TABLE OF CONTENTS







UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K/A

(Amendment No. 3)

(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



- On March 17, 2005 we filed our Annual Report on Form 10-K for the fiscal year ended
    January 1, 2005. That filing, pursuant to an extension under Rule 12b-25, only included
    Items 1, 2, 3, 4, 5, 9, 10, 11, 12, 13 and 14.



- On April 1, 2005, within the 15 day extension period under Rule 12b-25, we filed
    Amendment No. 1 on Form 10-K/A to include Items 6, 7, 7A, 8 (including our Consolidated
    Statements of Operations, Comprehensive Income (Loss), Changes in Stockholders' Equity and
    Cash Flows and related disclosures for the fiscal years 2004, 2003 and 2002, and the
    Consolidated Balance Sheets and related disclosures for fiscal years ended 2004 and 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.



- On April 4, 2005 we filed Amendment No. 2 on Form 10-K/A 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.



- We are filing this Amendment No. 3 on Form 10-K/A to include our independent registered
    public accounting firms report on managements assessment of the effectiveness
    of internal control over financial reporting and on the effectiveness of internal control
    over financial reporting and to amend Note 16 to the consolidated financial statements,
    included under Item 8 of Part II and Item 9A of Part II. The amendment to Note 16 provides
    additional quarterly financial information related to the restatement of our quarterly
    results for the first three quarters of fiscal 2004 and Item 9A now includes
    Managements Report on Internal Control over Financial Reporting. Managements
    and our independent registered public accounting firms reports on our internal
    control over financial reporting were previously omitted pursuant to the U. S. Securities
    and Exchange Commissions ("SEC") November 30, 2004 Exemptive Order under
    Section 36 of the Securities Exchange Act of 1934. The required certifications from our
    Chief Executive Officer and our Chief Financial Officer required by Sections 302 and 906
    of the Sarbanes-Oxley Act of 2002 are attached to this Form 10-K/A as Exhibits 31.1, 31.2,
    32.1 and 32.2. This amendment also includes the consents of our independent registered
    public accounting firms as Exhibits 23.1 and 23.2.



This Amendment No. 3 does not change any information contained in the
other items of the Companys Form 10-K/A, Amendment No. 2, as filed on April 4, 2005.
This Amendment No. 3 also does not reflect events that have occurred after the filing of
the Form 10-K/A, Amendment No. 2.

---





TABLE OF CONTENTS



|PART II. |  |                                                                   |   
|-------- |  | ----------------------------------------------------------------- | --
|         |  |                                                                   |   
|Item 8   |  | Financial Statements
    and Supplementary Data                   | 4 
|         |  |                                                                   |   
|Item 9A. |  | Controls
    and Procedures                                       | 42
|         |  |                                                                  
|PART IV. |  |                                                                   |   
|         |  |                                                                   |   
|Item 15. |  | Exhibits, Financial Statements and Financial Statements Schedules | 45
|         |  |                                                                   |   





---

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



---

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 in Note 2, and in the foregoing paragraph, the first three
quarters of 2004 and each quarter of 2003 are being restated. The presentation below
tracks the effects of the restatement compared with the As Recorded consolidated results
of operations on a quarterly basis (in thousands, except per-share amounts):



| |                                            |  | 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 |  |                                    
| |                                            |  |                                    
| |                                            |  |                                    



| |                                            |  | QUARTER ENDED
    March 27, 2004
| | ------------------------------------------ |  | --------------------------------
| |                                            |  |                                 
| | Statement of Operations Data               |  | As Recorded                     
| |                                            |  |                                 
| |                                            |  |                                 
| | Sales                                      |  | $ 263,795                       
| | Gross profit                               |  | $ 77,114                        
| | Net income (loss)                          |  | $ 2,357                         
| | Basic net income (loss) per common share   |  | $ 0.08                          
| |                                            |  |                                 
| | Diluted net income (loss) per common share |  | $ 0.08                          
| |                                            |  |                                 



| |                                            |  | QUARTER ENDED
    June 26, 2004
| | ------------------------------------------ |  | -------------------------------
| |                                            |  |                                
| | Statement of Operations Data               |  | As Recorded                    
| |                                            |  |                                
| |                                            |  |                                
| | Sales                                      |  | $ 251,697                      
| | Gross profit                               |  | $ 73,172                       
| | Net income (loss)                          |  | $ 363                          
| | Basic net income (loss) per common share   |  | $ 0.01                         
| |                                            |  |                                
| | Diluted net income (loss) per common share |  | $ 0.01                         
| |                                            |  |                                







| |                                            |  | QUARTER ENDED
    September 25, 2004
| | ------------------------------------------ |  | ------------------------------------
| |                                            |  |                                     
| | Statement of Operations Data               |  | As Recorded                         
| |                                            |  |                                     
| |                                            |  |                                     
| | Sales                                      |  | $ 250,739                           
| | Gross profit                               |  | $ 68,875                            
| | Net income (loss)                          |  | $ (6,065)                           
| | Basic net income (loss) per common share   |  | $ (0.21)                            
| |                                            |  |                                     
| | Diluted net income (loss) per common share |  | $ (0.21)                            
| |                                            |  |                                     





| |                                            |  | QUARTER ENDED
    January 1, 2005
| | ------------------------------------------ |  | ---------------------------------
| |                                            |  |                                  
| | 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 9A.

CONTROLS AND PROCEDURES



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. 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,
lease accounting controls and insufficient personnel resources in our finance and
accounting function as set forth below.



Restructuring Reserves. In 2004, management determined that the
restructuring reserves for the quarter ended June 28, 2003, were understated by $500,000.
An accrual had not been made for the remaining lease obligation for a closed store site in
Phoenix, Arizona. The error occurred as a result of unrelated accruals relating to
litigation and lease reserves that were incorrectly combined in the restructuring
analysis. During the quarter ended December 27, 2003, a $500,000 adjustment was recorded
to accrue for additional litigation related restructuring reserves for this closed store
site. On February 11, 2005, we reported the error in previously issued quarterly 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. There was no net effect on the annual financial statements for the
period ended December 27, 2003.



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 summary 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, management upon discussion with the Audit
Committee concluded that our previously issued consolidated financial statements should no
longer be relied upon because of lease accounting 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 the controls over the selection of appropriate
assumptions and factors affecting its lease accounting were not effective as of January 1,
2005, as those selections were not consistent with GAAP in regards to the following areas
(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. We have
restated our financial statements for the fiscal years ended December 27, 2003 and
December 28, 2002 and the first three quarters of 2004 as presented in our Form 10-K, as
amended, for the year ended January 1, 2005.



Accounting and Finance Personnel. In conjunction with filing the
Form 10-K/A, which included the restatement concerning the treatment of lease accounting
as discussed above, management concluded that the Company did not have sufficient
personnel with technical tax and accounting expertise to review and resolve non-routine
and/or complex accounting matters within the framework of the Companys internal
control structure, as designed. The Company identified a material weakness in the
operation of controls over the review and oversight of its tax accounts. Specifically, due
to the lack of technical expertise related to accounting for taxes, the controls, as
designed, were not operating effectively to adequately reduce potential misstatements and
ensure appropriate tax disclosures were being made in the Companys consolidated
financial statements. Additionally, due to the lack of sufficient technical resources
related to accounting and financial statement disclosure matters and as a result of errors
identified by our independent auditors in the disclosures and amounts in our annual report
on Form 10-K/A, the Company concluded that controls over the financial reporting process
were not effective. All identified adjustments were made to the consolidated financial
statements for the year ended January 1, 2005.





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 incorrect interpretation of existing GAAP. To remediate this material weakness,
we developed controls to strengthen our ongoing compliance with generally accepted
accounting principles related to leasing issues, as well as implemented additional review
procedures over the selection and monitoring of appropriate assumptions and estimates
affecting lease accounting practices. These controls included reviews of all lease terms
and the associated lives of additions to the Companys capitalized assets and
straight-line calculations, two independent and separate capital versus operating analyses
to validate the accounting treatment, regular communication between the accounting and
capital asset groups to validate occupancy dates for accounting purposes and reviews of
every new or modified lease undertaken by two people within the accounting function to
ensure all components were accounted for consistently and in accordance with GAAP.



The Company has hired a tax consultant with requisite knowledge to
ensure the deficiencies noted above related to taxes will be addressed going forward The
work of the consultant will be reviewed and monitored by a member of the finance
department with knowledge of tax accounting matters.



The Company has also hired three additional Certified Public
Accountants into the accounting and finance departments to ensure both the controls over
financial reporting are operating effectively as well as to ensure the Companys
internal controls continue to be appropriately assessed. The Company has ongoing efforts
to recruit and retain qualified personnel to staff the Companys finance and
accounting departments.



It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, and not absolute, assurance that the objectives
of the system will be met. The design of any control system is based, in part, upon the
benefits of the control system relative to its costs. Control systems can be circumvented
by the individual acts of some persons, by collusion of two or more people, or by
management override of the control. In addition, over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events.





Managements Report on Internal Control over Financial Reporting

The Companys management is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The
Companys internal control over financial reporting is a process designed, under the
supervision of the Companys chief executive officer and chief financial officer, to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.



The Company has conducted an evaluation of the effectiveness of its
internal controls over financial reporting as of January 1, 2005. This evaluation was
based on the framework in "Internal Control  Integrated Framework"issued
by the Committee of Sponsoring Organizations of the Treadway Commission. All internal
control systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with GAAP.



As of January 1, 2005, the Companys management concluded that
material weaknesses existed in its internal control over financial reporting, based on
criteria in Internal Control  Integrated Framework. A material weakness is a
control deficiency, or combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of the annual or interim financial
statements may not be prevented or detected. Management believes that the Company did not
maintain effective controls over the financial reporting process because of the facts and
circumstances that led to the two restatements of the Companys financial statements
relating to restructuring reserves and lease accounting, and because the Company lacked a
sufficient complement of personnel with a level of technical accounting and tax expertise
that was commensurate with the Companys financial reporting requirements. As a
result of these material weaknesses in the Companys internal control over financial
reporting management has concluded that, as of January 1, 2005, the Companys
internal control over financial reporting was not effective.



Managements assessment of the effectiveness of the Companys
internal control over financial reporting as of January 1, 2005, has been audited by Ernst
and Young LLP, the Companys independent registered public accounting firm, as stated
in their report which appears herein.









REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders of Wild Oats Markets, Inc.

We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over Financial Reporting, that
Wild Oats Markets, Inc. did not maintain effective internal control over financial
reporting as of January 1, 2005, because of the effect of material weaknesses identified
relating to accounting for restructuring reserves, lease accounting errors, and the lack
of a sufficient complement of personnel with a level of technical accounting and tax
expertise that was commensurate with the Companys financial reporting requirements,
based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Wild
Oats Markets, Inc.s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness of the companys
internal control over financial reporting 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 effective internal
control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.

A companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material misstatement
of the annual or interim financial statements will not be prevented or detected. The
following material weaknesses have been identified and included in managements
assessment: 1. under accrual of restructuring reserves due to lack of effective monitoring
controls to identify this error timely, 2. insufficient controls over the selection and
monitoring of appropriate assumptions and factors affecting lease accounting, and 3. the
lack of a sufficient complement of personnel with a level of technical accounting and tax
expertise that was commensurate with the Companys financial reporting requirements
to adequately reduce potential misstatements and address the completeness and accuracy of
disclosures or ensure appropriate procedures are being followed. These material weaknesses
resulted in adjustments to restructuring reserves, depreciation and amortization expense,
interest expense, asset impairment charges, financing lease obligations, capital leases,
rent abatement liability, property, plant, and equipment, net, income tax accounts, as
well as changes to required financial statement footnote disclosures. As a result of the
material weaknesses related to restructuring reserves and lease accounting, Wild Oats
Markets, Inc. concluded the Companys previously issued financial statements should
be restated. These material weaknesses were considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2004 financial statements, and this
report does not affect our report dated March 31, 2005 on those financial statements.

In our opinion, managements assessment that Wild Oats Markets,
Inc. did not maintain effective internal control over financial reporting as of January 1,
2005, is fairly stated, in all material respects, based on the COSO control criteria.
Also, in our opinion, because of the effect of the material weaknesses described above on
the achievement of the objectives of the control criteria, Wild Oats Markets, Inc. has not
maintained effective internal control over financial reporting as of January 1, 2005,
based on the COSO control criteria.

/s/ Ernst & Young LLP

Denver, Colorado
April 29, 2005



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: April 27, 2005 | By: /s/ Edward F. Dunlap                     
|                     | Edward F. Dunlap                             
|                     | Executive Officer and Chief Financial Officer
|                     | (Principal Financial and Accounting Officer) 

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