.





Principles of consolidation. The Company's consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany 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 January 1, 2005, December 27,
2003 and December 28, 2002. Fiscal 2004 was a 53-week year, while both fiscal 2003 and
fiscal 2002 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.





Short-term investments. These are investments made by the Company
that mature within one year from the date of purchase. The amortized cost of debt
securities are adjusted for amortization of premiums and accretion of discounts to
maturity computed under the effective interest method. Such amortization is included in
interest income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest income. The
cost of securities sold is based on the specific identification method. Income and
dividends on securities classified as available-for-sale are included in interest income.
Investments classified as available-for-sale are marked to market each reporting period
with the unrealized gain or loss reflected as a component of other comprehensive income.



Available-for-sale investments as of January 1, 2005 consist of the
following (in thousands):



| | Investment Type                      |  | Adjusted Cost |  | Gross Unrealized Gains |  | Estimated Fair Value
| | ------------------------------------ |  | ------------- |  | ---------------------- |  | --------------------
| |                                      |  |               |  |                        |  |                     
| |                                      |  |               |  |                        |  |                     
| | Mortgage backed securities           |  | $ 7,240       |  | $ 27                   |  | $ 7,267             
| | Corporate debt securities            |  | 2,490         |  | 10                     |  | 2,500               
| | Other debt securities                |  | 4,949         |  | -                      |  | 4,949               
| |                                      |  |               |  |                        |  |                     
| | Total available-for-sale investments |  | $ 14,679      |  | $ 37                   |  | $ 14,716            
| |                                      |  |               |  |                        |  |                     
| |                                      |  |               |  |                        |  |                     





Of the short term investments, $11.1 million are classified as short
term investments and the remaining balance is considered cash and cash equivalents because
they mature within 90 days. The Company recorded $50,000 in realized gains in interest
income during fiscal 2004 on short-term investments reaching maturity.





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. Certain other highly
perishable inventories are valued primarily at the lower of cost or market on a specific
item basis, 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 appropriate 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 five
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 the adoption of 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 2004 and 2003, 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.Otherintangible assets consist
primarily of leasehold interests and liquor licenses. Amortization of leasehold interests
is computed on a straight-line basis over the appropriate lease term. Certain liquor
licenses, purchased at significant expense, in limited issue jurisdictions subject only to
minimal renewal costs 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.





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. 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.





Leases. The Company is the lessee of land and buildings under
long-term operating, capital, and financing leases which include scheduled increases in
minimum rents and renewal provisions at the option of the Company. For certain leases, the
Company also receives reimbursements from landlords to compensate for costs incurred by
the Company in the construction of stores. The lease term used in all lease accounting
calculations begins with the date the Company takes possession of the space, and ends on
the later of the expiration of the primary lease term or the expiration of any renewal
periods that are deemed to be reasonably assured at the inception of the lease. The
Company amortizes leasehold improvements and leasehold interests over the shorter of the
economic useful life of the asset or the lease term. The expense associated with leases
that have rent holidays and escalating payment terms is recognized on a straight-line
basis over the lease term. In evaluating the capital versus operating classification of
the lease, the Company uses the same lease term defined above in performing the tests
required by SFAS No. 13, Accounting for Leases.Tenant improvement allowances
received from a lessor are recorded as a deferred rent liability and recognized evenly as
a reduction to rent expense over the lease term.





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. In fiscal 2004, the Company purchased 38% of
its cost of goods sold from its primary distributor, UNFI. The Company's reliance on this
supplier could be shifted, over a period of time, to alternative sources of supply, should
such changes be necessary. However, if the Company 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. The Company's receivables consist
primarily of volume discounts and other vendor incentive programs. Write-offs of accounts
receivable in the three fiscal years ending January 1, 2005 were $174,000, $136,000 and
$435,000 for the three years 2004, 2003 and 2002, respectively. The Company establishes an
allowance for doubtful accounts based upon the age of the outstanding receivables and as
well as specific facts and circumstances surrounding known collection issues. This
allowance is deducted from the related receivables and reflected net in the accompanying
financial statements.





Revenue recognition. Revenue for sales of the Company's products is
recognized at the point of sale to the retail customer. Revenue from the sale of gift
cards is deferred until the card is presented for purchase of goods. 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 Emerging Issues Task Force ("EITF") Issue No. 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 are
recorded in cost of goods sold when the inventory is sold.





Advertising. Advertising is expensed as incurred. Advertising
expense was $12.1 million, $14.5 million and $13.3 million for fiscal 2004, fiscal 2003
and fiscal 2002, respectively. These amounts are net of vendor reimbursements received for
advertising of $6.8 million, $6.3 million and $5.3 million for fiscal years 2004, 2003,
and 2002, respectively





Fair value of financial instruments. The carrying amounts of the
Company's financial instruments, including cash and cash equivalents, short term
investments, 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. Capital lease obligations approximate fair value, considering the rate at
which we present value those obligations have remained consistent over time and our
ability to borrow currently approximates that at which we entered into those obligations.





Derivative financial instruments. Prior to August 1, 2003, the
Company used an interest rate swap agreement 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.
The interest rate swap was carried at fair value and changes in fair value are reported in
other comprehensive income.  As of January 1, 2005, 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 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 591,559, 1,120,319 and 933,935 for
the fiscal years ended January 1, 2005, December 27, 2003 and December 28, 2002,
respectively, were not included in the earnings per share calculations. The debentures,
issued in May 2004, are contingently convertible into shares of common stock unless an
irrevocable election to settle the debentures in cash is made by the Company's Board of
Directors. The debentures currently are not convertible and are anti-dilutive. They
represent 3,790,019 anti-dilutive shares as of January 1, 2005.



A reconciliation of the basic and diluted per-share computations is as
follows (in thousands, except per-share data):

|                                                                           |  |            |  | 2003          |  | 2002   
|-------------------------------------------------------------------------- |  | ---------- |  | ------------- |  | -------
|                                                                           |  |            |  |               |  |        
|FISCAL YEAR                                                                |  | 2004       |  | (As Restated)
|                                                                           |  |            |  |              
|                                                                           |  |            |  |               |  |        
|Basic and diluted
    earnings per common share computation:               |  |            |  |               |  |        
|                                                                           |  |            |  |               |  |        
|Net income (loss)                                                          |  | $ (40,019) |  | $ 1,593       |  | $ 5,070
|Net income (loss) per
    common share:                                    |  |            |  |               |  |        
|Basic                                                                      |  | $ (1.37)   |  | $ 0.05        |  | $ 0.19 
|Diluted                                                                    |  | $ (1.37)   |  | $ 0.05        |  | $ 0.19 
|                                                                           |  |            |  |               |  |        
|Weighted average number of
    common shares outstanding, basic            |  | 29,219     |  | 29,851        |  | 26,481 
|Incremental shares from
    assumed conversions:                           |  |            |  |               |  |        
|Stock options                                                              |  | -          |  | 407           |  | 601    
|                                                                           |  |            |  |               |  |        
|Weighted average number of
    common shares outstanding assuming dilution |  | 29,219     |  | 30,258        |  | 27,082 
|                                                                           |  |            |  |               |  |        





Income taxes. The Company provides deferred tax expense or benefit,
net of valuation allowances equal to the change in the deferred tax asset during the year
in accordance with SAFS No. 109 "Accounting for Income Taxes." Deferred tax
represents tax credit carryforwards and future net tax effects resulting from temporary
differences between the financial statement and tax basis as assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected to reverse,
net of tax valuation allowances.





Stock-based compensation. At January 1, 2005, the Company has six
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 (loss) 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 Financial Accounting Standards Board
(FASB) Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.



| |                                                                                                                                                                         |                |      | 2003     |  | 2002         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ---- | -------- |  | -------------
| |                                                                                                                                                                         |                |      |          |  |              
| | FISCAL YEAR                                                                                                                                                             |                | 2004 |          |  | (As Restated)
| |                                                                                                                                                                         |                |      |          |  |              
| |                                                                                                                                                                         |                |      |          |  |              
| | Net income
    (loss), as reported                                                                                                                                      | $
    (40,019) |      | $ 1,593  |  | $ 5,070      
| | Add: Stock-based employee
    compensation expense included in reported net income (loss), net of tax of $0, $77, and
    $50, respectively                             | 457            |      | 205      |  | 133          
| | Deduct: Total stock-based employee
    compensation expense determined under fair value based method for all awards, net of tax
    of $0, $975, and $802, respectively | (1,829)        |      | (2,587)  |  | (2,128)      
| |                                                                                                                                                                         |                |      |          |  |              
| | Pro forma net income (loss)                                                                                                                                             | $
    (41,391) |      | $ (789)  |  | $ 3,075      
| |                                                                                                                                                                         |                |      |          |  |              
| |                                                                                                                                                                         |                |      |          |  |              
| | Earnings (loss)
    per share:                                                                                                                                          |                |      |          |  |              
| | Basic  as reported                                                                                                                                                     | $
    (1.37)   |      | $ 0.05   |  | $ 0.19       
| |                                                                                                                                                                         |                |      |          |  |              
| | Basic  pro forma                                                                                                                                                       | $
    (1.42)   |      | $ (0.03) |  | $ 0.12       
| |                                                                                                                                                                         |                |      |          |  |              
| |                                                                                                                                                                         |                |      |          |  |              
| | Diluted  as reported                                                                                                                                                   | $
    (1.37)   |      | $ 0.05   |  | $ 0.19       
| |                                                                                                                                                                         |                |      |          |  |              
| | Diluted  pro forma                                                                                                                                                     | $
    (1.42)   |      | $ (0.03) |  | $ 0.11       
| |                                                                                                                                                                         |                |      |          |  |              
| |                                                                                                                                                                         |                |      |          |  |              





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 $631,000 that
relates to the fair value of the previously described cash flow hedging relationship in
2003.



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 assesses (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 March of 2004, the FASB approved
the consensus reached on the EITF 03-1, "The Meaning of Other-than-Temporary
Impairment and Its Application to Certain Investments." The Issue's objective is to
provide guidance for identifying other-than-temporarily impaired investments. EITF 03-1
also provides new disclosure requirements for investments that are deemed to be
temporarily impaired. In September of 2004, the FASB issued a FASB Staff Position (FSP)
EITF 03-1-1 that delays the effective date of the measurement and recognition guidance in
EITF 03-1 until further notice. The disclosure requirements of EITF 03-1 are effective
with this report for fiscal 2004. The Company does not have any investments that it
believes are impaired on an other than temporary basis.



In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment." SFAS No. 123 (revised 2004) is a revision of SFAS No.
123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees." The new standard, which will be
effective for the Company beginning in the third quarter of 2005, establishes accounting
standards for transactions in which an entity exchanges its equity instruments for goods
or services, including stock option and restricted stock grants. The Company is evaluating
the impact on its results from adopting SFAS No. 123 (revised 2004), but expects it to be
comparable to the pro forma effects of applying the original SFAS No. 123 as disclosed in
Note 1 and Note 10.



During October of 2004, the American Jobs Creation Act of 2004
("Jobs Act") was signed into law. The Jobs Act provides certain domestic
companies a temporary opportunity to repatriate previously undistributed earnings of
controlled foreign subsidiaries at a reduced federal tax rate, approximating 5.25%. The
reduced rate is achieved via an 85% dividends received deduction on earnings repatriated
during a one-year period. Accounting and disclosure guidance was provided in December 2004
in FASB Staff Position No. SFAS No. 109-2, "Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004." The Company is in the process of evaluating whether it will repatriate foreign
earnings under the repatriation provisions of the Jobs Act, and if so, the amount that
will be repatriated, and the Company's policy on tax effecting cumulative translation
adjustment.



During November of 2004, the FASB issued SFAS No. 151, "Inventory
Costs  an amendment of ARB No. 43, Chapter 4." SFAS No. 151 requires abnormal
amounts of idle facility expense, freight, handling costs, and wasted material (spoilage)
to be recognized as current-period charges. It also requires that the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 will be effective for inventory costs incurred
beginning with fiscal 2006. The Company believes that SFAS No. 151 will not have a
material effect on its financial position or results of operations.





|2. | Restatement of Financial Statements
|-- | -----------------------------------



On February 7, 2005, the Office of the Chief Accountant of the SEC
issued a letter to the American Institute of Certified Public Accountants expressing its
views regarding certain lease accounting issues and their application under generally
accepted accounting principles ("GAAP") in the United States of America. In
light of this letter, the Company's management initiated a review of its lease accounting
and determined that its accounting for (1) amortization of leasehold improvements and
leasehold interests, (2) straight-line rent expense, (3) landlord incentives and
allowances, (4) sale leaseback transactions, and (5) classification of leases as capital
or operating in accordance with FAS 13 were not consistent with GAAP. As a result, the
Company has restated its consolidated financial statements for the fiscal years ended
December 27, 2003 and December 28, 2002 that appear in this Report.



The Company had previously followed an accounting policy to assess the
treatment of leases as operating versus capital under the provisions of SFAS No. 13,
"Accounting for Leases" using the initial lease term while utilizing the initial
lease term plus available extensions for amortizing leasehold improvements, or the
economic useful life of the leasehold improvements, whichever was shorter. Management
determined that the appropriate interpretation of SFAS No. 13 requires a use of the same
assumptions as to duration and thus the Company reassessed each lease it has been making
payments on at any time during the last five years for capital or operating treatment
using the initial term plus available extensions. As a result of this analysis, the
Company has determined that six leases previously accounted for as operating leases should
have been treated as capital.  In addition, the Company had incorrectly accounted for
two sale leaseback transactions as sales versus financing.  Due to continuing
involvement in the properties by the Company at the sale leaseback date, sales accounting
is precluded.  Also, the amortizable lives of all leasehold improvements have been
reduced to the shorter of the appropriate lease term or their useful lives. These
adjustments result in the capitalization of the leased assets and creation of associated
debt on the consolidated balance sheets for the present value of the future minimum lease
payments of leases considered capital or financing, while the increase in amortization of
the leasehold improvements results in an increase in the "Cost of goods sold and
occupancy costs" in the consolidated statements of operations. Therefore, interest
expense on those considered capital is reflected in the "Interest Expense" line
item.  Further discussion of the capital and financing lease obligations is in Notes
6 and 11 of these consolidated financial statements.



The Company had historically accounted for tenant improvement
allowances as reductions to the related leasehold improvement asset on the consolidated
balance sheets and capital expenditures in investing activities on the consolidated
statements of cash flows. Management determined that the appropriate interpretation of
FASB Technical bulletin No. 88-1, "Issues Relating to Accounting for Leases,"
requires these allowances to be recorded as deferred rent liabilites on the consolidated
balance sheets and the related amortization as a component of operating activities on the
consolidated statements of cash flows. Additionally, this adjustment results in an
increase in depreciation expense and a decrease in rent expense, both of which are within
the "Cost of goods sold and occupancy costs" in the consolidated statements of
operations.



The Company had historically recognized rent holiday periods and
escalating rent payments on a straight-line basis over the original lease term commencing
with the initial occupancy date. The store opening date coincided with the commencement of
business operations, which is the intended use of the property. Management re-evaluated
FASB Technical Bulletin No. 85-3, "Accounting for Operating Leases with Scheduled
Rent Increases," and determined that the lease term should commence on the date the
Company takes possession of the leased space for construction purposes or was legally
allowed access to the space, which is generally two to six months prior to a store opening
date. Excluding tax impacts, the correction of the accounting requires the Company to
record additional deferred rent in "Accrued liabilities" and "Other
long-term obligations" and to adjust "Accumulated deficit" on the
consolidated balance sheets as well as to correct amortization in "Costs of sales
including occupancy costs" and "Pre-opening expenses" on the consolidated
statements of operations for each of the two years in the period ended December 27, 2003.



The cumulative effect of these accounting changes is an increase to
accumulated deficit of $8.9 million as of the beginning of fiscal 2002 and a decrease to
net income of $1.8 million and $2.0 million for the fiscal years ended 2002 and 2003,
respectively.



Following is a summary of the effects of these changes on the Company's
Consolidated Statements of Operations for fiscal years 2003 and 2002, Consolidated Balance
Sheets as of December 27, 2003, as well as the effects of these changes on the Company's
consolidated statements of cash flows for fiscal years 2003 and 2002 (in thousands,
except share data):





| |                                           |  | Consolidated
    Statement of Operation
| | ----------------------------------------- |  | ---------------------------------------
| |                                           |  |                                        
| | Fiscal Year Ended December 27, 2003       |  | As Previously Reported                 
| |                                           |  |                                        
| |                                           |  |                                        
| | Cost of goods sold and occupancy costs    |  | $ 683,592                              
| | Gross profit                              |  | $ 285,612                              
| | Pre-opening expense                       |  | $ 2,890                                
| | Restructuring and asset impairment income |  | $ (892)                                
| | Income from operations                    |  | $ 7,960                                
| | Interest expense                          |  | $ (2,661)                              
| | Income before income taxes                |  | $ 5,893                                
| | Income tax expense                        |  | $ 2,302                                
| | Net income                                |  | $ 3,591                                
| |                                           |  |                                        
| | Net income per common share-basic         |  | $ 0.12                                 
| | Net income per common share - diluted     |  | $ 0.12                                 
| |                                           |  |                                        
| |                                           |  |                                        







| |                                           |  | Consolidated
    Statement of Operation
| | ----------------------------------------- |  | ---------------------------------------
| |                                           |  |                                        
| | Fiscal Year Ended December 28, 2002       |  | As Previously Reported                 
| |                                           |  |                                        
| |                                           |  |                                        
| | Cost of goods sold and occupancy costs    |  | $ 644,862                              
| | Gross profit                              |  | $ 274,268                              
| | Pre-opening expense                       |  | $ 1,897                                
| | Restructuring and asset impairment income |  | $ (832)                                
| | Income from operations                    |  | $ 19,617                               
| | Interest expense                          |  | $ (8,753)                              
| | Income before income taxes                |  | $ 11,642                               
| | Income tax expense                        |  | $ 4,733                                
| | Net income                                |  | $ 6,909                                
| |                                           |  |                                        
| | Net income per common share-basic         |  | $ 0.26                                 
| | Net income per common share - diluted     |  | $ 0.26                                 
| |                                           |  |                                        
| |                                           |  |                                        







| |                                            |  | Consolidated
    Balance Sheet
| | ------------------------------------------ |  | ------------------------------
| |                                            |  |                               
| | Fiscal Year Ended December 27, 2003        |  | As Previously Reported        
| |                                            |  |                               
| |                                            |  |                               
| | Deferred tax asset                         |  | $ 18,778                      
| | Property, plant and equipment, net         |  | $ 130,989                     
| | Other intangibles                          |  | $ 6,976                       
| | Total Assets                               |  | $ 339,576                     
| | Accrued liabilities                        |  | $ 42,998                      
| | Current portion of debt and capital leases |  | $ 14                          
| | Long-term debt and capital leases          |  | $ 30,179                      
| | Other long-term liabilities                |  | $ 14,058                      
| | Accumulated deficit                        |  | $ (31,777)                    
| | Total stockholders' equity                 |  | $ 175,086                     
| | Total liabilities and shareholder's equity |  | $ 339,576                     
| |                                            |  |                               
| |                                            |  |                               







| |                                               |  | Consolidated
    Statements of Cash Flows
| | --------------------------------------------- |  | -----------------------------------------
| |                                               |  |                                          
| | Fiscal Year Ended December 27, 2003           |  | As Previously Reported                   
| |                                               |  |                                          
| |                                               |  |                                          
| | Net cash provided by
    operating activities |  | $ 43,816                                 
| | Net cash (used by)
    investing activities   |  | $ (31,385)                               
| | Net cash (used in)
    financing activities   |  | $ (6,512)                                







| |                                               |  | Consolidated
    Statements of Cash Flows
| | --------------------------------------------- |  | -----------------------------------------
| |                                               |  |                                          
| | Fiscal Year Ended December 28, 2002           |  | As Previously Reported                   
| |                                               |  |                                          
| |                                               |  |                                          
| | Net cash provided by
    operating activities |  | $ 34,698                                 
| | Net cash used by investing
    activities     |  | $ (13,449)                               
| | Net cash (used in)
    financing activities   |  | $ (28,751)                               







Additionally, the Company has determined that an error existed in its
unaudited quarterly results for the quarters ended June 29, 2003 and December 27, 2003 as
it relates to the accounting for litigation and lease obligations for a closed location. A
description of the error and the resulting restated quarterly financial results are
included in Note 16.



|3. | Property and Equipment
|-- | ----------------------



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



| |                                      |  |           |  | 2003         
| | ------------------------------------ |  | --------- |  | -------------
| |                                      |  |           |  |              
| | FISCAL YEAR ENDED                    |  | 2004      |  | (As Restated)
| |                                      |  |           |  |              
| |                                      |  |           |  |              
| | Machinery and equipment              |  | $ 125,592 |  | $ 103,014    
| | Buildings and leasehold improvements |  | 156,829   |  | 144,125      
| | Software                             |  | 5,541     |  | 3,390        
| | Construction in progress             |  | 14,283    |  | 16,880       
| |                                      |  |           |  |              
| |                                      |  | 302,245   |  | 267,409      
| | Less accumulated depreciation        |  | (124,415) |  | (109,965)    
| |                                      |  |           |  |              
| |                                      |  | $ 177,830 |  | $ 157,444    
| |                                      |  |           |  |              
| |                                      |  |           |  |              





Depreciation expense related to property and equipment totaled
approximately $27.8 million, $27.3 million and $24.3 million in fiscal 2004, fiscal 2003
and fiscal 2002, respectively. Property and equipment includes approximately $424,000,
$439,000 and $129,000 of interest capitalized during the fiscal years 2004, 2003 and 2002,
respectively. The amounts shown above include, for each year presented, $20.5 million of
primarily buildings and leasehold improvements which are accounted for as capital and
financing leases, and which have accumulated amortization of $5.5 million and $4.8 million
at January 1, 2005 and December 27, 2003, respectively. Increases in construction related
accounts payable of $2.9 million and $2.7 million for 2004 and 2003, respectively, are
excluded from the statement of cash flows as non-cash items.



As a result of anticipated store closures, the Company accelerated
depreciation of its in-store assets $4.0 million and $3.8 million for the fiscal years
ended 2004 and 2003, respectively.





|4. | Goodwill and Other Intangible Assets
|-- | ------------------------------------



Goodwill consists of the following (in thousands):



| |                               |  |          |  | 2003         
| | ----------------------------- |  | -------- |  | -------------
| |                               |  |          |  |              
| | FISCAL YEAR ENDED             |  | 2004     |  | (As Restated)
| |                               |  |          |  |              
| | Goodwill                      |  | $117,042 |  | $ 117,394    
| | Less accumulated amortization |  | (10,958) |  | (10,990)     
| |                               |  |          |  |              
| |                               |  | $106,084 |  | $ 106,404    
| |                               |  |          |  |              
| |                               |  |          |  |              



Amortization expense related to goodwill was $0 for fiscal years 2004,
2003 and 2002, respectively. In January 2004, the Company sold a retail store located in
New York City that did not fit the Company's real estate strategy or format for $900,000
in cash. Goodwill net of accumulated amortization associated with this store of $320,000
was written off and included in the calculation of the gain on disposal of this business.
No other changes in the carrying amount of goodwill occurred.



Other intangible assets include the following (in thousands):



| |                                             |  |         |  | 2003         
| | ------------------------------------------- |  | ------- |  | -------------
| |                                             |  |         |  |              
| | FISCAL YEAR ENDED                           |  | 2004    |  | (As Restated)
| |                                             |  |         |  |              
| | Leasehold interests and other (amortizable) |  | $ 8,319 |  | $ 8,326      
| | Less accumulated amortization               |  | (2,049) |  | (1,790)      
| |                                             |  |         |  |              
| | Leasehold interests, net                    |  | 6,270   |  | 6,536        
| | Liquor licenses (indefinite lived)          |  | 221     |  | 171          
| |                                             |  |         |  |              
| |                                             |  | $ 6,491 |  | $ 6,707      
| |                                             |  |         |  |              
| |                                             |  |         |  |              



Amortization expense related to finite lived intangible assets was
$259,000, $194,000 and $188,000 in fiscal 2004, fiscal 2003 and fiscal 2002, respectively.



The estimated amortization of finite lived intangible assets for each
of the five fiscal years ending in fiscal 2009 is as follows (in thousands):



AmortizationFiscal Year
    
    Expense2005
    
    $ 4102006
    
    $ 3812007
    
    $ 3812008
    
    $ 3812009
    
    $ 381






|5. | Accrued Liabilities
|-- | -------------------



Accrued liabilities consist of the following (in thousands):



| |                                     |  |          |  | 2003         
| | ----------------------------------- |  | -------- |  | -------------
| |                                     |  |          |  |              
| | FISCAL YEAR ENDED                   |  | 2004     |  | (As Restated)
| |                                     |  |          |  |              
| | Wages and employee costs            |  | $ 20,979 |  | $ 18,418     
| | Self insurance liabilities          |  | 14,123   |  | 7,696        
| | Sales and personal property taxes   |  | 4,598    |  | 4,397        
| | Real estate costs                   |  | 8,447    |  | 7,472        
| | Deferred charges and other accruals |  | 5,007    |  | 6,333        
| |                                     |  |          |  |              
| |                                     |  | $ 53,154 |  | $ 44,316     
| |                                     |  |          |  |              
| |                                     |  |          |  |              



|6. | Long Term Debt
|-- | --------------



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



| |                                                                                                                                    |  |               |  | 2003             
| | ---------------------------------------------------------------------------------------------------------------------------------- |  | ------------- |  | -----------------
| |                                                                                                                                    |  |               |  |                  
| | FISCAL YEAR                                                                                                                        |  | 2004          |  | (As
    Restated)
| |                                                                                                                                    |  |               |  |                  
| |                                                                                                                                    |  |               |  |                  
| | Capital leases                                                                                                                     |  | $ 20,225      |  | $ 20,204         
| | Financing lease obligations                                                                                                        |  | 13,705        |  | 13,952           
| | Bank line of credit due February
    26, 2006, bearing interest at one month LIBOR plus 2.75% (5.17 at January 1, 2005)            |  | -             |  | 30,179           
| | Contingent convertible senior
    debentures due May 15, 2034, bearing interest at an annual rate of 3.25% issued at a
    premium |  | 115,150       |  | -                
| |                                                                                                                                    |  |               |  |                  
| |                                                                                                                                    |  | 149,080       |  | 64,335           
| | Less current portion                                                                                                               |  | (405)         |  | (293)            
| |                                                                                                                                    |  |               |  |                  
| |                                                                                                                                    |  | $
    148,675 |  | $ 64,042         
| |                                                                                                                                    |  |               |  |                  
| |                                                                                                                                    |  |               |  |                  



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



Fiscal Year
    
    Maturities2005
    
    $ 4052006
    
    4412007
    
    3852008
    
    4092009 and thereafter
    
    147,440Total
    
    $ 149,080






*Financing Lease Obligations (Restated)*. The Company previously owned retail
space in two separate locations which it subsequently sold and leased back from the buyers
in fiscal 1999. The lease term for both leases is 25 years with four five-year optional
renewal periods. The Company is and has been operating a retail store in each location and
has been subleasing or attempting to sublease a substantial portion of the leased space to
other parties. Since the subleasing activity for these locations is considered to be more
than minor, the Company is prevented from applying normal sale leaseback accounting
treatment in accordance with SFAS No. 98, "Accounting for Leases". As a result,
the original cost basis of the properties remains on the balance sheet and continues to be
depreciated. The proceeds received in connection with the sales of the properties have
been recorded as financing leases obligations with interest expense calculated using the
effective interest method.

Contingent convertible senior debentures. In June 2004, the Company
issued $115 million aggregate principal amount of its 3.25% Convertible Senior Debentures
due May 15, 2034 in a private placement. The debentures bear regular interest at the
annual rate of 3.25%, payable semiannually on May 15 and November 15 of each year until
May 15, 2011, after which date, no regular interest will be due. Commencing May 20, 2011
and ending November 14, 2011, and for any six-month period thereafter, contingent interest
will be due and payable in the amount of 0.25% of the average trading price of the
debentures during a specified period, if the average trading price of the debentures
equals or exceeds 125% of the principal amount of the debentures. Refer to Note 1 for the
potentially dilutive impact of the convertible debentures on future periods.



The debentures are callable and convertible into the Company's common
stock prior to maturity at the option of the holders under the following circumstances:
(1) during any calendar quarter commencing after June 30, 2004 and before March 31,
2029, if the last reported sale price of our common stock is greater than or equal to 130%
of the conversion price of $17.70 per share; (2) at any time on or after April 1,
2029 if the last reported sale price of our common stock on any date on or after March 31,
2029 is greater than or equal to 130% of the conversion price; (3) subject to certain
limitations, during the five business-day period after any five consecutive trading-day
period in which the trading price per debenture for each day of that period was less than
98% of the product of the conversion rate and the last reported sale price of the
Company's common stock; (4) if the Company calls the debentures for redemption;
(5) upon the occurrence of certain corporate transactions; or (6) if the Company
obtains credit ratings for the debentures, at any time when the credit ratings assigned to
the debentures are below specified levels. The debentures are initially convertible into
56.5099 shares of the Company's common stock per $1,000 principal amount, which is
equivalent to $17.70 per share, for total initial underlying shares of 6,498,639. The
conversion rate will be subject to adjustment upon the occurrence of specified events.
Upon conversion, the Company has the right to deliver, in lieu of common stock, cash or
any combination of cash and common stock. Pursuant to the underwriting agreement and
within 90 days of issuance, the Company was to file a shelf registration statement
covering resales of the debentures and the common stock issuable upon conversion thereof.



On or after May 20, 2011, the Company may redeem for cash some or all
of the debentures at any time and from time to time, for a price equal to 100% of the
principal amount of the debentures plus accrued and unpaid contingent interest, if any.
Holders have the right to require the Company to repurchase any or all debentures for
cash, at a repurchase price equal to 100% of the principal amount of the debentures, plus
accrued and unpaid interest on: (1) May 15, 2011, May 15, 2014, and May 15, 2024; and (2)
the occurrence of change in control (as defined in the debenture).



The debentures are unsecured and un-subordinated obligations, and rank
equal in priority with all of the Company's existing and future unsecured and
un-subordinated indebtedness and senior in right of payment to all of its subordinated
indebtedness. The debentures will effectively rank junior to any of the Company's secured
indebtedness and any of its indebtedness that is guaranteed by its subsidiaries. Payment
of principal and interest on the debentures will be structurally subordinated to the
liabilities of the Company's subsidiaries.



There are no financial covenants within the debenture agreement,
however, the Company will be paying penalty interest of 0.25% for the first 90 days of
2005 and 0.50% thereafter until the resale of the debentures are publicly registered.



Total proceeds from the issuance were $115.2 million. The Company used
$25.0 million of the net proceeds to repurchase 1,977,800 outstanding shares of its common
stock, $31.2 million to pay the outstanding balance on its credit facility, and
approximately $3.7 million to pay related debt issuance costs.





Credit facility. The Company's credit facility has a $95.0 million
limit, and a three-year term with a one-year renewal option. Under the 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.



The interest rate on the facility is currently either prime plus 1.25%
or one-month LIBOR plus 2.75% at the Company's election, and the rates modify depending on
the ratio of average total funded debt, as defined under the credit facility, plus six
times rent expense, to EBITDAR for the four fiscal quarter periods then ended, as
calculated on the Company's quarterly compliance certificate. Additionally, the Company is
charged a commitment fee on the unused portion of the line ranging from 0.625% to 0.75%
based on performance objectives as defined in the credit agreement. The outstanding
balance on the credit facility, other than for outstanding letters of credit, was repaid
in June 2004 from the proceeds of the private debt issuance. There is no outstanding
credit facility balance as of January 1, 2005. The balance outstanding, other than
outstanding letters of credit, on the credit facility as of December 27, 2003 was $30.2
million. See Note 20 - Subsequent Event.



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. 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 1.25% or
one-month LIBOR plus 2.75% 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 was 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.



As part of the credit facility, the Company has given its lenders
collateral in the form of cash, equipment and fixtures, inventory and other assets. The
Company has also granted leasehold mortgages in those leasehold interests previously
mortgaged to secure its former credit facility, although it has no obligation to provide a
security interest in any new leaseholds. There are various financial covenants included as
part of the original credit agreement which are as follows: (1) maximum allowable leverage
ratio, (2) minimum fixed charge coverage ratio, (3) maximum allowable annual capital
expenditures and (4) a minimum permitted stockholders' equity balance. Amendments to the
credit agreement have been made during 2004 to (a) modify the adjusted leverage and the
fixed charge ratios, (b) increase the maximum interest rate, and (c) require the Company
to maintain through June 2005 minimum cash and cash equivalents balances (as defined per
the agreement) of $25 million, net of letters of credit and outstanding borrowings under
the credit facility, with the minimum required balances decreasing to $10 million
beginning July 2005 and continuing through the remaining term of the agreement. The
Company is obligated to comply with the following: an adjusted leverage ratio (as
described above); a fixed charge coverage ratio, which is the ratio of EBITDAR for the
last four fiscal quarters minus certain maintenance capital expenditures and taxes to
fixed charges for the four fiscal quarters; a minimum stockholders' equity of $125 million
plus a portion of cumulative net income, adjusted for stock issuances and repurchase; a
limitation on new leases per fiscal year; a cap on capital expenditures per fiscal year,
and a minimum cash balance as of each compliance period.



The interest rate on the facility is currently either prime plus 1.0%
or one-month LIBOR plus 2.75% at the Company's election, and the rates modify depending on
the ratio of average total funded debt, as defined under the credit facility, plus six
times rent expense, to EBITDAR for the four fiscal quarter periods then ended, as
calculated on the Company's quarterly compliance certificate. Additionally, the Company is
charged a commitment fee on the unused portion of the line ranging from 0.625% to 0.75%
based on performance objectives as defined in the credit agreement. The outstanding
balance on the credit facility, other than for outstanding letters of credit, was repaid
in June 2004 from the proceeds of the private debt issuance. There is no outstanding
credit facility balance as of January 1, 2005. As the Company's new store growth
accelerates, it expects its cash requirements for 2005 will be satisfied from the proceeds
of the private debenture issuance as well as cash generated from operations.



Due to the restatement discussed in Note 2 to these Consolidated
Financial Statements, for the period ended January 1, 2005, the Company has violated three
of the financial covenants to the credit facility. The Company has obtained a waiver of
compliance from the requisite lenders under our credit facility. Even if the Company was
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. However, there can be no assurance that future
amendments or waivers will be obtained.



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%. The
interest rate swap agreement 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.





|7. | Income Taxes
|-- | ------------



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



| |             |  |            |  | 2003              |  | 2002   
| | ----------- |  | ---------- |  | ----------------- |  | -------
| |             |  |            |  |                   |  |        
| | FISCAL YEAR |  | 2004       |  | (As
    Restated)
| |             |  |            |  |                  
| |             |  |            |  |                   |  |        
| | Domestic    |  | $ (15,388) |  | $ 2,005           |  | $ 8,906
| | Foreign     |  | 1,207      |  | 682               |  | (170)  
| |             |  |            |  |                   |  |        
| |             |  | $ (14,181) |  | $ 2,687           |  | $ 8,736
| |             |  |            |  |                   |  |        
| |             |  |            |  |                   |  |        







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



| |                   |  |          |  | 2003              |  | 2002   
| | ----------------- |  | -------- |  | ----------------- |  | -------
| |                   |  |          |  |                   |  |        
| | FISCAL YEAR       |  | 2004     |  | (As
    Restated)
| |                   |  |          |  |                  
| | Current:          |  |          |  |                   |  |        
| | Federal           |  | $  -     |  | $ 294             |  | $  -   
| | State and foreign |  | 247      |  | 505               |  | $ 677  
| |                   |  |          |  |                   |  |        
| |                   |  | 247      |  | 799               |  | 677    
| | Deferred:         |  |          |  |                   |  |        
| | Federal           |  | 23,498   |  | (86)              |  | 3,434  
| | State and foreign |  | 2,093    |  | 381               |  | (445)  
| |                   |  |          |  |                   |  |        
| |                   |  | 25,591   |  | 295               |  | 2,989  
| |                   |  |          |  |                   |  |        
| |                   |  | $ 25,838 |  | $ 1,094           |  | $ 3,666
| |                   |  |          |  |                   |  |        
| |                   |  |          |  |                   |  |        







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



| |                                                                                   |  |         |  | 2003              |  | 2002 
| | --------------------------------------------------------------------------------- |  | ------- |  | ----------------- |  | -----
| |                                                                                   |  |         |  |                   |  |      
| | FISCAL YEAR                                                                       |  | 2004    |  | (As
    Restated)
| |                                                                                   |  |         |  |                  
| | Statutory tax rate                                                                |  | (35.0)% |  | 35.0%             |  | 35.0%
| | State income taxes, net of federal income
    tax expense and valuation allowance |  | (2.8)   |  | 2.7               |  | 3.6  
| | Foreign income taxes                                                              |  | 0.3     |  | -                 |  | 3.6  
| | Expired tax attributes                                                            |  | 1.7     |  | 1.8               |  | -    
| | Valuation allowance                                                               |  | 216.1   |  | -                 |  | -    
| | Other, net                                                                        |  | 1.9     |  | 1.2               |  | (0.2)
| |                                                                                   |  |         |  |                   |  |      
| | Effective tax rate                                                                |  | 182.2%  |  | 40.7%             |  | 42.0%
| |                                                                                   |  |         |  |                   |  |      





The effective tax rate for the fiscal years ended January 1, 2005 was
182.2% as compared to 40.7% for fiscal 2003 and 42.0% for fiscal 2002. The Company
recorded no reversals of its valuation allowance in the years ending 2004, 2003 and 2002,
respectively.



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):



| |                                          |          |  | 2003          | 
| | ---------------------------------------- | -------- |  | ------------- | 
| |                                          |          |  |               | 
| | FISCAL YEAR                              | 2004     |  | (As Restated) | 
| |                                          |          |  |               | 
| | Deferred tax assets:                     |          |  |               | 
| | Inventory-related                        | $ 309    |  | $ 248         | 
| | Vacation accrual                         | 2,659    |  | 2,657         | 
| | Real estate accruals                     | 12,127   |  | 10,516        | 
| | Net operating loss carry-forward         | 20,376   |  | 17,139        | 
| | Contribution and credit carry-forward    | 2,429    |  | 1,910         | 
| | Mark-to-market swap accrual              | -        |  | -             | 
| | Worker's compensation                    | 2,720    |  | 1,501         | 
| | Other                                    | 2,128    |  | 580           | 
| | Valuation allowance                      | (33,800) |  | (2,202)       | 
| |                                          |          |  |               | 
| | Total deferred tax assets                | 8,948    |  | 32,349        | 
| | Deferred tax liabilities:                |          |  |               | 
| | Property-related                         | (7,282)  |  | (5,905)       | 
| | Mark-to-market of short-term investments | (14)     |  | -             | 
| | Convertible debt                         | (1,234)  |  | -             | 
| |                                          |          |  |               | 
| | Total deferred tax liabilities           | (8,530)  |  | (5,905)       | 
| |                                          |          |  |               | 
| | Net deferred tax asset                   | $ 418    |  | $ 26,444      | 
| |                                          |          |  |               | 
| |                                          |          |  |               | 



During fiscal 2004, fiscal 2003 and fiscal 2002, the Company recognized
$0, $238,000 and $479,000, respectively, as a tax benefit directly to additional
paid-in-capital related to non-compensatory stock plans. If the valuation allowance
provided for is utilized in future periods, $1.0 million of it would not offset income tax
expense as it represents amounts taken directly to additonal paid in capital.



As of January 1, 2005, the Company has net operating losses related to
the following tax jurisdictions and expiration periods that are available to offset future
taxable income: U.S. federal income tax loss carryforwards of approximately $35.5 million
begin to expire in 2021; various state income tax loss carryforwards of approximately
$11.4 million begin to expire in 2005.



The Company performs assessments of the realization of its net deferred
tax assets considering all available evidence, both positive and negative. As a result of
this assessment, the Company concluded that it was more likely than not that its net tax
assets would not be realized and therefore established a valuation allowance against its
net deferred tax assets for the year ended January 1, 2005. The valuation allowance was
recorded as a result of the Company's analysis of the facts and circumstances, including
an evaluation of its pre-tax income and losses for historical periods, which led the
Company to conclude that it could no longer forecast taxable income utilizing the more
likely than not theory present in SFAS No. 109.





|8. | Capital Stock
|-- | -------------



Authorized preferred stock consists of 5,000,000 shares of which none
was outstanding during 2004, 2003 or 2002. Authorized common stock consists of 60,000,000
shares at $0.001 par value. Common stock outstanding at year end 2004 was 28.5 million
(net of 2.0 million shares of treasury stock). As of January 1, 2005, total common shares
reserved for issuance under the Company's six stock-based employee compensation plans
described in Note 9 was 6,236,851.



In September 2002, the Company raised net proceeds of $48.3 million in
an offering of the Company's equity securities 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, the balance consisting of 1.2
million shares having been previously registered by the Company. In June 2004, the Company
issued $115 million aggregate principal amount of its 3.25% Convertible Senior Debentures
due May 15, 2034 in a private placement. The debentures are callable and convertible into
the Company's common stock prior to maturity at the option of the holders. The debentures
are initially convertible into 56.5099 shares of the Company's common stock per $1,000
principal amount, which is equivalent to $17.70 per share, for total initial underlying
shares of 6,479,175. Upon conversion, the Company has the right to deliver, in lieu of
common stock, cash or any combination of cash and common stock. The Company filed a shelf
registration statement covering resales of the debentures and the common stock issuable
upon conversion thereof in August 2004, and is currently in the review phase with the
Securities and Exchange Commission.





Treasury stock. In connection with the convertible debenture
issuance, the Board of Directors of the Company authorized the repurchase of 1,977,800
outstanding shares for $25.0 million. The average price per share was $12.64 on the date
of purchase. There is no plan in place to purchase further outstanding shares.





|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. The Company obtained
shareholder approval in May 2001 to increase the pool of reserved stock by 500,000 shares.
As of January 1, 2005, 787,307 of shares are reserved, and 182,246 are available for
issuance.



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. 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. During the year ended January 1, 2005, there
were approximately $846,000 of payroll deductions of which $771,000 were used to purchase
76,676 shares of common stock.





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 January 1, 2005, 4,650,220 shares of common stock were
reserved for issuance under the 1996 Plan, and 524,921 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 and
restricted stock units (RSUs) and stock bonuses to employees, directors and consultants.
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.



In March 2004, the Board approved issuance of RSUs as a new alternative
compensation arrangement for non-employee board members' annual service grants and
compensation for meeting attendance. RSUs issued in lieu of cash compensation vest
immediately, while those issued as an annual grant vest over a one-year period. The
Company records compensation expense based on the date upon which an RSU is granted, equal
to the fair market value of stock underlying the RSU on the date granted and recognizes
the expense over the vesting period.





2001 Non-Officer/Non-Director Equity 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 January 1, 2005,
486,000 shares of common stock were reserved for issuance under the 2001 Plan, and options
for 83,952 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 four 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 four plans is 390,000 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 for
the employee stock purchase plan was estimated using the Black-Scholes model with the
following weighted-average assumptions:



| | FISCAL YEAR                           | 2004  |  | 2003  |  | 2002 
| | ------------------------------------- | ----- |  | ----- |  | -----
| |                                       |       |  |       |  |      
| |                                       |       |  |       |  |      
| | Estimated dividends                   | None  |  | None  |  | None 
| | Expected volatility                   | 73%   |  | 75%   |  | 69%  
| | Risk-free interest rate               | 3.11% |  | 1.0%  |  | 1.2% 
| | Expected life (years)                 | 0.5   |  | 0.5   |  | 0.5  
| | Weighted-average fair value per share | $2.10 |  | $4.40 |  | $2.74







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                               | 2004  |  | 2003  |  | 2002 
| | ----------------------------------------- | ----- |  | ----- |  | -----
| |                                           |       |  |       |  |      
| |                                           |       |  |       |  |      
| | Estimated dividends                       | None  |  | None  |  | None 
| | Expected volatility                       | 73%   |  | 75%   |  | 69%  
| | Risk-free interest rate                   | 2.86% |  | 2.47% |  | 3.02%
| | Expected life (years)                     | 4.0   |  | 4.1   |  | 4.2  
| | Weighted-average fair value per
    share | $5.90 |  | $5.92 |  | $5.94





The fiscal 2004, fiscal 2003 and fiscal 2002 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    | 32,213                |  | $ 7.67                          |  | $ 9.68                             
| | Options granted equal to market value | 380,125               |  | $ 5.45                          |  | $ 11.86                            
| |                                       |                       |  |                                 |  |                                    
| | Total options granted fiscal 2004     | 412,338               |  | $ 5.62                          |  | $ 11.50                            
| |                                       |                       |  |                                 |  |                                    
| | 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                            
| |                                       |                       |  |                                 |  |                                    
| |                                       |                       |  |                                 |  |                                    







A summary of the status of the Company's aggregated incentive and
nonqualified stock options plans as of the 2004, 2003 and 2002 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 29, 2001 | 3,355,933         |  | $ 10.36                             | 
| | Granted                             | 688,727           |  | $ 10.47                             | 
| | Forfeited                           | (362,665)         |  | $ 11.90                             | 
| | Exercised                           | (250,559)         |  | $ 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                             | 
| | Granted                             | 412,338           |  | $ 11.50                             | 
| | Forfeited                           | (469,312)         |  | $ 11.85                             | 
| | Exercised                           | (326,604)         |  | $ 8.19                              | 
| |                                     |                   |  |                                     | 
| | Outstanding as of January 1, 2005   | 2,962,707         |  | $ 10.55                             | 
| |                                     |                   |  |                                     | 
| |                                     |                   |  |                                     | 







The following table summarizes information about incentive and
nonqualified stock options outstanding and exercisable at January 1, 2005:

|OPTIONS
    OUTSTANDING |  | OPTIONS
    EXERCISABLE
|----------------------- |  | -----------------------
|                        |  |                        
|                        |  |                        
|Range Of                |  | Number                 
|Exercise Prices         |  | Outstanding            
|                        |  |                        
|$ 4.25  7.00           |  | 291,016                
|$ 7.01  8.50           |  | 618,832                
|$ 8.51  10.00          |  | 749,417                
|$ 10.01  12.00         |  | 738,833                
|$ 12.01  16.00         |  | 308,154                
|$ 16.01  26.50         |  | 256,455                
|                        |  |                        
|                        |  | 2,962,707              
|                        |  |                        
|                        |  |                        







At January 1, 2005, 541,921 shares were available for future grant
under the 1996 Plan, and 83,952 shares were available for future grant under the 2001
Plan. At January 1, 2005, December 27, 2003 and December 28, 2002 options for 2,224,275,
2,081,800 and 1,581,424 shares with weighted average exercise prices of $10.46, $10.42 and
$10.79, respectively, were exercisable. During 2004, 38,065 shares were granted out of the
1996 Equity Incentive Plan as RSUs. All grants remain outstanding and 10,065 shares were
vested as of January 1, 2005. Those grants are not considered in the above tables as
outstanding options, but reduce the amount available for grant from the 1996 Plan.





|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 for monetary
damages brought in the Supreme Court of British Columbia, Canada by the representative
plaintiffs on behalf of two groups of claimants - those who claim to have 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 in March
and April, 2002, after handling and/or consuming food products from Capers that were or
might have been contaminated with Hepatitis A. In the fourth quarter of 2003, the action
was certified as a class action by the court. The Company filed an appeal and a hearing
was held in September 2004. The appeal was denied in October 2004. In December 2004, the
Plaintiffs brought a motion for a summary trial of certain issues, and such motion was
denied in January 2005. The Company intends to vigorously defend the suit. The Company is
not able to estimate the potential outcome of the suit at this time. The Company's
insurers have acknowledged coverage for defense costs and liability, and the Company has
exhausted its deductible.



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. Plaintiff claimed
damages for diminution of value of the shopping center plus accelerated rent, fees and
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 filed a motion for
reconsideration, which was denied. The Company filed a petition for review with the
Arizona Supreme Court, which was denied. As of the end of fiscal 2004, the Company has
accrued $790,000, which the Company believes to be adequate to fully satisfy the judgment,
including interest.



Auchterlonie, individually and on behalf of all others similarly
situated and the general public, and Roes 1 to 1000 vs. Wild Oats Markets, Inc. and Does 1
through 100, is a purported class action suit brought in August 2004 in the Superior
Court, County of Los Angeles, for payment of overtime and damages relating to alleged
violations of the California Business and Professions Code by a former managerial
employee, on behalf of himself and all other similarly situated California employees,
claiming that store directors at the Company's California stores should have been
classified as non-exempt employees and paid on an hourly basis. Plaintiff also alleges
that the Company's incentive bonus program is illegal based upon deductions for items
outside of the employee's control. The Company believes that the employee, a former store
director, was properly classified as an exempt employee based upon his job duties, and
intends to vigorously defend the suit. At this time, the Company does not have sufficient
facts to estimate any potential damages. The case has been designated non-complex and
trial has been scheduled for October 2005.



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. | Leases and Other
    Commitments and Contingencies
|--- | --------------------------------------------------



The Company has numerous leases related to facilities and store
equipment. The initial lease term is usually between 10 and 20 years, and generally
includes renewal options for varying terms thereafter, as well as rent escalation clauses.
Certain store leases may require additional rental payments contingent upon sales volume
for the particular store ("contingent rentals").



Future minimum lease payments under noncancelable leases as of January
1, 2005 are summarized as follows (in thousands):

| | FISCAL YEAR                                     |  | Operating Leases |  | Capital Leases |  | Financing Leases
| | ----------------------------------------------- |  | ---------------- |  | -------------- |  | ----------------
| |                                                 |  |                  |  |                |  |                 
| | 2005                                            |  | $ 34,589         |  | $ 2,025        |  | $ 1,443         
| | 2006                                            |  | 33,480           |  | 1,980          |  | 1,443           
| | 2007                                            |  | 32,444           |  | 1,899          |  | 1,443           
| | 2008                                            |  | 30,193           |  | 1,890          |  | 1,443           
| | 2009                                            |  | 27,862           |  | 1,911          |  | 1,485           
| | Thereafter                                      |  | 231,363          |  | 41,691         |  | 22,659          
| |                                                 |  |                  |  |                |  |                 
| | Total minimum lease payments                    |  | $ 389,931        |  | 51,396         |  | 29,916          
| |                                                 |  |                  |  |                |  |                 
| | Less amount representing
    interest           |  | (31,207)         |  | (16,175)      
| |                                                 |  |                  |  |               
| | Present value of net minimum
    lease payments |  | 20,189           |  | 13,741        
| | Less current portion                            |  |                  |  | (187)          |  | (218)           
| |                                                 |  |                  |  |               
| | Long term portion                               |  |                  |  | $ 20,002       |  | $ 13,523        
| |                                                 |  |                  |  |               
| |                                                 |  |                  |  |                |  |                 



Minimum rentals shown above do not include contingent rental payments.
Total rent expense (consisting of minimum rent and contingent rent) under these leases was
$35.6 million, $33.9 million and $32.2 million during fiscal 2004, fiscal 2003, and fiscal
2002, respectively. Total contingent rentals paid during these same periods was $1.0
million, $1.0 million, and $949,000, respectively. Sublease income received for fiscal
years 2004, 2003, and 2002 was $2.0 million, $1.9 million, and $1.9 million, respectively.



Included in the $389.9 million of minimum lease payments is $32.4
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.



Future minimum sublease rental income payments to be received as of January 1, 2005 are
as follows (in thousands):



Fiscal Year
    
    Sublease Rental Income2005
    
    $ 2,3102006
    
    2,2682007
    
    2,1932008
    
    1,9222009
    
    1,787Thereafter
    
    7,314Total
    
    $ 17,794




As of January 1, 2005, the Company had commitments under construction
contracts totaling $4.4 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 2004



During fiscal 2004, the Company recorded restructuring and asset
impairment expense of $2.5 million consisting of the following components (in thousands):



| | Changes in estimate related to
    lease-related liabilities for sites previously identified for closure (including
    accretion) |  | $ 104  
| | ---------------------------------------------------------------------------------------------------------------------------------- |  | -------
| | Estimate related to lease-related
    liabilities for sites identified for closure during fiscal 2004                              |  | 566    
| | Severance for employees                                                                                                            |  | 754    
| | Asset impairments                                                                                                                  |  | 1,037  
| |                                                                                                                                    |  |        
| | Total restructuring and
    asset impairment expense                                                                               |  | $ 2,461
| |                                                                                                                                    |  |        



Details of the significant components are as follows:

- Changes in estimates related to lease-related liabilities for sites previously
      identified for closure.



- Estimates related to lease-related liabilities for sites identified for closure during
      2004.





- Severance for employees notified of termination during 2004. During the fiscal year,
      162 employees were terminated in conjunction with the closing of stores and a
      reorganization of our Home Office functions. The employees were notified of their
      involuntary termination approximately one month before the store closure. The costs of
      termination for the year were $754,000. As of January 1, 2005, $556,000 of involuntary
      termination benefits had been paid to terminated employees.



- Asset Impairments.



During 2004 and 2003, the Company incurred $4.0 million and $3.8
million, respectively, of charges for accelerated depreciation for planned store closures.
The costs are included in "Costs of Goods Sold and Occupancy Costs" in the
Statements of Operations.





Fiscal 2003 (As Restated)



During fiscal 2003, the Company recorded restructuring and asset
impairment income of ($1.3) million consisting of the following components (in
thousands):



| | Changes in estimates related to
    lease-related liabilities for sites closed during 2003                      |  | $ 188    
| | --------------------------------------------------------------------------------------------------------------- |  | ---------
| | Change in estimate related to lease-related
    liabilities for sites previously identified for closure or sale |  | (2,376)  
| | Insurance settlement received for impaired
    assets previously written off                                    |  | (250)    
| | Severance for employees terminated during
    fiscal 2003                                                       |  | 232      
| | Asset impairment charges                                                                                        |  | 947      
| |                                                                                                                 |  |          
| | Total restructuring and
    asset impairment income                                                             |  | $ (1,259)
| |                                                                                                                 |  |          





Details of the significant components are as follows:

- Changes in estimates related to lease-related liabilities for sites closed during 2003.



- Changes in estimates related to lease-related liabilities for sites previously
      identified for closure.



- Severance for employees notified of termination during 2003.
- Insurance settlement received for impaired assets previously written off.



- In addition to the restructuring income described above, management also identified
      asset impairment charges of $947,000 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.





Fiscal 2002 (As Restated)



During fiscal 2002, the Company recorded restructuring and asset
impairment income of $(0.8) million consisting of the following components (in
thousands):



| | Gain on sale of assets                                                                                  |  | $ (462)
| | ------------------------------------------------------------------------------------------------------- |  | -------
| | Change in estimate related to lease-related
    liabilities for sites previously identified for closure |  | (4,713)
| | Lease-related liabilities stores identified
    to be closed or sold during the year                    |  | 3,531  
| | Severance for employees                                                                                 |  | 420    
| | Fixed asset impairments for store
    construction project discontinuation                              |  | 449    
| |                                                                                                         |  |        
| | Total restructuring and asset impairment income                                                         |  | $ (775)
| |                                                                                                         |  |        





Details of the significant components are as follows:



- Gain on sale of assets



- Changes in estimates related to lease-related liabilities for sites previously
      identified for closure.



> The Company negotiated the early termination of a lease of property at
>     which the Company had operated a kitchen in Los Angeles, California. Also, 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 and, as a result, was removed from the lease in the first
>     quarter of fiscal 2003; therefore, the Company reversed the excess lease-related
>     liabilities previously recorded. 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. The Company completed
>     payment obligations for terminated lease obligations for sites in Boca Raton, Florida;
>     Santa Fe, New Mexico and Framingham, Massachusetts; and therefore reversed the remaining
>     lease-related liabilities previously recorded for these stores. 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. The net impact of the transactions was $1.3 million.

- Estimates related to lease-related liabilities for sites identified for closure during
      2002.



- Severance for employees terminated during fiscal 2002





- Fixed asset impairments. The Company decided to close two locations, one operated
      under the "Vitamin Expo" tradename as part of brand consolidation, and the other
      did not fit the future expectations of the Company and had an expiring lease.



> 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. The assets were fully disposed by the end of fiscal 2002.
>     Additionally, 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 recognized
>     in 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 2002.
>     Total asset impairment charges, net for 2002 were $449,000.

Sales and store contribution to profit (sales less cost of goods sold,
occupancy costs, and direct store expenses) for the fiscal years ended January 1, 2005,
December 27, 2003 and December 28, 2002 for stores that were held for disposal are as
follows (in thousands):



| |                              |  |         |  | 2003              |  | 2002     
| | ---------------------------- |  | ------- |  | ----------------- |  | ---------
| |                              |  |         |  |                   |  |          
| | FISCAL YEAR                  |  | 2004    |  | (As
    Restated)
| |                              |  |         |  |                  
| | Sales                        |  | $13,043 |  | $ 10,562          |  | $ 24,229 
| | Store contribution to profit |  | $ (999) |  | $ (1,899)         |  | $ (1,576)





The effect of suspending depreciation for assets held for disposal was
$0 for fiscal 2004, $0 for fiscal 2003 and approximately $34,000 fiscal year ended
December 28, 2002, respectively.





Restructuring Activity By Store Count (Unaudited)



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



| |                                                  | RESTRUCTURING
    STORE COUNT
| | ------------------------------------------------ | -----------------------------
| |                                                  |                              
| |                                                  | Fiscal
    Year Ending       
| |                                                  |                              
| |                                                  | 2004                         
| |                                                  |                              
| | Stores remaining at commencement of period       | 8                            
| | Stores identified in fiscal 2002
    for closure |                              
| | Stores identified in fiscal 2003
    for closure |                              
| | Stores identified in fiscal 2004 for closure     | 7                            
| | Support facilities identified for closure        | 2                            
| | Identified stores closed or abandoned            | (6)                          
| | Identified stores sold                           | (1)                          
| | Identified support facilities closed             | (4)                          
| |                                                  |                              
| | Identified stores remaining at period end        | 6                            
| |                                                  |                              
| |                                                  |                              



As of December 27, 2003, all six stores identified in fiscal 2002 for
closure have been sold or closed. Of the five stores and four support facilities
identified in fiscal 2003 for closure, one had been relocated as of December 27, 2003, one
was sold in January 2004, and the remainder were closed in 2004. Of the seven stores and
two support facilities identified in 2004 for closure, four stores and the support
facilities remained open as of year end, with two stores closing before February 26, 2005.

The following table summarizes accruals related to the Company's
restructuring activities during fiscal 2004, fiscal 2003 and fiscal 2002 (in thousands):



|                                | 2001        | 
|------------------------------- | ----------- | 
|                                | And         | 
|EXIT PLANS                      | Prior       | 
|                                |             | 
|BALANCE, 12-27-03 (As Restated) | $
    8,615 | 
|                                |             | 
|New accruals:                   |             | 
|Severance                       |             | 
|Lease-related liabilities       | 190         | 
|Cash paid :                     |             | 
|Severance                       |             | 
|Lease-related liabilities       | (250)       | 
|                                |             | 
|BALANCE, 03-27-04               | 8,555       | 
|                                |             | 
|New accruals:                   |             | 
|Severance                       |             | 
|Lease Related Liabilities       | (1,140)     | 
|Cash paid:                      |             | 
|Severance                       |             | 
|Lease-related liabilities       | (344)       | 
|                                |             | 
|BALANCE, 06-24-04               | 7,071       | 
|                                |             | 
|New Accruals:                   |             | 
|Severance                       |             | 
|Lease Related Liabilities       | 310         | 
|Cash Paid:                      |             | 
|Severance                       |             | 
|Lease Related Liabilities       | (446)       | 
|                                |             | 
|BALANCE, 09-25-04               | 6,935       | 
|                                |             | 
|New accruals                    |             | 
|Severance                       |             | 
|Lease-related liabilities       | 118         | 
|Cash paid:                      |             | 
|Severance                       |             | 
|Lease-related liabilities       | (389)       | 
|                                |             | 
|BALANCE, 01-05-2005             | $ 6,664(1)  | 
|                                |             | 
|                                |             | 

> 

1

2

3

As of January 1, 2005, the Company's restructuring balances consist of $2.9 million in
    accrued liabilities and other long-term obligations of $4.5 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
($13,000 in fiscal 2004) 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 2004, 2003 and fiscal 2002 were
approximately $1.2 million, $1.3 million and $1.2 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 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. The Company also
amended its 401(k) Plan in fiscal 2003 and fiscal 2004 to modify the eligibility
requirements.In fiscal 2003, the Company completed an audit of one of the record
keeping practices of one of its past plan administrators. The Company completed its
comprehensive review of past administrative practices of its 401(k) Plan during the third
quarter of fiscal 2004. As a result, in November 2004, the Company filed a voluntary
correction plan with the Internal Revenue Service related to the 401(k) Plan. Pursuant to
the Company's audit, the Company has determined that it was obligated to contribute an
estimated $1.2 million, inclusive of earnings, to the 401(k) Plan to correct certain past
administrative practices dating back to 1999, of which $1.0 million has been included in
direct store expense and $0.2 million in selling, general and administrative expense.





|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 in 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 2004, 2003 and 2002 were approximately $85,000, $84,000 and $39,000,
respectively. On December 31, 2004, in response to the Jobs Act, which mandated
modifications to Treasury regulations applicable to deferred compensation, the Company
froze the then-existing DCP participants' accounts, and created new participants'
accounts, effective January 1, 2005. The Company anticipates implementing a new DCP in
compliance with the new rules promulgated under the Jobs Act once such rules are issued.



|16. | Quarterly Information (Unaudited)
|--- | ---------------------------------



The following interim financial information presents the fiscal 2004 and fiscal 2003
consolidated results of operations on a quarterly basis (in thousands, except per-share
amounts):

| |                                                      |  | QUARTER ENDED
| | ---------------------------------------------------- |  | -------------
| |                                                      |  |              
| |                                                      |  | March 27,    
| | Statement of Operations Data                         |  | 2004         
| |                                                      |  |              
| |                                                      |  |              
| | Sales                                                |  | $ 263,795    
| | Gross profit                                         |  | $ 77,406     
| | Net income (loss)                                    |  | $ 2,069      
| |                                                      |  |              
| | Basic net income (loss) per common share             |  | $0.07        
| |                                                      |  |              
| | Diluted net income (loss) per common share           |  | $0.07        
| |                                                      |  |              
| | Basic weighted average number of common
    shares   |  | 30,184       
| |                                                      |  |              
| | Diluted weighted average number of common
    shares |  | 31,034       
| |                                                      |  |              
| |                                                      |  |              





| |                                                      |  | QUARTER ENDED
    (As Restated)
| | ---------------------------------------------------- |  | -------------------------------
| |                                                      |  |                                
| |                                                      |  | March 29,                      
| | Statement of Operations Data                         |  | 2003                           
| |                                                      |  |                                
| |                                                      |  |                                
| | Sales                                                |  | $235,987                       
| | Gross profit                                         |  | $ 71,490                       
| | Net income (loss)                                    |  | $ 829                          
| |                                                      |  |                                
| | Basic net income (loss) per common share             |  | $0.03                          
| |                                                      |  |                                
| | Diluted net income (loss) per common share           |  | $0.03                          
| |                                                      |  |                                
| | Basic weighted average number of common
    shares   |  | 29,704                         
| |                                                      |  |                                
| | Diluted weighted average number of common
    shares |  | 29,916                         
| |                                                      |  |                                
| |                                                      |  |                                



In accounting for the restructuring reserves for the quarter ended June
28, 2003, the Company understated its charge to accrue for the remaining lease obligation
for a closed store site in Phoenix, Arizona, in the amount of $500,000 due to the
commingling of litigation and lease-related reserves for this store in the supporting
reserve schedules. During the quarter ended December 27, 2003, the Company recorded a
charge to accrue for additional litigation related restructuring reserves for this closed
store site, which was overstated by the $500,000 due to the commingling of litigation and
lease-related reserves noted above. As a result of the restatement, restructuring expense
has been increased $500,000 ($304,000 net of tax) for the quarter ended June 28, 2003 and
decreased $500,000 for the quarter ended December 27, 2003. This restatement decreased
earnings per share $0.01 in the quarter ended June 28, 2003 and increased earnings per
share by the same in the quarter ended December 27, 2003. There is no net income, accrual
or cash flow impact on fiscal year 2003 as a whole.



As discussed per Note 2, and the previous paragraph, previoius years
are being restated. The related quarters below are the as presented and as adjusted
results.





| |                                            |  | QUARTER ENDED
    March 29, 2003
| | ------------------------------------------ |  | --------------------------------
| |                                            |  |                                 
| | Statement of Operations Data               |  |                                 
| |                                            |  |                                 
| |                                            |  |                                 
| | Sales                                      |  |                                 
| | Gross profit                               |  |                                 
| | Net income (loss)                          |  |                                 
| | Basic net income (loss) per common share   |  |                                 
| |                                            |  |                                 
| | Diluted net income (loss) per common share |  |                                 
| |                                            |  |                                 
| |                                            |  |                                 





| |                                                |  | QUARTER
    ENDED June 28, 2003
| | ---------------------------------------------- |  | -------------------------------
| |                                                |  |                                
| | Statement of Operations Data                   |  |                                
| |                                                |  |                                
| |                                                |  |                                
| | Sales                                          |  |                                
| | Gross profit                                   |  |                                
| | Net income (loss)                              |  |                                
| | Basic net income (loss) per
    common share   |  |                                
| |                                                |  |                                
| | Diluted net income (loss) per
    common share |  |                                
| |                                                |  |                                
| |                                                |  |                                





| |                                            |  | QUARTER ENDED
    September 27, 2003
| | ------------------------------------------ |  | ------------------------------------
| |                                            |  |                                     
| | Statement of Operations Data               |  |                                     
| |                                            |  |                                     
| |                                            |  |                                     
| | Sales                                      |  |                                     
| | Gross profit                               |  |                                     
| | Net income (loss)                          |  |                                     
| | Basic net income (loss) per common share   |  |                                     
| |                                            |  |                                     
| | Diluted net income (loss) per common share |  |                                     
| |                                            |  |                                     
| |                                            |  |                                     





| |                                            |  | QUARTER ENDED
    December 27, 2003
| | ------------------------------------------ |  | -----------------------------------
| |                                            |  |                                    
| | Statement of Operations Data               |  |                                    
| |                                            |  |                                    
| |                                            |  |                                    
| | Sales                                      |  |                                    
| | Gross profit                               |  |                                    
| | Net income (loss)                          |  |                                    
| | Basic net income (loss) per common share   |  |                                    
| |                                            |  |                                    
| | Diluted net income (loss) per common share |  |                                    
| |                                            |  |                                    
| |                                            |  |                                    





|17. | Comprehensive Income
|--- | --------------------



The components of other comprehensive income consist of unrealized
gains and losses on available-for-sale securities, adjustments related to a cash flow
hedge, and foreign currency translation adjustments, all reported  net of tax.
Comprehensive income has been disclosed in the statement of stockholders' equity for all
periods presented.



The components of accumulated other comprehensive income for fiscal
years ending 2004, 2003, and 2002 are as follows (in thousands):



|                                                                       |  | Foreign Currency
    Translation Adjustments |  | Unrealized Gain On
    Available-For Sale Securities |  | Cash Flow Hedge
    Adjustments |  | Total    
|---------------------------------------------------------------------- |  | -------------------------------------------- |  | ---------------------------------------------------- |  | ------------------------------- |  | ---------
|                                                                       |  |                                              |  |                                                      |  |                                 |  |          
|Balance at December 29, 2001                                           |  | $ (388)                                      |  | -                                                    |  | $ (1,421)                       |  | $ (1,809)
|                                                                       |  |                                              |  |                                                      |  |                                 |  |          
|Foreign currency translation adjustment                                |  | (61)                                         |  | -                                                    |  | -                               |  | (61)     
|Recognition of hedge results to interest
    expense during the period |  |                                              |  |                                                      |  | 1,176                           |  | 1,176    
|Change in market value of cash flow hedge
    during the period        |  |                                              |  |                                                      |  | (348)                           |  | (348)    
|                                                                       |  |                                              |  |                                                      |  |                                 |  |          
|Balance at December 28, 2002                                           |  | $ (449)                                      |  | -                                                    |  | $ (593)                         |  | $ (1,042)
|                                                                       |  |                                              |  |                                                      |  |                                 |  |          
|Foreign currency translation adjustment                                |  | 697                                          |  | -                                                    |  | -                               |  | 697      
|Recognition of hedge results to interest
    expense during the period |  | -                                            |  | -                                                    |  | 613                             |  | 613      
|Change in market value of cash flow hedge
    during the period        |  | -                                            |  |                                                      |  | (20)                            |  | (20)     
|                                                                       |  |                                              |  |                                                      |  |                                 |  |          
|Balance at December 27, 2003                                           |  | $ 248                                        |  | -                                                    |  | -                               |  | $ 248    
|                                                                       |  |                                              |  |                                                      |  |                                 |  |          
|Foreign currency translation adjustment                                |  | 681                                          |  | -                                                    |  | -                               |  | 681      
|Unrealized gain on available-for-sale
    securities                   |  | -                                            |  | $ 37                                                 |  | -                               |  | 37       
|                                                                       |  |                                              |  |                                                      |  |                                 |  |          
|Balance at January 1, 2005                                             |  | $ 929                                        |  | $ 37                                                 |  | -                               |  | $ 966    
|                                                                       |  |                                              |  |                                                      |  |                                 |  |          
|                                                                       |  |                                              |  |                                                      |  |                                 |  |          



|18. | Related Party Transactions
|--- | --------------------------



Michael C. Gilliland, Elizabeth Cook and Patrick Gilliland. Elizabeth
C. Cook and Michael C. Gilliland, former officers and directors and greater than 5%
stockholders 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 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 was 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. 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. The parties agreed to settle these two lawsuits in
July 2004. The settlement includes the disclosure to the Company of sources of certain
information obtained by defendants, a return of proprietary information to the Company,
mutual release of claims and the dismissal of the two suits.





Perry D. Odak. 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. 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 2004, the Compensation Committee of the Board of Directors
recommended to the Company's Board, which approved in concept, a modification to Mr.
Odak's employment agreement to provide for the payment of the existing $9.2 million
supplemental bonus in the event of Mr. Odak's death or disability while employed by the
Company. Subsequently, the Compensation Committee recommended, and the Board approved in
concept a modification to the employment agreement to provide for a payment of a bonus of
approximately $1.6 million: (i) in the event Mr. Odak terminates his employment for Good
Reason, as defined in his employment agreement; (ii) in the event Mr. Odak is terminated
without Cause, as defined in the agreement; or (iii) in the event his employment agreement
is not renewed at the end of its initial term in 2006. The Company has acquired an
insurance policy for the benefit of the Company to cover Mr. Odak's death or disability in
the approximate amount of the supplemental bonus.

In March 2001, Mr. Odak 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.





Other related parties. Mark A. Retzloff is a current member of the
Company's Board of Directors, and sits on its Real Estate Committee. Mr. Retzloff is Chief
Organic Officer of Aurora Organic Dairy, which derives 8% of its total revenues from sales
of organic milk to the Company under the Company's private label brand. Mr. Retzloff has
sat on the boards of directors of several other natural or organic companies that derive
5% of their revenues from sales of products to the Company. Stacey J. Bell, a current
member of the Company's Board of Directors, is an employee of Ideasphere, Inc., which
manufactures certain SKU's for the Company's private label vitamins and supplements. Total
purchases from these vendors for the fiscal years ending 2004, 2003 and 2002 are
$1,805,000, $905,000 and $657,000, respectively. A majority of these purchases are made
primarily through our primary distributor, UNFI and therefore are indirect in nature.
These costs are all for inventory and the related costs of goods sold. As of the fiscal
years ending 2004 and 2003, the associated accounts payable balances were $54,000 and
$54,000.



|19. | 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 UNFI 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. These transition 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. The Company completed the process of transitioning to UNFI from its prior
primary distributor in the first quarter of 2004.



|20. | Subsequent Event
|--- | ----------------





On March 31, 2005, the Company entered into a five-year revolving
secured credit facility with Bank of America, N.A. The new credit facility will allow
borrowings and letters of credit up to a maximum of $40 million, with an option to
increase up to $100 million, subject to a "borrowing base" determined by
inventory levels, credit card receivables, invested cash and mortgaged leaseholds. The
facility is secured by the Company's assets including, but not limited to, cash, inventory
and fixed assets. Borrowings under the new credit facility bear interest, at the Company's
election, at LIBOR plus 1.25% or prime. The applicable margin for LIBOR rate borrowings is
variable, ranging from 1.00%, based upon the availability calculation made in accordance
with the agreement. The Company is charged a 0.25% commitment fee on the unused portion of
the line. There are no financial covenant requirements, except that the Company must
maintain minimum excess availability (as defined in the agreement) at all times. The new
credit facility also contains limitations on incurring additional indebtedness, making
additional investments and permitting a change of control and cash management provisions.





Item 9.

CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND FINANCIAL DISCLOSURE



Not applicable.





Item 9A.

CONTROLS AND PROCEDURES

Conclusion Regarding Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based upon that evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures were not effective
as of the end of the period covered by this report due to material weaknesses in
establishing restructuring reserve and lease accounting controls as set forth below.



Restructuring Reserves. During management's review of the
restructuring reserves for the quarter ended June 28, 2003, we understated an adjustment
to accrue for the remaining lease obligation for a closed store site in Phoenix, Arizona,
in the amount of $500,000 due to the commingling of litigation and lease-related reserves
in the supporting reserve schedules. During the quarter ended December 27, 2003, we
recorded an adjustment to accrue for additional litigation related restructuring reserves
for this closed store site, which was overstated by the $500,000 due to the commingling of
litigation and lease-related reserves as described above. On February 11, 2005, we
reported the error in previously issued financial statements on Form 8-K. We have restated
our interim financial statements and related disclosures for fiscal year ended December
27, 2003 in this report to correctly report these adjustments.



Lease Accounting. On February 15, 2005, management of the Company
discussed with the Chairman of the Audit Committee of the Board of Directors a February 7,
2005 clarification of existing GAAP applicable to lease accounting articulated by the
Office of the Chief Accountant of the SEC, as well as recent restatements by several other
issuers related to the same accounting issue. The Chairman of the Audit Committee
instructed management to review the Company's accounting practices. On February 17, 2005,
based upon the preliminary results of this review, the Audit Committee concluded that our
previously issued consolidated financial statements should no longer be relied upon
because of errors, and we disclosed the same on Form 8-K filed on February 18, 2005.
Management has since completed its review of its lease accounting, and determined that its
accounting for (1) amortization of leasehold improvements and leasehold interests, (2)
straight-line rent expense, (3) landlord incentives and allowances, (4) sale leaseback
transactions, and (5) classification of leases as capital or operating in accordance with
SFAS No. 13 were not consistent with GAAP. We have restated our financial statements for
the fiscal years ended December 27, 2003 and December 28, 2002 as presented in this
report. See "Notes to Consolidated Financial Statements  Note 2 
Restatement of Financial Statements."



Based on the definition of "material weakness" in the Public
Company Accounting Oversight Board's Auditing Standard No. 2, An Audit of Internal
Control Over Financial Reporting Performed in Conjunction with an Audit of Financial
Statements,restatement of financial statements in prior filings with the SEC is a
strong indicator of the existence of a "material weakness" in the design or
operation of internal control over financial reporting. Accordingly, management concluded
that a material weakness existed in the Company's internal control over financial
reporting at January 1, 2005.





Changes in Internal Control over Financial Reporting



During the fourth quarter of fiscal 2004, there were no significant
changes in the Company's internal control over financial reporting that materially
affected or are reasonably likely to materially affect internal control over financial
reporting.



During the fiscal quarter ended April 2, 2005, we corrected the
deficiency in our internal controls over financial reporting for the restructuring reserve
error described above by reconstructing the supporting detailed restructuring reserve
schedule by specific site and type of restructuring reserve. This detailed schedule will
be utilized in management's quarterly evaluation of restructuring reserves to correct this
control deficiency.



The errors related to improper lease accounting resulted from the
Company's misinterpretation of existing GAAP, as recently clarified by the SEC staff. We
will be developing controls to strengthen our ongoing compliance with generally accepted
accounting principles related to leasing issues, as well as implementing additional review
procedures over the selection and monitoring of appropriate assumptions and estimates
affecting lease accounting practices.





Management's Report on Internal Control over Financial Reporting



We are in the process of completing our testing and evaluation of our
internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and
15a-15(f), as required by Section 404 of the Sarbanes-Oxley Act of 2002 and Item308(a) of
Regulation S-K. In this Annual Report on Form 10-K/A, we have not published our
management's report on internal control over financial reporting. We expect to complete
management's assessment of such internal controls over financial reporting, and file the
report on the same on Form 10-K/A within the 45 day period provided by the exemptive order
issued by the Securities and Exchange Commission in Release No. 50754, issued on November
30, 2004. Since we have not completed our testing and evaluation process, it is possible
that material weakneses in addition to those disclosed above may be identified. In
accordance with the exemptive order, the Form 10-K/A will include management's annual
report on internal control over financial reporting required by Item 308(a) of Regulation
S-K and the related attestation report of the registered public accounting firm required
by Item 308 (b) of Regulation S-K. As a result of the material weaknesses described above,
we expect to conclude that our internal control over financial reporting was not effective
as of January 1, 2005. As a result, we also expect that our independent registered public
accounting firm will issue an adverse opinion on the effectiveness of our internal control
over financial reporting in the amendment to this Annual Report on Form 10-K, which we
intend to file with our internal control report.





Item 9B.

OTHER INFORMATION



The following information is being provided in lieu of filing a Form 8-K to report our
entry into a material definitive agreement under Item 1.01 and the termination of a
material definitive agreement under Item 1.02.



On March 31, 2005, we entered into a five-year revolving secured credit
facility with Bank of America, N.A. (the "B of A Facility"). Concurrent with the
execution of the B of A Facility, we terminated our existing $95 million credit facility
with Wells Fargo Bank N.A. as administrative agent. The B of A Facility allows borrowings
and letters of credit up to a maximum of $40 million, with an option to increase
borrowings up to $100 million, subject to a borrowing base determined by the value of
certain inventory, credit card receivables, invested cash and, at our discretion,
mortgaged leaseholds. The B of A Facility is secured by certain of our assets including,
but not limited to, cash, inventory and fixed assets. Borrowings under the B of A Facility
bear interest, at our election, at the prime rate or at LIBOR plus a margin ranging from
1.00% to 1.50%, depending on the excess borrowing availability over amounts borrowed.
Interest rates are determined quarterly. We are charged a commitment fee on the unused
portion of the Facility. There are no financial covenants, other than the obligation to
maintain a certain percentage of minimum excess availability (as defined in the agreement)
at all times. The B of A Facility requires compliance on a monthly basis with certain
non-financial covenants, including limitations on incurring additional indebtedness and
making investments, the use and disposition of collateral, changes of control, as well as
cash management provisions.



As a result of the restatement to correct lease-related accounting errors described in
"Notes to Consolidated Financial Statements  Note 2  Restatement of
Financial Statements",as of January 1, 2005,we were in violation of
three financial covenants under our former credit facility with Wells Fargo Bank N.A., as
administrative agent, and certain other lenders ("Wells Facility"). We requested
and received waivers, dated March 28 and March 31, 2005, respectively, from the requisite
lenders under the Wells Facility, of our violation of covenants related to permitted
indebtedness, an adjusted leverage ratio equal to the ratio of average total funded debt,
as defined under the former Wells Facility, plus six times rent expense, to EBITDAR for
the four fiscal quarter periods then ended, and a minimum stockholders' equity threshold.



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 17, 2005, to be filed with the Commission approximately April 1, 2005, 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 17, 2005, to be filed with the Commission approximately
April 1, 2005, 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 17, 2005, to be filed with the Commission approximately
April 1, 2005, 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 17, 2005 to be filed
with the Commission approximately April 1, 2005, 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 17, 2005, to be filed with the Commission
approximately April 1, 2005, is incorporated herein by reference.



PART IV.



Item 15.

EXHIBITS AND FINANCIAL
STATEMENT

SCHEDULES

|(a) | Financial
    Statements and Financial Statement Schedules. The following are filed as a part of
    this Report on Form 10-K/A:
|--- | --------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                 
|    | (1)                                                                                                                             
|    |                                                                                                                                 
|    |                                                                                                                                 
|    |                                                                                                                                 
|    |                                                                                                                                 
|    |                                                                                                                                 
|    |                                                                                                                                 
|    | (2)                                                                                                                             
|    | (3)                                                                                                                             
|    |                                                                                                                                 
|    | Exhibit Number                                                                                                                  
|    |                                                                                                                                 
|    | 3(i).1.(a)**                                                                                                                    
|    | 3(i).1.(b)**                                                                                                                    
|    | 3(i).1.(c)**                                                                                                                    
|    | 3(ii).1**                                                                                                                       
|    | 4.1**                                                                                                                           
|    | 4.2**                                                                                                                           
|    | 4.3**                                                                                                                           
|    | 4.4**                                                                                                                           
|    | 10.1**                                                                                                                          
|    | 10.2#**                                                                                                                         
|    | 10.3#**                                                                                                                         
|    | 10.4#**                                                                                                                         
|    | 10.5#**                                                                                                                         
|    | 10.6#**                                                                                                                         
|    | 10.7#**                                                                                                                         
|    | 10.8#**                                                                                                                         
|    | 10.9#**                                                                                                                         
|    | 10.10#**                                                                                                                        
|    | 10.11#**                                                                                                                        
|    | 10.12#**                                                                                                                        
|    | 10.13#**                                                                                                                        
|    | 10.14#**                                                                                                                        
|    | 10.15#**                                                                                                                        
|    | 10.16#**                                                                                                                        
|    | 10.17#**                                                                                                                        
|    | 10.18#**                                                                                                                        
|    | 10.19#**                                                                                                                        
|    | 10.20#**                                                                                                                        
|    | 10.21#**                                                                                                                        
|    | 10.22#**                                                                                                                        
|    | 10.23#**                                                                                                                        
|    | 10.24#**                                                                                                                        
|    | 10.25#**                                                                                                                        
|    | 10.26#**                                                                                                                        
|    | 10.27**                                                                                                                         
|    | 10.28**                                                                                                                         
|    | 10.29**                                                                                                                         
|    | 10.30#**                                                                                                                        
|    | 10.31#**                                                                                                                        
|    | 10.32**                                                                                                                         
|    | 10.33**                                                                                                                         
|    | 10.34**                                                                                                                         
|    | 10.35**                                                                                                                         
|    | 10.36**                                                                                                                         
|    | 10.37**                                                                                                                         
|    | 10.38**                                                                                                                         
|    | 10.39**                                                                                                                         
|    | 10.40**                                                                                                                         
|    | 10.41**                                                                                                                         
|    | 10.42**                                                                                                                         
|    | 10.43**                                                                                                                         
|    | 10.44**                                                                                                                         
|    | 21.1**                                                                                                                          
|    | 23.1+                                                                                                                           
|    | 23.2+                                                                                                                           
|    | 31.1+                                                                                                                           
|    | 31.2+                                                                                                                           
|    | 32.1+                                                                                                                           
|    | 32.2+                                                                                                                           
|    |                                                                                                                                 



|#    | Management Compensation Plan.                                                                                                                                                              
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**   | Previously filed.                                                                                                                                                                          
|+    | Included herewith.                                                                                                                                                                         
|(1)  | Incorporated by reference
    from the Registrant's Form 10-K
    for the year ended December 28, 199 (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 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 29, 2001 (File No. 0-21577), filed on March 27, 2002.                                        
|(6)  | Incorporated by reference
    from the Registrants Form
    10-K for the year ended January 1, 2000 (File No. 0-21577).                                                                   
|(7)  | Incorporated by reference
    from the Registrants Form
    10-Q for the period ended March 31, 2001 (File No. 0-21577).                                                                  
|(8)  | Incorporated by reference
    from the Registrants Form
    10-Q for the period ended June 30, 2001(File No. 0-21577).                                                                    
|(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).                                                                 
|(13) | Incorporated by reference
    from the Registrants Form
    10-K for the year ended December 27, 2003 (File No. 0-21577).                                                                 
|(14) | Incorporated by reference
    from the Registrants report
    dated May 25, 2004 on Form 8-K (File No. 0-21577).                                                                          
|(15) | Incorporated by reference
    from the Registrants Form
    10-Q for the period ended June 26, 2004 (File No. 0-21577).                                                                   
|(16) | Incorporated by reference
    from the Registrants Registration
    Statement on Form S-3 filed with the Commission on August 20, 2004 (File No.
    333-18406).                          
|(17) | Incorporated by reference
    from the Registrants Form
    10-Q for the period ended September 25, 2004 (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 31, 2005 | 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,
    President and Director
    (Principal Executive Officer)                             | March 31, 2005
|                         |                                                                                                                   |               
|/s/ Edward F.
    Dunlap | Chief Financial
    Officer
    Senior Vice President Operations
    (Principal Financial and Accounting Officer) | March 31, 2005
|                         |                                                                                                                   |               
|/s/ Robert G. Miller     | Chairman                                                                                                          | March 31, 2005
|                         |                                                                                                                   |               
|/s/ Stacey J. Bell       | Director                                                                                                          | March 31, 2005
|                         |                                                                                                                   |               
|/s/ David M. Chamberlain | Director                                                                                                          | March 31, 2005
|                         |                                                                                                                   |               
|/s/ Brian K. Devine      | Director                                                                                                          | March 31, 2005
|                         |                                                                                                                   |               
|/s/ David J. Gallitano   | Director                                                                                                          | March 31, 2005
|                         |                                                                                                                   |               
|/s/ Mark A. Retzloff     | Director                                                                                                          | March 31, 2005
|                         |                                                                                                                   |               
|/s/ John A. Shields      | Director                                                                                                          | March 31, 2005
|                         |                                                                                                                   |