TABLE OF CONTENTS



---

---

UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWashington, D. C. 20549

---

FORM 10



|[X] | QUARTERLY REPORT PURSUANT TO SECTION
      13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|--- | ---------------------------------------------------------------------------------------------

For the quarterly period ended September 28, 2002

or

|[ 
      ] | TRANSITION REPORT PURSUANT TO SECTION 13
      OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|---------- | ----------------------------------------------------------------------------------------------

For the transition period
from        N/A        to        N/A

> 

Commission file number0-21577

WILD OATS MARKETS, INC.

(Exact name of registrant as specified in its charter)



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



3375 Mitchell Lane
Boulder, Colorado 80301-2244(Address of principal executive offices, including zip
code)



(303) 440-5220(Registrant's telephone number, including area code)



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

Yes   (X)                                               
   No  (  
)

As of November 8, 2002, there were 29,645,635 shares
outstanding of the Registrant's Common Stock (par value $0.001 per
share).





---



TABLE OF CONTENTS



|                             
|-----------------------------
|PART I. FINANCIAL INFORMATION
|                             
|Item 1.                      
|                             
|                             
|                             
|                             
|                             
|Item 2.                      
|Item 3.                      
|Item 4.                      
|                             
|PART II. OTHER INFORMATION   
|                             
|Item 1.                      
|Item 2.                      
|Item 3.                      
|Item 4.                      
|Item 5.                      
|Item 6.                      
|                             
|SIGNATURES                   
|CERTIFICATIONS               
|                             



2

---

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION



Item 1. Financial Statements

WILD OATS MARKETS, INC.Consolidated Balance Sheets

|September
    28,                          |                                                                                                        | December 29,                                    
|------------------------------------------ | ------------------------------------------------------------------------------------------------------ | ------------------------------------------------
|                                          
|                                           | (unaudited)                                                                                            |                                                 
|Assets                                     |                                                                                                        |                                                 
|Current assets:                            |                                                                                                        |                                                 
|                                           | Cash and cash equivalents                                                                              | $                                               
|                                           | Inventories (net of reserves of $1,113
    and $2,667, respectively)                                   |                                                 
|                                           | Accounts receivable (net of allowance
    fordoubtful accounts of
    $565 and $1,070,   respectively) |                                                 
|                                           | Income tax receivable                                                                                  |                                                 
|                                           | Prepaid expenses and other current
    assets                                                          |                                                 
|                                           | Deferred income taxes                                                                                  |                                                 
|                                           |                                                                                                        | Total current
    assets                        
|                                           |                                                                                                        |                                                 
|Property and equipment, net                |                                                                                                        | 119,897                                         
|Goodwill, net                              |                                                                                                        | 106,404                                         
|Other intangible assets, net               |                                                                                                        | 7,535                                           
|Deposits and other assets                  |                                                                                                        | 2,674                                           
|Deferred income taxes                      |                                                                                                        | 15,672                                          
|Total assets                               | $                                                                                                      | 365,543                                         
|                                           |                                                                                                        |                                                 
|Liabilities and Stockholders' Equity       |                                                                                                        |                                                 
|Current liabilities:                       |                                                                                                        |                                                 
|                                           | Accounts payable                                                                                       | $                                               
|                                           | Book overdraft                                                                                         |                                                 
|                                           | Accrued liabilities                                                                                    |                                                 
|                                           | Current portion of debt and capital
    leases                                                         |                                                 
|                                           |                                                                                                        | Total current
    liabilities                   
|                                           |                                                                                                        |                                                 
|Long-term debt and capital leases          |                                                                                                        | 20                                              
|Other long-term obligations                |                                                                                                        | 17,536                                          
|                                           |                                                                                                        | Total liabilities                               
|                                           |                                                                                                        |                                                 
|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;
    29,642,849 and 24,766,409 shares issued and outstanding                                |                                                 
|                                           | Additional paid-in capital                                                                             |                                                 
|                                           | Note receivable, related party                                                                         |                                                 
|                                           | Accumulated deficit                                                                                    |                                                 
|                                           | Accumulated other comprehensive loss                                                                   |                                                 
|                                           |                                                                                                        | Total
    stockholders' equity                  
|Total liabilities and stockholders' equity | $                                                                                                      | 365,543                                         



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



3

---

TABLE OF CONTENTS



WILD OATS MARKETS, INC.

Consolidated Statements of Operations

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



|                                         |                                                   | Three
      Months Ended                |         | Nine Months Ended |         
|---------------------------------------- | ------------------------------------------------- | --------------------------------------- | ------- | ----------------- | --------
|
|
|
|Sales                                    |                                                   | $   228,102                             |         | $   222,168       |         
|Cost of goods sold and occupancy costs   |                                                   | 161,026                                 |         | 158,625           |         
|Gross profit                             |                                                   | 67,076                                  |         | 63,543            |         
|                                         | Operating expenses:                               |                                         |         |                   |         
|                                         | Direct store expenses                             |                                         | 48,639  |                   | 52,128  
|                                         | Selling, general and administrative expenses      |                                         | 12,708  |                   | 13,212  
|                                         | Pre-opening expenses                              |                                         | 237     |                   | 1       
|                                         | Restructuring & asset impairment charges (income) |                                         | (174)   |                   | 776     
|                                         |                                                   |                                         |         |                   |         
|                                         | Income (loss) from operations                     |                                         | 5,666   |                   | (2,574) 
|                                         | Loss on investment                                |                                         |         |                   |         
|                                         | Interest income                                   |                                         | 234     |                   | 486     
|                                         | Interest expense                                  |                                         | (2,368) |                   | (2,530) 
|                                         |                                                   | Income
      (loss) before income taxes |         | 3,532             |         
|                                         | Income tax expense (benefit)                      |                                         | 1,360   |                   | (1,720) 
|Net income (loss)                        |                                                   | $     2,172                             |         | $    (2,898)      |         
|                                         |                                                   |                                         |         |                   |         
|Net income (loss) per common share:      |                                                   |                                         |         |                   |         
|                                         | Basic                                             |                                         | $ 0.08  |                   | $ (0.12)
|                                         | Diluted                                           |                                         | $ 0.08  |                   | $ (0.12)
|                                         |                                                   |                                         |         |                   |         
|Average common shares outstanding, basic |                                                   | 26,440                                  |         | 24,699            |         
|Dilutive effect of stock options         |                                                   | 745                                     |         |                   |         
|                                         |                                                   |                                         |         |                   |         
|Average common shares outstanding,       |                                                   |                                         |         |                   |         
|                                         | assuming dilution                                 |                                         | 27,185  |                   | 24,699  



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





4

---

TABLE OF CONTENTS



WILD OATS MARKETS, INC.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands) (unaudited)



|                                   |                                                               | Three Months Ended                                   |  | Nine Months Ended | 
|---------------------------------- | ------------------------------------------------------------- | ---------------------------------------------------- |  | ----------------- | 
|
|
|                                   |                                                               |                                                      |  |                   | 
|Net income (loss)                  |                                                               | $ 2,172                                              |  | $ (2,898)         | 
|                                   |                                                               |                                                      |  |                   | 
|Other comprehensive income (loss): |                                                               |                                                      |  |                   | 
|                                   | Foreign currency translation adjustments
      arising during |                                                      |  |                   | 
|                                   |                                                               | the period                                           |  | (196)             | 
|                                   | Cumulative effect of change in accounting principle,          |                                                      |  |                   | 
|                                   |                                                               | net of
      tax of $352                             |  |                   | 
|                                   | Recognition of hedge results to interest
      expense during |                                                      |  |                   | 
|                                   |                                                               | the period, net of
      tax of $172, $128, $542 and |  |                   | 
|                                   |                                                               | $264, respectively                                   |  | 287               | 
|                                   | Change in market value of cash flow
      hedge during the    |                                                      |  |                   | 
|                                   |                                                               | period, net of tax
      of $27, $418, $194 and      |  |                   | 
|                                   |                                                               | $810,respectively                                    |  | (45)              | 
|                                   |                                                               |                                                      |  |                   | 
|Other comprehensive income (loss)  |                                                               | 46                                                   |  | (881)             | 
|                                   |                                                               |                                                      |  |                   | 
|Comprehensive income (loss)        |                                                               | $ 2,218                                              |  | $ (3,779)         | 



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





5

---

TABLE OF CONTENTS



WILD OATS MARKETS, INC.

Consolidated Statements of Cash Flows

(in thousands) (unaudited)



|                                                                                                  | Nine Months Ended        
|------------------------------------------------------------------------------------------------- | -------------------------
|                                                                                                  | September 28, 
      2002
|                                                                                                  |                          
|Cash Flows from Operating Activities                                                              |                          
|Net income (loss)                                                                                 | $                        
|Adjustments to reconcile net income (loss)
                to net cash from operating activities: |                          
|Depreciation and amortization                                                                     |                          
|Loss (gain) on disposal of property and equipment                                                 |                          
|Deferred tax expense (benefit)                                                                    |                          
|Restructuring and asset impairment charges (income)                                               |                          
|Loss on investment                                                                                |                          
|Other                                                                                             |                          
|Change in assets and liabilities:                                                                 |                          
|Inventories                                                                                       |                          
|Receivables and other assets                                                                      |                          
|Accounts payable                                                                                  |                          
|Accrued liabilities                                                                               |                          
|Net cash provided by operating activities                                                         |                          
|                                                                                                  |                          
|Cash Flows from Investing Activities                                                              |                          
|Capital expenditures                                                                              |                          
|Proceeds from sale of property and equipment                                                      |                          
|Net cash used in investing activities                                                             |                          
|                                                                                                  |                          
|Cash Flows from Financing Activities                                                              |                          
|Net repayments under line-of-credit agreement                                                     |                          
|Proceeds from notes payable and
      long-term debt                                              |                          
|Repayments on notes payable, long-term debt and capital leases                                    |                          
|Proceeds from issuance of common stock, net                                                       |                          
|Net cash provided by (used in) financing activities                                               |                          
|                                                                                                  |                          
|Effect of exchange rate changes on cash                                                           |                          
|Net increase in cash and cash equivalents                                                         |                          
|Cash and cash equivalents at beginning of period                                                  |                          
|Cash and cash equivalents at end of period                                                        | $                        
|                                                                                                  |                          
|Non-Cash Investing and Financing Activities                                                       |                          
|Stock issued in exchange for note receivable                                                      |                          
|Stock issued in partial payment of note payable                                                   | $                        
|Partial settlement of note payable against accounts receivable                                    | $                        





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





6

---

TABLE OF CONTENTS



WILD OATS MARKETS, INC.

Notes to Consolidated Financial Statements

(unaudited)



1. Nature of Operations and Basis of Presentation

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

The consolidated balance sheet as of September 28,
2002, the consolidated statements of operations and comprehensive income
(loss) for the three months and nine months ended September 28, 2002 and
September 29, 2001, as well as the consolidated statements of cash flows
for the nine months ended September 28, 2002 and September 29, 2001 have
been prepared without an audit. In the opinion of management, all
adjustments, consisting only of normal, recurring adjustments necessary
for a fair statement thereof, have been made.

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

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



2. New Accounting Standards

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

During the first quarter ended March 30, 2002, the
Company adopted the provisions of SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145, among other things, rescinds
SFAS No. 4, which required that gains and losses from extinguishment of
debt be classified as an extraordinary item, net of related income tax
effects. SFAS No. 145 is to be applied in fiscal years beginning after
May 15, 2002 and encourages early application of the recission of SFAS
No. 4. During the nine months ended September 28, 2002, and September
29, 2001, there were no gains or losses on early extinguishment of debt.

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

In conjunction with its purchase acquisitions, the
Company historically recorded goodwill at the store level; however,
based on the Company's consolidation of its brands to
increase synergy and awareness, the Company changed its goodwill
accounting policy and accordingly assigned the carrying value of its
goodwill to one reporting unit at the





7

---

TABLE OF CONTENTS



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

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

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



|                                | Three Months Ended     |    | Nine Months Ended
|------------------------------- | ---------------------- | -- | -----------------
|
|
|                                |                        |    |                  
|Goodwill amortization           | $                      | -- |                  
|Leasehold interest amortization | $                      | 73 |                  
|Net income (loss) available     |                        |    |                  
|                                | to common stockholders | $  | 2,172            



The following table illustrates net income (loss)
available to common stockholders and earnings per share, exclusive of
goodwill amortization expense in the prior periods (in thousands):



|                                                                            | Three Months Ended |       | Nine Months Ended
|--------------------------------------------------------------------------- | ------------------ | ----- | -----------------
|
|
|                                                                            |                    |       |                  
|Reported net income (loss) available
      to common stockholders           | $                  | 2,172 |                  
|Goodwill amortization                                                       |                    | --    |                  
|Adjusted net income (loss) available
      to common stockholders           | $                  | 2,172 |                  
|                                                                            |                    |       |                  
|EARNINGS PER SHARE -
      BASIC AND DILUTED                                |                    |       |                  
|Reported net income (loss) per share
      available to common stockholders | $                  | 0.08  |                  
|Goodwill amortization                                                       |                    | --    |                  
|Adjusted net income (loss) per share
      available to common stockholders | $                  | 0.08  |                  





During the three months and nine months ended
September 28, 2002, amortization of intangible assets expense was
$119,000 and $356,000, respectively. The estimated amortization of
intangible assets for each of the five fiscal years ending in fiscal
2006 is as follows (in thousands):





8

---

TABLE OF CONTENTS



| | FiscalYear |   | AmortizationExpense | 
| | ---------- | - | ------------------- | 
| |            |   |                     | 
| | 2002       | $ | 472,000             | 
| | 2003       |   | 472,000             | 
| | 2004       |   | 472,000             | 
| | 2005       |   | 472,000             | 
| | 2006       |   | 472,000             | 





3. Derivatives and Hedging Activities

In accordance with the Company's interest rate risk
management strategy and as required by the terms of the Company's
credit facility, the Company entered into a swap agreement in September
2000 to hedge the interest rate on $35.0 million of its borrowings as of
September 28, 2002. The swap agreement locks in a one-month LIBOR rate
of 6.6% and expires in August 2003. The fair value of the swap at
September 28, 2002 was ($1.3 million), which has been recorded in the
accompanying balance sheet in accrued liabilities.





4. Earnings Per Share

Earnings per share are calculated in accordance with
the provisions of SFAS No. 128, Earnings Per Share.SFAS No. 128
requires the Company to report both basic earnings per share, which is
based on the weighted-average number of common shares outstanding, and
diluted earnings per share, which is based on the weighted-average
number of common shares outstanding and all dilutive potential common
shares outstanding, except where the effect of their inclusion would be
antidilutive (i.e., in a loss period). Antidilutive stock options of
1,246,005 and 1,507,087 for the nine months and 1,300,069 and 1,270,268
for the three months ended September 28, 2002 and September 29, 2001,
respectively, were not included in the earnings per share calculations.







During the third quarter of fiscal 2002, the Company
recorded restructuring and asset impairment income of $174,000 consisting of the following
components:





9

---

TABLE OF CONTENTS



|Gain
      on sale of assets for                              | $                                                           | (85,000)  |          
|------------------------------------------------------------- | ----------------------------------------------------------- | --------- | ---------
|                                                              | a
        site sold during the third quarter of fiscal 2002 |           |          
|Change in estimate related to lease-related liabilities for   |                                                             | (100,000) |          
|                                                              | sites previously identified for closure or sale             |           |          
|Fixed asset impairments for one additional store identified   |                                                             | 6,000     |          
|                                                              | and closed in the third quarter of fiscal 2002              |           |          
|Lease-related liabilities for one additional store identified |                                                             |           |          
|                                                              | and closed in the third quarter of fiscal 2002              |           | 5,000    
|                                                              | Total restructuring and asset impairment income             | $         | (174,000)





Details of the significant components are as follows:



- Gain on sale of assets  for a site sold during the third
    quarter of fiscal 2002 ($85,000 of asset disposal income)



- Change in estimate related to lease-related liabilities for sites
    previously identified for closure or sale ($100,000 of restructuring
    income). During the third quarter of fiscal 2002, the Company
  negotiated the early termination of a lease in Tempe, Arizona. During
  the third quarter of fiscal 2002, the Company also terminated lease
  obligations for a site in Denver, Colorado. Based on these changes in
  facts and circumstances and the related changes in estimates, the
  Company reversed the remaining lease-related liabilities previously
  recorded for these locations and therefore recognized restructuring
  income of $100,000 during the third quarter of fiscal 2002.



- Fixed asset impairments for one additional store identified and
    closed in the third quarter of fiscal 2002 ($6,000 of asset
    impairment  expense). During the third quarter of fiscal 2002, the Company
  decided to close one small vitamin store operated under the
  "Vitamin Expo" tradename as part of brand consolidation. The
  assets will be disposed by the end of fiscal 2002.



- Lease-related liabilities for one additional store identified and
    closed in the third quarter of fiscal 2002 ($5,000 of restructuring
    expense). During the third quarter of fiscal 2002, the Company
  exercised the right of early lease termination with 90 days' notice
  to the landlord for a small vitamin store in El Paso, Texas. The lease-related liabilities for this location represent the remaining
  lease cost through termination in the fourth quarter of fiscal 2002.





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



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







10

---

TABLE OF CONTENTS



Details of the significant components are as follows:

- Fixed asset impairments for sites
    previously identified for closure or sale ($35,000 of asset
    impairment expense)



- Change in estimate related to lease-related liabilities for sites
    previously identified for closure or sale ($678,000 of restructuring
    income)



- Fixed asset impairments for one additional store identified in the
    second quarter of fiscal 2002 to be closed during the third quarter
    of fiscal 2002 ($131,000 of asset impairment expense)



- Fixed asset impairments for store construction project
    discontinuation ($370,000 of asset impairment expense)



- Severance for employees terminated during the second quarter of
    fiscal 2002 ($142,000 of restructuring expense)





11

---

TABLE OF CONTENTS



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



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





Details of the significant components are as follows:



- Change in estimate related to lease-related liabilities for sites
    previously identified for closure or sale that were closed, sold or
    disposed of during the first quarter of fiscal 2002 ($761,000 of
    restructuring income)



- Gain on sale of assets for a site sold during the first quarter of
    fiscal 2002 ($253,000 of asset disposal  income)



- Change in estimate related to lease-related liabilities for sites
    previously identified for closure ($93,000 of restructuring expense)



- Severance for employees terminated during the first quarter of
    fiscal 2002 ($269,000 of restructuring expense)

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







12

---

TABLE OF CONTENTS

> 

|Exit Plans                  | 1999and prior                               | Q22000                                     | Q42000 |       | Q22001 | Q32001 | Q42001 | Q12002 | Q22002 | Q32002 | Total 
|--------------------------- | ------------------------------------------- | ------------------------------------------ | ------ | ----- | ------ | ------ | ------ | ------ | ------ | ------ | ------
|
|Balance, December 29, 2001  | $                                           | 2,458                                      |        | $     | 2,462  |        | $      | 4,061  |        | $      | 10,102
|                            | New accruals:                               |                                            |        |       |        |        |        |        |        |        |       
|                            | Severance                                   |                                            |        |       |        |        |        |        |        |        |       
|                            |                                             | Lease-related liabilities                  |        | 216   |        |        | (649)  |        |        | 4      |       
|                            |                                             | Cash received - lease-related
 liabilities |        | 459   |        |        |        |        |        |        |       
|                            | Note receivable in lieu of cash             |                                            | 375    |       |        |        |        |        |        |        |       
|                            | Cash paid - severance                       |                                            |        |       |        |        |        |        |        |        |       
|                            | Cash paid - lease-related liabilities       |                                            | (346)  |       |        | (137)  |        |        | (502)  |        |       
|Balance, March 30, 2002     |                                             | 3,162                                      |        |       | 1,676  |        |        | 3,563  |        |        | 9,788 
|                            | New accruals:                               |                                            |        |       |        |        |        |        |        |        |       
|                            |                                             | Severance                                  |        |       |        |        |        |        |        |        |       
|                            |                                             | Lease-related liabilities                  |        | (305) |        |        | (6)    |        |        | (5)    |       
|                            | Cash paid - severance                       |                                            |        |       |        |        |        |        |        |        |       
|                            | Cash paid - lease-related liabilities       |                                            | (198)  |       |        | (114)  |        |        | (292)  |        |       
|Balance, June 29, 2002      |                                             | 2,659                                      |        |       | 1,556  |        |        | 3,266  |        |        | 9,184 
|                            | New accruals:                               |                                            |        |       |        |        |        |        |        |        |       
|                            |                                             | Lease-related liabilities                  |        | (91)  |        |        |        |        |        |        |       
|                            | Cash paid - severance                       |                                            |        |       |        |        |        |        |        |        |       
|                            | Cash paid - lease-related
      liabilities |                                            | (320)  |       |        | (72)   |        |        | (299)  |        |       
|                            |                                             |                                            | 1      |       |        | 1      |        |        | 1      |        |       
|Balance, September 28, 2002 | $                                           | 2,248                                      |        | $     | 1,484  |        | $      | 2,967  |        | $      | 8,799 

_______________________________

> 1 The restructuring accrual balance consists of lease-related
>   liabilities.







13

---

TABLE OF CONTENTS



As of September 28, 2002, the components of the accruals related to
the Company's restructuring activities are accrued liabilities ($4.9
million) and other long-term obligations ($13.7 million).





As of September 28, 2002, there were $90.8 million
  in borrowings outstanding under the Company's line of credit
  facility ($59.5 million under the revolving facility and $31.3 million
  under the term loan). All borrowings were classified as a current
  liability at September 28, 2002 based on the credit facility's
  maturity date of August 1, 2003. The Company currently is in the
  process of refinancing its debt and establishing a new line of credit
  facility.



The Company has a $20.9 million net deferred tax
asset, primarily as a result of the $54.9 million of restructuring and
asset impairment charges recorded during fiscal 2001. For the three
months ended September 28, 2002, the Company recorded $1.4 million of
income tax expense, primarily as a result of income before income taxes
of $3.5 million during the period. For the nine months ended September
28, 2002, the Company recorded $2.6 million of income tax expense,
primarily as a result of income before income taxes of $7.0 million
during the period. The recoverability of the net deferred tax asset is
primarily dependent upon the Company generating sufficient taxable
income in the future. Although realization of the net deferred tax asset
is not assured, the Company believes it is more likely than not that the
Company will generate sufficient taxable income in the future to realize
the full amount of the deferred tax asset. The Company's assessment is
based on projections that assume that the Company can maintain its
current store contribution margin. Furthermore, the Company expects to
maintain the aggregate sales growth experienced over the past five
years, which would generate additional taxable income. The primary
uncertainty related to the realization of the deferred tax asset is the
Company's ability to achieve its four-year business plan and generate
future taxable income to realize the full amount of the deferred tax
asset. The Company believes that the sales, gross margin, store
contribution margin, and selling, general and administrative expenses
assumptions in its four-year business plan are reasonable and, more
likely than not, attainable. The Company will continue to assess the
recoverability of the net deferred tax asset, and to the extent it is
determined in the future that a valuation allowance is required, it will
be recognized as a charge to earnings at that time.

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



8.  Related Party Transactions

In May 2002, the Company's Board of Directors
amended the employment agreement of Perry D. Odak, the Company's CEO
and President, to extend through December 2002 the period during which
the issuance by the Company of additional securities as part of an
equity financing would entitle Mr. Odak to receive up to 300,000 stock
options exercisable for the Company's common stock. In March 2002, Mr.
Odak was issued options to purchase 5,856 shares of common stock under a
provision of his employment agreement that provided for the maintenance
of his 5% equity position in the event of a capital-raising transaction,
based upon the issuance of 111,269 shares of common stock, the resale of
which was registered





14

---

TABLE OF CONTENTS



on Form S-3 filed in April 2002. The stock was
issued pursuant to the terms of a settlement agreement between the
Company and former directors and co-founders Michael Gilliland and
Elizabeth Cook. 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 September 2002, the Company filed suit against
Mr.  Gilliland and Ms.  Cook, former officers and directors and
greater than 5% shareholders of the Company, together with two
individuals and three limited liability corporations, for a temporary
restraining order related to a breach of Mr. Gilliland's
noncompetition covenant, contained in his 1996 employment agreement,
arising from the opening of a competitive grocery store in New Mexico.
After a hearing, the court issued a temporary restraining order against
Mr. Gilliland, prohibiting him from engaging in the operation of the
competing grocery store.



9.  Distributor Contract

A transition fee is referenced in the Company's
June 2002 distribution agreement with Tree of Life, Inc. ("Tree of
Life"). In the second and third quarters of fiscal 2002, the
Company used a portion of the transition fee to offset the transition
costs incurred during the transition of the Company's primary
distribution relationship to Tree of Life. These costs include, but are
not limited to, the cost of retagging store shelves, modification of
product inventory, disposal of discontinued products, resetting of
products on store shelves and training of store personnel in new
procedures, and legal and consulting expenses. The portion of the
transition support fee used to defray transition expenses incurred had
no material impact on the Company's results of operations for the
three and nine months ended September 28, 2002.



10.  Litigation

In April 2000, the Company was named as defendant in S/H-Ahwatukee,
LLC and YP- Ahwatukee LLC v. Wild Oats Markets, Inc., Superior Court
of Arizona, Maricopa County, by a landlord alleging Wild Oats breached a
continuous operations clause arising from the closure of a Phoenix,
Arizona store. In September 2002, the plaintiffs withdrew their notice
of intent to appeal in the suit. After trial in November 2001, the judge
awarded the plaintiff $326,000 in damages and $210,000 in attorneys'
fees and the Company has reserved such amounts. The Company has appealed
the judgment.

In October 2000, the Company was named as defendant
in 3601 Group Inc. v. Wild Oats Northwest, Inc., Wild Oats, Inc. and
Wild Oats Markets, Inc., a suit filed in Superior Court for King
County, Washington, by a property owner who claims that Alfalfa's,
Inc., the Company's predecessor in interest, breached a lease in 1995
related to certain property in Seattle, Washington. A trial on damages
was held in July 2002, and the jury awarded no damages, based on its
determination that the plaintiff had benefited monetarily from the
Company's lease termination. In October 2002, the Company was awarded attorneys' fees and costs. 
In November 2002, the plaintiff filed a notice of appeal of the
judgment, certain orders and rulings, and the award of attorneys' fees
and costs to the Company.





15

---

TABLE OF CONTENTS



In September 2002, the Company filed a suit captioned
Wild Oats Markets, Inc. v. Michael C. Gilliland, Elizabeth C. Cook,
Mark R. Clapp and Patrick Gilliland, Westside Farmer's Market LLC,
Westside Liquors LLC and Milagro Cafe LLC, in District Court,
Boulder County, Colorado, for injunctive relief related to alleged
breach of Mr. Gilliland's noncompetition covenant contained in his
1996 employment agreement arising from the opening of a competing
grocery store in Albuquerque, New Mexico. Based on Mr. Gilliland's
testimony, after a hearing, the court issued a temporary restraining
order against Mr. Gilliland, prohibiting him from engaging in the
operation of the competing grocery store. The defendants, Mr. Gilliland
and Ms. Cook, have counterclaimed for severance payments for Ms. Cook
and issuance of additional stock options for both Ms. Cook and Mr.
Gilliland, on a theory that they did not receive a sufficient number of
options when they were employed by the Company. The Company withdrew its
motion for preliminary injunctive relief and intends to file an action
in arbitration against Mr. Gilliland as required by his employment
agreement.

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.



In October 2002, the Company was named as defendant
in Helen Fakhri, as Representative Plaintiff, v. Alfalfa's Canada,
Inc., assigned No. L023298, in the Supreme Court of British
Columbia, Canada, a class action lawsuit seeking damages for a class of
plaintiffs who did not contract, but were concerned about contracting,
hepatitis A, based on the Company's announcement that a former
employee had contracted hepatitis A. The Company intends to vigorously
defend against the suit. At this time, the Company cannot evaluate the
likelihood of success in such defense or the materiality of the suit.





16

---

TABLE OF CONTENTS



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

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



Overview

Marketing and Merchandising Initiatives and
Operational Improvements. During the third quarter of fiscal 2002,
we had a 10.5% increase in average weekly sales per store, a 5.7%
increase in average weekly customer count per store and a 4.9% increase
in average sales per customer chain-wide as compared to the third
quarter of fiscal 2001.

Over the last 15 months, we have instituted new
programs to improve customer service and store-level execution. We also
implemented inventory and SKU reduction programs, centralized product
ordering and pricing functions to refocus store management energies on
store-level operations, and reset store merchandise for customer
convenience in many stores. In the third quarter of fiscal 2002, we also
transferred our primary distribution business to Tree of Life, Inc., our
new distributor. We believe these programs, together with marketing and
merchandising initiatives discussed in previous reports on Form 10-Q,
contributed to overall operational improvements that increased store
sales, customer count and average transaction size in the third quarter
of fiscal 2002, as compared to the third quarter of fiscal 2001.

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

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

- general economic conditions

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

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





17

---

TABLE OF CONTENTS



- the timing of advertising and promotional events

- store remodels
- store closures

- our ability to effectively execute our operating plans
- changes in consumer preferences for natural foods products
- availability of produce and other seasonal merchandise.



Past increases in comparable store sales may not be
indicative of future performance. The farmers market format stores,
which depend heavily on produce sales, are more susceptible to sales
fluctuations resulting from the availability and pricing of certain
produce items. Road construction adjacent to our operating stores, as
well as construction within the common areas of the shopping centers in
which we operate, may also affect customer traffic and comparable store
sales results.

As a result of marketing and merchandising
initiatives, operational improvements, and the closure of one weaker
store, comparable store sales chain-wide increased by 5.6% in the third
quarter of fiscal 2002, as compared to 5.2% in the second quarter of
2002, 7.3% in the first quarter of fiscal 2002, 5.7% in the fourth
quarter of fiscal 2001, 5.5% in the third quarter of fiscal 2001, 3.9%
in the second quarter of fiscal 2001, and 1.0% in the first quarter of
fiscal 2001. Comparable store sales are expected to be between 3.5% and
5.5% for the remainder of the year. No new store openings are
anticipated until early 2003. There can be no assurance that comparable
store sales for any particular period will not decrease in the future.

Store openings, closings, sales, remodels,
relocations and acquisitions. In the third quarter of fiscal 2002,
we opened no new stores, and we closed one farmers market store in San
Diego, California when the lease expired, as well as one small vitamin
store in El Paso, Texas. In the third quarter of fiscal 2001, we opened
no new stores and we closed no stores. Subsequent to the third quarter
of fiscal 2002, we sold one other small vitamin store in El Paso, Texas.

At September 28, 2002, we had 100 stores located in
23 states and Canada, as compared to 107 stores in 23 states and Canada
as of the end of fiscal 2001, and 106 stores in 22 states and Canada as
of the end of fiscal 2000. A summary of store openings, acquisitions,
closures and sales is as follows:



|                                   |  | TOTAL STORE COUNT       
|---------------------------------- |  | ------------------------
|                                   |  | Fiscal Year       Ending
|                                   |  |                         
|                                   |  |                         
|                                   |  | 2000                    
|                                   |  |                         
|Store count at beginning of period |  | 110                     
|Stores opened                      |  | 14                      
|Stores acquired                    |  | 2                       
|Stores closed                      |  | (17)                    
|Stores sold                        |  | (3)                     
|                                   |  |                         
|Store count at end of period       |  | 106                     



We currently have an inventory of 14 vacant sites,
not including those referenced below, comprising closed store, kitchen
and warehouse locations and excess unoccupied space acquired during
acquisitions or other leasing transactions, for which we have rent
obligations; appropriate accruals have been made for such obligations.
We are actively seeking subtenants or assignees for the spaces, although
many of the sites are difficult to sublease or assign because of unusual
site characteristics, surpluses of vacant retail space in the markets in
which the sites are located, or because the remaining lease terms are
relatively short. In the third quarter of fiscal 2002, we negotiated an
early lease termination for one site, sublet one small space adjacent to
an existing store, and sold one kitchen facility.

In September 2002, we concluded an offering of 4.45
million shares of our common stock for total gross proceeds of $51.2
million. Under the terms of our amended credit facility, as a result of
the completion of the equity financing, we will be allowed to increase
the number of new leases we may execute and new stores we may open,
based on the format of the stores proposed to be opened. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- Liquidity and Capital Resources."





18

---

TABLE OF CONTENTS



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

Pre-opening expenses.  Pre-opening expenses
include labor, rent, advertising, utilities, supplies and certain other
costs incurred prior to a store's opening. The amount per store may
vary depending on whether the store is the first to be opened in a
market or is part of a cluster of stores in that market. We expect our
pre-opening expenses will increase to $400,000 to $500,000 per natural
foods supermarket store, and $200,000 to $300,000 per farmers market
store, depending on whether the store is the first in a geographic area,
the date of rent commencement negotiated under the lease, and the extent
of grand opening advertising and staff training activities.

Restructuring and Asset Impairment Activity.During
the third quarter of fiscal 2002, management made certain decisions
relating to our operations which changed estimates of prior
restructuring and asset impairment charges and resulted in net
restructuring and asset impairment income of $174,000. During the second
quarter of fiscal 2002, management made certain decisions relating to
our operations which changed estimates of prior restructuring and asset
impairment charges and resulted in net restructuring and asset
impairment expense of $0. During the first quarter of fiscal 2002,
management made certain decisions relating to our operations which also
changed estimates of prior restructuring and asset impairment charges
and resulted in restructuring and asset impairment income of $652,000.
See our 2001 Annual Report filed on Form 10-K for the fiscal year ended
December 29, 2001 for a detailed discussion of restructuring and asset
impairment charges during the last three years.

Critical Accounting Policies and Estimates. Our
discussion and analysis of 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. The preparation of these financial
statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities. We base our
estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.

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



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



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





19

---

TABLE OF CONTENTS



Factors Impacting Results of Operations

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



- the number, timing and mix of store openings, acquisitions,
    relocations, remodels or closings
- availability of financing to replace maturing obligations
- fluctuations in quarterly results of operations
- impact of merchandising and marketing initiatives on store
    performance
- economic conditions
- construction adjacent to operating stores
- competition
- labor issues
- loss of key management
- government regulations
- changes in suppliers, distributors and manufacturers
- volatility in our stock price



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

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

The construction or acquisition of new stores,
remodeling of existing stores, as well as completion of capital
purchases of new technology systems required for efficient operation of
our business require substantial capital expenditures. In the past, our
capital expenditures have been funded by cash generated from operations,
bank debt and equity financing proceeds. These sources of capital may
not be available to us in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- Liquidity and Capital Resources."

Our existing credit facility matures in August 2003.
We are currently discussing a new line of credit will several potential
lenders. Our results of operations may be impacted by our ability to
refinance as well as on the interest rates and covenants negotiated with
any new lender.

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

We have implemented merchandising and marketing
initiatives in certain of our natural foods supermarket format stores in
fiscal 2002. There can be no assurances that these programs will be
successful in those stores, nor that the cost of program roll-out will
be at or below the costs incurred in fiscal 2001 for similar programs.





20

---

TABLE OF CONTENTS



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

Construction on roads and in parking lots and
shopping center common areas adjacent to our operating stores is an
ongoing and unpredictable variable in the operation of our stores. Such
activity historically has negatively impacted our results of operations
by reducing customer traffic and lowering sales volumes.

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

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

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

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

We received a transition fee as a part of our June
2002 distribution agreement with Tree of Life, Inc. We are using the
transition fee to offset the transition costs incurred during the
transition of our primary distribution relationship to Tree of Life.
These costs include, but are not limited to, the cost of retagging store
shelves, modification of product inventory, disposal of discontinued
products, resetting of products on store shelves and training of store
personnel in new procedures, and legal and consulting expenses. A
portion of the transition fee received was used to defray transition
expenses incurred in the second and third quarters.

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



Results of Operations

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





21

---

TABLE OF CONTENTS



|                                                    | Three Months Ended |  | Nine Months Ended |        
|--------------------------------------------------- | ------------------ |  | ----------------- | -------
|                                                    | Sep 28,            |  | Sep 29,           |        
|                                                    | 2002               |  | 2001              |        
|                                                    |                    |  |                   |        
|Sales                                               | 100.0%             |  |                   | 100.0 %
|Cost of goods sold and occupancy costs              | 70.6               |  |                   | 71.4   
|Gross margin                                        | 29.4               |  |                   | 28.6   
|Direct store expenses                               | 21.3               |  |                   | 23.5   
|Selling, general and administrative expenses        | 5.6                |  |                   | 5.9    
|Pre-opening expenses                                | 0.1                |  |                   | 0.0    
|Restructuring and asset impairment charges (income) | (0.1)              |  |                   | 0.4    
|Income (loss) from operations                       | 2.5                |  |                   | (1.2)  
|Loss on investment                                  |                    |  |                   |        
|Interest income                                     | 0.1                |  |                   | 0.2    
|Interest expense                                    | (1.0)              |  |                   | (1.1)  
|Income (loss) before income taxes                   | 1.6                |  |                   | (2.1)  
|Income tax expense (benefit)                        | 0.6                |  |                   | (0.8)  
|Net income (loss)                                   | 1.0%               |  |                   | (1.3)% 





Sales. Sales for the three months ended September
28, 2002, increased 2.7% to $228.1 million from $222.2 million in the
same period in fiscal 2001. Sales for the nine months ended September
28, 2002, increased 3.9% to $697.3 million from $671.1 million in the
same period in fiscal 2001. The increases were primarily attributed to
improvements in same-store sales resulting from the positive impact of
marketing and merchandising initiatives and overall operational
improvements. The increases were achieved despite the sale or closure of
eight stores during the first nine months of fiscal 2002. For the most
part, these store sales or closures were part of the Company's program
to divest under-performing stores. Comparable store sales increased 5.6%
for the third quarter of fiscal 2002 from a 5.2% increase in the second
quarter of fiscal 2002, as compared to a 5.5% increase in the third
quarter of fiscal 2001, due to operational improvements in a number of
stores; and the continued implementation of merchandising and marketing
programs in fiscal 2002.

Gross Profit. Gross profit for the three months
ended September 28, 2002, increased 5.6% to $67.1 million from $63.5
million in the same period in fiscal 2001. Gross profit for the nine
months ended September 28, 2002 increased 5.0% to $206.1 million from
$196.3 million in the same period in fiscal 2001. The increases were
primarily attributed to higher sales volumes. As a percentage of sales,
gross profit increased to 29.4% for the third quarter of fiscal 2002
from 28.6% for the same period in fiscal 2001. As a percentage of sales,
gross profit increased to 29.6% for the nine months ended September 28,
2002 from 29.3% for the same period in fiscal 2001. The increases were
due to lower occupancy costs, which were partially offset by lower
merchandise margins resulting from a shift in sales mix and aggressive markdowns made in response
to weaker-than-expected sales of certain seasonal specialty produce
items during the third quarter of fiscal 2002.

Direct Store Expenses. Direct store expenses for
the three months ended September 28, 2002, decreased 6.7% to $48.6
million from $52.1 million in the same period in fiscal 2001, and for
the nine months ended September 28, 2002, decreased 5.2% to $150.6
million from $158.7 million in the same period in fiscal 2001. The
decreases were the result of disciplined payroll expense management and
operational improvements in the stores. As a percentage of sales, direct
store expenses decreased to 21.3% for the third quarter of fiscal 2002
from 23.5% for





22

---

TABLE OF CONTENTS



the same period in fiscal 2001. As a percentage of sales,
direct store expenses decreased to 21.6% for the nine months ended
September 28, 2002 from 23.7% for the same period in fiscal 2001. The
decreases are primarily due to the reduction of store-level payroll and
better cost-containment measures. In addition, certain marketing
expenses are now included in selling, general and administrative
expenses.

Selling, General and Administrative Expenses. Selling,
general and administrative expenses for the three months ended September
28, 2002, decreased 3.8% to $12.7 million from $13.2 million for the
same period in fiscal 2001. As a percentage of sales, selling, general
and administrative expenses decreased to 5.6% for the third quarter of
fiscal 2002 from 5.9% for the same period in fiscal 2001. The decrease
was attributable to more disciplined cost management, including the
deferral of headcount additions, as well as the favorable resolution of
a legal matter. Selling, general and administrative expenses for the
nine months ended September 28, 2002, increased 10.5% to $41.6 million
from $37.7 million in the same period in fiscal 2001. As a percentage of
sales, selling, general and administrative expenses increased to 6.0%
for the nine months ended September 28, 2002 from 5.6% for the same
period in fiscal 2001. The increase was primarily due to our ongoing
investments in marketing and advertising to improve sales performance.
Based on the first nine months' results, we expect selling, general
and administrative expenses as a percentage of sales to return to
approximately 6.0% as we scale up for new store openings in fiscal 2003.
We currently are evaluating the nature, frequency and reach of our advertising activities. Changes in our advertising strategy
could affect future levels of selling, general and administrative
expenses in both absolute dollars and as a percentage of sales.

Pre-Opening Expenses.

Interest Income.Interest income for the
three months ended September 28, 2002, decreased 51.9% to $234,000 from
$486,000 for the same period in fiscal 2001, and for the nine months
ended September 28, 2002, decreased 20.1% to $603,000 from $755,000 for
the same period in fiscal 2001. The decreases were attributable to lower
interest rates and reduced levels of invested cash.  See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources"below.

Interest Expense. Interest expense for the three
months ended September 28, 2002, decreased 6.4% to $2.4 million from
$2.5 million in the same period in fiscal 2001, and for the nine months
ended September 28, 2002, decreased 11.0% to $7.1 million from $8.0
million in the same period in fiscal 2001 due to decreased borrowings
during the nine-month period. As part of the October 2001 amendment to
our credit facility, our revolving line of credit accrues interest on
prime-based and LIBOR-based loans at prime plus 3.25% and one-month
LIBOR plus 4.75% (6.6% at September 28, 2002), respectively, both
increasing by 0.5% on January 1, 2003; thereafter, the rate will remain
constant through the maturity date of August 1, 2003. Due to the current
state of the U.S. economy, management believes that the variable
interest rates will remain constant or decrease slightly during the next
six to 12 months. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources"below.





23

---

TABLE OF CONTENTS



Restructuring and Asset Impairment Charges (Income). During
the third quarter of fiscal 2002, the Company recorded restructuring and
asset impairment income of $174,000 consisting of the following components:



- Gain on sale of assets for a site sold
    during the third quarter of fiscal 2002 ($85,000 of asset disposal income)



- Change in estimate related to lease-related liabilities for sites
    previously identified for closure or sale ($100,000 of restructuring
    income). During the third quarter of fiscal 2002, the Company
  negotiated the early termination of a lease in Tempe, Arizona. During
  the third quarter of fiscal 2002, the Company also terminated lease
  obligations for a site in Denver, Colorado. Based on these changes in
  facts and circumstances and the related changes in estimates, the
  Company reversed the remaining lease-related liabilities previously
  recorded for these locations and therefore recognized restructuring
  income of $100,000 during the third quarter of fiscal 2002.



- Fixed asset impairments for one additional store identified and
    closed in the third quarter of fiscal 2002 ($6,000 of asset
    impairment expense). During the third quarter of fiscal 2002, the Company
  decided to close one small vitamin store operated under the
  "Vitamin Expo" tradename as part of brand consolidation. The
  assets will be disposed by the end of  fiscal
  2002.



- Lease-related liabilities for one additional store identified and
    closed in the third quarter of fiscal 2002 ($5,000 of restructuring expense). During the third quarter of fiscal 2002, the Company
  exercised the right of early lease termination with 90 days' notice
  to the landlord for a small vitamin store in El Paso, Texas. The lease-related liabilities for this location represent the remaining
  lease cost through termination in the fourth quarter of fiscal 2002.



During the second quarter of fiscal 2002, we recorded
restructuring and asset impairment expense of $0, consisting of the following significant
components:

- Fixed asset impairments for sites
    previously identified for closure or sale ($35,000 of asset
    impairment expense)



- Change in estimate related to lease-related liabilities for sites
    previously identified for closure or sale ($678,000 of restructuring
    income)





24

---

TABLE OF CONTENTS



- Fixed asset impairments for one additional store identified in the
    second quarter of fiscal 2002 to be closed during the third quarter
    of fiscal 2002 ($131,000 of asset impairment expense)



- Fixed asset impairments for store construction project
    discontinuation ($370,000 of asset impairment expense)



- Severance for employees terminated during the second quarter of
    fiscal 2002 ($142,000 of restructuring expense)



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

- Change in estimate related to lease-related liabilities for sites
    previously identified for closure or sale that were closed, sold or
    disposed of during the first quarter of fiscal 2002 ($761,000 of
    restructuring income)



- Gain on sale of assets for a site sold during the first quarter of
    fiscal 2002 ($253,000 of asset disposal  income)



- Change in estimate related to lease-related liabilities for sites
    previously identified for closure ($93,000 of restructuring expense)





25

---

TABLE OF CONTENTS



- Severance for employees terminated during the first quarter of
    fiscal 2002 ($269,000 of restructuring expense)



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



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



Income Tax Expense. The Company has a $20.9
million net deferred tax asset, primarily as a result of the $54.9
million of restructuring and asset impairment charges recorded during
fiscal 2001. For the three months ended September 28, 2002, we recorded
$1.4 million of income tax expense, primarily as a result of income
before income taxes of $3.5 million during the period. For the nine
months ended September 28, 2002, we recorded $2.6 million of income tax
expense, primarily as a result of income before income taxes of $7.0
million during the period. The recoverability of the net deferred tax
asset is primarily dependent upon the Company generating sufficient
taxable income in the future. Although realization of the net deferred
tax asset is not assured, we believe it is more likely than not that the
Company will generate sufficient taxable income in the future to realize
the full amount of the deferred tax asset. Our assessment is based on
projections that assume that the Company can maintain its current store
contribution margin. Furthermore, we expect to maintain the sales growth
experienced over the past five years that would generate additional
taxable income. The primary uncertainty related to the realization of
the deferred tax asset is the Company's ability to achieve its four-year business plan and generate future taxable income to realize
the full amount of the deferred tax asset. We believe that the sales,
gross margin, store contribution margin, and selling, general and
administrative expenses assumptions in our four-year business plan are
reasonable and, more likely than not, attainable. We will continue to
assess the recoverability of the net deferred tax asset and to the
extent it is determined in the future that a valuation allowance is
required, it will be recognized as a charge to earnings at that time.



Liquidity and Capital Resources

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





26

---

TABLE OF CONTENTS



We have a current credit facility that matures in
August 2003, and we have commenced discussions with a number of lending
institutions regarding a new credit facility of $100.0 million to $125.0
million. Our current facility has two separate lines of credit, a
revolving line of up to $86.2 million and a term loan of up to $38.8
million, each with a three-year term expiring August 1, 2003. As part of
the October 2001 amendment of the credit facility, which had an original
credit capacity of $157.5 million, borrowings under the credit facility
have been limited to $125.0 million. As of September 28, 2002, there
were $59.5 million in borrowings outstanding under the $86.2 million
revolving line of this facility and $31.3 million in borrowings
outstanding under the $38.8 million term note. The interest rate on the
facility is currently prime plus 3.25% or one-month LIBOR plus 4.75%, at
our election (6.6% at September 28, 2002), and the rates increase by
0.5% on January 1, 2003, and thereafter, remain constant through the
maturity of August 1, 2003. We currently do not have sufficient funds to
pay all outstanding indebtedness. The Company is in the process of
refinancing its debt and negotiating a new credit facility. If we are
not successful in negotiating a new credit facility prior to the August
1, 2003 maturity date of the existing credit facility, our liquidity and
ability to fund operations will be negatively impacted, and we may not
have sufficient funds to repay all outstanding indebtedness. Although no
assurances can be given, we expect that we will be successful in
securing a new credit facility prior to August 1, 2003.

Net cash provided by operating activities was $24.6
million during the first nine months of fiscal 2002 as compared to $25.6
million during the same period in fiscal 2001. Cash from operating
activities decreased during this period primarily due to changes in
working capital items. We have not required significant external
financing to support inventory requirements at our existing and new
stores because we have been able to rely on vendor financing for most of
the inventory costs, and we anticipate that vendor financing will
continue to be available for new store openings.

Net cash used in investing activities was $6.7
million during the first nine months of fiscal 2002 as compared to $18.8
million during the same period in fiscal 2001. The decrease is due to a
reduction in capital expenditures related to new store construction and
remodels.

Net cash provided by financing activities was $20.6
million during the first nine months of fiscal 2002 as compared to $5.3
million used in financing activities during the same period in fiscal
2001. The change reflects $51.2 million of gross equity offering
proceeds,
offset by $31.5 million in debt repayments and $590,000 in partial
repayment of a related-party note.

We have a net deferred tax asset of $20.9 million on
our balance sheet, primarily as a result of $54.9 million of
restructuring and asset impairment charges recorded during fiscal 2001.
The net deferred tax asset will reduce cash required for payment of
federal and state income taxes, as we believe we will generate
sufficient taxable income for realization of the asset in the future.
The Company has determined that it must amend its 1999, 2000 and 2001
tax returns to correct the reporting of deemed dividend income from a
foreign subsidiary. Such determination was the result of an internal
self-review and not the result of any tax audit by the Internal Revenue
Service or other tax authority. The Company believes that such amended
tax returns will not materially affect the consolidated results,
liquidity or financial position of the Company, or have any impact on
tax expense reported in financial statements for 1999, 2000 and 2001.
The Company believes that it has sufficient net operating loss
carryovers to carry back to such tax years in order to eliminate any
additional tax liability, but expects that it will have liability for
interest and potential penalties. Current estimates of total tax
liability, interest and potential penalties is not more than
approximately $400,000. The Company believes that it has sufficient
reserves to cover any interest and potential penalties that may result
from the amended returns. The Company currently is in the process of
amending the returns and intends to seek a waiver from the Internal
Revenue Service for certain penalties; however, no assurance can be
given that such waiver will be granted.

In September 2002, the Company raised $51.2 million
in an offering of the Company's equity to provide additional
liquidity. The Company filed a registration statement on Form S-3 to
register 3.25 million shares of the Company's common stock in
connection with such placement, in addition to 1.2 million shares
previously registered. The Company engaged JP Morgan Securities Inc. to
act as the advisor to the Company in the equity financing, for which JP
Morgan Securities received a fee of approximately $2.4 million. JP
Morgan Securities Inc. is affiliated with J.P. Morgan Partners (SBIC),
LLC, which holds approximately 7.9% of our outstanding common stock.





27

---

TABLE OF CONTENTS



We maintain an interest rate risk management
strategy, required by our amended credit facility terms, that uses
derivative instruments to minimize significant, unanticipated earnings
fluctuations that may arise from volatility in interest rates. The
Company's specific goals are to (1) manage interest rate sensitivity
by modifying the repricing or maturity characteristics of some of its
debt and (2) lower (where possible) the cost of its borrowed funds. In
accordance with the Company's interest rate risk management strategy,
and in accordance with the requirements of our credit facility, the
Company has entered into a swap agreement to hedge the interest rate on
$35.0 million of its borrowings. The swap agreement locks in a one-month
LIBOR rate of 6.6% and expires on August 1, 2003.

Capital Expenditures. We spent approximately $6.9
million during the first nine months of fiscal 2002 for new store
construction, development, remodels and other capital expenditures,
exclusive of acquisitions. Capital expenditures during the first nine
months of fiscal 2002 were less than previously estimated due to
abandonment of one new store site and the deferral of three new store
openings until the first quarter of fiscal 2003, in part due to landlord
delays in completion of construction. The aggregate amount to construct
all five originally scheduled stores was originally estimated at $15.0
million to $20.0 million, but we terminated one store's lease
obligations and opened one store in April 2002. Our average capital
expenditures to open a leased store, including leasehold improvements,
equipment and fixtures, have ranged from approximately $2.0 million to
$5.0 million historically, excluding inventory costs and initial
operating losses. We anticipate that the average capital expenditures to
open a natural foods supermarket format store will be $3.0 million to
$4.0 million in the future, partly because of our decision to reduce the
size or simplify the format of our food service department in new
stores, as well as our decision not to increase store size in the
majority of geographic areas. Our average capital expenditures to open a
farmers market format store are estimated at $2.0 million to $2.5
million in the future. Delays in opening new stores may result in
increased capital expenditures and increased pre-opening costs for the
site, as well as lower than planned sales for the Company. Under our
amended credit facility, we are limited in our new store capital
expenditures to a cumulative $3.2 million from the fourth quarter of
fiscal 2001 through the third quarter of fiscal 2002; however, proceeds
from the equity offering completed in September 2002 may be used to
increase our total allowable level of capital expenditures by the net
cash proceeds of $48.3 million. We plan to use the equity proceeds to
complete the construction of three stores to be opened during the first
quarter of fiscal 2003 and execute leases for and commence capital
expenditures for up to 15 new stores through fiscal 2003. Although there
can be no assurance that actual capital expenditures will not exceed
anticipated levels, we believe that cash generated from operations and
the recent equity offering, and available under our existing credit
facility will be sufficient to satisfy our budgeted capital expenditure
requirements through the remainder of fiscal 2002.

The cost of initial inventory for a new store is
approximately $300,000 to $800,000 depending on the store format;
however, we obtain vendor financing for most of this cost. Pre-opening
costs are
expensed as incurred. Pre-opening costs for natural foods supermarket
format stores in the future are projected at $400,000 to $500,000 per
store, depending on the store's location, and pre-opening costs for
farmers market format stores are projected at $200,000 to $300,000, as a
result of increased grand opening advertising and staff training for new
stores. The amounts and timing of such pre-opening costs will depend
upon the availability of new store sites and other factors, including
the location of the store and whether it is in a new or existing market
for us, the size of the store, and the required build-out at the site.
Costs to acquire future stores, if any, are impossible to predict and
could vary materially from the cost to open new stores. There can be no
assurance that actual capital expenditures will not exceed anticipated
levels, although our amended credit facility contains aggregate limits
on the amounts of capital expenditures we may make. We believe that cash
generated from operations and the recent equity offering and available
under our existing credit facility will be sufficient to satisfy our
budgeted cash requirements through fiscal 2002.



Cautionary Statement Regarding Forward-Looking
Statements

This Report on Form 10-Q contains
"forward-looking statements," within the meaning of the
Private Securities Litigation Reform Act of 1995, which involve known
and unknown risks. Such forward-looking statements include statements as
to the Company's plans to open, acquire or relocate additional stores;
the anticipated performance of such stores; the impact of competition
and current economic uncertainty; our expectations for comparable store
sales; the impact of changes resulting from further implementation of
merchandising, advertising





28

---

TABLE OF CONTENTS



and pricing programs; levels of
cannibalization; expected pre-opening expenses and capital expenditures;
and other statements containing words such as "believes,"
"anticipates," "estimates," "expects,"
"may," "intends" and words of similar import or
statements of management's opinion. These forward-looking statements and
assumptions involve known and unknown risks, uncertainties and other
factors that may cause the actual results, market performance or
achievements of the Company to differ materially from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause
differences in results of operations include, but are not limited to,
the timing and success of the continued implementation of marketing and
merchandising and pricing programs; the timing and execution of new
store openings, relocations, remodels, sales and closures; the impact of
competition; changes in product supply or suppliers; changes in
management information needs; changes in customer needs and
expectations; governmental and regulatory actions; general industry or
business trends or events; changes in economic or business conditions in
general or affecting the natural foods industry in particular; and
competition for and the availability of sites for new stores and
potential acquisition candidates. The Company undertakes no obligation
to update any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this Report.





29

---

TABLE OF CONTENTS



Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

The Company's exposure to interest rate changes is
primarily related to its variable rate debt issued under its $125.0
million revolving credit facility. The facility has two separate lines
of credit, a revolving line of up to $86.2 million and a term loan of up
to $38.8 million, each with a three-year term expiring August 1, 2003.
As part of the October 2001 amendment of the credit facility, which had
an original credit capacity of $157.5 million, borrowings under the
credit facility have been limited to $125.0 million. As of September 28,
2002, there were $59.5 million in borrowings outstanding under the $86.2
million revolving line of this facility and $31.3 million in borrowings
outstanding under the $38.8 million term note. As part of the amendment
to the credit facility, the interest rate on the facility was amended to
either prime plus 2.25% or one-month LIBOR plus 3.75%, at our election,
and the rates increase by 0.5% starting January 1, 2002 and each six
months thereafter through January 2003. Current interest rates as of
September 28, 2002 are prime plus 3.25% or one-month LIBOR plus 4.75%
(6.6% at September 28, 2002). Because the interest rates on these
facilities are variable, based upon the prime rate or LIBOR, the
Company's interest expense and net income are affected by interest rate
fluctuations. If interest rates were to increase or decrease by 100
basis points, the result, based upon the existing outstanding debt as of
September 28, 2002, would be an annual increase or decrease of
approximately $908,000 in interest expense and a corresponding decrease
or increase of approximately $565,000 in the Company's net income after
taxes.

In September 2000, as required by the Company's
credit facility, the Company entered into an interest rate swap to hedge
its exposure on variable rate debt positions. Variable rates are
predominantly linked to LIBOR as determined by one-month intervals. The
interest rate provided by the swap on variable rate debt is 6.6%. At
September 28, 2002, the notional principal amount of the interest rate
swap agreement was $35.0 million, expiring on August 1, 2003. The
notional amount is the amount used for the calculation of interest
payments that are exchanged over the life of the swap transaction on the
amortized principal balance. In the third quarter of fiscal 2002, the
loss, net of taxes, included in other comprehensive loss for this cash
flow hedge was approximately $287,000.





30

---

TABLE OF CONTENTS



Item 4. Controls and Procedures

We maintain a system of controls and procedures
designed to provide reasonable assurance as to the reliability of the
financial statements and other disclosures included in this report, as
well as to safeguard assets from unauthorized use or disposition. We
evaluated the effectiveness of the design and operation of our
disclosure controls and procedures under supervision and with the
participation of management, including our Chief Executive Officer and
Chief Financial Officer, within 90 days prior to the filing date of this
report. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in our periodic Securities and Exchange
Commission filings. No significant changes were made to our internal
controls or other factors that could significantly affect these controls
subsequent to the date of their evaluation.





31

---

TABLE OF CONTENTS



Part II. OTHER INFORMATION

Item 1. Legal Proceedings

In April 2000, the Company was named as defendant in S/H
-Ahwatukee, LLC and YP- Ahwatukee LLC v. Wild Oats Markets, Inc.,
Superior Court of Arizona, Maricopa County, by a landlord alleging Wild
Oats breached a continuous operations clause arising from the closure of
a Phoenix, Arizona store. The plaintiffs appealed, but in September
2002, the plaintiffs withdrew their notice of intent to appeal in the
suit. After trial in November 2001, the judge awarded the plaintiff
$326,000 in damages and $210,000 in attorneys' fees and the Company
has reserved such amounts. The Company has appealed the judgment.

In October 2000, the Company was named as defendant
in 3601 Group Inc. v. Wild Oats Northwest, Inc., Wild Oats, Inc. and
Wild Oats Markets, Inc., a suit filed in Superior Court for King
County, Washington, by a property owner who claims that Alfalfa's,
Inc., our predecessor in interest, breached a lease in 1995 related to
certain property in Seattle, Washington. A trial on damages was held in
July 2002, and the jury awarded no damages, based on its determination
that the plaintiff had benefited monetarily from the Company's lease
termination. In October 2002, the Company was awarded attorneys' fees and costs. 
In November 2002, the plaintiff filed a notice of appeal of the
judgment, certain orders and rulings, and the award of attorneys' fees
and costs to the Company.

In September 2002, the Company filed a suit captioned
Wild Oats Markets, Inc. v. Michael C. Gilliland, Elizabeth C. Cook,
Mark R. Clapp and Patrick Gilliland, Westside Farmer's Market LLC,
Westside Liquors LLC and Milagro Cafe LLC, in District Court,
Boulder County, Colorado, for injunctive relief related to alleged
breach of Mr. Gilliland's noncompetition covenant contained in his
1996 employment agreement arising from the opening of a competing
grocery store in Albuquerque, New Mexico. Based on Mr. Gilliland's
testimony, after a hearing, the court issued a temporary restraining
order against Mr. Gilliland, prohibiting him from engaging in the
operation of the competing grocery store. The defendants, Mr. Gilliland
and Ms. Cook, have counterclaimed for severance payments for Ms. Cook
and issuance of additional stock options for both Ms. Cook and Mr.
Gilliland, on a theory that they did not receive a sufficient number of
options when they were employed by the Company. The Company withdrew its
motion for preliminary injunction and intends to file an action in
arbitration, as required by his employment agreement, against Mr.
Gilliland for damages.

In October 2002, the Company was named as defendant
in Helen Fakhri, as Representative Plaintiff, v. Alfalfa's Canada,
Inc., assigned No. L023298, in the Supreme Court of British
Columbia, Canada, a class action lawsuit seeking damages for a class of
plaintiffs who did not contract, but where concerned about contracting,
hepatitis A, based on the Company's announcement that a former
employee had contracted hepatitis A. The Company intends to vigorously
defend against the suit. At this time, the Company cannot evaluate the
likelihood of success in such defense or the materiality of the suit.

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



Item 2.Changes in Securities and Use of
Proceeds

None.



Item 3. Defaults Upon Senior Securities

None.





32

---

TABLE OF CONTENTS



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

None.





Item 5. Other Information

Not applicable.



Item 6. Exhibits and Reports on Form
8-K

> Exhibit 99.1   CEO Certification
>             Exhibit 99.2   CFO Certification

(b) Reports on Form
8-K:



> Report dated June 14, 2002, filed on July 1,
>         2002, on Form 8-K, reported under Item 5, "Other
>         Events," disclosing a distribution agreement with Tree of
>         Life, Inc.
>         Report dated September 4, 2002, filed on
>         September 5, 2002, on Form 8-K, reported under Item 5,
>         "Other Events," disclosing the sale of 4.45 million
>         shares of common stock.





33

---

TABLE OF CONTENTS





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 12 day of November 2002.

> Wild Oats Markets, Inc.
> By:   /s/Edward F. Dunlap___________
>             
> Edward F. Dunlap
>             
> Chief Financial Officer





34

---

TABLE OF CONTENTS

> 

Certification of CEO
Pursuant to 
18 U.S.C. Section 1350,
As Adopted pursuant to 
Section 302 of the Sarbanes-Oxley Act of 2002





I, Perry D. Odak, Chief Executive Officer of Wild
Oats Markets, Inc., certify that:



1. I have reviewed this quarterly report on Form 10-Q
of Wild Oats Markets, Inc. (the "Registrant");



2. Based on my knowledge, this quarterly report
    does not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were made,
    not misleading with respect to the period covered by this quarterly
    report;

> 

3. Based on my knowledge, the financial
    statements, and other financial information included in this
    quarterly report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    Registrant as of, and for, the periods presented in this quarterly
    report;

> 

4. The Registrant's other certifying officers
    and I are responsible for establishing and maintaining disclosure
    controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the Registrant and have:

> 

1. designed such disclosure controls and procedures to ensure
          that material information relating to the Registrant,
          including its consolidated subsidiaries, is made known to us
          by others within those entities, particularly during the
          period in which this quarterly report is being prepared;
2. evaluated the effectiveness of the Registrant's disclosure
          controls and procedures as of a date within 90 days prior to
          the filing date of this quarterly report (the "Evaluation
          Date"); and
3. presented in this quarterly report our conclusions about the
          effectiveness of the disclosure controls and procedures based
          on our evaluation as of the Evaluation Date;



5. The Registrant's other certifying officers
    and I have disclosed, based on our most recent evaluation, to the
    Registrant's auditors and the audit committee of Registrant's
    board of directors (or persons performing the equivalent functions):

> 

1. all significant deficiencies in the design or operation of
          internal controls which could adversely affect the registrant's
          ability to record, process, summarize and report financial
          data and have identified for the Registrant's auditors any
          material weaknesses in internal controls; and
2. any fraud, whether or not material, that involves management
          or other employees who have a significant role in the
          registrant's internal controls;



6. The Registrant's other certifying officers
    and I have indicated in this quarterly report whether there were
    significant changes in internal controls or in other factors that
    could significantly affect internal controls subsequent to the date
    of our most recent evaluation, including any corrective actions with
    regard to significant deficiencies and material weaknesses.

> 

Date: November 8, 2002





/s/ Perry D. Odak                                   
Perry D. Odak, Chief Executive Officer





35

---

TABLE OF CONTENTS



Certification of CFO
Pursuant to 
18 U.S.C. Section 1350,
As Adopted pursuant to 
Section 302 of the Sarbanes-Oxley Act of 2002



I, Edward Dunlap, Chief Financial Officer of Wild Oats Markets, Inc.,
certify that:



1. I have reviewed this quarterly report on Form
    10-Q of Wild Oats Markets, Inc. (the "Registrant");

> 

2. Based on my knowledge, this quarterly report
    does not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were made,
    not misleading with respect to the period covered by this quarterly
    report;

> 

3. Based on my knowledge, the financial
    statements, and other financial information included in this
    quarterly report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    Registrant as of, and for, the periods presented in this quarterly
    report;

> 

4. The Registrant's other certifying officers
    and I are responsible for establishing and maintaining disclosure
    controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the Registrant and have:

> 

1. designed such disclosure controls and procedures to ensure that
      material information relating to the Registrant, including its
      consolidated subsidiaries, is made known to us by others within
      those entities, particularly during the period in which this
      quarterly report is being prepared;
2. evaluated the effectiveness of the Registrant's disclosure
      controls and procedures as of a date within 90 days prior to the
      filing date of this quarterly report (the "Evaluation
      Date"); and
3. presented in this quarterly report our conclusions about the
      effectiveness of the disclosure controls and procedures based on
      our evaluation as of the Evaluation Date;



5. The Registrant's other certifying officers
    and I have disclosed, based on our most recent evaluation, to the
    Registrant's auditors and the audit committee of Registrant's
    board of directors (or persons performing the equivalent functions):

> 

1. all significant deficiencies in the design or operation of
      internal controls which could adversely affect the registrant's
      ability to record, process, summarize and report financial data
      and have identified for the Registrant's auditors any material
      weaknesses in internal controls; and



1. any fraud, whether or not material, that involves management or
      other employees who have a significant role in the registrant's
      internal controls;



6. The Registrant's other certifying officers
    and I have indicated in this quarterly report whether there were
    significant changes in internal controls or in other factors that
    could significantly affect internal controls subsequent to the date
    of our most recent evaluation, including any corrective actions with
    regard to significant deficiencies and material weaknesses.

> 

Date: November 8, 2002





/s/ Edward Dunlap                                   
Edward Dunlap, Chief Financial Officer





37

---