TABLE OF CONTENTS

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q



|(X)   | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
    OCTOBER 1, 2005.         
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                 
|      | 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
    84-1100630(State or other
    jurisdiction of
    (I.R.S. Employer
    Identification Number)Incorporation or
    organization)












3375 Mitchell Lane

Boulder, Colorado 80301

(Address of principal executive offices, including zip code)







(303) 440-5220

(Registrants telephone number, including area code)







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

Yes       ( X )       No      (
   )



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

Yes       ( X )       No      (
   )



As of November 7, 2005, there were 29,032,639 shares outstanding of the registrant's
common stock (par value $.001 per share).







---





TABLE OF CONTENTS

|PART I.                |  | FINANCIAL
    INFORMATION                                                                                                                          | Page
|---------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|                       |  |                                                                                                                                                    |     
|Item 1.                |  | Financial Statements:                                                                                                                              |     
|                       |  |                                                                                                                                                    |     
|                       |  | Consolidated Balance Sheets, October 1, 2005
      (unaudited) and January 1, 2005                                                                 | 3   
|                       |  |                                                                                                                                                    |     
|                       |  | Consolidated Statements of
      Operations (unaudited), Three and Nine Months Ended October 1, 2005 and September 25, 2004                        | 4   
|                       |  |                                                                                                                                                    |     
|                       |  | Consolidated
      Statements of Comprehensive Income (Loss) (unaudited), Three and Nine Months Ended October
      1, 2005 and September 25, 2004 | 5   
|                       |  |                                                                                                                                                    |     
|                       |  | Consolidated Statements of Cash
      Flows (unaudited), Nine Months Ended October 1, 2005 and September 25, 2004                                  | 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                                                                                   | 29  
|                       |  |                                                                                                                                                    |     
|Item 4.                |  | Controls and Procedures                                                                                                                            | 29  
|                       |  |                                                                                                                                                    |     
|PART II.               |  | OTHER INFORMATION                                                                                                                                  |     
|                       |  |                                                                                                                                                    |     
|Item 1.                |  | Legal Proceedings                                                                                                                                  | 30  
|                       |  |                                                                                                                                                    |     
|Item 2.                |  | Unregistered
      Sales of Equity Securities and Use of Proceeds                                                                                  | 30  
|                       |  |                                                                                                                                                    |     
|Item 3.                |  | Defaults
      Upon Senior Securities                                                                                                              | 30  
|                       |  |                                                                                                                                                    |     
|Item 4.                |  | Submission
      of Matters to a Vote of Security Holders                                                                                          | 31  
|                       |  |                                                                                                                                                    |     
|Item 5.                |  | Other Information                                                                                                                                  | 31  
|                       |  |                                                                                                                                                    |     
|Item 6.                |  | Exhibits and Reports on Form 8-K                                                                                                                   | 31  
|                       |  |                                                                                                                                                    |     
|SIGNATURE AND EXHIBITS | 
|                       |  |                                                                                                                                                    |     
|                       |  | Signatures                                                                                                                                         | 32  
|                       |  |                                                                                                                                                    |     



---

PART I.  FINANCIAL INFORMATION





Item 1.  Financial Statements



WILD OATS MARKETS, INC.

Consolidated Balance Sheets

(in thousands, except share data)

|                                         |                                                              |                                                                                                                                                                               |                            |          | October 1, 2005 |          | January 1, 2005
|---------------------------------------- | ------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------- | --------------- | -------- | ---------------
|                                         |                                                              |                                                                                                                                                                               |                            |          | (unaudited)     |          |                
|                                         |                                                              |                                                                                                                                                                               |                            |          |                 |          |                
|ASSETS                                   |                                                              |                                                                                                                                                                               |                            |         
|                                         |                                                              |                                                                                                                                                                               |                            |         
|                                         | Current assets:                                              |                                                                                                                                                                               |                            |          |                
|                                         |                                                              | Cash and cash equivalents                                                                                                                                                     |                            | $ 51,373 |                 | $ 30,671
|                                         |                                                              | Short-term investments                                                                                                                                                        |                            | -        |                 | 11,144  
|                                         |                                                              | Inventories (net of reserves of
    $909 and $815, respectively)                                                                                                              |                            | 59,819   |                 | 54,960  
|                                         |                                                              | Accounts receivable (net of
    allowance for doubtful accounts of $192 and $153, respectively)                                                                               |                            | 3,400    |                 | 3,860   
|                                         |                                                              | Prepaid expenses and other current
    assets                                                                                                                                 |                            | 5,811    |                 | 5,741   
|                                         |                                                              | Current deferred tax asset                                                                                                                                                    |                            | 258      |                 | -       
|                                         |                                                              |                                                                                                                                                                               |                            |          |                 |          |                
|                                         |                                                              |                                                                                                                                                                               | Total current assets       |          | 120,661         |          | 106,376        
|                                         |                                                              |                                                                                                                                                                               |                            |          |                 |          |                
|                                         | Property and equipment, net                                  |                                                                                                                                                                               | 176,655                    |          | 177,830        
|                                         | Goodwill, net                                                |                                                                                                                                                                               | 105,124                    |          | 106,084        
|                                         | Other intangible assets, net                                 |                                                                                                                                                                               | 6,193                      |          | 6,491          
|                                         | Deposits and other assets                                    |                                                                                                                                                                               | 6,137                      |          | 8,361          
|                                         | Deferred tax asset, net                                      |                                                                                                                                                                               | -                          |          | 418            
|                                         |                                                              |                                                                                                                                                                               |                            |          |                 |          |                
|                                         |                                                              |                                                                                                                                                                               |                            |          | $ 414,770       |          | $ 405,560      
|                                         |                                                              |                                                                                                                                                                               |                            |          |                 |          |                
|LIABILITIES AND
    STOCKHOLDERS EQUITY |                                                              |                                                                                                                                                                               |                            |         
|                                         |                                                              |                                                                                                                                                                               |                            |         
|                                         | Current liabilities:                                         |                                                                                                                                                                               |                            |          |                
|                                         |                                                              | Accounts payable                                                                                                                                                              |                            | $ 56,443 |                 | $ 54,428
|                                         |                                                              | Book overdraft                                                                                                                                                                |                            | 21,728   |                 | 23,325  
|                                         |                                                              | Accrued liabilities                                                                                                                                                           |                            | 54,265   |                 | 53,154  
|                                         |                                                              | Current portion of debt, capital
    leases and financing obligations                                                                                                         |                            | 628      |                 | 405     
|                                         |                                                              |                                                                                                                                                                               |                            |          |                 |          |                
|                                         |                                                              |                                                                                                                                                                               | Total current liabilities  |          | 133,064         |          | 131,312        
|                                         |                                                              |                                                                                                                                                                               |                            |          |                 |          |                
|                                         | Long-term debt, capital leases and
    financing obligations |                                                                                                                                                                               | 148,296                    |          | 148,675        
|                                         | Other long-term obligations                                  |                                                                                                                                                                               | 27,390                     |          | 24,472         
|                                         |                                                              |                                                                                                                                                                               |                            |          |                 |          |                
|                                         |                                                              |                                                                                                                                                                               | 308,750                    |          | 304,459        
|                                         |                                                              |                                                                                                                                                                               |                            |          |                 |          |                
|                                         | Commitments and contingencies                                |                                                                                                                                                                               |                            |          |                
|                                         |                                                              |                                                                                                                                                                               |                            |          |                 |          |                
|                                         | Stockholders equity:                                        |                                                                                                                                                                               |                            |          |                
|                                         |                                                              | Preferred stock, $0.001 par value;
    5,000,000 shares authorized, no shares issued and outstanding                                                                          |                            | -        |                 | -       
|                                         |                                                              | Common stock, $0.001 par value;
    60,000,000 shares authorized, 31,008,782 and 30,466,701 shares issued; and 29,030,982 and
    28,488,901 shares outstanding, respectively |                            | 31       |                 | 30      
|                                         |                                                              | Treasury stock, at cost: 1,977,800
    shares as of October 1, 2005 and January 1, 2005                                                                                       |                            | (24,999) |                 | (24,999)
|                                         |                                                              | Additional paid-in capital                                                                                                                                                    |                            | 226,274  |                 | 221,029 
|                                         |                                                              | Note receivable, related party                                                                                                                                                |                            | (11,889) |                 | (11,416)
|                                         |                                                              | Accumulated deficit                                                                                                                                                           |                            | (84,657) |                 | (84,509)
|                                         |                                                              | Accumulated other comprehensive
    income                                                                                                                                    |                            | 1,260    |                 | 966     
|                                         |                                                              |                                                                                                                                                                               |                            |          |                 |          |                
|                                         |                                                              |                                                                                                                                                                               | Total stockholders equity |          | 106,020         |          | 101,101        
|                                         |                                                              |                                                                                                                                                                               |                            |          |                 |          |                
|                                         |                                                              |                                                                                                                                                                               |                            |          | $ 414,770       |          | $ 405,560      
|                                         |                                                              |                                                                                                                                                                               |                            |          |                 |          |                
|                                         |                                                              |                                                                                                                                                                               |                            |          |                 |          |                





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



---



WILD OATS MARKETS, INC.

Consolidated Statements of Operations

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

|                                                                     |                                                        | THREE MONTHS
    ENDED            |         | NINE
    MONTHS ENDED
|-------------------------------------------------------------------- | ------------------------------------------------------ | --------------------------------- | ------- | ---------------------
|                                                                     |                                                        |                                   |         |                      
|                                                                     |                                                        | October 1,                        |         | September 25,        
|                                                                     |                                                        | 2005                              |         | 2004                 
|                                                                     |                                                        |                                   |         |                      
|                                                                     |                                                        |                                   |         |                      
|Sales                                                                |                                                        | $278,522                          |         | $250,739             
|Cost of goods sold and occupancy
    costs                           |                                                        | 197,785                           |         | 181,911              
|                                                                     |                                                        |                                   |         |                      
|Gross profit                                                         |                                                        | 80,737                            |         | 68,828               
|Operating expenses:                                                  |                                                        |                                   |         |                      
|                                                                     | Direct store expenses                                  |                                   | 62,086  |                      
|                                                                     | Selling, general and
    administrative    expenses    |                                   | 16,644  |                      
|                                                                     | Loss on disposal of assets                             |                                   | 43      |                      
|                                                                     | Pre-opening expenses                                   |                                   | 325     |                      
|                                                                     | Restructuring and asset impairment
       charges, net |                                   | 51      |                      
|                                                                     |                                                        |                                   |         |                      
|                                                                     |                                                        | Income (loss) from operations     |         | 1,588                
|                                                                     | Loss on early extinguishment of
    debt               |                                   | -       |                      
|                                                                     | Interest income                                        |                                   | 451     |                      
|                                                                     | Interest expense                                       |                                   | (1,784) |                      
|                                                                     |                                                        |                                   |         |                      
|                                                                     |                                                        | Income (loss) before income taxes |         | 255                  
|                                                                     | Income tax expense (benefit)                           |                                   | 173     |                      
|                                                                     |                                                        |                                   |         |                      
|Net income (loss)                                                    |                                                        | $ 82                              |         | $ (7,052)            
|                                                                     |                                                        |                                   |         |                      
|                                                                     |                                                        |                                   |         |                      
|Net income (loss) per common
    share:                              |                                                        |                                   |         |                      
|                                                                     | Basic                                                  |                                   | $ 0.00  |                      
|                                                                     | Diluted                                                |                                   | $ 0.00  |                      
|                                                                     |                                                        |                                   |         |                      
|Weighted average common shares
       outstanding, basic             |                                                        | 28,928                            |         | 28,458               
|Dilutive effect of stock options
    and restricted stock units      |                                                        | 766                               |         | -                    
|                                                                     |                                                        |                                   |         |                      
|Weighted average common shares
       outstanding, assuming dilution |                                                        | 29,694                            |         | 28,458               
|                                                                     |                                                        |                                   |         |                      
|                                                                     |                                                        |                                   |         |                      



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





---





WILD OATS MARKETS, INC.

Consolidated Statements
of Comprehensive Income (Loss)

(in thousands) (unaudited)



|                            |                                                             |       |     |           | THREE MONTHS
    ENDED |         | NINE MONTHS
    ENDED
|--------------------------- | ----------------------------------------------------------- | ----- | --- | --------- | ---------------------- | ------- | ---------------------
|                            |                                                             |       |     |           |                        |         |                      
|                            |                                                             |       |     |           | October 1,             |         | September 25,        
|                            |                                                             |       |     |           | 2005                   |         | 2004                 
|                            |                                                             |       |     |           |                        |         |                      
|                            |                                                             |       |     |           |                        |         |                      
|Net income (loss)           |                                                             | $ 82  |     | $ (7,052) |                        | $ (148) |                      
|                            |                                                             |       |     |           |                        |         |                      
|Other comprehensive income: |                                                             |       |     |           |                        |         |                      
|                            | Foreign currency translation
    adjustments                |       | 571 |           | 346                    |         | 316                  
|                            | Unrealized gain (loss) on
    available-for-sale securities |       | 6   |           | 7                      |         | (22)                 
|                            |                                                             |       |     |           |                        |         |                      
|Other comprehensive income  |                                                             | 577   |     | 353       |                        | 294     |                      
|                            |                                                             |       |     |           |                        |         |                      
|                            |                                                             |       |     |           |                        |         |                      
|Comprehensive income (loss) |                                                             | $ 659 |     | $ (6,699) |                        | $ 146   |                      
|                            |                                                             |       |     |           |                        |         |                      
|                            |                                                             |       |     |           |                        |         |                      





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

---

WILD OATS MARKETS, INC.

Consolidated Statements of Cash Flows

(in thousands) (unaudited)

|                                                                           |                                                                                     |                                                      |                                               |          | NINE MONTHS
    ENDED
|-------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ---------------------------------------------------- | --------------------------------------------- | -------- | ---------------------
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|                                                                           |                                                                                     |                                                      |                                               |          | October 1,           
|                                                                           |                                                                                     |                                                      |                                               |          | 2005                 
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|CASH FLOWS FROM OPERATING
    ACTIVITIES:                                  |                                                                                     |                                                      |                                               |         
|                                                                           | Net loss                                                                            |                                                      | $ (148)                                       |          | $ (5,314)            
|                                                                           | Adjustments to reconcile net loss
    to net cash provided by operating activities: |                                                      |                                               |          |                      
|                                                                           |                                                                                     | Depreciation and amortization                        |                                               | 19,635   |                      
|                                                                           |                                                                                     | Loss on disposal of property and
    equipment       |                                               | 87       |                      
|                                                                           |                                                                                     | Deferred tax expense (benefit)                       |                                               | 223      |                      
|                                                                           |                                                                                     | Restructuring and asset impairment
    expense, net  |                                               | 2,511    |                      
|                                                                           |                                                                                     | Interest on related party
    receivable             |                                               | (473)    |                      
|                                                                           |                                                                                     | Stock based compensation                             |                                               | 383      |                      
|                                                                           |                                                                                     | Income tax benefit from stock
    based compensation |                                               | -        |                      
|                                                                           |                                                                                     | Accretion of debt issuance costs                     |                                               | 96       |                      
|                                                                           |                                                                                     | Loss on early extinguishment of
    debt             |                                               | 559      |                      
|                                                                           | Change in assets and liabilities:                                                   |                                                      |                                               |          |                      
|                                                                           |                                                                                     | Inventories, net                                     |                                               | (4,817)  |                      
|                                                                           |                                                                                     | Receivables, net, and other assets                   |                                               | 1,941    |                      
|                                                                           |                                                                                     | Accounts payable                                     |                                               | 1,950    |                      
|                                                                           |                                                                                     | Accrued liabilities and other
    liabilities        |                                               | 3,387    |                      
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|                                                                           |                                                                                     |                                                      | Net cash provided by operating
    activities |          | 25,334               
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|CASH FLOWS FROM INVESTING
    ACTIVITIES:                                  |                                                                                     |                                                      |                                               |         
|                                                                           | Capital expenditures                                                                |                                                      | (19,182)                                      |          | (41,540)             
|                                                                           | Purchase of short-term investments                                                  |                                                      | -                                             |          | (26,299)             
|                                                                           | Proceeds from sale of short-term
    investments                                    |                                                      | 11,122                                        |          | -                    
|                                                                           | Proceeds from sale of property and
    equipment                                    |                                                      | 58                                            |          | 988                  
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|                                                                           |                                                                                     |                                                      | Net cash used in investing
    activities     |          | (8,002)              
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|CASH FLOWS FROM FINANCING
    ACTIVITIES:                                  |                                                                                     |                                                      |                                               |         
|                                                                           | Net repayments under
    line-of-credit agreement                                   |                                                      | -                                             |          | (30,179)             
|                                                                           | Net decrease in book overdraft                                                      |                                                      | (1,597)                                       |          | (5,193)              
|                                                                           | Proceeds from long-term debt                                                        |                                                      | -                                             |          | 115,150              
|                                                                           | Purchase of treasury stock                                                          |                                                      | -                                             |          | (24,999)             
|                                                                           | Payment of debt issuance costs                                                      |                                                      | -                                             |          | (3,866)              
|                                                                           | Repayments on notes payable,
    long-term debt and capital leases                  |                                                      | (156)                                         |          | (148)                
|                                                                           | Proceeds from issuance of common
    stock, net                                     |                                                      | 4,863                                         |          | 3,420                
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|                                                                           |                                                                                     |                                                      | Net cash provided by financing
    activities |          | 3,110                
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|Effect of exchange rate changes
    on cash                                |                                                                                     | 260                                                  |                                               | 168     
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|Net increase in cash and cash
    equivalents                              |                                                                                     | 20,702                                               |                                               | 10,668  
|Cash and cash equivalents at
    beginning of period                       |                                                                                     | 30,671                                               |                                               | 17,400  
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|Cash and cash equivalents at
    end of period                             |                                                                                     | $ 51,373                                             |                                               | $ 28,068
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|SUPPLEMENTAL DISCLOSURE OF
    NONCASH INVESTING AND FINANCING ACTIVITIES:
|                                                                           | Equipment acquired through capital
    lease                                        |                                                      | $ 278                                         |          | $ 105                
|                                                                           |                                                                                     |                                                      |                                               |          |                      
|                                                                           |                                                                                     |                                                      |                                               |          |                      



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



---

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 and
organic foods supermarkets in the United States and Canada. The Company also operates
bakeries, commissary kitchens and a distribution center 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 October 1, 2005, the Consolidated
Statements of Operations and Consolidated Statements of Comprehensive Income (Loss) for
the three and nine months ended October 1, 2005 and September 25, 2004, as well as the
Consolidated Statements of Cash Flows for the nine months ended October 1, 2005 and
September 25, 2004 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.



The financial statements have been prepared by the Company in
accordance with the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to SEC regulations,
therefore, these consolidated financial statements should be read in conjunction with
financial statements and notes thereto included in the Company's 2004 Annual Report on
Form 10-K, as amended. The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities,
revenue, expenses and related disclosures of contingent assets and liabilities. Examples
include accounting for self-insurance reserves, restructuring charges and store closing
costs, asset impairment charges, goodwill, inventory valuation, and contingencies. Actual
results may differ from these estimates. The results of operations for 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 year
presentation.



The unaudited information included in the consolidated financial
statements for the three and nine months ended October 1, 2005 and September 25, 2004
include the results of operations of the Company for the 13 and 39 weeks then ended.





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



The amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity computed under the
effective interest method. Such amortization and accretion is included in interest income.
Realized gains and losses and declines in value judged to be other than temporary on
available-for-sale securities are included in interest income. The cost of securities sold
is based on the specific identification method. Realized income and dividends on
securities classified as available-for-sale are included in interest income. Investments
classified as available-for-sale are marked to market each reporting period with the
unrealized gain or loss reflected as a component of other comprehensive income (loss).





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



At October 1, 2005, the Company had five stock-based employee
compensation plans, which are described more fully in Note 9  Stock Plans and
Options in our fiscal 2004 Annual Report filed on Form 10-K, as amended, for the
period ended January 1, 2005. These plans allow for awards of both stock options and
restricted stock units ("RSUs"). The Company accounts for those plans in
accordance with the intrinsic value based method in Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Some stock-based compensation expense is reflected in net income
for options issued at a discount and for RSUs issued as Board of Directors
compensation. All other options granted under the plans had an exercise price equal to the
market value of the underlying common stock on the date of grant; therefore, no
stock-based compensation expense is reflected in net income for these grants. Reflected in
results of operations for the first nine months of fiscal 2005 and 2004 is compensation
expense of $383,000 and $539,000, respectively.



As required by Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") Nos. 123, Accounting for
Stock-Based Compensation,and 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, the following table illustrates the effect on
net income and earnings per share if stock-based compensation costs were to be calculated
based on the fair value of the options granted and recognized ratably over the vesting
period as prescribed in SFAS No. 123 (in thousands):



|                               |                                                                                                                         |                             |      |           | THREE MONTHS
    ENDED |           | NINE
    MONTHS ENDED
|------------------------------ | ----------------------------------------------------------------------------------------------------------------------- | --------------------------- | ---- | --------- | ---------------------- | --------- | ---------------------
|                               |                                                                                                                         |                             |      |           |                        |           |                      
|                               |                                                                                                                         |                             |      |           | October 1,             |           | September 25,        
|                               |                                                                                                                         |                             |      |           | 2005                   |           | 2004                 
|                               |                                                                                                                         |                             |      |           |                        |           |                      
|                               |                                                                                                                         |                             |      |           |                        |           |                      
|Net income (loss), as reported |                                                                                                                         | $ 82                        |      | $ (7,052) |                        | $ (148)   |                      
|                               | Add: Stock-based compensation
    expense included in reported net income, net of tax*                                  |                             | 86   |           | 78                     |           | 232                  
|                               | Deduct: Total stock-based
    compensation expense determined under fair value based method for all awards, net of tax* |                             | (46) |           | (286)                  |           | (1,156)              
|                               |                                                                                                                         |                             |      |           |                        |           |                      
|                               |                                                                                                                         | Pro forma net income (loss) |      | $ 122     |                        | $ (7,260) |                      
|                               |                                                                                                                         |                             |      |           |                        |           |                      
|                               |                                                                                                                         |                             |      |           |                        |           |                      
|                               | Earnings (loss) per share:                                                                                              |                             |      |           |                        |           |                      
|                               |                                                                                                                         | Basic  as reported         |      | $ 0.00    |                        | $ (0.25)  |                      
|                               |                                                                                                                         |                             |      |           |                        |           |                      
|                               |                                                                                                                         | Basic  pro forma           |      | $ 0.00    |                        | $ (0.26)  |                      
|                               |                                                                                                                         |                             |      |           |                        |           |                      
|                               |                                                                                                                         |                             |      |           |                        |           |                      
|                               |                                                                                                                         | Diluted  as reported       |      | $ 0.00    |                        | $ (0.25)  |                      
|                               |                                                                                                                         |                             |      |           |                        |           |                      
|                               |                                                                                                                         | Diluted - pro forma         |      | $ 0.00    |                        | $ (0.26)  |                      
|                               |                                                                                                                         |                             |      |           |                        |           |                      
|                               |                                                                                                                         |                             |      |           |                        |           |                      

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



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment ("SFAS No. 123R"). SFAS No. 123R is a revision of SFAS No. 123, and
supersedes APB Opinion No. 25. The new standard establishes accounting standards for
transactions in which an entity exchanges its equity instruments for goods or services,
including stock option and restricted stock grants. The provisions of SFAS No. 123R will
be effective for the Company on January 1, 2006. The Company is currently evaluating the
impact on its results from adopting SFAS No. 123R, but expects it to be comparable to the
pro forma effects of applying the original SFAS No. 123. Accordingly, the adoption of SFAS
No. 123R is expected to have a material effect on the Companys results of
operations.



In February 2005, the Company approved the acceleration of all
non-director, non-officer options that were unvested with an exercise price of $9.00 or
higher, resulting in the accelerated vesting of an aggregate of 219,190 options. The
effect of the accelerated vesting of these options is included in the SFAS No. 123
calculation above. The purpose of this acceleration was driven by the Companys
efforts to reduce non-cash compensation expense that will be required beginning with the
first quarter of 2006 in accordance with SFAS No. 123R.





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



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



|                                         |  |           |  |           | October 1, 2005 |  | January 1, 2005 | 
|---------------------------------------- |  | --------- |  | --------- | --------------- |  | --------------- | 
|                                         |  |           |  |           |                 |  |                 | 
|                                         |  |           |  |           |                 |  |                 | 
|Machinery and equipment                  |  | $ 136,662 |  | $ 131,133 |                
|Buildings and leasehold
    improvements |  | 164,630   |  | 156,829   |                
|Construction in progress                 |  | 8,501     |  | 14,283    |                
|                                         |  |           |  |           |                 |  |                 | 
|                                         |  | 309,793   |  | 302,245   |                
|Less: accumulated depreciation           |  | (133,138) |  | (124,415) |                
|                                         |  |           |  |           |                 |  |                 | 
|Property and equipment, net              |  | $ 176,655 |  | $ 177,830 |                
|                                         |  |           |  |           |                 |  |                 | 
|                                         |  |           |  |           |                



Depreciation expense was $6.4 million and $7.2 million for the three months and $19.3
and $21.0 million for the nine months ended October 1, 2005 and September 25, 2004,
respectively.

In June 2005, the Emerging Issues Task Force ("EITF") reached
a consensus on EITF Issue No. 05-6, Determining the Amortization Period for Leasehold
Improvements Purchased After Lease Inception Acquired in a Business Combination("EITF
No. 05-6"). EITF No. 05-6 requires that leasehold improvements acquired in a
business combination be amortized over the shorter of the useful life of the assets or a
term that includes required lease periods and renewals deemed to be reasonably assured at
the date of acquisition. EITF No. 05-6 further requires that leasehold improvements that
are placed in service significantly after and not contemplated at or near the beginning of
the lease term shall be amortized over the shorter of the useful life of the assets or a
term that includes the required lease periods and renewals deemed to be reasonably assured
at the date of the acquisition. EITF No. 05-6 became effective for the Companys
fiscal quarter beginning July 2, 2005. The adoption of EITF No. 05-6 did not have a
material effect on the Companys Consolidated Financial Statements.





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



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



During the second quarter of 2005, the Company made an irrevocable
election to pay the principal amount of debentures in cash upon conversion, however, the
Company retains the ability to satisfy the remainder of any conversion payment in cash or
any combination of cash and common stock. The debentures are callable and convertible into
the Company's common stock prior to maturity at the option of the holders under the
following circumstances: (1) during any calendar quarter commencing after June 30, 2004
and before March 31, 2029, if the last reported sale price of the Companys common
stock is greater than or equal to 130% of the conversion price of $17.70 per share; (2) at
any time on or after April 1, 2029 if the last reported sale price of the Companys
common stock on any date on or after March 31, 2029 is greater than or equal to 130% of
the conversion price; (3) subject to certain limitations, during the five business-day
period after any five consecutive trading-day period in which the trading price per
debenture for each day of that period was less than 98% of the product of the conversion
rate and the last reported sale price of the Company's common stock; (4) if the Company
calls the debentures for redemption; (5) upon the occurrence of certain corporate
transactions; or (6) if the Company requests a credit rating for the debentures, at any
time when the credit ratings assigned to the debentures are below specified levels. While
a credit rating has been issued for the debentures, the rating was not requested by the
Company, but initiated by the rating agency. Therefore, a change in the current rating
will not trigger a call provision. The debentures are initially convertible into 56.5099
shares of the Company's common stock per $1,000 principal amount, which is equivalent to
approximately $17.70 per share, for total initial underlying shares of 6,498,639. The
conversion rate will be subject to adjustment upon the occurrence of specified events.
Pursuant to the underwriting agreement and within 90 days of issuance, the Company filed a
shelf registration statement covering resales of the debentures and the common stock
issuable upon conversion thereof. The registration statement was declared effective August
26, 2005.



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



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



There are no financial covenants within the debenture indenture,
however, the Company paid penalty interest of 0.25% for the first 90 days of 2005 and paid
0.50% thereafter until the debentures were publicly registered on August 26, 2005. As of
October 1, 2005, the Company has accrued $166,943 and paid $138,160 in additional interest
to debenture holders due to not having an effective registration statement within the
specified timeframe.



In 2004, total proceeds from the issuance of the debentures were $115.2
million. The Company used $25.0 million of the net proceeds to repurchase 1,977,800
outstanding shares of its common stock, $31.2 million to pay the outstanding balance on
its credit facility, and approximately $3.7 million to pay related debt issuance costs.



Credit facility. On March 31, 2005, the Company entered into a
five-year revolving secured credit facility with Bank of America, N.A. (the "B of A
Facility"). Concurrent with the execution of the B of A Facility, the Company
terminated its existing $95 million credit facility (the "Wells Facility") with
Wells Fargo Bank N.A. as administrative agent. The B of A Facility allows borrowings and
letters of credit up to a maximum of $40 million, with an option to increase borrowings up
to $100 million, subject to a borrowing base determined by the value of certain inventory,
credit card receivables, invested cash and, at the Companys discretion, mortgaged
leaseholds. The B of A Facility is secured by certain assets including, but not limited
to, cash, inventory and fixed assets. Borrowings under the B of A Facility bear interest,
at the Companys election, at the prime rate or at LIBOR plus a margin ranging from
1.00% to 1.50%, depending on the excess borrowing availability over amounts borrowed.
Interest rates are determined quarterly. The Company is charged a commitment fee on the
unused portion of the B of A Facility. There are no financial covenants, other than the
obligation to maintain a certain percentage of minimum excess availability (as defined in
the agreement) at all times. The B of A Facility requires compliance on a monthly basis
with certain non-financial covenants, including limitations on incurring additional
indebtedness and making investments, the use and disposition of collateral, changes of
control, as well as cash management provisions. In conjunction with the debt refinancing,
the Company incurred a non-cash charge of approximately $559,000 to write off the
remaining unamortized debt issuance cost from the Wells Facility and capitalized debt
issuance costs of approximately $371,000 through October 1, 2005, to be amortized over the
life of the agreement using the effective interest method. As of October 1, 2005, the
Company had letters of credit outstanding totaling $11.3 million with Bank of America and
$520,000 outstanding with Wells Fargo.



The Wells Facility was entered into in February of 2003, with Wells
Fargo Bank N.A. acting as lead bank and administrative. The Wells Facility had a $95
million limit and a three-year term with a one-year renewal option. As of January 1, 2005,
and as of the date of termination of the Wells Facility, there were no outstanding
borrowings under the Wells Facility, and letters of credit outstanding totaled $9.1
million.





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



The Company does not have any derivative financial instruments as of
October 1, 2005 that meet the criteria of SFAS No. 133,Accounting for
Derivative Instruments and Hedging Activities.





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



Earnings per share are calculated in accordance with the provisions of
SFAS No. 128, Earnings Per Share("SFAS No. 128"). SFAS No. 128 requires
the Company to report both basic earnings per share, which is based on the
weighted-average number of common shares outstanding, and diluted earnings per share,
which is based on the weighted-average number of common shares outstanding and all
dilutive potential common shares outstanding, except where the effect of their inclusion
would be anti-dilutive. Anti-dilutive stock options of 437,747 and 1,190,480 for the three
months ended October 1, 2005 and September 25, 2004, respectively, and 938,146 and 614,830
for the nine months ended October 1, 2005 and September 25, 2004, respectively, were not
included in the diluted earnings per share calculations.



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





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



During the third quarter of fiscal 2005, the Company concluded goodwill
was not impaired and no other changes in the carrying amount of goodwill occurred. During
the first quarter of fiscal 2005, $960,000 goodwill, net of accumulated amortization, was
written off resulting in an ending net balance of $105,124. See Note 9 
Restructuring and Asset Impairment Chargesfor further details.



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



| |  |                                        |  |         | October 1, 2005 |         | January 1, 2005
| |  | -------------------------------------- |  | ------- | --------------- | ------- | ---------------
| |  |                                        |  |        
| |  | Leasehold interests                    |  | $ 8,373 |                 | $ 8,388
| |  | Less accumulated amortization          |  | (2,486) |                 | (2,200)
| |  |                                        |  |        
| |  | Leasehold interests, net               |  | 5,887   |                 | 6,188  
| |  | Liquor licenses (indefinite
    lived) |  | 306     |                 | 303    
| |  |                                        |  |        
| |  |                                        |  | $ 6,193 |                 | $ 6,491
| |  |                                        |  |        
| |  |                                        |  |         |                 |        





Amortization expense related to finite lived intangible assets was
$90,000 and $105,000 for the three months and $291,000 and $246,000 for the nine months
ended October 1, 2005 and September 25, 2004, respectively. The estimated amortization of
finite lived intangible assets for the remainder of 2005 and each of the fiscal years
through 2010 is as follows (in thousands):



| | FISCAL 
    YEAR  |  | AMORTIZATION EXPENSE | 
| | ----------------- |  | -------------------- | 
| |                   |  |                      | 
| |                   |  |                      | 
| | Remainder of 2005 |  | $ 90                 | 
| | 2006              |  | 358                  | 
| | 2007              |  | 358                  | 
| | 2008              |  | 358                  | 
| | 2009
    2010     |  | 358
    358          | 





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



During the third quarter of fiscal 2005, the Company recorded net
restructuring and asset impairment charges of $51,000 consisting of the following
components (in thousands):



| | Change in estimate related to
    lease-related liabilities for sites previously identified for closure or sale |                                                      | $ (96) | 
| | --------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------ | 
| | Lease-related liability and
    asset impairments for sites closed and relocated during the quarter             |                                                      | 5      | 
| | Severance for employees
    terminated during the third quarter of fiscal 2005                                  |                                                      | 21     | 
| | Accretion expense on lease
    related liabilities                                                              |                                                      | 121    | 
| |                                                                                                                 |                                                      |        | 
| |                                                                                                                 | Total restructuring and asset
    impairment expense | $ 51   | 
| |                                                                                                                 |                                                      |        | 



Details of the significant components are as follows:

- Changes in estimate related to lease-related liabilities for sites previously identified
    for closure or sale ($96,000 of restructuring income)



- Lease-related liability and asset impairments for sites closed and relocated during the
    third quarter ($5,000 of restructuring expense)



- Severance for employees notified of termination in the third quarter of fiscal 2005
    ($21,000 of restructuring expense)



- Accretion expense on lease-related liabilties ($121,000 of restructuring expense)



During the third quarter of 2005, there were no asset impairment
charges in accordance with the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. In determining whether an impairment
exists, the Company estimates the stores future cash flows on an undiscounted basis,
and if the cash flows are not sufficient to recover the carrying value, then the Company
uses a discounted cash flow based on a risk-adjusted discount rate, to adjust its carrying
value of the assets, and records a provision for impairment as appropriate. The Company
continually re-evaluates its stores performance to monitor the carrying value of its
long-lived assets in comparison to projected cash flows.



For the nine months ended October 1, 2005, the Company recorded net
restructuring and asset impairment charges of $2.5 million, consisting of the following
components (in thousands):



| | Change in
    estimate related to lease-related liabilities    for sites previously
    identified for closure or sale |                                                      | $ (243) | 
| | ---------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------- | 
| | Lease-related
    liability for site closed during the nine    months ended October 1, 2005                            |                                                      | 429     | 
| | Severance for
    employees terminated during the nine    months ended October 1, 2005                                 |                                                      | 134     | 
| | Accretion
    expense on lease related liabilities                                                                     |                                                      | 347     | 
| | Write off of
    goodwill                                                                                              |                                                      | 960     | 
| | Asset
    impairment charges                                                                                           |                                                      | 884     | 
| |                                                                                                                        |                                                      |         | 
| |                                                                                                                        | Total
    restructuring and asset impairment expense | $ 2,511 | 
| |                                                                                                                        |                                                      |         | 



Details of the significant components are as follows:

- Changes in estimate related to lease-related liabilities for sites previously
    identified for closure or sale ($243,000 of restructuring income)  For the nine
    months ended October 1, 2005, the Company accrued additional amounts for an Oregon
    location and two Tennessee locations. In addition, the Company reversed an existing
    accrual for potential litigation related to a location in Missouri and received a
    termination fee for early termination of an existing lease agreement in Scottsdale,
    Arizona.



- Lease-related liabilities for sites closed year to date through October 1, 2005
    ($429,000 of restructuring expense)



- Severance for employees notified of termination ($134,000 of restructuring expense)



- Accretion expense on lease-related liabilities ($347,000 of restructuring expense)



- Write off of goodwill ($960,000 of restructuring expense)



The Company incurred charges for accelerated depreciation related to
planned store closures of $54,000 and $1.1 million for the three months and, $501,000 and
$3.7 million for the nine months ended October 1, 2005 and September 25, 2004,
respectively. These costs are included in the "Cost of goods sold and occupancy
costs" line of the Consolidated Statements of Operations.



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



|                          | 2001 and |       |         |         | 1st Qtr | 2nd Qtr | 3rd Qtr |        
|------------------------- | -------- | ----- | ------- | ------- | ------- | ------- | ------- | -------
|EXIT PLANS                | Prior    | 2002  | 2003    | 2004    | 2005    | 2005    | 2005    | Total  
|                         
|                          |          |       |         |         |         |         |         |        
|Balance at                |          |       |         |         |         |         |         |        
|December 27, 2003:        | $ 8,615  | $ 421 | $ 224   | $
    - | $
    - | $
    - | $
    - | $ 9,260
|                          |          |       |         |         |         |         |         |        
|Severance expense         | -        | -     | -       | 754     | -       | -       | -       | 754    
|Lease-related expense     | (310)    | 344   | 70      | 566     | -       | -       | -       | 670    
|                          |          |       |         |         |         |         |         |        
|Cash paid:                |          |       |         |         |         |         |         |        
|Severance                 | -        | (7)   | (54)    | (495)   | -       | -       | -       | (556)  
|Lease-related liabilities | (1,429)  | (757) | (235)   | (48)    | -       | -       | -       | (2,469)
|                          |          |       |         |         |         |         |         |        
|Provision adjustments     | (212)    | -     | (5)     | (15)    | -       | -       | -       | (232)  
|                          |          |       |         |         |         |         |         |        
|Balance at                |          |       |         |         |         |         |         |        
|January 1, 2005:          | $ 6,664  | $ 1   | $
    - | $ 762   | $
    - | $
    - | $
    - | $ 7,427
|                          |          |       |         |         |         |         |         |        
|Severance expense         | -        | -     | -       | -       | 217     | -       | -       | 217    
|Lease-related expense     | 114      | -     | 140     | -       | 120     | -       | -       | 374    
|                          |          |       |         |         |         |         |         |        
|Cash paid:                |          |       |         |         |         |         |         |        
|Severance                 | -        | -     | -       | (88)    | (99)    | -       | -       | (187)  
|Lease-related liabilities | (429)    | -     | (35)    | (99)    | 21      | -       | -       | (542)  
|                          |          |       |         |         |         |         |         |        
|Provision adjustments     | -        | -     | -       | -       | (7)     | -       | -       | (7)    
|                          |          |       |         |         |         |         |         |        
|Balance at                |          |       |         |         |         |         |         |        
|April 2, 2005:            | $ 6,349  | $ 1   | $ 105   | $ 575   | $ 252   | $
    - | $
    - | $ 7,282
|                          |          |       |         |         |         |         |         |        
|Severance expense         | -        | -     | -       | -       | -       | (104)   | -       | (104)  
|Lease-related expense     | (465)    | -     | 377     | (87)    | -       | 304     | -       | 129    
|                          |          |       |         |         |         |         |         |        
|Cash Paid:                |          |       |         |         |         |         |         |        
|Severance                 | -        | -     | -       | (79)    | (14)    | (25)    | -       | (118)  
|Lease-related liabilities | (408)    | -     | (35)    | (135)   | -       | (154)   | -       | (732)  
|                          |          |       |         |         |         |         |         |        
|Provision adjustments     | 656      | -     | -       | 92      | (104)   | 684     | -       | 1,328  
|                          |          |       |         |         |         |         |         |        
|                          |          |       |         |         |         |         |         |        
|Balance at                |          |       |         |         |         |         |         |        
|July 2, 2005              | $ 6,132  | -     | $ 447   | $ 366   | $ 134   | $ 705   | $
    - | $ 7,785
|                          |          |       |         |         |         |         |         |        
|Severence expense         | -        | -     | -       | -       | -       | -       | 21      | 21     
|Lease-related expense     | 8        | -     | 11      | 11      | (7)     | 2       | 5       | 30     
|                          |          |       |         |         |         |         |         |        
|Cash paid:                |          |       |         |         |         |         |         |        
|Severance                 | -        | -     | -       | -       | -       | -       | (21)    | (21)   
|Lease-related liabilities | (330)    | -     | (35)    | (90)    | (93)    | (215)   | (5)     | (768)  
|                          |          |       |         |         |         |         |         |        
|Provision adjustment      | 75       | -     | -       | -       | -       | -       | -       | 75     
|                          |          |       |         |         |         |         |         |        
|Balance at                |          |       |         |         |         |         |         |        
|October 1, 2005:          | $ 5,8851 | $ 11  | $ 4231  | $ 2872  | $ 341   | $ 4921  | $
    - | $ 7,122
|                          |          |       |         |         |         |         |         |        
|                          |          |       |         |         |         |         |         |        



|Note: | 1. The restructuring accrual balance
    consists of lease-related liabilities.                                    
|----- | -------------------------------------------------------------------------------------------------------------------
|      | 2. The restructuring accrual balance
    consists of lease-related liabilities and $6,000 for employee termination.

As of October 1, 2005, the Companys restructuring balances consist of $1.9
million in accrued liabilities and other long-term obligations of $5.2 million.





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



For the nine months ended October 1, 2005, the Company recorded
$496,000 of income tax expense, as a result of income before income taxes of $348,000
during the period. The tax expense relates to income generated by the Companys
Canadian operations. The Company has a $258,000 net current deferred tax asset, that was
generated primarily as a result of timing differences related to its Canadian operations.
The Company performs assessments of the realization of its net deferred tax assets
according to SFAS No. 109, Accounting for Income Taxes. As a result of these
assessments, the Company concluded at January 1, 2005, that it should place a full
valuation allowance against its US net deferred tax asset. The Company has adjusted its
valuation allowance during the current quarter to continue to record a full valuation
allowance against its US net deferred tax asset.





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



Perry D. Odak.In May 2002, the Companys Board of
Directors amended the employment agreement of Perry D. Odak, the Companys CEO and
President. The amendment extended through December 2002, the period during which the
issuance by the Company of additional securities as part of an equity financing would
entitle Mr. Odak to receive up to 300,000 stock options exercisable for the Companys
common stock. In March 2002, Mr. Odak was issued options to purchase 5,856 shares of
common stock under a provision of his employment agreement that provided for the
maintenance of his 5% equity position in the event of a capital-raising transaction, based
upon the issuance of 111,269 shares of common stock, the resale of which was registered on
Form S-3, filed in April 2002. In August 2002, the Companys Board of Directors
approved a third amendment to Mr. Odaks employment agreement, pursuant to which up
to 70,000 of the stock options to which Mr. Odak would be entitled under his employment
agreement as a result of the closing of a capital-raising transaction could be granted to
other employees of the Company designated by Mr. Odak. The options would only be granted
upon the closing of the capital-raising transaction, have a 10-year term, vest over four
years and have an exercise price equal to the closing price of the Companys stock on
the date the capital-raising transaction was concluded. An equal number of options would
be granted simultaneously to Mr. Odak, provided that the options granted to Mr. Odak would
only be exercisable as the options granted to other employees terminated (as opposed to
expired) without exercise.



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



In 2004, the Compensation Committee of the Board of Directors
recommended to the Company's Board, which approved, in concept, a modification to Mr.
Odak's employment agreement to provide for the payment of the existing $9.2 million
supplemental bonus in the event of Mr. Odak's death or disability while employed by the
Company. The Board also approved the modification of the definition of
"disability" to extend the period during which Mr. Odak is unable to work from
90 to 365 consecutive days. Subsequently, the Compensation Committee recommended, and the
Board approved, in concept, a modification to the employment agreement to provide for a
payment of a bonus of approximately $1.6 million: (i) in the event Mr. Odak terminates his
employment for Good Reason, as defined in his employment agreement; (ii) in the event Mr.
Odak is terminated without Cause, as defined in the agreement; or (iii) in the event his
employment agreement is not renewed at the end of its initial term in March, 2006. The
Company has acquired an insurance policy for the benefit of the Company to cover payment
in the event of Mr. Odak's death or disability in the approximate amount of the
supplemental bonus. On May 10, 2005, the Company and Mr. Odak entered into a Fourth
Amendment to Employment Agreement, documenting the foregoing.



Other. Mark A. Retzloff is a current member of the Companys
Board of Directors, and sits on its Real Estate Committee. Mr. Retzloff is Chief Organic
Officer of Aurora Organic Dairy, which derives 8% of its total revenues from sales of
organic milk to the Company under the Companys private label brand. Mr. Retzloff
sits on the boards of directors of several other natural or organic companies that derive
5% of their revenues from sales of products to the Company. Stacey J. Bell, a current
member of the Companys Board of Directors, is an employee of Ideasphere, Inc., which
manufactures certain of the Companys private label vitamins and supplements. Total
purchases from these vendors were $1.6 million and $873,000 for the three months and $3.8
million and $2.3 million for the nine months ended October 1, 2005 and September 25, 2004,
respectively. Purchases of grocery products are made primarily through the Companys
primary distributor, UNFI and therefore are indirect in nature. As of the fiscal quarters
ending October 1, 2005 and September 25, 2004, amounts owed for these vendors were
$470,000 and $170,000, respectively.





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



Wild Oats Markets Canada, Inc., as successor to Alfalfa's Canada, Inc.,
a Canadian subsidiary of the Company, was a defendant in Helen Fakhri and Ady Aylon, as
Representative Plaintiffs v. Alfalfa's Canada, Inc., a class action suit for monetary
damages brought in the Supreme Court of British Columbia, Canada by the representative
plaintiffs on behalf of two groups of claimants - those who claim to have contracted
Hepatitis A allegedly through the consumption of food purchased at a Capers Community
Market ("Capers") in the spring of 2002, and those who were inoculated against
Hepatitis A in March and April, 2002, after handling and/or consuming food products from
Capers that were or might have been contaminated with Hepatitis A. In July 2005, the Court
approved a settlement agreement pursuant to which plaintiffs submitting proof of claim
receive either cash or a gift card, redeemable at the Companys Canadian stores, of
certain amounts determined by classification of the claimant within one of three separate
categories. The Company's insurers have acknowledged coverage for defense and
administrative costs and settlement liability, and the Company has exhausted its
deductible.



Tim Auchterlonie, individually and on behalf of all others similarly
situated and the general public, and Roes 1 to 1000 vs. Wild Oats Markets, Inc. and Does 1
through 100, is a purported class action suit brought in August 2004 in the Superior
Court, County of Los Angeles, for payment of overtime and damages relating to alleged
violations of the California Business and Professions Code by a former managerial
employee, on behalf of himself and all other similarly situated California employees,
claiming that store directors at the Companys California stores should have been
classified as non-exempt employees and paid on an hourly basis, and claiming that certain
calculations used in determining bonuses were unlawful wage deductions. In mid-2005, six
new named plaintiffs were added to the suit, and the trials of the original plaintiff and
the six new plaintiffs were bifurcated. The Company believes that all of the named
plaintiffs were correctly classified as exempt employee based upon their job duties. The
Company has settled with the original plaintiff, and the trial date has been vacated. A
trial for the remaining six plaintiffs has been set for third quarter 2006.



In June 2002, an administrative law judge ("ALJ") found
against the Company in Wild Oats Markets, Inc. and Local 371, United Food &
Commercial Workers, in certain unfair labor practice charges brought in connection
with the opening of the Company's store in Westport, Connecticut. The Company appealed the
ALJ's decision to the National Labor Relations Board. In May 2005, the National Labor
Relations Board denied the appeal and issued a Decision and Order, setting forth certain
equitable, injunctive and monetary remedies to be undertaken by the Company, including
payment of backpay less interim earnings, and offers of employment to certain former
employees of a store previously sold by the Company in 2000 (the "Sold Store").
The Company has reserved for its potential liability to the employees specifically named
in the action; however, the Company is not presently able to estimate its potential
liability to other former employees of the Sold Store because the process of
identification and establishment of such claims has not been completed. The Company is
seeking clarification of other aspects of the Decision and Order. The Company is currently
evaluating whether to appeal all or part of the Decision and Order.



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





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

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



Executive Summary



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



Wild Oats Markets, Inc. is one of the largest natural foods supermarket
chains in North America. As of the date of this report, we operated 113 natural foods
stores in 24 states and British Columbia, Canada. We operate in the retail grocery
industry with two store formats: the natural foods supermarket format, under the Wild Oats
Natural Marketplace(R)name
nationwide and the Capers Community Market(R)name in Canada; and the farmers market format, under the Henrys
Farmers Market(R)name in southern
California and Phoenix, Arizona, and the Sun Harvest name in Texas. Both formats
emphasize natural and organic products with a wide selection of products in a full-service
environment. The formats share a core demographic customer profile. We manage support
services provided to the stores centrally from our Boulder, Colorado headquarters. All of
our United States stores, regardless of format, purchase from the same primary
distributor based on centralized negotiations, merchandising and marketing strategies. Our
distribution facility, opened in February 2004, primarily supplies produce and other
perishables for approximately 70 stores in the western United States. We continue to
identify additional procurement opportunities to maximize efficiencies of the warehouse.



In 2005, we have refined our product mix and marketing strategies to
maximize the potential of all of our stores with an expanded product offering that we
believe will better appeal to our customer demographics of our existing store sites. To
broaden our appeal, we began to introduce more gourmet and epicurean items to reach the
specialty foods customer, and plan to expand our foodservice product offering by year end.
We continue to expand our private label line of products, including the Wild Oats(R)and the Henrys(R)branded products and plan to introduce additional private label products
throughout 2005 and beyond. We continue to focus on growth through new store development.
To date in 2005, we have added eight new stores to our base and we have completed four
major remodels.



As of the end of the third quarter of fiscal 2005, we had 112 stores
located in 24 states and Canada, as compared to 106 stores located in 24 states and Canada
at the end of the third quarter of fiscal 2004.



| |                                    |  | TOTAL
    STORE COUNT
| | ---------------------------------- |  | ---------------------
| |                                    |  | NINE
    MONTHS ENDED
| |                                    |  |                      
| |                                    |  | October 1,
    2005  
| |                                    |  |                      
| | Store count at beginning of period |  | 108                  
| | Stores opened                      |  | 7                    
| | Stores closed                      |  | (3)                  
| | Stores sold                        |  | -                    
| |                                    |  |                      
| | Store count at end of period       |  | 112                  
| |                                    |  |                      



In the third quarter of fiscal 2005, we opened one new Henrys
Farmers Market store in Glendale, Arizona. As of the date of this report, we have also
opened a new Henrys Farmers Market store in Rancho Cucamonga, California.



Results of Operations



Our net income for the third quarter of fiscal 2005 was $82,000 or
$0.00 per diluted share, compared with a net loss of $7.1 million or $0.25 per diluted
share, in the same period in fiscal 2004. The following tables set forth, for the periods
indicated, certain selected income statement data expressed as a percentage of sales and
in dollars (in thousands - percentages may not add due to rounding):



| |                                                     | THREE MONTHS
    ENDED
| | --------------------------------------------------- | ----------------------
| |                                                     |                       
| |                                                     | October 1,
    2005   
| |                                                     |                       
| | Sales                                               | $ 278,522             
| | Cost of goods sold and occupancy costs              | 197,785               
| |                                                     |                       
| | Gross profit                                        | 80,737                
| | Direct store expenses                               | 62,086                
| | Selling, general and administrative expenses        | 16,644                
| | Loss on disposal of assets                          | 43                    
| | Pre-opening expenses                                | 325                   
| | Restructuring and asset impairment charges,
    net | 51                    
| |                                                     |                       
| | Income (loss) from operations                       | 1,588                 
| |                                                     |                       
| | Interest income                                     | 451                   
| | Interest expense                                    | (1,784)               
| |                                                     |                       
| | Income (loss) before income taxes                   | 255                   
| | Income tax expense (benefit)                        | 173                   
| |                                                     |                       
| | Net income (loss)                                   | $ 82                  
| |                                                     |                       





| |                                                        |  |           | NINE
    MONTHS ENDED
| | ------------------------------------------------------ |  | --------- | ---------------------
| |                                                        |  |           |                      
| |                                                        |  |           | October 1,
    2005  
| |                                                        |  |           |                      
| | Sales                                                  |  | $ 841,209 |                      
| | Cost of goods sold and occupancy
    costs             |  | 597,657   |                      
| |                                                        |  |           |                      
| | Gross profit                                           |  | 243,552   |                      
| | Direct store expenses                                  |  | 183,181   |                      
| | Selling, general and
    administrative    expenses    |  | 48,885    |                      
| | Loss on disposal of assets                             |  | 87        |                      
| | Pre-opening expenses                                   |  | 3,022     |                      
| | Restructuring and asset impairment
       charges, net |  | 2,511     |                      
| |                                                        |  |           |                      
| | Income (loss) from operations                          |  | 5,866     |                      
| |                                                        |  |           |                      
| | Loss on early extinguishment of
    debt               |  | (559)     |                      
| | Interest income                                        |  | 1,136     |                      
| | Interest expense                                       |  | (6,095)   |                      
| |                                                        |  |           |                      
| | Income (loss) before income taxes                      |  | 348       |                      
| | Income tax expense (benefit)                           |  | 496       |                      
| |                                                        |  |           |                      
| | Net loss                                               |  | $ (148)   |                      
| |                                                        |  |           |                      
| |                                                        |  |           |                      





Third Quarter of 2005 vs. Third Quarter of 2004.



Sales. Sales for the three months ended October 1, 2005 increased
11.1% as compared to the same period in fiscal 2004. This increase was primarily driven by
strong comparable sales and a greater number of stores in our store base compared to 2004.
Total square feet of open stores increased 8.0% over the third quarter of 2004, as the
third fiscal quarter 2005 ended with 2.56 million total square feet as compared to 2.37
million total square feet in the third fiscal quarter of 2004. Comparable store sales
increased 6.1% for the quarter as compared to a 0.6% decrease in the same period last
year. Comparable store basket size grew 7.0% for the third quarter of fiscal 2005 as
compared to 3.5% in the same period last year, while customer traffic decreased 0.8% as
compared to a decline of 4.1% for the third quarters of fiscal 2005 and 2004,
respectively.



Gross profit. Gross profit consists of sales less cost of goods
sold and store occupancy costs. Occupancy costs include store related depreciation, rent
and utilities. As a percentage of sales, gross profit increased to 29.0% in the third
quarter of fiscal 2005 from 27.5% in the same period in fiscal 2004, due primarily to the
Companys ability to strike a balance between promotions and sales, the
implementation of new merchandising initiatives focused on reducing product costs, and
further growth in the Companys private label business.



Direct store expenses. Direct store expenses include the following:
payroll, payroll taxes and benefits, store supplies and maintenance, in-store community
marketing and other store-specific costs. As a percentage of sales, direct store expenses
decreased to 22.3% in the fiscal quarter ended October 1, 2005, from 23.1% in the same
period last year. The improvement is due to leveraging payroll and the related taxes along
with the stabilization of health care costs, offset in part by increased supply costs,
credit card transaction fees and losses associated with Hurricane Katrina.



Selling, general and administrative expenses. Selling, general and
administrative expenses include corporate and regional administrative support services,
purchasing, and marketing costs. Selling, general and administrative expenses for the
quarter ended October 1, 2005 decreased 0.2% as a percentage of sales compared to the same
period in fiscal 2004. Selling, general and administrative expenses in the third quarter
of 2005 were lower as a percentage of sales compared to the same period in 2004 due to
leveraging against higher sales, offset by accrued corporate and regional level bonuses
and increased professional fees. We expect selling, general and administrative costs as a
percentage of sales to improve slightly for the full year of 2005 as compared to 2004.



Pre-opening expenses. Pre-opening expenses include labor, rent,
advertising, utilities, supplies and certain other costs incurred prior to a stores
opening. Pre-opening expenses for the third quarter of fiscal 2005 decreased to $325,000
compared to $1.7 million during the same period in fiscal 2004, due to the opening of one
new store in the third quarter of fiscal 2005 compared to three new stores during the
third quarter of last year.



During the third quarter of fiscal 2005, the Company recorded net
restructuring and asset impairment charges of $51,000 consisting of the following
components (in thousands):



| | Change in estimate related to
    lease-related liabilities for sites previously identified for closure or sale |                                                      | $ (96) | 
| | --------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------ | 
| | Lease-related liability and
    asset impairments for sites closed and relocated during the quarter             |                                                      | 5      | 
| | Severance for employees
    terminated during the third quarter of fiscal 2005                                  |                                                      | 21     | 
| | Accretion expense on lease
    related liabilities                                                              |                                                      | 121    | 
| |                                                                                                                 |                                                      |        | 
| |                                                                                                                 | Total restructuring and asset
    impairment expense | $ 51   | 
| |                                                                                                                 |                                                      |        | 



Details of the significant components are as follows:

- Changes in estimate related to lease-related liabilities for sites previously identified
    for closure or sale ($96,000 of restructuring income)



- Lease-related liability and asset impairments for sites closed and relocated during the
    third quarter ($5,000 of restructuring expense)



- Severance for employees notified of termination in the third quarter of fiscal 2005
    ($21,000 of restructuring expense)



- Accretion expense on lease-related liabilties ($121,000 of restructuring expense)



During the third quarter of 2005, there were no asset impairment
charges in accordance with the provisions of SFAS No.144, Accounting for the Impairment
or Disposal of Long-Lived Assets. In determining whether an impairment exists, the
Company estimates the stores future cash flows on an undiscounted basis, and if the
cash flows are not sufficient to recover the carrying value, then the Company uses a
discounted cash flow based on a risk-adjusted discount rate, to adjust its carrying value
of the assets, and records a provision for impairment as appropriate. The Company
continually re-evaluates its stores performance to monitor the carrying value of its
long-lived assets in comparison to projected cash flows.



Interest income. Interest income was $451,000 for the third quarter
ended October 1, 2005 compared to $370,000 for the fiscal quarter ended September 25,
2004. This is due to the increase in interest rates as compared to prior year.



Interest expense. Interest expense for the fiscal quarter ended
October 1, 2005 decreased to $1.8 million from $1.9 million in the same period in fiscal
2004, as a result of lower commitment fees on existing lines of credit compared to 2004.



Income tax expense. For the quarter ended October 1, 2005, we
recorded $173,000 of income tax expense, as a result of taxable foreign income during the
period. The tax benefit resulting from the loss on domestic operations has been fully
offset by the tax valuation allowance that was established at fiscal 2004 year end.



First Nine Months of 2005 vs. First Nine Months of 2004.



Sales. Sales for the nine months ended October 1, 2005 increased
9.8% as compared to the same period in fiscal 2004. This increase was primarily driven by
a greater number of stores in our store base compared to 2004 and an increase in
comparable store sales of 3.7% for the first nine months of 2005 compared to the 3.1%
increase for the same period in 2004. During the second quarter of 2005, the Company
lapped the final quarter of difficult comparisons to a year ago, when it benefited from
the southern California strike against the conventional grocery retailers. Excluding
strike affected stores, comparable sales were 7.9% for the first nine months of 2005
compared to the same period in 2004.



Gross profit. Gross profit consists of sales less cost of goods
sold and store occupancy costs. Occupancy costs include store related depreciation, rent
and utilities. As a percentage of sales, gross profit increased to 29.0% in the first nine
months of fiscal 2005 from 28.7% in the same period in fiscal 2004, due primarily to the
Companys ability to strike a balance between promotions and sales.



Direct store expenses. Direct store expenses include the following:
payroll, payroll taxes and benefits, store supplies and maintenance, in-store community
marketing and other store-specific costs. As a percentage of sales, direct store expenses
decreased to 21.8% in the year to date period ended October 1, 2005, from 22.3% in the
same period last year. The improvement is due to leveraging payroll and the related taxes
along with improved results in our self-insured employee benefits.



Selling, general and administrative expenses. Selling, general and
administrative expenses include: corporate and regional administrative support services,
purchasing, and marketing costs. Selling, general and administrative expenses for the nine
months ended October 1, 2005 decreased 0.1% as a percentage of sales compared to the same
period in fiscal 2004. Selling, general and administrative expenses during the first nine
months of 2005 were lower as a percentage than prior year due to leveraging against higher
sales, offset primarily by accrued corporate and regional level bonuses.



Pre-opening expenses. Pre-opening expenses include labor, rent,
advertising, utilities, supplies and certain other costs incurred prior to a stores
opening. Pre-opening expenses for year to date fiscal 2005 decreased to $3.0 million
compared to $4.3 million during the same period in fiscal 2004, due to the opening of
seven new stores in the nine months ended October 1, 2005, compared to nine new stores in
the same period in 2004.



For the nine months ended October 1, 2005, the Company recorded net
restructuring and asset impairment charges of $2.5 million, consisting of the following
components (in thousands):



| | Change in
    estimate related to lease-related liabilities    for sites previously
    identified for closure or sale |                                                      | $ (243) | 
| | ---------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------- | 
| | Lease-related
    liability for site closed during the nine    months ended October 1, 2005                            |                                                      | 429     | 
| | Severance for
    employees terminated during the nine    months ended October 1, 2005                                 |                                                      | 134     | 
| | Accretion
    expense on lease related liabilities                                                                     |                                                      | 347     | 
| | Write off of
    goodwill                                                                                              |                                                      | 960     | 
| | Asset
    impairment charges                                                                                           |                                                      | 884     | 
| |                                                                                                                        |                                                      |         | 
| |                                                                                                                        | Total
    restructuring and asset impairment expense | $ 2,511 | 
| |                                                                                                                        |                                                      |         | 



Details of the significant components are as follows:

- Changes in estimate related to lease-related liabilities for sites previously identified
    for closure or sale ($243,000 of restructuring income)



- Lease-related liabilities for sites closed year to date through October 1, 2005
    ($429,000 of restructuring expense)



- Severance for employees notified of termination ($134,000 of restructuring expense)



- Accretion expense on lease-related liabilities ($347,000 of restructuring expense)



- Write off of goodwill ($960,000 of restructuring expense)



Loss on early extinguishment of debt. During the year to date
period ended October 1, 2005, we had a loss on the early extinguishment of debt of
$559,000 due to the write off of remaining unamortized debt issuance costs relating to the
termination of the Wells Facility. There was no such activity during the nine months of
fiscal 2004.



Interest income. Interest income was $1.1 million for the nine
months ended October 1, 2005 compared to $778,000 for the same period ended September 25,
2004. This is due to the increase in average invested cash and short-term investment
balances over prior year.



Interest expense. Interest expense for the fiscal year to date
period ended October 1, 2005 increased to $6.1 million from $4.3 million in the same
period in fiscal 2004, as a result of the increase of average borrowings due to the $115.0
million debentures issued in June 2004.



Income tax expense. For the year to date period ended October 1,
2005, we recorded $496,000 of income tax expense, as a result of taxable foreign income
during the period.



Earnings before interest, taxes, depreciation and amortization, loss on
early extinguishment of debt, loss (gain) on asset disposals, net, and restructuring and
asset impairment charges (income), net, as adjusted ("EBITDA, as adjusted").EBITDA, as adjusted, was $28.1 million, or 3.3% of sales for the nine months ended
October 1, 2005 as compared to $20.0 million, or 2.6% of sales in the first nine months of
2004. We believe that the reconciliation of earnings before interest, taxes, depreciation
and amortization ("EBITDA") and EBITDA, as adjusted, provides meaningful non
GAAP financial measures to help management and investors understand and compare business
trends among different reporting periods on a consistent basis, independently of regularly
reported non-cash charges and infrequent or unusual events as determined by management.
Readers are cautioned not to view EBITDA or EBITDA, as adjusted, as an alternative to GAAP
results or as being comparable to results reported or forecasted by other companies, and
should refer to the reconciliation of GAAP net income (loss) results to EBITDA and EBITDA,
as adjusted, for the third quarters and first nine months of 2005 and 2004, respectively.
For an explanation of EBITDA, and EBITDA, as adjusted, see Non GAAP Financial
Information.



Remainder of 2005. The increase in comparable store sales for full
fiscal 2005 are expected to be in the range of 3.0% to 4.0%



New Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board
("FASB") issued SFAS No. 123 (revised 2004), Share-Based Payment
("SFAS No. 123R"). SFAS No. 123R is a revision of SFAS No. 123, and supersedes
APB Opinion No. 25. The new standard establishes accounting standards for transactions in
which an entity exchanges its equity instruments for goods or services, including stock
option and restricted stock grants. The provisions of SFAS No. 123R will be effective for
the Company on January 1, 2006. The Company is currently evaluating the impact on its
results from adopting SFAS No. 123R, but expects it to be comparable to the pro forma
effects of applying the original SFAS No. 123. Accordingly, the adoption of SFAS No. 123R
is expected to have a material effect on the Companys results of operations.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and
Error Corrections("SFAS No. 154"). SFAS No. 154 requires restatement
of prior periods financial statements for changes in accounting principles, unless
it is impracticable to determine either the period-specific effects or the cumulative
effect of change. SFAS No. 154 also requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.

In June 2005, the FASBs Emerging Issues Task Force reached a
consensus on Issue No. 05-6, Determining the Amortization Period for Leasehold
Improvements Purchased after Lease Inception or Acquired in a Business Combination("EITF
No. 05-6").EITF No. 05-6 requires that leasehold
improvements acquired in a business combination be amortized over the shorter of the
useful life of the assets or a term that includes required lease periods and renewals
deemed to be reasonably assured at the date of acquisition. EITF No. 05-6 further requires
that leasehold improvements that are placed in service significantly after and not
contemplated at or near the beginning of the lease term shall be amortized over the
shorter of the useful life of the assets or a term that includes the required lease
periods and renewals deemed to be reasonably assured at the date of the acquisition. EITF
No. 05-6 became effective for the Companys fiscal quarter beginning July 2, 2005.
The adoption of EITF No. 05-6 is not expected to have a material effect on the
Companys Consolidated Financial Statements.



Liquidity and Capital Resources

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



Net cash generated by operating activities increased to $25.3 million
during the first nine months of fiscal 2005, as compared to $23.2 million during the same
period in fiscal 2004. This increase is due to a decreased net loss, offset by higher
restructuring charges and working capital changes as compared to third quarter 2004.



Net cash used in investing activities was $8.0 million during the first
nine months of fiscal 2005 as compared to a $66.9 million use of cash during the same
period in fiscal 2004, due to a decrease in capital expenditures and proceeds from the
sale of the short term investments in 2005 compared to purchases of short term investments
in 2004.



Net cash provided by financing activities of $3.1 million during the
first nine months of 2005 was $51.1 million less than the $54.2 million reported during
the same period in fiscal 2004. The decrease in cash flows from financing activities is
the direct result of a $115 million private debenture offering completed in June 2004 as
discussed below.



EBITDA. EBITDA was $24.9 million for the nine month period ended
October 1, 2005, as compared to $17.8 million for the nine months ended September 25,
2004. EBITDA was negatively impacted in 2005 due to $2.5 million of restructuring and
asset impairment charges in addition to $559,000 in losses on the extinguishment of debt.
For an explanation and reconciliation of EBITDA, see Non GAAP Financial Information.



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



During the second quarter of 2005, we made an irrevocable election to
pay the principal amount of debentures in cash upon conversion; however, the Company
retains the ability to satisfy the remainder of any conversion payment, in cash or any
combination of cash and common stock. The debentures are callable and convertible into our
common stock prior to maturity at the option of the holders under the following
circumstances: (1) during any calendar quarter commencing after June 30, 2004 and before
March 31, 2029, if the last reported sale price of our common stock is greater than or
equal to 130% of the conversion price of $17.70 per share; (2) at any time on or after
April 1, 2029 if the last reported sale price of our common stock on any date on or after
March 31, 2029 is greater than or equal to 130% of the conversion price; (3) subject to
certain limitations, during the five business-day period after any five consecutive
trading-day period in which the trading price per debenture for each day of that period
was less than 98% of the product of the conversion rate and the last reported sale price
of our common stock; (4) if we call the debentures for redemption; (5) upon the occurrence
of certain corporate transactions; or (6) if we request a credit rating for the
debentures, at any time when the credit ratings assigned to the debentures are below
specified levels. While a credit rating has been issued for the debentures, the rating was
not requested by us, but initiated by the ratings agency. Therefore, a change in the
current rating will not trigger a call provision. The debentures are initially convertible
into 56.5099 shares of our common stock per $1,000 principal amount, which is equivalent
to approximately $17.70 per share, for total initial underlying shares of 6,498,639. The
conversion rate will be subject to adjustment upon the occurrence of specified events.
Pursuant to the underwriting agreement and within 90 days of issuance, we filed a shelf
registration statement covering resales of the debentures and the common stock issuable
upon conversion thereof. The registration statement was declared effective August 26,
2005.



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



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



There are no financial covenants within the debenture indenture,
however, we paid penalty interest of 0.25% for the first 90 days of 2005 and paid 0.50%
thereafter until the debentures were publicly registered on August 26, 2005. As of October
1, 2005, the Company has accrued $166,943 and paid $138,160 in additional interest to
debenture holders due to not having an effective registration statement within the
specified timeframe.



In 2004, total proceeds from the issuance of the debentures were $115.2
million. We used $25.0 million of the net proceeds to repurchase 1,977,800 outstanding
shares of its common stock, $31.2 million to pay the outstanding balance on its credit
facility, and approximately $3.7 million to pay related debt issuance costs.



Credit facility. On March 31, 2005, we entered into a five-year
revolving secured credit facility with the Bank of America, N.A. ("B of A
Facility"). Concurrent with the execution of the B of A Facility, we terminated our
existing $95 million credit facility with Wells Fargo Bank N.A. as administrative agent.
The B of A Facility allows borrowings and letters of credit up to a maximum of $40
million, with an option to increase borrowings up to $100 million, subject to a borrowing
base determined by the value of certain inventory, credit card receivables, invested cash
and, at our discretion, mortgaged leaseholds. The B of A Facility is secured by certain of
our assets including, but not limited to, cash, inventory and fixed assets. Borrowings
under the B of A Facility bear interest, at our election, at the prime rate or at LIBOR
plus a margin ranging from 1.00% to 1.50%, depending on the excess borrowing availability
over amounts borrowed. Interest rates are determined quarterly. We are charged a
commitment fee on the unused portion of the B of A Facility. There are no financial
covenants, other than the obligation to maintain a certain percentage of minimum excess
availability (as defined in the agreement) at all times. The B of A Facility requires
compliance on a monthly basis with certain non-financial covenants, including limitations
on incurring additional indebtedness and making investments, the use and disposition of
collateral, changes of control, as well as cash management provisions. We expect that we
will be in compliance with all covenants. We further expect that our cash requirements
through the third quarter of fiscal 2005 will be primarily satisfied from the proceeds of
the 2004 debenture issuance as well as cash generated from operations, and thereafter from
cash generated from operations and borrowings under the new credit facility. As of October
1, 2005, the Company had letters of credit outstanding totaling $11.3 million with Bank of
America and $520,000 outstanding with Wells Fargo.



Our prior credit facility was entered into in February of 2003, with
Wells Fargo Bank N.A. acting as lead bank and administrative agent (the "Wells
Facility"). The Wells Facility had a $95.0 million limit and a three-year term with a
one-year renewal option. As of January 1, 2005 and as of the date of our termination of
the Wells Facility, there were no outstanding borrowings and letters of credit outstanding
totaled $9.1 million.



As of October 1, 2005, we had no off-balance sheet arrangements,
unconsolidated subsidiaries, commitments or guarantees, except as disclosed in the notes
to the consolidated financial statements. As of October 1, 2005, we had a working capital
deficit of $12.4 million, or an improvement of $12.5 million over the quarter ended
September 15, 2004.



Capital expenditures. We spent approximately $19.2 million during
the nine months ended October 1, 2005 for new store construction, remodels and other
capital expenditures. Our average capital expenditures to open a store, including
leasehold improvements, equipment and fixtures, has ranged from approximately $2.0 million
to $5.0 million historically, excluding inventory costs and initial operating losses. We
anticipate that the average capital expenditures to open a natural foods supermarket
format store will be $2.0 million to $3.0 million in the future, on a turnkey lease basis.
Turnkey leases are properties that are ready for a tenant to begin business by having the
tenant furnish only fixtures. Our average capital expenditures to open a farmers
market format store are estimated at $1.6 million to $2.5 million in the future. Delays in
opening new stores may result in increased pre-opening costs for the site, as well as
lower than planned sales for the Company.



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



Critical Accounting Policies and Estimates



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



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



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



We believe the following critical accounting policies affect our most
significant judgments and estimates used in the preparation of our consolidated financial
statements. There have been no changes in 2005 in the application of these policies:



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



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



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



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



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



A 2% increase in our sales growth assumption utilized in the cash flow
projection would have resulted in no stores identified for impairment and no related asset
impairment charges. A 2% decrease in our sales growth assumption would have resulted in
the impairment of an additional two stores held for use and approximately $3.2 million of
additional asset impairment charges.



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



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



In calculating the lease related liabilities, we apply a discount rate
to the estimation of our remaining lease obligations. By decreasing the discount rate by
22%, we determined that our third quarter lease related restructuring expense would have
increased by approximately $28,000. An increase of 22% in the discount rate would have
decreased the third quarter lease related restructuring expense by $24,000.



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



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



Relative to the above, a hypothetical increase of 1% to our
cost-to-retail ratio would result in a decrease of approximately $760,000 to our inventory
valuation. Conversely, a hypothetical decrease of 1% would result in an increase of
approximately $760,000 to our inventory balance as of the end of third quarter, 2005. With
regards to our allowance for inventory, an increase or decrease of 1% would cause our
allowance to fluctuate by about $607,000.



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



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



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



Cautionary Statement Regarding Forward-Looking Statements



This Report on Form 10-K contains "forward-looking
statements," within the meaning of the Private Securities Litigation Reform Act of
1995, which involve known and unknown risks. Such forward-looking statements include
statements as to the number of stores we plan to open or relocate in future periods and
the anticipated performance of such stores; the impact of competition; the sufficiency of
funds to satisfy our cash requirements through the remainder of fiscal 2005; the impact of
changes resulting from our merchandising and marketing programs; our ability to benefit
from past supply chain modifications; expected pre-opening expenses and capital
expenditures; and other statements containing words such as "believes,"
"anticipates," "estimates," "expects," "may,"
"intends" and words of similar import or statements of management's opinion.
These forward-looking statements and assumptions involve known and unknown risks,
uncertainties and other factors that may cause our actual results, market performance or
achievements to differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Important factors that could
cause differences in results of operations include, but are not limited to, the timing and
execution of new store openings, relocations, remodels and closures; new competitive
impacts; changes in product supply or suppliers and supplier performance levels; changes
in management information needs; changes in customer needs and expectations; changes in
government regulations applicable to our business; changes in economic or business
conditions in general or affecting the natural foods industry in particular; cost and
stability of fuel and power sources; and competition for and the availability of sites for
new stores. We undertake no obligation to update any forward-looking statements in order
to reflect events or circumstances that may arise after the date of this Report.



Non GAAP Financial Information



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



| |                                                     |  | THREE MONTHS
    ENDED
| | --------------------------------------------------- |  | ----------------------
| |                                                     |  |                       
| |                                                     |  | October 1, 2005       
| |                                                     |  |                       
| |                                                     |  |                       
| | Net income (loss)                                   |  | $ 82                  
| | Interest expense, net of
    interest income        |  | 1,333                 
| | Income tax expense
    (benefit)                    |  | 173                   
| | Depreciation and
    amortization                   |  | 6,517                 
| |                                                     |  |                       
| | EBITDA                                              |  | 8,105                 
| | Loss on asset disposals,
    net                    |  | 43                    
| | Restructuring and asset
    impairment charges, net |  | 51                    
| |                                                     |  |                       
| | EBITDA, as adjusted                                 |  | $ 8,199               
| |                                                     |  |                       
| |                                                     |  |                       
| | EBITDA, as a percentage of
    sales                |  | 2.9%                  
| | EBITDA, as adjusted, as a
    percentage of sales   |  | 2.9%                  



| |                                                     |  | NINE MONTHS
    ENDED
| | --------------------------------------------------- |  | ---------------------
| |                                                     |  |                      
| |                                                     |  | October 1, 2005      
| |                                                     |  |                      
| |                                                     |  |                      
| | Net loss                                            |  | $ (148)              
| | Interest expense, net of
    interest income        |  | 4,959                
| | Income tax expense
    (benefit)                    |  | 496                  
| | Depreciation and
    amortization                   |  | 19,635               
| |                                                     |  |                      
| | EBITDA                                              |  | 24,942               
| | Loss on early
    extinguishment of debt            |  | 559                  
| | Loss (gain) on asset
    disposals, net             |  | 87                   
| | Restructuring and asset
    impairment charges, net |  | 2,511                
| |                                                     |  |                      
| | EBITDA, as adjusted                                 |  | $ 28,099             
| |                                                     |  |                      
| |                                                     |  |                      
| | EBITDA, as a percentage of
    sales                |  | 3.0%                 
| | EBITDA, as adjusted, as a
    percentage of sales   |  | 3.3%                 



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



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





Item
3.  Quantitative and Qualitative Disclosures about Market Risk

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



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





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





Item 4. Controls and
Procedures



Disclosure Controls and Procedures. The Company's management, with
the participation of the Company's Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of the Company's disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of October 1, 2005. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer have
concluded that, as of October 1, 2005, the Company's disclosure controls and procedures
are effective in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act and are effective in ensuring that information required to
be disclosed by the Company in the reports that it files or submits under the Exchange Act
is accumulated and communicated to the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.



Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter
ended October 1, 2005 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.



Part II.  OTHER INFORMATION



Item 1.  Legal Proceedings

Wild Oats Markets Canada, Inc., as successor to Alfalfa's Canada, Inc.,
a Canadian subsidiary of the Company, was a defendant in Helen Fakhri and Ady Aylon, as
Representative Plaintiffs v. Alfalfa's Canada, Inc., a class action suit for monetary
damages brought in the Supreme Court of British Columbia, Canada by the representative
plaintiffs on behalf of two groups of claimants - those who claim to have contracted
Hepatitis A allegedly through the consumption of food purchased at a Capers Community
Market ("Capers") in the spring of 2002, and those who were inoculated against
Hepatitis A in March and April, 2002, after handling and/or consuming food products from
Capers that were or might have been contaminated with Hepatitis A. In July 2005, the Court
approved a settlement agreement pursuant to which plaintiffs submitting proof of claim
receive either cash or a gift card, redeemable at our Canadian stores, of certain amounts
determined by classification of the claimant within one of three separate categories. Our
insurers have acknowledged coverage for defense and administrative costs and settlement
liability, and we have exhausted our deductible.



Tim Auchterlonie, individually and on behalf of all others similarly
situated and the general public, and Roes 1 to 1000 vs. Wild Oats Markets, Inc. and Does 1
through 100, is a purported class action suit brought in August 2004 in the Superior
Court, County of Los Angeles, for payment of overtime and damages relating to alleged
violations of the California Business and Professions Code by a former managerial
employee, on behalf of himself and all other similarly situated California employees,
claiming that store directors at our California stores should have been classified as
non-exempt employees and paid on an hourly basis, and claiming that certain calculations
used in determining bonuses were unlawful wage deductions. In mid-2005, six new named
plaintiffs were added to the suit, and the trials of the original plaintiff and the six
new plaintiffs were bifurcated. The Company believes that all of the named plaintiffs were
correctly classified as exempt employee based upon their job duties. We have settled with
the original plaintiff, and the trial date has been vacated. A trial for the remaining six
plaintiffs has been set for third quarter 2006.



In June 2002 an administrative law judge ("ALJ") found
against us in Wild Oats Markets, Inc. and Local 371, United Food & Commercial
Workers, in certain unfair labor practice charges brought in connection with the
opening of our store in Westport, Connecticut. We appealed the ALJ's decision to the
National Labor Relations Board. In May 2005, the National Labor Relations Board denied the
appeal and issued a Decision and Order, setting forth certain equitable, injunctive and
monetary remedies to be undertaken by us, including payment of backpay less interim
earnings, and offers of employment to certain former employees of a store that we
previously sold in 2000 (the "Sold Store"). We have reserved for our potential
liability to the employees specifically named in the action; however, we are not presently
able to estimate our potential liability to other former employees of the Sold Store
because the process of identification and establishment of such claims has not been
completed. The Company is seeking clarification of other aspects of the Decision and
Order. The Company is currently evaluating whether to appeal all or part of the Decision
and Order.



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





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

None.





Item
3.  Defaults Upon Senior Securities

None.





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

None.





Item 5.  Other Information

None.





Item 6.  Exhibits

|                            | Exhibit Number | Description                                                          
|--------------------------- | -------------- | ---------------------------------------------------------------------
|                            |                |                                                                      
|                            | 31.1+          | CEO
    Certification under Section 302 of Sarbanes-Oxley Act of 2002
|                            | 31.2+          | CFO
    Certification under Section 302 of Sarbanes-Oxley Act of 2002
|                            | 32.1+          | CEO
    Certification under Section 906 of Sarbanes-Oxley Act of 2002
|                            | 32.2+          | CFO
    Certification under Section 906 of Sarbanes-Oxley Act of 2002
|                            |                |                                                                      
|+    Included
    herewith.



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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 9th day of November 2005.



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