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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q





> (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE
>   SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 29, 2002

OR

> ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE
>   SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
>   __________

Commission file number

0-21577

WILD OATS MARKETS, INC.

(Exact name of registrant as specified in its charter)



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



> 

3375 Mitchell Lane

Boulder, Colorado 80301-2244

(Address of principal executive offices, including zip code)



(303) 440-5220

(Registrant's telephone number, including area code)



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

Yes (X) No ( )

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







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



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PART I. FINANCIAL INFORMATION



Item 1. Financial Statements





WILD OATS MARKETS, INC.

Consolidated Balance Sheets

(in thousands, except share data)

|                                                                 | June 29,                |  | December 29,           
|---------------------------------------------------------------- | ----------------------- |  | -----------------------
|                                                                 | 2002                    |  | 2001                   
|                                                                 | (unaudited)             |  |                        
|Assets                                                           |                         |  |                        
|Current assets:                                                  |                         |  |                        
|Cash and cash equivalents                                        | $ 12,728                |  | $ 18,840               
|Inventories (net of reserves of $1,431 and $2,667, respectively) | 47,502                  |  | 54,058                 
|Accounts receivable (net of allowance for doubtful               |                         |  |                        
|accounts of $564 and $1,070, respectively)                       | 3,341                   |  | 2,906                  
|Income tax receivable                                            | 935                     |  | 4,186                  
|Prepaid expenses and other current assets                        | 2,877                   |  | 2,858                  
|Deferred income taxes                                            | 5,459                   |  | 5,378                  
|Total current assets                                             | 72,842                  |  | 88,226                 
|                                                                 |                         |  |                        
|Property and equipment, net                                      | 122,882                 |  | 128,922                
|Goodwill, net                                                    | 106,404                 |  | 106,404                
|Other intangible assets, net                                     | 7,655                   |  | 7,892                  
|Deposits and other assets                                        | 2,896                   |  | 2,992                  
|Deferred income taxes                                            | 17,880                  |  | 18,990                 
|                                                                 | $ 330,559 
      ====== |  | $ 353,426 
      ======
|Liabilities and Stockholders' Equity                             |                         |  |                        
|Current liabilities:                                             |                         |  |                        
|Accounts payable                                                 | $ 37,710                |  | $ 39,796               
|Book overdraft                                                   | 24,936                  |  | 23,056                 
|Accrued liabilities                                              | 40,156                  |  | 39,526                 
|Current portion of debt and capital leases                       | 10,206                  |  | 12,338                 
|Total current liabilities                                        | 113,008                 |  | 114,716                
|                                                                 |                         |  |                        
|Long-term debt and capital leases                                | 86,283                  |  | 112,291                
|Other long-term obligations                                      | 18,324                  |  | 19,404                 
|                                                                 | 217,615                 |  | 246,411                
|Stockholders' equity:                                            |                         |  |                        
|Preferred stock, $0.001 par value; 5,000,000                     |                         |  |                        
|shares authorized; no shares issued and                          |                         |  |                        
|outstanding                                                      |                         |  |                        
|Common stock, $0.001 par value; 60,000,000 shares                |                         |  |                        
|authorized; 25,105,680 and 24,766,409 shares                     |                         |  |                        
|issued and outstanding                                           | 25                      |  | 25                     
|Additional paid-in capital                                       | 164,308                 |  | 160,736                
|Note receivable, related party                                   | (9,927)                 |  | (9,660)                
|Accumulated deficit                                              | (40,111)                |  | (42,277)               
|Accumulated other comprehensive loss                             | (1,351)                 |  | (1,809)                
|Total stockholders' equity                                       | 112,944                 |  | 107,015                
|                                                                 | $ 330,559 
      ====== |  | $ 353,426 
      ======





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



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WILD OATS MARKETS, INC.

Consolidated Statements of Operations

(in thousands, except per-share data) (unaudited)



|                                                        |  | Three Months Ended |  | Six Months Ended      
|------------------------------------------------------- |  | ------------------ |  | ----------------------
|                                                        |  | June 29,           |  | June 30,              
|                                                        |  | 2002               |  | 2001                  
|                                                        |  |                    |  |                       
|Sales                                                   |  | $236,186           |  | $229,383              
|Cost of goods sold and occupancy costs                  |  | 164,758            |  | 163,005               
|Gross profit                                            |  | 71,428             |  | 66,378                
|Operating expenses:                                     |  |                    |  |                       
|Direct store expenses                                   |  | 51,510             |  | 54,996                
|Selling, general and administrative
      expenses      |  | 14,761             |  | 13,376                
|Pre-opening expenses                                    |  | 645                |  | 85                    
|Restructuring & asset impairment
      charges (income) |  |                    |  | 54,834                
|Income (loss) from operations                           |  | 4,512              |  | (56,913)              
|Loss on investment                                      |  |                    |  | (228)                 
|Interest income                                         |  | 193                |  | 3                     
|Interest expense                                        |  | (2,347)            |  | (2,765)               
|Income (loss) before income taxes                       |  | 2,358              |  | (59,903)              
|Income tax expense (benefit)                            |  | 860                |  | (21,783)              
|Net income (loss)                                       |  | $ 1,498====        |  | $(38,120)
      ======
|                                                        |  |                    |  |                       
|Net income (loss) per common share:                     |  |                    |  |                       
|Basic                                                   |  | $ 0.06             |  | $ (1.55)              
|Diluted                                                 |  | $ 0.06             |  | $ (1.55)              
|                                                        |  |                    |  |                       
|Average common shares outstanding, basic                |  | 25,016             |  | 24,641                
|Dilutive effect of stock options                        |  | 929                |  |                       
|Average common shares outstanding,                      |  |                    |  |                       
|assuming dilution                                       |  | 25,945=====        |  | 24,641=====           



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





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WILD OATS MARKETS, INC.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands) (unaudited)



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



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

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WILD OATS MARKETS, INC.

Consolidated Statements of Cash Flows

(in thousands) (unaudited)



|                                                               | Six Months Ended     
|-------------------------------------------------------------- | ---------------------
|                                                               | June 29,
      2002  
|                                                               |                      
|Cash Flows from Operating Activities                           |                      
|Net income (loss)                                              | $ 2,166              
|Adjustments to reconcile net income (loss)                     |                      
|to net cash from operating activities:                         |                      
|Depreciation and amortization                                  | 10,528               
|Loss (gain) on disposal of property and equipment              | (39)                 
|Deferred tax expense (benefit)                                 | 820                  
|Restructuring and asset impairment charges (income)            | (652)                
|Loss on investment                                             |                      
|Other                                                          | (60)                 
|Change in assets and liabilities:                              |                      
|Inventories                                                    | 6,596                
|Receivables and other assets                                   | 2,746                
|Accounts payable                                               | (236)                
|Accrued liabilities                                            | 1,900                
|Net cash provided by operating activities                      | 23,769               
|                                                               |                      
|Cash Flows from Investing Activities                           |                      
|Capital expenditures                                           | (4,644)              
|Proceeds from sale of property and equipment                   | 5                    
|Net cash used in investing activities                          | (4,639)              
|                                                               |                      
|Cash Flows from Financing Activities                           |                      
|Net repayments under line-of-credit agreement                  | (21,000)             
|Proceeds from notes payable and long-term debt                 |                      
|Repayments on notes payable, long-term debt and capital leases | (5,730)              
|Proceeds from issuance of common stock, net                    | 1,434                
|Net cash used in financing activities                          | (25,296)             
|                                                               |                      
|Effect of exchange rate changes on cash                        | 54                   
|Net increase (decrease) in cash and cash equivalents           | (6,112)              
|Cash and cash equivalents at beginning of period               | 18,840               
|Cash and cash equivalents at end of period                     | $ 12,728 
      =====
|                                                               |                      
|Non-Cash Investing and Financing Activities                    |                      
|Stock issued in exchange for note receivable                   |                      
|Stock issued in partial payment of note payable                | $ 1,210 
      ====  
|Partial settlement of note payable against accounts receivable | $ 200 
      ===     





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





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WILD OATS MARKETS, INC.

Notes to Consolidated Financial Statements

(unaudited)



1. Nature of Operations and Basis of Presentation

Wild Oats Markets, Inc. ("Wild Oats" or the
"Company"), headquartered in Boulder, Colorado, owns and operates
natural foods grocery stores in the United States and Canada. The Company also
operates commissary kitchens and warehouses that supply the stores. The Company's
operations are concentrated in one market segment, grocery stores, and are
geographically concentrated in the western and central parts of the United
States.

The consolidated balance sheet as of June 29, 2002, the
consolidated statements of operations and comprehensive income (loss) for the
three months and six months ended June 29, 2002 and June 30, 2001, as well as
the consolidated statements of cash flows for the six months ended June 29, 2002
and June 30, 2001 have been prepared without an audit. In the opinion of
management, all adjustments, consisting only of normal, recurring adjustments
necessary for a fair statement thereof, have been made.

Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These consolidated
financial statements should be read in conjunction with financial statements and
notes thereto included in the Company's 2001 Annual Report on Form 10-K. The
results of operations for interim periods presented are not necessarily
indicative of the operating results for the full year.

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



2. New Accounting Standards

Statement of Financial Accounting Standards ("SFAS")
No. 146,  Accounting for Costs Associated with Exit or Disposal Activities, was
issued on July 30, 2002. SFAS No. 146 will require companies to recognize costs
associated with exit or disposal activities when they occur rather than at the
date of a commitment to an exit or disposal plan. SFAS No. 146 is effective for
the Company on January 1, 2003 and will have no material effect on the Company's
historical financial results.

During the first quarter ended March 30, 2002, the Company
adopted the provisions of SFAS No. 145,  Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No.
145, among other things, rescinds SFAS No. 4, which required that gains and
losses from extinguishment of debt be classified as an extraordinary item, net
of related income tax effects. SFAS No. 145 is to be applied in fiscal years
beginning after May 15, 2002 and encourages early application of the recission
of SFAS No. 4. During the six months ended June 29, 2002, and June 30, 2001, there were no gains or
losses on early extinguishment of debt.

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

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

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

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

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



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





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



|                                                                                |  | Three Months Ended |  | Six Months Ended    
|------------------------------------------------------------------------------- |  | ------------------ |  | --------------------
|                                                                                |  | June 29,           |  | June 30,            
|                                                                                |  | 2002               |  | 2001                
|                                                                                |  |                    |  |                     
|Reported net income (loss)


    per share
    available to common stockholders |  | $ 1,498            |  | $ (38,120)          
|Goodwill amortization                                                           |  | ---                |  | 459                 
|Adjusted net income (loss) available
    to common stockholders                 |  | $ 1,498

    ===== |  | $ (37,661)

  ======
|                                                                                |  |                    |  |                     
|EARNINGS PER SHARE

    -
BASIC AND DILUTED                                     |  |                    |  |                     
|Reported net income (loss) per share
    available to common stockholders       |  | $ 0.06             |  | $ (1.55)            
|Goodwill amortization                                                           |  | ---                |  | 0.02                
|Adjusted net income (loss) per share
    available to common stockholders       |  | $ 0.06

    ====   |  | $ (1.53)

  ====    





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



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





3. Derivatives and Hedging Activities

In accordance with the Company's interest rate risk
management strategy and as required by the terms of the Company's credit
facility, the Company entered into a swap agreement in September 2000 to hedge
the interest rate on $37.5 million of its borrowings as of June 29, 2002. The
swap agreement locks in a one-month LIBOR rate of 6.6% and expires in August
2003. The fair value of the swap at June 29, 2002 was ($1.7 million), which has
been recorded in the accompanying balance sheet in accrued liabilities.



4. Earnings Per Share

Earnings per share are calculated in accordance with the
provisions of SFAS No. 128,  Earnings Per Share. SFAS No. 128 requires the
Company to report both basic earnings per share, which is based on the
weighted-average number of common shares outstanding, and diluted earnings per
share, which is based on the weighted-average number of common shares
outstanding and all dilutive potential common shares outstanding, except where
the effect of their inclusion would be antidilutive (i.e., in a loss period).
Antidilutive stock options of 1,288,177 and 1,840,007 for the six months and
1,420,861 and 1,738,071 for the three months ended
June 29, 2002 and June 30, 2001, respectively, were not included in the earnings
per share calculations.



5. Restructuring and Asset Impairment Income

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



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







Details of the significant components are as follows:

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



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



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



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



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



During the first quarter of fiscal 2002, the Company recorded
restructuring income of $652,000 consisting of the following components:



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

  =======



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Details of the significant components are as follows:



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



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



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



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

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

> 

|Exit Plans                                |  | 1999
      and prior |  | Q2
      2000    |  | Q4
      2000    |  | Q2
      2001    |  | Q3
      2001 |  | Q4
      2001   |  | Q1
      2002 |  | Q2
      2002 |  | Total           
|----------------------------------------- |  | -------------------- |  | ---------------- |  | ---------------- |  | ---------------- |  | ------------- |  | --------------- |  | ------------- |  | ------------- |  | ----------------
|                                          |  |                      |  |                  |  |                  |  |                  |  |               |  |                 |  |               |  |               |  |                 
|Balance, December 29, 2001                |  | $ 2,458              |  | $ 2,462          |  | $ 4,061          |  | $10,102          |  | $ 87          |  | $ 3,879         |  |               |  |               |  | $23,049         
|New accruals:                             |  |                      |  |                  |  |                  |  |                  |  |               |  |                 |  |               |  |               |  |                 
|Severance                                 |  |                      |  |                  |  |                  |  |                  |  |               |  |                 |  | $ 269         |  |               |  | 269             
|Lease-related liabilities                 |  | 216                  |  | (649)            |  | 4                |  |                  |  |               |  | (239)           |  |               |  |               |  | (668)           
|Cash received-
lease-related liabilities  |  | 459                  |  |                  |  |                  |  |                  |  |               |  |                 |  |               |  |               |  | 459             
|Note receivable in lieu of cash           |  | 375                  |  |                  |  |                  |  |                  |  |               |  |                 |  |               |  |               |  | 375             
|Cash paid

    -
severance                |  |                      |  |                  |  |                  |  | (95)             |  |               |  | (55)            |  | (213)         |  |               |  | (363)           
|Cash paid -
    lease-related liabilities |  | (346)                |  | (137)            |  | (502)            |  | (219)            |  | (31)          |  | (330)           |  |               |  |               |  | (1,565)         
|Balance, March 30, 2002                   |  | 3,162                |  | 1,676            |  | 3,563            |  | 9,788            |  | 56            |  | 3,255           |  | 56            |  |               |  | 21,556          
|New accruals:                             |  |                      |  |                  |  |                  |  |                  |  |               |  |                 |  |               |  |               |  |                 
|Severance                                 |  |                      |  |                  |  |                  |  |                  |  |               |  |                 |  |               |  | $ 142         |  | 142             
|Lease-related liabilities                 |  | (305)                |  | (6)              |  | (5)              |  | (358)            |  | (10)          |  | 6               |  |               |  |               |  | (678)           
|Cash paid -
severance                     |  |                      |  |                  |  |                  |  | (16)             |  |               |  | (2)             |  | (56)          |  | (100)         |  | (174)           
|Cash paid -
lease-related liabilities     |  | (198)                |  | (114)            |  | (292)            |  | (230)            |  | (26)          |  | (73)            |  |               |  |               |  | (933)           
|                                          |  | 1                    |  | 1                |  | 1                |  | 2                |  | 1             |  | 1               |  |               |  | 3             |  |                 
|Balance, June 29, 2002                    |  | $ 2,659

    =====   |  | $ 1,556

  ===== |  | $ 3,266

  ===== |  | $ 9,184

  ===== |  | $ 20

  ==    |  | $ 3,186
  ===== |  | $ ---

  ===  |  | $ 42

  ===   |  | $19,913
  ======

_______________________________

> 1 The restructuring accrual balance consists of lease-related liabilities
>   2 The restructuring accrual balance consists of $9.2 million for
>   lease-related liabilities and $25,000 for employee termination benefits.
>   3 The restructuring accrual balance consists of employee termination
>   benefits.

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



1. Long-Term Debt

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

1. Income Taxes

The Company has a $23.3 million net deferred tax asset,
primarily as a result of the $54.9 million of restructuring and asset impairment
charges recorded during fiscal 2001. For the three months ended June 29, 2002,
the Company recorded $860,000 of income tax expense, primarily as a result of
income before income taxes of $2.4 million during the period. For the six months
ended June 29, 2002, the Company recorded $1.3 million of income tax expense,
primarily as a result of income before income taxes of $3.4 million during the
period.  The recoverability
of the net deferred tax asset is primarily dependent upon the Company generating
sufficient taxable income in the future. Although realization of the net
deferred tax asset is not assured, the Company believes it is more likely than
not that the Company will generate sufficient taxable income in the future to
realize the full amount of the deferred tax asset. The Company's assessment is
based on projections that assume that the Company can maintain its current store
contribution margin. Furthermore, the Company expects to maintain the aggregate
sales growth experienced over the past five years, which would generate
additional taxable income. The primary uncertainty related to the realization of
the deferred tax asset is the Company's ability to achieve its four-year
business plan and generate future taxable income to realize the full amount of
the deferred tax asset. The Company believes that the sales, gross margin, store
contribution margin, and selling, general and administrative expenses
assumptions in its four-year business plan are reasonable and, more likely than
not, attainable. The Company will continue to assess the recoverability of the
net deferred tax asset, and to the extent it is determined in the future that a
valuation allowance is required, it will be recognized as a charge to earnings
at that time.

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



1. Related Party Transactions

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

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

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

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

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

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

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

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



1. Distributor Contract

On June 14, 2002, the Company entered into a new primary
distribution agreement with Tree of Life, Inc. ("Tree of Life") as
distributor. The distribution arrangement commences effective September 1, 2002,
which is the date upon which the Company's existing primary distribution
contract with United Natural Foods, Inc. expires. The new agreement has no
specified term, although either party can terminate the agreement after three
years upon 120 days' prior written notice to the other party. Either party
also may terminate the agreement for defaults by the other party of certain
provisions of the agreement. Under the terms of the new agreement, the Company
is obligated to purchase 90% of its total cost of goods from specified
categories of goods for sale in its U.S. stores from Tree of Life, except in
certain defined circumstances when such percentage-purchasing obligation is
excused. The Company currently purchases approximately 28.2% of its aggregate
cost of goods for all product categories for all stores from its existing
primary distributor. The Company believes Tree of Life has sufficient warehouse
capacity and distribution technology to service the Company's existing stores'
distribution needs for natural foods and products as well as the needs of new
stores in the future. Upon expiration of the existing distribution agreement
with the Company's current primary distributor, other than the agreement with
Tree of Life, the Company will have no other supply contracts with the majority
of its smaller vendors,

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

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



1. Litigation

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

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

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

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



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Item
2. Management's Discussion And Analysis Of Financial Condition And Results Of
Operations

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



Overview

Marketing and Merchandising Initiatives and Operational
Improvements. During the
second quarter of fiscal 2002, we had a 9.6% increase in average weekly sales, a 6.1% increase
in average weekly customer count and a 3.3% rise in average sales per customer
chain-wide as compared to the second quarter of fiscal 2001.  We believe
that these
improvements were primarily driven by continued positive customer response to
our marketing and merchandising programs, including the Fresh Look program, and
operational improvements at store level.  Our marketing and
merchandising initiatives have
been expanded to additional Wild Oats stores in Arizona, Arkansas, Illinois, New
Mexico, Ohio, Tennessee and Utah. To date, 60 of the 73 natural foods
supermarket format stores in our chain have implemented these marketing
programs, which are designed to drive greater awareness of Wild Oats and to
increase customer traffic through weekly advertising circulars distributed to
customers via newspaper inserts and direct mail.

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

Store format. We operate two store formats: the natural foods
supermarket and farmers market formats. The natural foods supermarket format
store, operated under the Wild Oats(R) Natural
Marketplace and Nature's

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

- general economic conditions

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

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

- the timing of advertising and promotional events

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- store remodels

- store closures

- our ability to effectively execute our operating plans

- changes in consumer preferences for natural foods products

- availability of produce and other seasonal merchandise.



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

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

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

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

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

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

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

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

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

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

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



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



2002 Outlook

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



Factors Impacting Results of Operations

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

- the number, timing and mix of store openings, acquisitions, relocations,
    remodels or closings
- availability of capital
- fluctuations in quarterly results of operations
- impact of merchandising and marketing initiatives, including the Fresh
    Look program, on store performance
- economic conditions

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

New stores build their sales volumes and refine their
merchandise selection gradually and, as a result, generally have lower gross
margins and higher operating expenses as a percentage of sales than more mature
stores. We anticipate that the new stores opened in fiscal 2002 and 2003 will
experience operating losses for the first six to 12 months of operation, in
accordance with historical trends.

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

The construction or acquisition of new stores, remodeling of
existing stores, as well as completion of capital purchases of new technology
systems required for efficient operation of our business require substantial
capital expenditures. In the past, our capital expenditures have been funded by
cash generated from operations, bank debt and equity financing proceeds. These
sources of capital may not be available to us in the future; in addition, our
existing credit agreement contains limitations on our ability to make capital
expenditures that may constrain future growth without additional equity
financings. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."

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

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

Downturns in general economic conditions in communities,
states, regions or the nation as a whole can affect our results of operations.
While purchases of food generally do not decrease in a slower economy, consumers
may choose less expensive alternative sources for food purchases. In addition,
downturns in the economy make the disposition of excess properties, for which
the Company continues to pay rent and other carrying costs, substantially more
difficult as the markets become saturated with vacant space and market rents
decrease.

As mentioned previously, we compete with both natural foods
and conventional grocers. As competition in certain markets intensifies, our
results of operations may be negatively impacted through loss of sales,
reduction in margin from competitive price modifications, and disruptions in our
employee base.

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

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Our future direction and success is dependent in large part
on the continued services of certain key executive officers. Loss of any key
officer may have an adverse affect on current operations and future growth
programs.

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

On June 14, 2002, the Company entered into a new primary
distribution agreement with Tree of Life, Inc. ("Tree of Life") as
distributor. The distribution arrangement commences effective September 1, 2002,
which is the date upon which our existing primary distribution contract with
United Natural Foods, Inc. expires. The new agreement has no specified term,
although either party can terminate the agreement after three years upon 120
days' prior written notice to the other party. Either party also may terminate
the agreement for defaults by the other party of certain provisions of the
Agreement. Under the terms of the new agreement, we are obligated to purchase
90% of our total cost of goods from specified categories of goods for sale in
our U.S. stores from Tree of Life, except in certain defined circumstances when
such percentage purchasing obligation is excused. The Company currently
purchases approximately 28.2% of its aggregate cost of goods for all product
categories for all stores from its existing primary distributor. We believe Tree
of Life has sufficient warehouse capacity and distribution technology to service
the Company's existing stores' distribution needs for natural foods and products
as well as the needs of new stores in the future. Upon expiration of the
existing distribution agreement with our current primary distributor, other than
the agreement with Tree of Life, we will have no other supply contracts with the
majority of our smaller vendors, who could discontinue selling to Wild Oats at
any time. Although we believe that we could develop alternative sources of
supply, any such termination may create a short-term disruption in store-level
merchandise selection. Any significant disruption in the supply of goods could
have a material impact on our overall sales volume and cost of goods.

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

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



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Results of Operations

The following table sets forth for the periods indicated,
certain selected income statement data expressed as a percentage of sales.



|                                                 |  | Three Months Ended    |  | Six Months Ended  
|------------------------------------------------ |  | --------------------- |  | ------------------
|                                                 |  | June 29,              |  | June 30,          
|                                                 |  | 2002                  |  | 2001              
|                                                 |  |                       |  |                   
|Sales                                            |  | 100.0 %               |  | 100.0 %           
|Cost of goods sold and occupancy costs           |  | 69.8                  |  | 71.1              
|Gross margin                                     |  | 30.2                  |  | 28.9              
|Direct store expenses                            |  | 21.8                  |  | 24.0              
|Selling, general and
    administrative expenses |  | 6.2                   |  | 5.8               
|Pre-opening expenses                             |  | 0.3                   |  | 0.0               
|Restructuring and asset
    impairment charges   |  |                       |  | 23.9              
|Income (loss) from operations                    |  | 1.9                   |  | (24.8)            
|Loss on investment                               |  |                       |  | 0.1               
|Interest expense, net                            |  | 0.9                   |  | 1.2               
|Income (loss) before income taxes                |  | 1.0                   |  | (26.1)            
|Income tax expense (benefit)                     |  | 0.4                   |  | (9.5)             
|Net income (loss)                                |  | 0.6 %
           ==== |  | (16.6)%
    ======



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

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

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

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

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

Interest Expense, Net. Net interest expense for the three
months ended June 29, 2002 decreased 22.0% to $2.2 million from $2.8 million in
the same period in fiscal 2001, and for the six months ended June 29, 2002
decreased 15.7% to $4.4 million from $5.2 million in the same period in fiscal
2001 due to decreased borrowings during the six-month period. As part of the
October 2001 amendment to our credit facility, our revolving line interest rates
on prime-based and LIBOR-based loans are prime plus 2.25% and one-month LIBOR
plus 3.75%, respectively, both increasing by 0.5% each June 30 and January 1
through January 1, 2003 when the rate will remain constant through the maturity
date of August 1, 2003. Due to the current state of the U.S. economy, management
believes that the variable interest rates will remain constant during the next
six to 12 months. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources"
below.

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

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

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

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

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

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

During the first quarter of fiscal 2002, we recorded
restructuring income of $652,000. Details of the significant components are as
follows:

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

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

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

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



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



|                                                     |  | RESTRUCTURING
    STORE COUNT
|---------------------------------------------------- |  | -----------------------------
|                                                     |  | Fiscal Year
  Ending         
|                                                     |  |                              
|                                                     |  | 2000                         
|                                                     |  |                              
|Stores remaining at commencement of period           |  |                              
|Stores identified in fiscal 2000 for closure or sale |  | 22                           
|Stores identified in fiscal 2001 for closure or sale |  |                              
|Stores identified in fiscal 2002 for closure or sale |  |                              
|Identified stores closed or abandoned                |  | (10)                         
|Identified stores sold                               |  | (3)                          
|Reversal of stores identified for closure or sale    |  |                              
|Identified stores remaining at period end            |  | 9 
    ===                   





Income Tax Expense. For the three months ended June 29, 2002,
we recorded $860,000 of income tax expense, primarily as a result of income
before income taxes of $2.4 million during the period. . For the six months
ended June 29, 2002, we recorded $1.3 million of income tax expense, primarily
as a result of income before income taxes of $3.4 million during the
period.  The recoverability of the
net deferred tax asset is primarily dependent upon the Company generating
sufficient taxable income in the future. Although realization of the net
deferred tax asset is not assured, we believe it is more likely than not that
the Company will generate sufficient taxable income in the future to realize the
full amount of the deferred tax asset. Our assessment is based on projections
that assume that the Company can maintain its current store contribution margin.
Furthermore, we expect to maintain the sales growth experienced over the past
five years that would generate additional taxable income. The primary
uncertainty related to the realization of the deferred tax asset is the Company's
ability to achieve its four-year business plan and generate future taxable
income to realize the full amount of the deferred tax asset. We believe that the
sales, gross margin, store contribution margin, and selling, general and
administrative expenses assumptions in our four-year business plan are
reasonable and, more likely than not, attainable. We will continue to assess the
recoverability of the net deferred tax asset and to the extent it is determined
in the future that a valuation allowance is required, it will be recognized as a
charge to earnings at that time.



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Liquidity and Capital Resources

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

Net cash provided by operating activities was $23.8 million
during the first six months of fiscal 2002 as compared to $20.1 million during
the same period in fiscal 2001. Cash from operating activities increased during
this period primarily due to an increase in net income before depreciation and
amortization expense and changes in working capital items. We have not required
significant external financing to support inventory requirements at our existing
and new stores because we have been able to rely on vendor financing for most of
the inventory costs, and we anticipate that vendor financing will continue to be
available for new store openings.

Net cash used in investing activities was $4.6 million during
the first six months of fiscal 2002 as compared to $15.3 million during the same
period in fiscal 2001. The decrease is due to a reduction in capital
expenditures related to new store construction and remodels.

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

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

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

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

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

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Capital Expenditures. We spent approximately $4.6 million
during the first six months of fiscal 2002 for new store construction,
development, remodels and other capital expenditures, exclusive of acquisitions.
Capital expenditures originally planned for certain of the stores rescheduled to
open in fiscal 2002 were incurred commencing in the fourth quarter of fiscal
2001. The aggregate amount to construct all five originally scheduled stores was
originally estimated at $15.0 million to $20.0 million, but may be revised
downward as part of our comprehensive review of the business operations and
strategic plan. We have terminated one store's lease obligations. Our average
capital expenditures to open a leased store, including leasehold improvements,
equipment and fixtures, have ranged from approximately $2.0 million to $5.0
million historically, excluding inventory costs and initial operating losses. As
part of our reexamination of our operating strategies, we anticipate that the
average capital expenditures to open a natural foods supermarket format store
will be $2.5 million to $4.0 million in the future, partly because of our
decision to reduce the size or simplify the format of our food service
department in new stores, as well as our decision not to increase store size in
the majority of geographic areas. Our average capital expenditures to open a
farmers market format store are estimated at $1.5 million to $2.25 million in
the future. Delays in opening new stores may result in increased capital
expenditures and increased pre-opening costs for the site, as well as lower than
planned sales for the Company. Under our amended credit facility, we are limited
in our new store capital expenditures to an aggregate $3.1 million in the second
quarter of fiscal 2002 for the first six months, and an aggregate $3.2 million
in the third quarter. Proceeds from any equity offering in excess of $30.0
million may be used to increase our total allowable level of capital
expenditures by $4.0 million per natural foods supermarket format store and
$2.25 million per farmers market format store. If we are successful in raising
the additional equity financing, we plan to use the equity proceeds to complete
the early construction of two stores in fiscal 2002 and execute leases for and
commence capital expenditures on up to 15 new stores through fiscal 2003.
Although there can be no assurance that actual capital expenditures will not
exceed anticipated levels, we believe that cash generated from operations and
available under our existing credit facility will be sufficient to satisfy our
budgeted capital expenditure requirements through the remainder of fiscal 2002.

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



Cautionary Statement Regarding Forward-Looking Statements

This Report on Form 10-Q contains "forward-looking
statements," within the meaning of the Private Securities Litigation Reform
Act of 1995, which involve known and unknown risks. Such forward-looking
statements include statements as to the Company's plans to open, acquire or
relocate additional stores; the anticipated performance of such stores; the
impact of competition and current economic uncertainty; the sufficiency of funds
to satisfy the Company's cash requirements through the remainder of fiscal 2002,
our expectations for comparable store sales; the impact of changes resulting
from further implementation of our Fresh Look merchandising, advertising and
pricing program; levels of cannibalization; expected pre-opening expenses and
capital expenditures; and other statements containing words such as
"believes," "anticipates," "estimates,"
"expects," "may," "intends" and words of similar
import or statements of management's opinion. These forward-looking statements
and assumptions involve known and unknown risks, uncertainties and other factors
that may cause the actual results, market performance or achievements of the
Company to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Important
factors that could cause differences in results of operations include, but are
not limited to, the Company's ability to conclude an equity financing; the
timing and success of the continued implementation of the Fresh Look program;

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the timing and execution of new store openings, relocations, remodels, sales and
closures; the impact of competition; changes in product supply or suppliers;
changes in management information needs; changes in customer needs and
expectations; governmental and regulatory actions; general industry or business
trends or events; changes in economic or business conditions in general or
affecting the natural foods industry in particular; and competition for and the
availability of sites for new stores and potential acquisition candidates. The
Company undertakes no obligation to update any forward-looking statements in
order to reflect events or circumstances that may arise after the date of this
Report.



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Item
3. Quantitative and Qualitative Disclosures About Market Risk

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

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

The Company's exposure to interest rate changes is primarily
related to its variable rate debt issued under its $125.0 million revolving
credit facility. The facility has two separate lines of credit, a revolving line
of up to $86.2 million and a term loan of up to $38.8 million, each with a
three-year term expiring August 1, 2003. As part of the October 2001 amendment
of the credit facility, which had an original credit capacity of $157.5 million,
borrowings under the credit facility have been limited to $125.0 million. As of
June 29, 2002, there were $62.5 million in borrowings outstanding under the
$86.2 million revolving line of this facility and $33.8 million in borrowings
outstanding under the $38.8 million term note. As part of the amendment to the
credit facility, the interest rate on the facility was amended to either prime
plus 2.25% or one-month LIBOR plus 3.75%, at our election, and the rates
increase by 0.5% starting January 1, 2002 and each six months thereafter through
January 2003. Because the interest rates on these facilities are variable, based
upon the prime rate or LIBOR, the Company's interest expense and net income are
affected by interest rate fluctuations. If interest rates were to increase or
decrease by 100 basis points, the result, based upon the existing outstanding
debt as of June 29, 2002, would be an annual increase or decrease of
approximately $963,000 in interest expense and a corresponding decrease or
increase of approximately $605,000 in the Company's net income after taxes.

In September 2000, as required by the Company's credit
facility, the Company entered into an interest rate swap to hedge its exposure
on variable rate debt positions. Variable rates are predominantly linked to
LIBOR as determined by one-month intervals. The interest rate provided by the
swap on variable rate debt is 6.6%. At June 29, 2002, the notional principal
amount of the interest rate swap agreement was $37.5 million, expiring on August
1, 2003. The notional amount is the amount used for the calculation of interest
payments that are exchanged over the life of the swap transaction on the
amortized principal balance. In the second quarter of fiscal 2002, the loss, net
of taxes, included in other comprehensive loss for this cash flow hedge was
approximately $303,000.



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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

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

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

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

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





Item 2.Changes in Securities and Use of Proceeds

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

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



Item 3. Defaults Upon
Senior Securities

None.



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

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



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



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

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



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





Item 5. Other Information

Not applicable.



Item 6. Exhibits and
Reports on Form 8-K

> 10.1      Second
>     Amendment to
>     Employment Agreement between Wild Oats Markets, Inc. and Perry D. Odak,
>     dated June 19, 2002.
>     10.2      Third
>     Amendment to
>     Employment Agreement between Wild Oats Markets, Inc. and Perry D. Odak,
>     dated August 12, 2002.
>     10.3      Assignment of
>     Kaczynski Employment Agreement, dated June 29, 2002, between Registrant and
>     Sparky, Inc.
>     10.4      Assignment of Dunlap
>     Employment Agreement, dated June 29, 2002, between Registrant and Wild Oats
>     Financial, Inc.
>     10.5      Re-filing of correct
>     version of Edward F. Dunlap Equity Incentive Plan (incorrect version filed
>     as Exhibit 10.20 to the Company's 
>            
>          Annual Report filed on Form 10-K for fiscal
>     year ending December 29, 2001)

(b) Reports on Form 8-K:

> None.

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> 

SIGNATURES



Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boulder, County of
Boulder, State of Colorado, on the 13th day of August, 2002.

Wild Oats Markets, Inc.

By: /s/Edward F. Dunlap

Edward F. Dunlap

Chief Financial Officer















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Certification of CEO Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002



In connection with the Quarterly Report of Wild Oats Markets,
Inc. (the "Company") on Form 10-Q for the period ended June 29, 2002
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), Perry D. Odak, as Chief Executive Officer of the Company
hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906
of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:



(1) The Report fully complies with the requirements of
section 13(a) of the Securities Exchange Act of 1934; and



(2) The information contained in the Report fairly presents,
in all material respects, the financial condition and results of operations of
the Company.



/s/Perry D. Odak

Perry D. Odak

Chief Executive Officer

August 12, 2002





This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.





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Certification of CFO Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002



In connection with the Quarterly Report of Wild Oats Markets,
Inc. (the "Company") on Form 10-Q for the period ended June 29, 2002
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), Edward F. Dunlap, as Chief Financial Officer of the
Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:



(1) The Report fully complies with the requirements of
section 13(a) of the Securities Exchange Act of 1934; and



(2) The information contained in the Report fairly presents,
in all material respects, the financial condition and results of operations of
the Company.





/s/Edward F. Dunlap

Edward F. Dunlap

Chief Financial Officer

August 12, 2002



This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.













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