**TABLE OF CONTENTS**

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q



x
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL
    1, 2006.ORo
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
    SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
    __________ TO __________.








Commission file number 0-21577





WILD OATS MARKETS, INC.

(Exact name of registrant as specified in its charter)



Delaware
    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)







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

Yes( X )No( )



Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).

Large Accelerated Filer( )         Accelerated
Filer(X)Non-Accelerated Filer( )

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12-b of the Exchange Act).

Yes( )No( X )



As of April 28, 2006, there were 28,860,572 shares outstanding of the registrant's
common stock (par value $0.001 per share).



---









TABLE OF CONTENTS

|PART I.                |  | FINANCIAL
    INFORMATION                                                                                                          | Page
|---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- | ----
|                       |  |                                                                                                                                    |     
|Item 1.                |  | Financial Statements:                                                                                                              |     
|                       |  |                                                                                                                                    |     
|                       |  | Consolidated Balance Sheets,
      April 1, 2006 (unaudited) and December 31, 2005                                                 | 3   
|                       |  |                                                                                                                                    |     
|                       |  | Consolidated Statements
      of Operations (unaudited), 
      Three Months Ended April 1, 2006 and April 2, 2005                 | 4   
|                       |  |                                                                                                                                    |     
|                       |  | Consolidated
      Statements of Comprehensive Income (Loss) (unaudited), Three Months Ended April 1, 2006
      and April 2, 2005 | 5   
|                       |  |                                                                                                                                    |     
|                       |  | Consolidated Statements
      of Cash Flows (unaudited), 
      Three Months Ended April 1, 2006 and April 2, 2005                 | 6   
|                       |  |                                                                                                                                    |     
|                       |  | Notes to
      Consolidated Financial Statements (unaudited)                                                                       | 7   
|                       |  |                                                                                                                                    |     
|Item 2.                |  | Managements Discussion and Analysis of Financial Condition and Results of
      Operations                                        | 16  
|                       |  |                                                                                                                                    |     
|Item 3.                |  | Quantitative
      and Qualitative Disclosures About Market Risk                                                                   | 27  
|                       |  |                                                                                                                                    |     
|Item 4.                |  | Controls and Procedures                                                                                                            | 27  
|                       |  |                                                                                                                                    |     
|PART II.               |  | OTHER INFORMATION                                                                                                                  |     
|                       |  |                                                                                                                                    |     
|Item 1.                |  | Legal Proceedings                                                                                                                  | 28  
|                       |  |                                                                                                                                    |     
|Item 1A.               |  | Risk Factors                                                                                                                       | 28  
|                       |  |                                                                                                                                    |     
|Item 2.                |  | Unregistered
      Sales of Equity Securities and Use of Proceeds                                                                  | 29  
|                       |  |                                                                                                                                    |     
|Item 3.                |  | Defaults
      Upon Senior Securities                                                                                              | 29  
|                       |  |                                                                                                                                    |     
|Item 4.                |  | Submission
      of Matters to a Vote of Security Holders                                                                          | 29  
|                       |  |                                                                                                                                    |     
|Item 5.                |  | Other Information                                                                                                                  | 29  
|                       |  |                                                                                                                                    |     
|Item 6.                |  | Exhibits                                                                                                                           | 30  
|                       |  |                                                                                                                                    |     
|SIGNATURE AND EXHIBITS | 
|                       |  |                                                                                                                                    |     
|                       |  | Signatures                                                                                                                         | 31  
|                       |  |                                                                                                                                    |     



---

PART I.  FINANCIAL
INFORMATION





Item
1.  Financial Statements



WILD OATS MARKETS, INC.

Consolidated Balance Sheets

(in thousands, except share data)

|                                         |                                                              |                                                                                                                                                                               |                            |          | April 1, 2006 |          | December 31, 2005
|---------------------------------------- | ------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------- | ------------- | -------- | -----------------
|                                         |                                                              |                                                                                                                                                                               |                            |          | (unaudited)   |          |                  
|                                         |                                                              |                                                                                                                                                                               |                            |          |               |          |                  
|ASSETS                                   |                                                              |                                                                                                                                                                               |                            |         
|                                         |                                                              |                                                                                                                                                                               |                            |         
|                                         | Current assets:                                              |                                                                                                                                                                               |                            |          |              
|                                         |                                                              | Cash and cash equivalents                                                                                                                                                     |                            | $ 39,110 |               | $ 35,250
|                                         |                                                              | Short-term investments                                                                                                                                                        |                            | 21,406   |               | 14,522  
|                                         |                                                              | Inventories (net of reserves of
    $991 and $960, respectively)                                                                                                              |                            | 65,700   |               | 63,056  
|                                         |                                                              | Accounts receivable (net of
    allowance for doubtful accounts of $159 and $190, respectively)                                                                               |                            | 3,291    |               | 4,006   
|                                         |                                                              | Prepaid expenses and other current
    assets                                                                                                                                 |                            | 6,764    |               | 5,962   
|                                         |                                                              |                                                                                                                                                                               |                            |          |               |          |                  
|                                         |                                                              |                                                                                                                                                                               | Total current assets       |          | 136,271       |          | 122,796          
|                                         |                                                              |                                                                                                                                                                               |                            |          |               |          |                  
|                                         | Property and equipment, net                                  |                                                                                                                                                                               | 177,919                    |          | 178,867      
|                                         | Goodwill, net                                                |                                                                                                                                                                               | 105,124                    |          | 105,124      
|                                         | Other intangible assets, net                                 |                                                                                                                                                                               | 6,016                      |          | 6,122        
|                                         | Deposits and other assets                                    |                                                                                                                                                                               | 5,640                      |          | 5,897        
|                                         | Deferred tax asset, net                                      |                                                                                                                                                                               | 64                         |          | 64           
|                                         |                                                              |                                                                                                                                                                               |                            |          |               |          |                  
|                                         |                                                              |                                                                                                                                                                               |                            |          | $ 431,034     |          | $ 418,870        
|                                         |                                                              |                                                                                                                                                                               |                            |          |               |          |                  
|LIABILITIES AND
    STOCKHOLDERS EQUITY |                                                              |                                                                                                                                                                               |                            |         
|                                         |                                                              |                                                                                                                                                                               |                            |         
|                                         | Current liabilities:                                         |                                                                                                                                                                               |                            |          |              
|                                         |                                                              | Accounts payable                                                                                                                                                              |                            | $ 59,581 |               | $ 56,078
|                                         |                                                              | Book overdraft                                                                                                                                                                |                            | 22,590   |               | 23,351  
|                                         |                                                              | Accrued liabilities                                                                                                                                                           |                            | 54,635   |               | 53,354  
|                                         |                                                              | Current portion of debt, capital
    leases and financing obligations                                                                                                         |                            | 606      |               | 614     
|                                         |                                                              |                                                                                                                                                                               |                            |          |               |          |                  
|                                         |                                                              |                                                                                                                                                                               | Total current liabilities  |          | 137,412       |          | 133,397          
|                                         |                                                              |                                                                                                                                                                               |                            |          |               |          |                  
|                                         | Long-term debt, capital leases and
    financing obligations |                                                                                                                                                                               | 148,064                    |          | 148,181      
|                                         | Other long-term obligations                                  |                                                                                                                                                                               | 28,262                     |          | 27,750       
|                                         |                                                              |                                                                                                                                                                               |                            |          |               |          |                  
|                                         |                                                              |                                                                                                                                                                               | 313,738                    |          | 309,328      
|                                         |                                                              |                                                                                                                                                                               |                            |          |               |          |                  
|                                         | Commitments and contingencies                                |                                                                                                                                                                               |                            |          |              
|                                         |                                                              |                                                                                                                                                                               |                            |          |               |          |                  
|                                         | Stockholders equity:                                        |                                                                                                                                                                               |                            |          |              
|                                         |                                                              | Preferred stock, $0.001 par value;
    5,000,000 shares authorized, no shares issued and outstanding                                                                          |                            | -        |               | -       
|                                         |                                                              | Common stock, $0.001 par value;
    60,000,000 shares authorized, 31,506,925 and 31,036,834 shares issued; and 28,881,202 and
    29,059,034 shares outstanding, respectively |                            | 31       |               | 31      
|                                         |                                                              | Treasury stock, at cost: 2,656,330
    and 1,977,800 shares as of April 1, 2006 and December 31, 2005                                                                         |                            | (37,138) |               | (24,999)
|                                         |                                                              | Additional paid-in capital                                                                                                                                                    |                            | 231,650  |               | 226,645 
|                                         |                                                              | Note receivable, related party                                                                                                                                                |                            | -        |               | (12,051)
|                                         |                                                              | Accumulated deficit                                                                                                                                                           |                            | (78,439) |               | (81,324)
|                                         |                                                              | Accumulated other comprehensive
    income                                                                                                                                    |                            | 1,192    |               | 1,240   
|                                         |                                                              |                                                                                                                                                                               |                            |          |               |          |                  
|                                         |                                                              |                                                                                                                                                                               | Total stockholders equity |          | 117,296       |          | 109,542          
|                                         |                                                              |                                                                                                                                                                               |                            |          |               |          |                  
|                                         |                                                              |                                                                                                                                                                               |                            |          | $ 431,034     |          | $ 418,870        
|                                         |                                                              |                                                                                                                                                                               |                            |          |               |          |                  
|                                         |                                                              |                                                                                                                                                                               |                            |          |               |          |                  





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



---



WILD OATS MARKETS, INC.

Consolidated Statements
of Operations

(in thousands, except per share amounts) (unaudited)

|                                                                                  |                                                     | THREE MONTHS
    ENDED           
|--------------------------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------
|                                                                                  |                                                     |                                  
|                                                                                  |                                                     | April 1, 2006                    
|                                                                                  |                                                     |                                  
|                                                                                  |                                                     |                                  
|Sales                                                                             |                                                     | $298,357                         
|Cost of goods sold and occupancy
    costs                                        |                                                     | 206,985                          
|                                                                                  |                                                     |                                  
|Gross profit                                                                      |                                                     | 91,372                           
|Operating expenses:                                                               |                                                     |                                  
|                                                                                  | Direct store expenses                               |                                  
|                                                                                  | Selling, general and
    administrative expenses    |                                  
|                                                                                  | Loss (gain) on disposal of assets                   |                                  
|                                                                                  | Pre-opening expenses                                |                                  
|                                                                                  | Restructuring and asset impairment
    charges, net |                                  
|                                                                                  |                                                     |                                  
|                                                                                  |                                                     | Income from operations           
|                                                                                  | Loss on early extinguishment of
    debt            |                                  
|                                                                                  | Interest income                                     |                                  
|                                                                                  | Interest expense                                    |                                  
|                                                                                  |                                                     |                                  
|                                                                                  |                                                     | Income (loss) before income taxes
|                                                                                  | Income tax expense                                  |                                  
|                                                                                  |                                                     |                                  
|Net income (loss)                                                                 |                                                     | $ 2,885                          
|                                                                                  |                                                     |                                  
|                                                                                  |                                                     |                                  
|Net income (loss) per common
    share:                                           |                                                     |                                  
|                                                                                  | Basic                                               |                                  
|                                                                                  | Diluted                                             |                                  
|                                                                                  |                                                     |                                  
|Weighted-average common
    shares outstanding, basic                             |                                                     | 28,970                           
|Dilutive effect of stock options,
    restricted stock and restricted stock units |                                                     | 572                              
|                                                                                  |                                                     |                                  
|Weighted-average common
    shares outstanding, assuming dilution                 |                                                     | 29,542                           
|                                                                                  |                                                     |                                  
|                                                                                  |                                                     |                                  



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





---





WILD OATS MARKETS, INC.

Consolidated
Statements of Comprehensive Income (Loss)

(in thousands) (unaudited)



|                            |                                                      |         |      |           | THREE MONTHS
    ENDED | 
|--------------------------- | ---------------------------------------------------- | ------- | ---- | --------- | ---------------------- | 
|                            |                                                      |         |      |           |                        | 
|                            |                                                      |         |      |           | April 1, 2006          | 
|                            |                                                      |         |      |           |                        | 
|                            |                                                      |         |      |           |                        | 
|Net income (loss)           |                                                      | $ 2,885 |      | $ (1,151) |                       
|                            |                                                      |         |      |           |                        | 
|Other comprehensive loss:   |                                                      |         |      |           |                       
|                            | Foreign currency translation
    adjustments         |         | (44) |           | (57)                   | 
|                            | Unrealized loss on
    available-for-sale securities |         | (4)  |           | (30)                   | 
|                            |                                                      |         |      |           |                        | 
|Other comprehensive loss    |                                                      | (48)    |      | (87)      |                       
|                            |                                                      |         |      |           |                        | 
|                            |                                                      |         |      |           |                        | 
|Comprehensive income (loss) |                                                      | $ 2,837 |      | $ (1,238) |                       
|                            |                                                      |         |      |           |                        | 
|                            |                                                      |         |      |           |                       





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

---

WILD OATS MARKETS, INC.

Consolidated Statements
of Cash Flows

(in thousands) (unaudited)

|                                                                           |                                                                                              |                                                       |                                                         |          | THREE MONTHS
    ENDED
|-------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ----------------------------------------------------- | ------------------------------------------------------- | -------- | ----------------------
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|                                                                           |                                                                                              |                                                       |                                                         |          | April 1, 2006         
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|CASH FLOWS FROM OPERATING
    ACTIVITIES:                                  |                                                                                              |                                                       |                                                         |         
|                                                                           | Net income (loss)                                                                            |                                                       | $ 2,885                                                 |          | $ (1,151)             
|                                                                           | Adjustments to reconcile net
    income (loss) to net cash provided by operating activities: |                                                       |                                                         |          |                       
|                                                                           |                                                                                              | Depreciation and amortization                         |                                                         | 6,687    |                       
|                                                                           |                                                                                              | Loss (gain) on disposal of
    property and equipment |                                                         | 90       |                       
|                                                                           |                                                                                              | Deferred tax benefit                                  |                                                         | -        |                       
|                                                                           |                                                                                              | Restructuring and asset impairment
    expense, net   |                                                         | 1,670    |                       
|                                                                           |                                                                                              | Interest on related party
    receivable              |                                                         | (88)     |                       
|                                                                           |                                                                                              | Stock-based compensation                              |                                                         | 778      |                       
|                                                                           |                                                                                              | Accretion of debt issuance costs                      |                                                         | 156      |                       
|                                                                           |                                                                                              | Loss on early extinguishment of
    debt              |                                                         | -        |                       
|                                                                           | Change in assets and liabilities:                                                            |                                                       |                                                         |          |                       
|                                                                           |                                                                                              | Inventories, net                                      |                                                         | (2,651)  |                       
|                                                                           |                                                                                              | Receivables, net, and other assets                    |                                                         | 15       |                       
|                                                                           |                                                                                              | Accounts payable                                      |                                                         | 3,506    |                       
|                                                                           |                                                                                              | Accrued liabilities and other
    liabilities         |                                                         | 133      |                       
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|                                                                           |                                                                                              |                                                       | Net cash provided by operating
    activities           |          | 13,181                
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|CASH FLOWS FROM INVESTING
    ACTIVITIES:                                  |                                                                                              |                                                       |                                                         |         
|                                                                           | Capital expenditures                                                                         |                                                       | (5,759)                                                 |          | (6,171)               
|                                                                           | Purchase of short-term investments                                                           |                                                       | (21,410)                                                |          | -                     
|                                                                           | Proceeds from sale of short-term
    investments                                             |                                                       | 14,522                                                  |          | 9,645                 
|                                                                           | Proceeds from sale of property and
    equipment                                             |                                                       | 24                                                      |          | 17                    
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|                                                                           |                                                                                              |                                                       | Net cash (used in) provided by
    investing activities |          | (12,623)              
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|CASH FLOWS FROM FINANCING
    ACTIVITIES:                                  |                                                                                              |                                                       |                                                         |         
|                                                                           | Net decrease in book overdraft                                                               |                                                       | (760)                                                   |          | (1,991)               
|                                                                           | Repayments on notes payable,
    long-term debt and capital leases                           |                                                       | (125)                                                   |          | (117)                 
|                                                                           | Proceeds from issuance of common
    stock, net                                              |                                                       | 4,227                                                   |          | 634                   
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|                                                                           |                                                                                              |                                                       | Net cash provided by (used in)
    financing activities |          | 3,342                 
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|Effect of exchange rate changes
    on cash                                |                                                                                              | (40)                                                  |                                                         | (60)    
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|Net increase in cash and cash
    equivalents                              |                                                                                              | 3,860                                                 |                                                         | 10,492  
|Cash and cash equivalents at
    beginning of period                       |                                                                                              | 35,250                                                |                                                         | 30,671  
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|Cash and cash equivalents at
    end of period                             |                                                                                              | $ 39,110                                              |                                                         | $ 41,163
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|SUPPLEMENTAL DISCLOSURE OF NONCASH
    INVESTING AND FINANCING ACTIVITIES:
|                                                                           | Equipment acquired through capital
    lease                                                 |                                                       | $ -                                                     |          | $ 262                 
|                                                                           |                                                                                              |                                                       |                                                         |          |                       
|                                                                           |                                                                                              |                                                       |                                                         |          |                       





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



---

WILD OATS MARKETS, INC.

Notes to
Consolidated Financial Statements

(unaudited)



|1. | Basis of Presentation
    and Summary of Significant Accounting Policies
|-- | ------------------------------------------------------------------------



The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with United States generally accepted accounting
principles for interim financial information and pursuant to instructions to Form 10-Q and
Article 10 of Regulation S-X. Certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with United States
generally accepted accounting principles have been condensed or omitted pursuant to
Securities and Exchange Commissions ("SEC") rules and regulations. In the
opinion of the Company, all adjustments necessary to present fairly the financial position
at April 1, 2006 and results of operations and cash flows for all periods presented have
been made. The consolidated balance sheet at December 31, 2005 has been derived from the
audited financial statements at that date.



These consolidated financial statements should be read in conjunction
with the Companys audited financial statements and notes thereto included in the
Company's 2005 Annual Report on Form 10-K as filed with the SEC. The preparation of
financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, expenses and related disclosures of
contingent assets and liabilities. Examples include accounting for self-insurance
reserves, stock-based compensation, restructuring charges and store closing costs, asset
impairment charges, goodwill, inventory valuation, and contingencies. Actual results may
differ from these estimates. The results of operations for the three months ended April 1,
2006 are not necessarily indicative of the operating results to be expected for any
subsequent quarter or for the entire fiscal year ending December 30, 2006.



The unaudited information included in the consolidated financial
statements for the three months ended April 1, 2006 and April 2, 2005 include the results
of operations of the Company for the 13 weeks then ended.





Principles of consolidation. The Companys consolidated
financial statements include the amounts of the Company and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.





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.





Reclassifications. Certain prior period information has been
reclassified to conform to the current year presentation. This includes a reclassification
of the Companys 2005 results of operations to more accurately reflect Selling,
General and Administrative expenses and Direct Store expenses. For the quarter ended April
2, 2005, approximately $5.0 million was reclassified from Selling, General and
Administrative expenses to Direct Store expenses in order to reflect regional store
support services more appropriately.





|2. | Short-Term Investments
|-- | ----------------------



The amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity computed under the
effective interest method. Such amortization and accretion 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. Realized 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 (loss).





|3. | Stock-Based Compensation
|-- | ------------------------



Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS No.
123R") and related interpretations, using the Black-Scholes valuation model and
the modified prospective application. Accordingly, the financial statements for periods
prior to January 1, 2006, will not include compensation cost calculated under the fair
value method of SFAS No. 123R. SFAS No. 123R requires companies to recognize the cost of
employee services received in exchange for awards of equity instruments based upon the
grant-date fair value of those awards.



Stock-based compensation expense recognized under SFAS No. 123R in the
Consolidated Statement of Operations for the three months ended April 1, 2006 was
$778,000. For the period ended April 1, 2006, there was no income tax benefit recognized
in the Consolidated Statement of Operations for stock-based compensation arrangements. The
estimated fair value of the Companys stock-based awards, less estimated forfeitures,
is amortized over the awards expected life on a straight-line basis. The stock-based
compensation expense for the three months ended April 1, 2006 included $103,000 related to
restricted stock units ("RSUs") that were issued as Board of Directors
compensation that would have been included in the Companys Consolidated Statements
of Operations under the provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees,and related interpretations.



The Employee Stock Purchase Plan ("ESPP") was modified in
response to the adoption of SFAS No. 123R. Beginning in the first quarter of 2006, the
discount on the price of the shares was reduced to 5% and will be applied to the price of
shares on the date in which the buy period closes each quarter.



The following table illustrates the effect on net income and earnings
per share as if the Company had applied the fair value recognition provisions of SFAS No.
123R to its stock option plans for the three months ended April 2, 2005:



|                                 |                                                                                                                                    |           |          |  | THREE MONTHS ENDED | 
|-------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | --------- | -------- |  | ------------------ | 
|                                 |                                                                                                                                    |           |          |  |                    | 
|                                 |                                                                                                                                    |           |          |  | April 2, 2005     
|                                 |                                                                                                                                    |           |          |  |                   
|                                 |                                                                                                                                    |          
|Net loss, as reported            |                                                                                                                                    | $ (1,151)
|                                 | Add: Stock-based employee compensation expense included in reported net
      income (loss), net of tax*                           |           | 76      
|                                 | Deduct: Total stock-based employee compensation expense determined under
      fair value based method for all awards, net of tax* |           | (965)   
|                                 |                                                                                                                                    |           |          |  |                   
|Pro forma net loss:              |                                                                                                                                    | $ (2,040)
|                                 |                                                                                                                                    |           |          |  |                   
|Basic earnings per share:        |                                                                                                                                    |          
|                                 | As reported                                                                                                                        |           | $ (0.04)
|                                 | Pro forma fair value expense, net of income taxes                                                                                  |           | $ (0.03)
|                                 |                                                                                                                                    |           |          |  |                   
|Pro forma basic loss per share   |                                                                                                                                    | $ (0.07) 
|                                 |                                                                                                                                    |           |          |  |                   
|Diluted earnings per share:      |                                                                                                                                    |          
|                                 | As reported                                                                                                                        |           | $ (0.04)
|                                 | Pro forma fair value expense, net of income taxes                                                                                  |           | $ (0.03)
|                                 |                                                                                                                                    |           |          |  |                   
|Pro forma diluted loss per share |                                                                                                                                    | $ (0.07) 
|                                 |                                                                                                                                    |           |          |  |                   
|                                 |                                                                                                                                    |          

* Amounts are net of a pro-forma tax rate which is not necessarily
indicative of our effective tax rate for the respective periods.



At April 1, 2006, the Company had five stock-based compensation plans:
the 1996 Equity Incentive Plan ("1996 Plan"), the 2001 Non-Officer/Non-Director
Equity Incentive Plan ("2001 Plan"), and three individual nonqualified stock
option plans. The 1996 Plan provides for grant of incentive stock option 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 2001 Plan provides for the grant of nonqualified stock
options to employees of the Company who are not officers or directors. The individual
stock option plans were created during 2001, 2005 and 2006 as inducements to certain
executives to accept offers of employment with the Company. For all five stock-based
compensation plans, the exercise price of the options 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. The outstanding options for all five plans generally
vest over a period of four years and generally expire 10 years from the grant date.



For all of the Companys stock-based compensation plans, the fair
value of each grant was estimated at the date of grant using the Black-Scholes option
pricing model. Black-Scholes utilizes assumptions related to volatility, the risk-free
interest rate, the dividend yield and expected life. Expected volatilities utilized in the
model are based on the historical volatility of the Companys stock price. The
risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the
time of grant. The model incorporates exercise and post-vesting forfeiture assumptions
based on an analysis of historical data. The expected life of the fiscal 2006 grants is
derived from historical information and other factors. The following summary presents the
weighted-average assumptions used for grants issued in fiscal 2006 and fiscal 2005:



|                                          |  | THREE MONTHS
    ENDED
|----------------------------------------- |  | ----------------------
|                                          |  |                       
|                                          |  | April 1, 2006         
|                                          |  |                       
|                                          |  |                       
|Estimated dividends                       |  | None                  
|Expected volatility                       |  | 56%                   
|Risk-free interest rate                   |  | 4.34% - 4.63%         
|Expected life (years)                     |  | 4.0                   
|Weighted-average fair value
    per share |  | $5.31                 





The following summary presents information regarding outstanding stock
options as of April 1, 2006 and changes during the three months then ended with regard to
options under the Plans:



|                                        |  | Number of Options |  | Weighted-Average Exercise
    Price |  | Weighted- Average
    Remaining Contractual Life |  | Aggregate Intrinsic Value
|--------------------------------------- |  | ----------------- |  | ----------------------------------- |  | ------------------------------------------------ |  | -------------------------
|                                        |  |                   |  |                                     |  |                                                  |  |                          
|                                        |  |                   |  |                                     |  | (in years)                                       |  | (in thousands)           
|Outstanding as of
    December 31, 2005 |  | 2,570,199         |  | $ 10.19                             |  |                                                  |  |                          
|Granted                                 |  | 108,000           |  | $ 12.61                             |  |                                                  |  |                          
|Cancellations and
    expirations       |  | (35,326)          |  | $ 10.54                             |  |                                                  |  |                          
|Exercised                               |  | (428,684)         |  | $ 8.98                              |  |                                                  |  |                          
|                                        |  |                   |  |                                     |  |                                                  |  |                          
|Outstanding as of April
    1, 2006     |  | 2,214,189         |  | $ 10.54                             |  | 5.48                                             |  | $ 21,895                 
|                                        |  |                   |  |                                     |  |                                                  |  |                          
|Exercisable as of April 1, 2006         |  | 1,756,265         |  | $ 10.73                             |  | 5.53                                             |  | $ 17,078                 
|                                        |  |                   |  |                                     |  |                                                  |  |                          
|                                        |  |                   |  |                                     |  |                                                  |  |                          





The aggregate instrinsic value in the table above represents the total
pretax intrinsic value, based on the Companys closing stock price of $20.33 at March
31, 2006, which would have been received by award holders had all award holders exercised
their options that were in-the-money as of that date. The total number of in-the-money
options exercisable as of March 31, 2006 was approximately 1.7 million. The aggregate
intrinsic value of awards exercised during the three months ended April 1, 2006 was $3.9
million.



In February 2006, the Company granted restricted stock awards under the
1996 Plan. The restricted stock awards granted under the 1996 Plan vest on the passage of
time. The Company records compensation expense ratably over the vesting period equal to
the number of shares multiplied by the closing price of the Companys common stock on
the date of grant less an estimated forfeiture rate. The Compensation Committee and the
Board of Directors approved this grant of restricted stock awards in February 2006. The
Company recorded compensation expense related to these restricted stock awards totaling
$545,000 during the first quarter, 2006.



A summary of the status of the Companys nonvested options to buy
shares as of April 1, 2006, and changes during the quarter then ended is presented below:



|                               |  |          |  |        | Number of shares |  | Weighted-Average
    Grant-Date Fair Value | 
|------------------------------ |  | -------- |  | ------ | ---------------- |  | ------------------------------------------ | 
|                               |  |          |  |        |                  |  |                                            | 
|                               |  |          |  |        |                  |  |                                            | 
|Nonvested at December 31, 2006 |  | 406,086  |  | $ 4.30 |                 
|Granted                        |  | 108,000  |  | $ 5.95 |                 
|Vested                         |  | (34,935) |  | $ 3.34 |                 
|Forfeited                      |  | (21,227) |  | $ 5.01 |                 
|                               |  |          |  |        |                  |  |                                            | 
|Nonvested at April 1, 2006     |  | 457,924  |  | $ 4.73 |                 
|                               |  |          |  |        |                 





As of April 1, 2006, the total unrecorded deferred stock-based
compensation balance for unvested shares, net of expected forfeitures, was $1.6 million
which is expected to be amortized over a weighted-average period of 1.4 years.



Cash received from option
exercises was $3.9 million and $162,000 for the three months ended April 1, 2006 and April
2, 2005, respectively.For periods subsequent to the adoption of SFAS No. 123R, the
Company presents excess tax benefits from the exercise of stock options, if any, in the
Consolidated Statement of Cash Flows as a financing cash inflow and as a corresponding
reduction in operating cash flow.





|4. | Property and Equipment
|-- | ----------------------



Property, plant and equipment are recorded at cost and consist of the
following (in thousands):



|                                         |  |           |  |           | April 1, 2006 |  | December 31, 2005 | 
|---------------------------------------- |  | --------- |  | --------- | ------------- |  | ----------------- | 
|                                         |  |           |  |           |               |  |                   | 
|                                         |  |           |  |           |               |  |                   | 
|Machinery and equipment                  |  | $ 141,553 |  | $ 140,171 |              
|Buildings and leasehold
    improvements |  | 168,320   |  | 167,265   |              
|Construction in progress                 |  | 13,613    |  | 10,784    |              
|                                         |  |           |  |           |               |  |                   | 
|                                         |  | 323,486   |  | 318,220   |              
|Less: accumulated depreciation           |  | (145,567) |  | (139,353) |              
|                                         |  |           |  |           |               |  |                   | 
|Property and equipment, net              |  | $ 177,919 |  | $ 178,867 |              
|                                         |  |           |  |           |               |  |                   | 
|                                         |  |           |  |           |              



Depreciation expense was $6.6 million for both three month periods ended April 1, 2006
and April 2, 2005.





|5. | Debt
|-- | ----



Contingent convertible senior debentures. In June 2004, the Company
issued $115.0 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 7
 Earnings per Sharefor the potentially dilutive impact of the convertible
debentures on future periods.



During the second quarter of 2005, the Company made an irrevocable
election to pay the principal amount of debentures in cash upon conversion, however, the
Company retains the ability to satisfy the remainder of any conversion payment, exceeding
the debenture defined principal, in cash or any combination of cash and common stock.
According to their terms, 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 the Companys common stock is
greater than or equal to 130% of the conversion price of $17.70 per share for at least 20
trading days in the period of 30 consecutive trading days ending on the last trading day
of the proceeding calendar quarter; (2) at any time on or after April 1, 2029 if the last
reported sale price of the Companys 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 requests a credit
rating for the debentures, at any time when the credit ratings assigned to the debentures
are below specified levels. While a credit rating has been issued for the debentures, the
rating was not requested by the Company, but initiated by the rating agency. Therefore, a
change in the current rating will not trigger a call provision. The debentures are
initially convertible into 56.5099 shares of the Company's common stock per $1,000
principal amount, which is equivalent to approximately $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. Pursuant to the underwriting agreement and within 90 days
of issuance, the Company filed a shelf registration statement covering resales of the
debentures and the common stock issuable upon conversion thereof. The registration
statement was declared effective August 26, 2005.



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)
upon the occurrence of a fundamental change (as defined in the debenture indenture). In
the case of a fundamental change in which all of the consideration for the common stock in
the transaction or transactions constituting the fundamental change consists of cash, the
Company also will pay to the holders a make-whole premium (as defined in the debenture
indenture), the amount of which could be significant but would not be determinable unless
and until there were to be a public announcement of such a fundamental change. Any
make-whole premium would be payable to all holders regardless of whether the holder elects
to require the Company to repurchase the debentures or elects to surrender the debentures
for conversion.



The debentures are unsecured and unsubordinated obligations, and rank
equal in priority with all of the Company's existing and future unsecured and
unsubordinated 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 indenture,
however, the Company paid penalty interest of 0.25% for the first 90 days of 2005 and paid
0.50% thereafter until the debentures were publicly registered on August 26, 2005. In
2005, the Company paid $305,102 in additional interest to debenture holders due to not
having an effective registration statement within the specified timeframe.



In 2004, total proceeds from the issuance of the debentures 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. On March 31, 2005, the Company entered into a
five-year revolving secured credit facility with Bank of America, N.A. (the "B of A
Facility"). Concurrent with the execution of the B of A Facility, the Company
terminated its existing $95.0 million credit facility (the "Wells Facility")
with Wells Fargo Bank N.A. as administrative agent. The B of A Facility allows borrowings
and letters of credit up to a maximum of $40.0 million, with an option to increase
borrowings up to $100.0 million, subject to a borrowing base determined by the value of
certain inventory, credit card receivables, invested cash and, at the Companys
discretion, mortgaged leaseholds. The B of A Facility is secured by certain assets
including, but not limited to, cash, inventory and fixed assets. Borrowings under the B of
A Facility bear interest, at the Companys election, at the prime rate or at London
Interbank Offering Rate ("LIBOR") plus a margin ranging from 1.00% to 1.50%,
depending on the excess borrowing availability over amounts borrowed. Interest rates are
determined quarterly. The Company is charged a commitment fee on the unused portion of the
B of A Facility. There are no financial covenants, other than the obligation to maintain a
certain percentage of minimum excess availability (as defined in the agreement) at all
times. The B of A Facility requires compliance on a monthly basis with certain
non-financial covenants, including limitations on incurring additional indebtedness and
making investments, the use and disposition of collateral, changes of control, as well as
cash management provisions. In conjunction with the debt refinancing, the Company wrote
off approximately $559,000 related to the remaining unamortized debt issuance cost from
the Wells Facility and capitalized debt issuance costs of approximately $331,000 through
December 31, 2005 to be amortized over the life of the agreement using the effective
interest method. No additional issuance costs have been capitalized in 2006. As of April
1, 2006, the Company had letters of credit outstanding totaling $14.5 million which reduce
our availability to approximately $25.5 million.





|6. | Derivatives and Hedging
    Activities
|-- | --------------------------------------



The Company does not have any derivative financial instruments as of
April 1, 2006 that meet the criteria of SFAS No. 133,Accounting for Derivative
Instruments and Hedging Activities.





|7. | Earnings Per Share
|-- | ------------------



Earnings per share are calculated in accordance with the provisions of
SFAS No. 128, Earnings Per Share("SFAS No. 128"). SFAS No. 128 requires
the Company to report both basic earnings per share, which is based on the
weighted-average number of common shares outstanding, and diluted earnings per share,
which is based on the weighted-average number of common shares outstanding and all
dilutive potential common shares outstanding, except where the effect of their inclusion
would be anti-dilutive. Anti-dilutive stock options of 423,806 and 2,382,570 for the three
months ended April 1, 2006 and April 2, 2005, respectively, were not included in the
diluted earnings per share calculations.



The Emerging Issues Task Force ("the Task Force") of the FASB
concluded in Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted
Earnings per Share that contingently convertible debt should be included in diluted
earnings per share computations using the if-converted method regardless of whether any of
the conversion contingencies have been met. During the second quarter of 2005, the Company
irrevocably elected to satisfy 100% of the principal amount of the debentures in cash to
be converted on or after July 1, 2005. The Company maintains the right to satisfy the
remainder of the conversion obligation to the extent it exceeds the principal amount in
cash or common stock or any combination of cash and common stock. In calculating diluted
earnings per share for the three months ending April 1, 2006, no shares related to the
debentures conversion have been included as the effect would have been anti-dilutive.





|8. | Goodwill and Intangible
    Assets
|-- | ----------------------------------



During the first quarter of fiscal 2006, the Company concluded goodwill
was not impaired and no other changes in the carrying amount of goodwill were recorded.
During the first quarter of fiscal 2005, $960,000 goodwill, net of accumulated
amortization, was written off resulting in an ending net balance of $105.1 million. See Note
9  Restructuring and Asset Impairment Chargesfor further details.



Other intangible assets consist of the following (in thousands):



| |  |                                        |  |         | April 1,
    2006 |         | December 31, 2005
| |  | -------------------------------------- |  | ------- | ----------------- | ------- | -----------------
| |  |                                        |  |         |                   |         |                  
| |  |                                        |  |        
| |  | Leasehold interests                    |  | $ 8,374 |                   | $ 8,374
| |  | Less accumulated amortization          |  | (2,665) |                   | (2,576)
| |  |                                        |  |         |                   |         |                  
| |  | Leasehold interests, net               |  | 5,709   |                   | 5,798  
| |  | Liquor licenses (indefinite
    lived) |  | 307     |                   | 324    
| |  |                                        |  |         |                   |         |                  
| |  |                                        |  | $ 6,016 |                   | $ 6,122
| |  |                                        |  |         |                   |        





Amortization expense related to finite lived intangible assets was
$90,000 and $103,000 for the three months ended April 1, 2006 and April 2, 2005,
respectively. The estimated amortization of finite lived intangible assets for the
remainder of 2006 and each of the fiscal years through 2011 is as follows (in thousands):



| | FISCAL 
    YEAR  |  | AMORTIZATION EXPENSE | 
| | ----------------- |  | -------------------- | 
| |                   |  |                      | 
| |                   |  |                      | 
| | Remainder of 2006 |  | $ 268                | 
| | 2007              |  | 358                  | 
| | 2008              |  | 358                  | 
| | 2009              |  | 358                  | 
| | 2010              |  | 358                  | 
| | 2011              |  | 352                  | 





|9. | Restructuring and Asset
    Impairment Charges
|-- | ----------------------------------------------



During the first quarter of fiscal 2006, the Company recorded net
restructuring charges of $1.7 million consisting of the following components (in
thousands):



| | Change in estimate related to
    lease-related liabilities for sites previously identified for closure |                             | $ 66    | 
| | ------------------------------------------------------------------------------------------------------- | --------------------------- | ------- | 
| | Lease-related liability for
    sites closed during the quarter                                         |                             | 1,362   | 
| | Severance for employees
    terminated during the first quarter of fiscal 2006                          |                             | 114     | 
| | Accretion expense on
    lease-related liabilities                                                      |                             | 128     | 
| |                                                                                                         |                             |         | 
| |                                                                                                         | Total restructuring expense | $ 1,670 | 
| |                                                                                                         |                             |         | 





Details of the significant components are as follows:



- Changes in estimate related to lease-related liabilities for sites previously identified
    for closure ($66,000 of restructuring expense)



- Lease-related liability for sites closed during the first quarter ($1.4 million of
    restructuring expense)



- Severance for employees notified of termination in the first quarter of fiscal 2006
    ($114,000 of restructuring expense)



- Accretion expense on lease-related liabilties ($128,000 of restructuring expense)



During the first quarter of 2006, there were no asset impairment
charges in accordance with the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. In determining whether an impairment
exists, the Company estimates the stores future cash flows on an undiscounted basis,
and if the cash flows are not sufficient to recover the carrying value, then the Company
uses a discounted cash flow based on a risk-adjusted discount rate, to adjust its carrying
value of the assets, and records a provision for impairment as appropriate. The Company
continually re-evaluates its stores performance to monitor the carrying value of its
long-lived assets in comparison to projected cash flows.



The Company incurred charges for accelerated depreciation related to
planned store closures of $52,000 and $393,000 for the three months ended April 1, 2006
and April 2, 2005, respectively. These costs are included in the "Cost of goods sold
and occupancy costs" line of the Consolidated Statements of Operations.





The following table summarizes accruals related to the Companys
restructuring charges (in thousands):



|EXIT PLANS                | 2002 and Prior | 2003     | 2004     | 2005       | 1st
    Qtr 2006 | Total  
|------------------------- | -------------- | -------- | -------- | ---------- | ---------------- | -------
|                         
|                          |                |          |          |            |                  |        
|Balance at                |                |          |          |            |                  |        
|January 1, 2005:          | $ 6,665        | $ -      | $ 762    | $ -        | $ -              | $ 7,427
|                          |                |          |          |            |                  |        
|Severance expense         | -              | -        | -        | 134        | -                | 134    
|Lease-related expense     | (315)          | 539      | (76)     | 1,355      | -                | 1,503  
|                          |                |          |          |            |                  |        
|Cash paid:                |                |          |          |            |                  |        
|Severance                 | -              | -        | (167)    | (159)      | -                | (326)  
|Lease-related liabilities | (1,539)        | (132)    | (324)    | (720)      | -                | (2,715)
|                          |                |          |          |            |                  |        
|Provision adjustments     | 731            | -        | 92       | 573        | -                | 1,396  
|                          |                |          |          |            |                  |        
|Balance at                |                |          |          |            |                  |        
|December 31, 2005:        | $ 5,542        | $ 407    | $ 287    | $ 1,183    | $ -              | $ 7,419
|                          |                |          |          |            |                  |        
|Severance expense         | -              | -        | -        | -          | 114              | 114    
|Lease-related expense     | 164            | 21       | -        | 9          | 1,362            | 1,556  
|                          |                |          |          |            |                  |        
|Cash paid:                |                |          |          |            |                  |        
|Severance                 | -              | -        | -        | -          | (105)            | (105)  
|Lease-related liabilities | (347)          | (31)     | -        | (177)      | (47)             | (602)  
|                          |                |          |          |            |                  |        
|Provision adjustments     | 20             | -        | -        | -          | 8                | 28     
|                          |                |          |          |            |                  |        
|Balance at                |                |          |          |            |                  |        
|April 1, 2006:            | $ 5,379(1)     | $ 397(1) | $ 287(2) | $ 1,015(1) | $ 1,332(3)       | $ 8,410
|                          |                |          |          |            |                  |        

|Note: | 1. The restructuring accrual balance consists of
    lease-related liabilities.                                
|----- | ---------------------------------------------------------------------------------------------------------------
|      | 2. The restructuring accrual balance consists of
    lease-related liabilities and $6 for employee termination.
|      | 3. The restructuring accrual balance consists of
    lease-related liabilities and $9 for employee termination.
|      |                                                                                                                



As of April 1, 2006, the Companys restructuring balances consist of $2.5 million
in accrued liabilities and other long-term obligations of $5.9 million.





|10. | Income Taxes
|--- | ------------



For the three months ended April 1, 2006, the Company recorded $205,000
of income tax expense, as a result of income before income taxes of $3.1 million during
the period. The tax expense relates to income generated by the Companys Canadian
operations. The Company has a $64,000 net deferred tax asset, which was generated
primarily as a result of temporary differences related to its Canadian operations. The
Company performs assessments of the realization of its net deferred tax assets according
to SFAS No. 109, Accounting for Income Taxes. As a result of these assessments, the
Company concluded at January 1, 2005, that it should place a full valuation allowance
against its US net deferred tax asset. The Company has assessed its valuation allowance
during the current quarter and continues to record a full valuation allowance against its
US net deferred tax asset.





|11. | Related Party
    Transactions
|--- | ------------------------------



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.
The amendment extended 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.



The Odak Agreement, as amended, provides for the payment of the
existing $9.2 million supplemental bonus in the event of Mr. Odak's death or disability,
as defined in the Odak Agreement, while employed by the Company, and for payment of a
bonus of approximately $1.6 million: (i) in the event Mr. Odak terminates his employment
for "good reason", as defined in the Odak Agreement, or (ii) in the event Mr.
Odak is terminated without "Cause", as defined in the Odak Agreement. 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 $9.3 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. On
February 19, 2006, pursuant to the termination of the five-year promissory note, Mr. Odak
sold 678,530 shares of Common Stock for $17.89 per share to the Company. The Company
repurchased the shares for $12,138,902, effectively relieving all debt owed by Mr. Odak
and reducing the number of shares outstanding by 678,530. The repurchased shares are
reflected as treasury shares in the Companys consolidated balance sheet.



Other. 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 6% of its total revenues from sales of
organic milk to the Company under the Companys private label brand. Stacey J. Bell,
a current member of the Companys Board of Directors, is an indirect employee of
Ideasphere, Inc., which sells vitamins and supplements to the Company. Total purchases
from these vendors were $1.0 million for both three month periods ended April 1, 2006 and
April 2, 2005. A majority of these purchases are made primarily through the Companys
primary distributor, UNFI and therefore are indirect in nature. These costs are all for
inventory and the related cost of goods sold. As of the fiscal quarters ending April 1,
2006 and April 2, 2005, amounts owed to these vendors were $53,000 and $106,000,
respectively.





|12. | Contingencies
|--- | -------------



Tim 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 store director
claiming that he should have been classified as an employee paid on an hourly basis,
together with other related claims. In mid-2005, five additional named plaintiffs were
added to the suit, and the trials of the original plaintiff and the new plaintiffs were
bifurcated. The Company believes that all of the named plaintiffs were correctly
classified as exempt employee based upon their job duties. The Company has settled with
the original plaintiff for an immaterial amount, and the trial date has been vacated. A
trial for the remaining plaintiffs has been set for third quarter 2006.



In June 2002 an administrative law judge ("ALJ") found
against us in Wild Oats Markets, Inc. and Local 371, United Food & Commercial
Workers, in certain unfair labor practice charges brought in connection with the
opening of our store in Westport, Connecticut. The Company appealed the ALJs
decision to the National Labor Relations Board ("NLRB"). In May 2005, the NLRB
denied the appeal and issued a Decision and Order, setting forth certain equitable,
injunctive and monetary remedies to be undertaken by the Company, including payment of
backpay less interim earnings, and offers of employment to certain former employees of a
store that the Company previously sold in 2000 (the "Sold Store"). The Company
agreed to reinstate one former employee and paid an immaterial amount to settle the claims
of ten named individuals in the ruling. The NLRB has indicated that there may be liability
to other employees from the Sold Store for certain periods that such individuals were
unemployed. The Company is currently evaluating whether to appeal the remainder of the
Decision.



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





Item
2.  Management's Discussion and Analysis of Financial Condition and Results of
Operations

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



Executive Summary



This Executive Summary section of Managements Discussion and
Analysis of Financial Condition and Results of Operationsprovides a broad summary of
the more specific and detailed information disclosed in other sections of this report. The
context that it provides should be viewed as a supplement to, and read in conjunction
with, the details contained elsewhere in this report.



Wild Oats Markets, Inc. is one of the largest natural foods supermarket
chains in North America. As of the date of this report, we operated 113 natural foods
stores in 24 states and British Columbia, Canada. We operate in the retail grocery
industry with two store formats: the natural foods supermarket format, under the Wild Oats
Natural Marketplace



In 2006, we continued to improve our gross margins over last quarter
attributable to the continued success of our marketing and merchandising initiatives.
Through the date of this report, our two new store openings set records for the strongest
grand opening sales in the Companys history by their respective format. We have also
closed two smaller, older, under-performing stores.



As of the end of the first quarter of fiscal 2006, we had 112 stores
located in 24 states and Canada, as compared to 110 stores located in 24 states and Canada
at the end of the first quarter of fiscal 2005.



| |                                    |  | TOTAL
    STORE COUNT 
| | ---------------------------------- |  | ----------------------
| |                                    |  | THREE
    MONTHS ENDED
| |                                    |  |                       
| |                                    |  | April 1,
    2006     
| |                                    |  |                       
| | Store count at beginning of period |  | 113                   
| | Stores opened                      |  | 1                     
| | Stores closed                      |  | (2)                   
| |                                    |  |                       
| | Store count at end of period       |  | 112                   
| |                                    |  |                       
| |                                    |  |                       





In the first quarter of fiscal 2006, we opened one new Henrys
Farmers Market store in Carlsbad, California. As of the date of this report, we have also
opened a new Wild Oats Natural Marketplace store in Tampa, Florida.







Results of Operations



Our net income for the first quarter of fiscal 2006 was $2.9 million or
$0.10 per diluted share, compared with a net loss of $1.2 million or $0.04 per diluted
share, in the same period in fiscal 2005. The following table sets forth, for the periods
indicated, certain selected income statement data expressed as a percentage of sales and
in dollars (in thousands  percentages may not add due to rounding):



| |                                                     | THREE
    MONTHS ENDED
| | --------------------------------------------------- | ----------------------
| |                                                     |                       
| |                                                     |                       
| | Sales                                               |                       
| | Cost of goods sold and occupancy costs              |                       
| |                                                     |                       
| | Gross profit                                        |                       
| | Direct store expenses                               |                       
| | Selling, general and administrative expenses        |                       
| | Loss (gain) on disposal of assets                   |                       
| | Pre-opening expenses                                |                       
| | Restructuring and asset impairment charges,
    net |                       
| |                                                     |                       
| | Income from operations                              |                       
| |                                                     |                       
| | Loss on early extinguishment of debt                |                       
| | Interest income                                     |                       
| | Interest expense                                    |                       
| |                                                     |                       
| | Income (loss) before income taxes                   |                       
| | Income tax expense                                  |                       
| |                                                     |                       
| | Net income (loss)                                   |                       
| |                                                     |                       
| |                                                     |                       





First Quarter of 2006 vs. First Quarter of 2005



Sales

|                                               |  | April 1, 2006 |  | April 2, 2005 |  | % Change 2005 to 2006 | 
|---------------------------------------------- |  | ------------- |  | ------------- |  | --------------------- | 
|                                               |  |               |  |               |  |                       | 
|For the three months ended
    (in thousands): |  | $298,357      |  | $278,079      |  | 7.3%                  | 





Sales for the three months ended April 1, 2006 increased 7.3% as
compared to the same period in fiscal 2005. This increase was primarily driven by positive
comparable sales and a greater number of stores in our store base compared to 2005. Total
square feet of open stores increased 2.4% over the first quarter of 2005, as the first
fiscal quarter 2006 ended with 2.56 million total square feet as compared to 2.50 million
total square feet in the first fiscal quarter of 2005. Comparable store sales increased
4.1% for the first quarter of 2006 as compared to a 0.4% decrease in the same period last
year due to the continued success of our promotional plans and marketing and merchandising
initiatives implemented during 2005. We also experienced a shift in Easter holiday sales,
which occurred in the first quarter of last year compared to the second quarter of this
year.





Gross profit

|                                               |  | April 1, 2006 |  | April 2, 2005 |  | % Change 2005 to 2006 | 
|---------------------------------------------- |  | ------------- |  | ------------- |  | --------------------- | 
|                                               |  |               |  |               |  |                       | 
|For the three months ended
    (in thousands): |  | $91,372       |  | $80,256       |  | 13.9%                 | 
|As a percent of sales:                         |  | 30.6%         |  | 28.9%         |  | 1.7%                  | 





Gross profit consists of sales less cost of goods sold and store
occupancy costs. Occupancy costs include store related depreciation, rent and utilities.
As a percentage of sales, gross profit increased to 30.6% in the first quarter of fiscal
2006 from 28.9% in the same period in fiscal 2005. Approximately 80 basis points of this
improvement was due to opening only one new store during the first quarter of 2006
compared to four new stores in the first quarter of 2005. Traditionally, the gross margins
of new stores are lower due to higher shrink and heavy promotional activity. The remaining
increase was due to a shift in the overall product sales mix to departments with higher
gross margin rates.





Direct store expenses

|                                               |  | April 1, 2006 |  | April 2, 2005 |  | % Change 2005 to 2006 | 
|---------------------------------------------- |  | ------------- |  | ------------- |  | --------------------- | 
|                                               |  |               |  |               |  |                       | 
|For the three months ended
    (in thousands): |  | $69,833       |  | $65,368       |  | 6.8 %                 | 
|As a percent of sales:                         |  | 23.4%         |  | 23.5%         |  | (0.1)%                | 





Direct store expenses include the following: payroll, payroll taxes and
benefits, marketing and advertising, regional store support services, store supplies and
maintenance, and other store-specific costs. As a percentage of sales, direct store
expenses decreased to 23.4% in the fiscal quarter ended April 1, 2006, from 23.5% in the
same period last year. The improvement is due to leveraging payroll and the related taxes.







Selling, general and administrative expenses

|                                               |  | April 1, 2006 |  | April 2, 2005 |  | % Change 2005 to 2006 | 
|---------------------------------------------- |  | ------------- |  | ------------- |  | --------------------- | 
|                                               |  |               |  |               |  |                       | 
|For the three months ended
    (in thousands): |  | $13,965       |  | $10,043       |  | 39.1%                 | 
|As a percent of sales:                         |  | 4.7%          |  | 3.6%          |  | 1.1%                  | 





Selling, general and administrative expenses include corporate
administrative support services and purchasing. Selling, general and administrative
expenses for the quarter ended April 1, 2006 increased 1.1% as a percentage of sales
compared to the same period in fiscal 2005. Selling, general and administrative expenses
in the first quarter of 2006 were higher as a percentage of sales compared to the same
period in 2005 primarily due to an increase in accrued corporate and regional level
bonuses, legal and professional fees, and the impact of expensing stock compensation
resulting from the implementation of Statement of Financial Accounting Standards
("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS No.
123R")..







Pre-opening expenses

|                                               |  | April 1, 2006 |  | April 2, 2005 |  | % Change 2005 to 2006 | 
|---------------------------------------------- |  | ------------- |  | ------------- |  | --------------------- | 
|                                               |  |               |  |               |  |                       | 
|For the three months ended
    (in thousands): |  | $1,459        |  | $1,917        |  | (23.9)%               | 
|As a percent of sales:                         |  | 0.5%          |  | 0.7%          |  | (0.2)%                | 



Pre-opening expenses include labor, rent, advertising, utilities,
training, supplies and certain other costs incurred prior to a stores opening.
Pre-opening expenses for the first quarter of fiscal 2006 decreased to $1.5 million
compared to $1.9 million during the same period in fiscal 2005, due to the timing of the
opening of new stores, in addition to the costs related to future planned store openings.





Restructuring and asset impairment charges, net



During the first quarter of fiscal 2006, the Company recorded net
restructuring charges of $1.7 million consisting of the following components (in
thousands):



| | Change in estimate related to
    lease-related liabilities for sites previously identified for closure |                             | $ 66    | 
| | ------------------------------------------------------------------------------------------------------- | --------------------------- | ------- | 
| | Lease-related liability for
    sites closed during the quarter                                         |                             | 1,362   | 
| | Severance for employees
    terminated during the first quarter of fiscal 2006                          |                             | 114     | 
| | Accretion expense on
    lease-related liabilities                                                      |                             | 128     | 
| |                                                                                                         |                             |         | 
| |                                                                                                         | Total restructuring expense | $ 1,670 | 
| |                                                                                                         |                             |         | 







Details of the significant components are as follows:

- Changes in estimate related to lease-related liabilities for sites previously identified
    for closure ($66,000 of restructuring expense)



- Lease-related liability for sites closed during the first quarter ($1.4 million of
    restructuring expense)



- Severance for employees notified of termination in the first quarter of fiscal 2006
    ($114,000 of restructuring expense)



- Accretion expense on lease-related liabilties ($128,000 of restructuring expense)



During the first quarter of 2006, there were no asset impairment
charges in accordance with the provisions of SFAS No.144, Accounting for the Impairment
or Disposal of Long-Lived Assets. In determining whether an impairment exists, the
Company estimates the stores future cash flows on an undiscounted basis, and if the
cash flows are not sufficient to recover the carrying value, then the Company uses a
discounted cash flow based on a risk-adjusted discount rate, to adjust its carrying value
of the assets, and records a provision for impairment as appropriate. The Company
continually re-evaluates its stores performance to monitor the carrying value of its
long-lived assets in comparison to projected cash flows.







Interest income

|                                               |  | April 1, 2006 |  | April 2, 2005 |  | % Change 2005 to 2006 | 
|---------------------------------------------- |  | ------------- |  | ------------- |  | --------------------- | 
|                                               |  |               |  |               |  |                       | 
|For the three months ended
    (in thousands): |  | $589          |  | $324          |  | 81.8%                 | 
|As a percent of sales:                         |  | 0.2%          |  | 0.1%          |  | 0.1%                  | 





Interest income was $589,000 for the first quarter ended April 1, 2006
compared to $324,000 for the fiscal quarter ended April 2, 2005. This is due to a
combination of an increase in the average balance of cash invested and the increase in our
rate of return on our invested cash.







Interest expense

|                                               |  | April 1, 2006 |  | April 2, 2005 |  | % Change 2005 to 2006 | 
|---------------------------------------------- |  | ------------- |  | ------------- |  | --------------------- | 
|                                               |  |               |  |               |  |                       | 
|For the three months ended
    (in thousands): |  | $1,854        |  | $2,167        |  | (14.4)%               | 
|As a percent of sales:                         |  | 0.6%          |  | 0.8%          |  | (0.2)%                | 





Interest expense for the fiscal quarter ended April 1, 2006 decreased
to $1.9 million from $2.2 million in the same period in fiscal 2005. The decrease is
attributable to elimination of penalty interest on our debentures in 2006 as compared to
2005 due to the effective filing of our registration statement in August 2005. In
addition, we have lower fees and interest rates as a result of a change in our bank credit
facility.







Income tax expense

|                                                   |  | April 1, 2006 |  | April 2, 2005 |  | % Change 2005 to 2006 | 
|-------------------------------------------------- |  | ------------- |  | ------------- |  | --------------------- | 
|                                                   |  |               |  |               |  |                       | 
|For the three months ended
    (in thousands):     |  | $205          |  | $135          |  | 51.9%                 | 
|As a percent of sales:                             |  | 0.0%          |  | 0.0%          |  | 0.0%                  | 
|Effective tax rate for the
    three months ended: |  | 6.6%          |  | (13.3%)       |  | 19.9%                 | 





For the quarter ended April 1, 2006, we recorded $205,000 of income tax
expense, as a result of taxable foreign income during the period. The tax benefit
resulting from the loss in previous years on domestic operations has been fully offset by
the tax valuation allowance that was established at fiscal 2004 year end. The Company has
determined that any expected federal or state income tax expense for the current quarter
and fiscal year, except as described above, will be expected to be fully offset by
deferred tax assets that are currently subject to a 100% valuation allowance.





Earnings before interest, taxes, depreciation and amortization, loss on
early extinguishment of debt, loss (gain) on asset disposals, net, restructuring and asset
impairment charges (income), net, and stock-based compensation expense, as adjusted
("EBITDA, as adjusted")

|                                               |  | April 1, 2006 |  | April 2, 2005 |  | % Change 2005 to 2006 | 
|---------------------------------------------- |  | ------------- |  | ------------- |  | --------------------- | 
|                                               |  |               |  |               |  |                       | 
|For the three months ended
    (in thousands): |  | $13,580       |  | $9,767        |  | 39.0%                 | 
|As a percent of sales:                         |  | 4.6%          |  | 3.5%          |  | 1.1%                  | 





We believe that the reconciliation of earnings before interest, taxes,
depreciation and amortization ("EBITDA") and EBITDA, as adjusted, provides
meaningful non GAAP financial measures to help management and investors understand and
compare business trends among different reporting periods on a consistent basis,
independently of regularly reported non-cash charges and infrequent or unusual events as
determined by management. Readers are cautioned not to view EBITDA or EBITDA, as adjusted,
as an alternative to GAAP results or as being comparable to results reported or forecasted
by other companies, and should refer to the reconciliation of GAAP net income (loss)
results to EBITDA and EBITDA, as adjusted, for the first three months of 2006 and 2005,
respectively. For an explanation and reconciliation of EBITDA, and EBITDA, as adjusted,
see Non GAAP Financial Information.







Liquidity and Capital Resources



Our primary sources of capital have been cash flow from operations
(which includes trade payables), bank indebtedness, and the sale of equity securities. In
addition to these, we have also raised an additional $112.3 million, net of sales
commissions, in capital through the issuance of contingent convertible senior debentures
in a private placement in June 2004, as discussed below. Primary uses of cash have been
the financing of new store development, new store openings, relocations, remodels and
acquisitions, repurchase of common stock and repayment of debt.



Net cash generated by operating activities increased by $4.6 million to
$13.2 million during the first three months of fiscal 2006, as compared to $8.5 million
during the same period in fiscal 2005. This increase is due primarily to an increase in
net income of $4.0 million and a non-cash increase in stock-based compensation expense of
$674,000 due to the implementation of SFAS No. 123R.



Net cash used in investing activities was $12.6 million during the
first three months of fiscal 2006 as compared to $3.5 million of cash provided by
investing activities during the same period in fiscal 2005. The $16.1 million reduction is
mainly due to the net purchase of short-term investments during the first quarter of 2006
versus the sale of short-term investments in the first quarter of 2005.



Net cash provided by financing activities of $3.3 million during the
first three months of 2006 was $4.8 million more than the $1.5 million of cash used in
financing activities during the same period in fiscal 2005. The change in cash flows from
financing activities is the result of an increase of $3.6 million in proceeds from the
issuances of common stock due to option exercises and a $1.2 million decrease in book
overdraft.





EBITDA. EBITDA was $11.0 million for the three month period ended
April 1, 2006, as compared to $7.6 million for the three months ended April 2, 2005. The increase in EBITDA is primarily
attributable to the increase in gross margin as well as the Companys ability to
leverage higher sales against expenses. For an explanation and reconciliation of EBITDA,
see Non GAAP Financial Information.



Contingent convertible senior debentures. In June 2004, we issued
$115.0 million aggregate principal amount of our 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.



During the second quarter of 2005, we made an irrevocable election to
pay the principal amount of debentures in cash upon conversion; however, the Company
retains the ability to satisfy the remainder of any conversion payment, exceeding the
debenture defined principal, in cash or any combination of cash and common stock.
According to their terms, the debentures are callable and convertible into our common
stock prior to maturity at the option of the holders under the following circumstances:
(1) during any calendar quarter commencing after June 30, 2004 and before March 31, 2029,
if the last reported sale price of our common stock is greater than or equal to 130% of
the conversion price of $17.70 per share for at least 20 trading days in the period of 30
consecutive trading days ending on the last trading day of the proceeding calendar
quarter; (2) at any time on or after April 1, 2029 if the last reported sale price of our
common stock on any date on or after March 31, 2029 is greater than or equal to 130% of
the conversion price; (3) subject to certain limitations, during the five business-day
period after any five consecutive trading-day period in which the trading price per
debenture for each day of that period was less than 98% of the product of the conversion
rate and the last reported sale price of our common stock; (4) if we call the debentures
for redemption; (5) upon the occurrence of certain corporate transactions; or (6) if we
request a credit rating for the debentures, at any time when the credit ratings assigned
to the debentures are below specified levels. While a credit rating has been issued for
the debentures, the rating was not requested by us, but initiated by the ratings agency.
Therefore, a change in the current rating will not trigger a call provision. The
debentures are initially convertible into 56.5099 shares of our common stock per $1,000
principal amount, which is equivalent to approximately $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. Pursuant to the underwriting agreement and within 90 days
of issuance, we filed a shelf registration statement covering resales of the debentures
and the common stock issuable upon conversion thereof. The registration statement was
declared effective August 26, 2005.



On or after May 20, 2011, we may redeem for cash some or all of the
debentures at any time and from time to time, for a price equal to 100% of the principal
amount of the debentures plus accrued and unpaid contingent interest, if any. Holders have
the right to require us to repurchase any or all debentures for cash, at a repurchase
price equal to 100% of the principal amount of the debentures, plus accrued and unpaid
interest on: (1) May 15, 2011, May 15, 2014, and May 15, 2024; and (2) upon the occurrence
of a fundamental change (as defined in the debenture indenture). In the case of a
fundamental change in which all of the consideration for the common stock in the
transaction or transactions constituting the fundamental change consists of cash, we also
will pay to the holders a make-whole premium (as defined in the debenture indenture), the
amount of which could be significant but would not be determinable unless and until there
were to be a public announcement of such a fundamental change. Any make-whole premium
would be payable to all holders regardless of whether the holder elects to require us to
repurchase the debentures or elects to surrender the debentures for conversion.



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



There are no financial covenants within the debenture indenture,
however, we paid penalty interest of 0.25% for the first 90 days of 2005 and paid 0.50%
thereafter until the debentures were publicly registered on August 26, 2005. During 2005,
the Company paid $305,102 in additional interest to debenture holders due to not having an
effective registration statement within the specified timeframe.



In 2004, total proceeds from the issuance of the debentures were $115.2
million. We 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. On March 31, 2005, we entered into a five-year
revolving secured credit facility with Bank of America, N.A. ("B of A
Facility"). Concurrent with the execution of the B of A Facility, we terminated our
existing $95 million credit facility with Wells Fargo Bank N.A. as administrative agent.
The B of A Facility allows borrowings and letters of credit up to a maximum of $40.0
million, with an option to increase borrowings up to $100.0 million, subject to a
borrowing base determined by the value of certain inventory, credit card receivables,
invested cash and, at our discretion, mortgaged leaseholds. The B of A Facility is secured
by certain of our assets including, but not limited to, cash, inventory and fixed assets.
Borrowings under the B of A Facility bear interest, at our election, at the prime rate or
at London Interbank Offering Rate ("LIBOR") plus a margin ranging from 1.00% to
1.50%, depending on the excess borrowing availability over amounts borrowed. Interest
rates are determined quarterly. We are charged a commitment fee on the unused portion of
the B of A Facility. There are no financial covenants, other than the obligation to
maintain a certain percentage of minimum excess availability (as defined in the agreement)
at all times. The B of A Facility requires compliance on a monthly basis with certain
non-financial covenants, including limitations on incurring additional indebtedness and
making investments, the use and disposition of collateral, changes of control, as well as
cash management provisions. We expect that we will be in compliance with all covenants. We
further expect that our cash requirements will be generated from operations and borrowings
under the new credit facility. As of April 1, 2006, the Company had letters of credit
outstanding totaling $14.5 million, which reduces are availability to approximately $25.5
million.



As of April 1, 2006, we had no off-balance sheet arrangements,
unconsolidated subsidiaries, commitments or guarantees, except as disclosed in the notes
to the consolidated financial statements. As of April 1, 2006, we had a working capital
deficit of $1.1 million, a decrease of $9.5 million over the quarter ended April 2, 2005.





Capital expenditures. We spent approximately $5.8 million during
the three months ended April 1, 2006 for new store construction, remodels and other
capital expenditures. Our average capital expenditures to open a leased store, including
leasehold improvements, equipment and fixtures, has ranged from approximately $2.0 million
to $5.0 million historically, excluding inventory costs and initial operating losses. We
anticipate that the average capital expenditures to open a natural foods supermarket
format store will be $2.5 million to $3.5 million in the future, on a turnkey lease basis.
Under turnkey leases, the landlord constructs the building to our specifications, up to a
cost cap per foot, and installs equipment we purchase. Average capital expenditures for
non turnkey leases are expected between $5.0 million and $6.5 million. Our average capital
expenditures to open a farmers market format store are estimated at $2.0 million to
$2.5 million in the future. Delays in opening new stores may result in increased capital
expenditures and increased pre-opening costs for the site, as well as lower than planned
sales for the Company.



Based upon the current level of operations, we believe that cash flows
from operations and other sources available such as cash from our debentures and available
line of credit will be adequate to meet anticipated requirements for working capital,
capital expenditures, interest payments and future debenture payments in the foreseeable
future. However, there can be no assurance that the business will continue to generate
cash flows from operations at current levels or that we will be able to maintain our
ability to borrow under the line of credit.





Critical Accounting Policies and Estimates



Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosures of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.



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



- Goodwill valuation,
- Asset impairment charges,
- Restructuring charges and store closing costs,
- Inventory valuation and reserves,
- Self-insurance reserves, and
- Tax valuation allowances
- Stock-based compensation expense



We believe the following critical accounting policies affect our most
significant judgments and estimates used in the preparation of our consolidated financial
statements. Due to the implementation of SFAS 123R, we identified a new critical
accounting policy related to stock-based compensation, which is listed below. There have
been no changes in the application of the Companys other critical accounting
policies and estimates in 2006:





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



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



Two of the most significant assumptions underlying the determination of
the fair value of goodwill and other intangible assets are the EBITDA multiples and the
growth rate on our free cash flow projections. In connection with our annual goodwill
impairment measurement, we determined that a 33% reduction in our estimated EBITDA
multiple would have decreased the valuation by $71.9 million. A 25% reduction in our
estimated free cash flow projection percentage would have resulted in a decrease of $100.7
million. Despite these calculated decreases, our lowest valuation still exceeds book
value, and therefore, no impairment would be recognized.





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



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



A 2.0% increase in our sales growth assumption utilized in the cash
flow projection would have resulted in no stores identified for impairment and no related
asset impairment charges. A 2.0% decrease in our sales growth assumption would have
resulted in the impairment of two stores held for use and approximately $2.7 million of
additional asset impairment charges.





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



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



In calculating the lease related liabilities, we apply a discount rate
to the estimation of our remaining lease obligations. By decreasing the discount rate by
2.0%, we determined that our first quarter lease related restructuring expense would have
increased by approximately $52,000. An increase of 2.0% in the discount rate would have
decreased the first quarter lease related restructuring expense by $48,000.





Inventory. Our inventory is stated at the lower of cost or market
on a first-in, first-out basis using the retail method of accounting to determine cost of
sales and inventory for approximately 80% of inventories and using the item cost method
for highly perishable products representing approximately 20% of inventories in our
stores. Under the retail inventory method, the valuation of inventories at cost and the
resulting gross margins are determined by applying a cost-to-retail ratio for various
categories of similar items to the retail value of inventories. Inherent in the retail
inventory method calculations are certain management judgments and estimates, including
shrinkage, which could significantly impact the ending inventory valuation at cost as well
as the resulting gross margins. Physical inventory counts are taken at each location to
ensure that the amounts reflected in the consolidated financial statements are properly
stated as of the end of each reporting period.



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



Relative to the above, a hypothetical increase of 1.0% to our
cost-to-retail ratio would result in a decrease of approximately $887,000 to our inventory
valuation. Conversely, a hypothetical decrease of 1.0% would result in an increase of
approximately $887,000 to our inventory balance as of the end of first quarter, 2006. With
regards to our allowance for inventory, an increase or decrease of 1.0% would cause our
allowance to fluctuate by about $667,000.





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





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



When we are able to show a profitable trend and have generated cumulative income for a
reasonable period, we will re-evaluate the need for a valuation allowance using all
factors available to us at that time.





Stock-based compensation expense. Effective January 1, 2006, we
adopted the provisions of SFAS No. 123R and related interpretations, using the
Black-Scholes valuation model and the modified prospective application. Under the fair
value recognition provisions of this statement, stock-based compensation cost is measured
at the grant date based on the value of the award and is recognized as expense on a
straight-line basis over the awards vesting period. Determining the fair value of
stock-based awards at grant date requires judgment, including estimating the amount of
stock-based awards expected to be forfeited. If actual results differ significantly from
these estimates, our results of operations could be materially impacted. These estimates
are outlined in Note 3  Stock-Based Compensation.





Cautionary Statement Regarding Forward-Looking Statements



This Report on Form 10-K contains "forward-looking
statements," within the meaning of the Private Securities Litigation Reform Act of
1995, which involve known and unknown risks. Such forward-looking statements include
statements as to the number of stores we plan to open or relocate in future periods and
the anticipated performance of such stores; the impact of competition; the sufficiency of
funds to satisfy our cash requirements through the remainder of fiscal 2006; the impact of
changes resulting from our merchandising and marketing programs; our ability to benefit
from past supply chain modifications; expected pre-opening expenses and capital
expenditures; and other statements containing words such as "believes,"
"anticipates," "estimates," "expects," "may,"
"intends" and words of similar import or statements of management's opinion.
These forward-looking statements and assumptions involve known and unknown risks,
uncertainties and other factors that may cause our actual results, market performance or
achievements to differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Important factors that could
cause differences in results of operations include, but are not limited to, the timing and
execution of new store openings, relocations, remodels and closures; new competitive
impacts; changes in product supply or suppliers and supplier performance levels; changes
in management information needs; changes in customer needs and expectations; changes in
government regulations applicable to our business; changes in economic or business
conditions in general or affecting the natural foods industry in particular; cost and
stability of fuel and power sources; and competition for and the availability of sites for
new stores. We undertake no obligation to update any forward-looking statements in order
to reflect events or circumstances that may arise after the date of this Report.





Non GAAP Financial Information



The following is a reconciliation of EBITDA and EBITDA, as adjusted, to
net income (in thousands):



| |                                                     |  | THREE MONTHS
    ENDED
| | --------------------------------------------------- |  | ----------------------
| |                                                     |  |                       
| |                                                     |  | April 1, 2006         
| |                                                     |  |                       
| |                                                     |  |                       
| | Net income (loss)                                   |  | $ 2,885               
| | Interest expense, net of
    interest income        |  | 1,265                 
| | Income tax expense
    (benefit)                    |  | 205                   
| | Depreciation and
    amortization                   |  | 6,687                 
| |                                                     |  |                       
| | EBITDA                                              |  | 11,042                
| | Loss on early
    extinguishment of debt            |  | -                     
| | Loss (gain) on asset
    disposals, net             |  | 90                    
| | Stock-based compensation
    expense                |  | 778                   
| | Restructuring and asset
    impairment charges, net |  | 1,670                 
| |                                                     |  |                       
| | EBITDA, as adjusted                                 |  | $ 13,580              
| |                                                     |  |                       
| |                                                     |  |                       
| | EBITDA, as a percentage of
    sales                |  | 3.7%                  
| | EBITDA, as adjusted, as a
    percentage of sales   |  | 4.6%                  







EBITDA and EBITDA, as adjusted, are measures used by management to
measure operating performance.  EBITDA is defined as net income plus interest, taxes,
depreciation, and amortization.  EBITDA, as adjusted, excludes certain non-cash
charges and other items that management does not utilize in assessing operating
performance or for purposes of corporate and regional level bonuses.  The items
included in the reconciliation from EBITDA to EBITDA, as adjusted, are either (a) non-cash
items (e.g. asset impairments and stock-based compensation expense) or (b) items that
management does not consider to be relevant to assessing operating performance (e.g.
restructuring, gain/loss on sale of assets, net).  Due to the implementation of SFAS
123R during the first quarter of 2006 using the modified prospective application, the
financial statements for periods prior to January 1, 2006, will not include compensation
cost calculated under the fair value method. Regarding the non-cash items, management
believes that investors can better assess operating performance if the measures are
presented without such items.  In the case of the items that management does not
consider relevant to assessing operating performance, management believes that investors
can better assess ongoing operating performance if the measures are presented without
these items because their financial impact has no continuing relevance to our ongoing
business.  The above table reconciles net income to EBITDA and EBITDA, as adjusted.
   Management believes that EBITDA and EBITDA, as adjusted, are useful to
investors because securities analysts, lenders and other interested parties frequently
utilize them to evaluate our peer companies and us. Neither EBITDA nor EBITDA, as
adjusted, are recognized terms under GAAP and do not purport to be an alternative to net
income as an indicator of operating performance or any other GAAP measure.  Not all
companies utilize identical calculations, therefore, the presentation of EBITDA and
EBITDA, as adjusted, may not be comparable to other identically titled measures of other
companies.  In addition, EBITDA and EBITDA, as adjusted, are not intended to be
measures of free cash flow for managements discretionary use since they do not
consider certain cash requirements, such as interest payments, tax payments and capital
expenditures.





Comparable stores sales. We deem sales of a new or acquired stores
comparable commencing in the thirteenth full month of operations.







Item
3.  Quantitative and Qualitative Disclosures about Market Risk



In the normal course of business, the Company is exposed to
fluctuations in fossil fuel commodity prices, interest rates and the value of foreign
currency. Fossil fuels commodity prices directly impact the costs the Company pays for
utilities and distribution, and are subject to fluctuation due to availability and other
natural causes. The Company attempts to balance retail price increases against lost
profits without losing customer loyalty. The Company will employ various financial
instruments to manage certain exposures to foreign currency and interest rate risk when
considered practical.



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





Should we begin drawing on the B of A Facility for additional capital,
our exposure to interest rate changes would be primarily related to our variable rate debt
issued under the B of A Facility. The total commitment available is $40.0 million under a
revolving line of credit, with a five-year term expiring March 31, 2010. The interest rate
on the credit facility is prime or LIBOR plus 1.25%, at our election, and the rates modify
depending on the excess borrowings availability over amounts borrowed. Because the
interest rate on the facility is variable, based upon the prime rate or LIBOR, the
Company's interest expense and net income would be affected by interest rate fluctuations.





Item 4. Controls and
Procedures



Disclosure Controls and Procedures. The Company's management, with
the participation of the Company's Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of the Company's disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of April 1, 2006. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer have
concluded that, as of April 1, 2006, the Company's disclosure controls and procedures are
effective in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act and are effective in ensuring that information required to
be disclosed by the Company in the reports that it files or submits under the Exchange Act
is accumulated and communicated to the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.





Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter
ended April 1, 2006 that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.





Part II.  OTHER INFORMATION



Item 1.  Legal Proceedings





Tim 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 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 store director claiming that he
should have been classified as an employee paid on an hourly basis, together with other
related claims. In mid-2005, five additional named plaintiffs were added to the suit, and
the trials of the original plaintiff and the new plaintiffs were bifurcated. We believe
that all of the named plaintiffs were correctly classified as exempt employees based upon
their job duties. We have settled with the original plaintiff, and the trial date has been
vacated. A trial for the remaining plaintiffs has been set for third quarter 2006.



In June 2002 an administrative law judge ("ALJ") found
against us in Wild Oats Markets, Inc. and Local 371, United Food & Commercial
Workers, in certain unfair labor practice charges brought in connection with the
opening of our store in Westport, Connecticut. We appealed the ALJs decision to the
National Labor Relations Board ("NLRB"). In May 2005, the NLRB denied the appeal
and issued a Decision and Order, setting forth certain equitable, injunctive and monetary
remedies to be undertaken by us, including payment of backpay less interim earnings, and
offers of employment to certain former employees of a store that we sold in 2000 (the
"Sold Store"). We agreed to reinstate one former employee and paid an immaterial
amount to settle the claims of ten named individuals in the ruling. The NLRB has indicated
that there may be liability to other employees from the Sold Store for certain periods
that such individuals were unemployed. We are currently evaluating whether to appeal the
remainder of the Decision.



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





Item 1A.  Risk Factors

There have not been any material changes from the risk factors previously disclosed in
our Form 10-K for the fiscal year ended December 31, 2005.





Item
2.  Unregistered Sales of Equity Securities and Use of Proceeds.

The following table presents receipt by the Company of its common stock for the quarter
ended April 1, 2006:



|Period   |  | (a) Total Number of Shares (or Units)
    Purchased |  | (b) Average Price Paid per Share (or Units) |  | (c) Total Number of Shares (or Units)
    Purchased as Part of Publicly Announced Plans or Programs |  | (d) Maximum Number (or Approximate Dollar
    Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
|-------- |  | --------------------------------------------------- |  | ------------------------------------------- |  | --------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------
|02/19/06 |  | 678,530(1)                                          |  | $17.89(2)                                   |  | None(3)                                                                                             |  | Not Applicable(3)                                                                                                              

______________________

|(1) | Shares of registered Common
    Stock received by the Company in accordance with the terms of and in full satisfaction of
    the principal and accrued interest on a promissory note ("Note") from Perry
    Odak, the Companys President and Chief Executive Officer.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The terms of the Note
    provided for the acceptance of shares in payment of amounts due under the Note, with the
    number of shares required for payment determined by the closing price per share on NASDAQ
    National Market.                                   
|(3) | The Company did not
    purchase the shares though a publicly announced plan or program.                                                                                                                                                                                





Item
3.  Defaults Upon Senior Securities

None.





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

None.





Item 5.  Other Information

None.





Item 6.  Exhibits

|                                                                                                                                         | Exhibit Number | Description                                                                                                    
|---------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ---------------------------------------------------------------------------------------------------------------
|                                                                                                                                         |                |                                                                                                                
|                                                                                                                                         | 3(ii).1+       | Amended
    and Restated By-Laws of the Registrant, as amended                                                 
|                                                                                                                                         | 10.1#+         | Employment
    Agreement dated January 5, 2006 between Samuel M. Martin and Registrant.                        
|                                                                                                                                         | 10.2#+         | Samuel M.
    Martin Equity Incentive Plan                                                                     
|                                                                                                                                         | 10.3#+         | Severance
    Agreement dated January 12, 2006 between Samuel M. Martin and Registrant.                        
|                                                                                                                                         | 10.4#+         | Form of
    Restricted Stock Agreement granted under the 1996 Equity Incentive Plan                            
|                                                                                                                                         | 10.5#**        | 2006
    Equity Incentive Plan (1)                                                                             
|                                                                                                                                         | 10.6#+         | Form of
    Restricted Stock Agreement granted under the 2006 Equity Incentive Plan                            
|                                                                                                                                         | 10.7#+         | Form of
    Incentive Stock Option Agreement granted under the 2006 Equity Incentive Plan                      
|                                                                                                                                         | 10.8#+         | Form of
    Non-Qualified Stock Option Agreement granted under the 2006 Equity Incentive Plan                  
|                                                                                                                                         | 10.9#+         | Form of
    Non-Qualified Stock Option Agreement for Directors granted under the 2006 Equity Incentive
    Plan
|                                                                                                                                         | 10.10#+        | Form of
    Restricted Stock Unit Agreement granted under the 2006 Equity Incentive Plan                       
|                                                                                                                                         | 10.11#+        | Form of
    Restricted Stock Unit Agreement for Directors granted under the 2006 Equity Incentive Plan         
|                                                                                                                                         | 31.1+          | CEO
    Certification under Section 302 of Sarbanes-Oxley Act of 2002                                          
|                                                                                                                                         | 31.2+          | CFO
    Certification under Section 302 of Sarbanes-Oxley Act of 2002                                          
|                                                                                                                                         | 32.1+          | CEO
    Certification under Section 906 of Sarbanes-Oxley Act of 2002                                          
|                                                                                                                                         | 32.2+          | CFO
    Certification under Section 906 of Sarbanes-Oxley Act of 2002                                          
|                                                                                                                                         |                |                                                                                                                
|#    Management
    Compensation Plan.                                                                                                  
|**    Previously
    filed.                                                                                                             
|+    Included
    herewith.                                                                                                             
|(1)   Incorporated
    by reference to the Companys Registration Statement on Form S-8 filed on May 11,
    2006 (File No. 333-134003).



---

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Boulder, County of Boulder, State of Colorado,
on the 11th day of May 2006.



| | Wild Oats Markets, Inc.                      
| | ---------------------------------------------
| | (Registrant)                                 
| |                                              
| |                                              
| | By: /s/ Robert B. Dimond                     
| | Robert B. Dimond                             
| | Executive Officer and Chief Financial Officer
| | (Principal Financial and Accounting Officer) 
| |