TABLE OF CONTENTS

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q



(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE
SECURITIES
       EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 30, 2002

OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE
SECURITIES



Commission file number

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 May 1, 2002, there were 24,993,857 shares outstanding of the
Registrant's Common Stock (par value $0.001 per share).



TABLE OF CONTENTS





PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets,

Consolidated Statements of Operations
(unaudited),

Consolidated Statements of Comprehensive Income (Loss) (unaudited),

Consolidated Statements of Cash Flows
(unaudited),
          Three Months Ended March 30, 2002 and March 31, 2001

Notes to Consolidated Financial Statements (unaudited)

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk



PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities

Item 3. Defaults Upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements





WILD OATS MARKETS, INC.

Consolidated Balance Sheets

(in thousands, except share data)

|                                                                                                         | March 30, 2002           |  | December 29, 2001       
|-------------------------------------------------------------------------------------------------------- | ------------------------ |  | ------------------------
|                                                                                                         | (unaudited)              |  |                         
|Assets                                                                                                   |                          |  |                         
|Current assets:                                                                                          |                          |  |                         
|Cash and cash equivalents                                                                                | $ 14,235                 |  | $ 18,840                
|Inventories (net of reserves of $1,695 and $2,667, respectively)                                         | 48,147                   |  | 54,058                  
|                                                                                                         |                          |  |                         
|Accounts receivable (net of allowance for doubtful
           accounts of $677 and $1,070, respectively) | 3,479                    |  | 3,197                   
|Income tax receivable                                                                                    | 3,911                    |  | 4,186                   
|Prepaid expenses and other current assets                                                                | 3,208                    |  | 3,123                   
|Deferred income taxes                                                                                    | 4,894                    |  | 5,378                   
|Total current assets                                                                                     | 77,874                   |  | 88,782                  
|                                                                                                         |                          |  |                         
|Property and equipment, net                                                                              | 126,513                  |  | 128,922                 
|Goodwill, net                                                                                            | 106,404                  |  | 106,404                 
|Other intangible assets, net                                                                             | 7,774                    |  | 7,892                   
|Deposits and other assets                                                                                | 2,645                    |  | 2,436                   
|Deferred income taxes                                                                                    | 18,907                   |  | 18,990                  
|                                                                                                         | $ 340,117 
      ======= |  | $ 353,426 
      =======
|Liabilities and Stockholders' Equity                                                                     |                          |  |                         
|Current liabilities:                                                                                     |                          |  |                         
|Accounts payable                                                                                         | $ 39,201                 |  | $ 39,796                
|Book overdraft                                                                                           | 24,457                   |  | 23,056                  
|Accrued liabilities                                                                                      | 40,984                   |  | 40,081                  
|Current portion of debt and capital leases                                                               | 10,492                   |  | 12,338                  
|Total current liabilities                                                                                | 115,134                  |  | 115,271                 
|                                                                                                         |                          |  |                         
|Long-term debt and capital leases                                                                        | 96,787                   |  | 112,291                 
|Other long-term obligations                                                                              | 18,772                   |  | 18,849                  
|                                                                                                         | 230,693                  |  | 246,411                 
|Stockholders' equity:                                                                                    |                          |  |                         
|Preferred stock, $0.001 par value; 5,000,000                                                             |                          |  |                         
|shares authorized; no shares issued and                                                                  |                          |  |                         
|outstanding                                                                                              |                          |  |                         
|Common stock, $0.001 par value; 60,000,000 shares                                                        |                          |  |                         
|authorized; 24,961,413 and 24,766,409 shares                                                             |                          |  |                         
|issued and outstanding                                                                                   | 25                       |  | 25                      
|Additional paid-in capital                                                                               | 162,342                  |  | 160,736                 
|Note receivable, related party                                                                           | (9,792)                  |  | (9,660)                 
|Accumulated deficit                                                                                      | (41,609)                 |  | (42,277)                
|Accumulated other comprehensive loss                                                                     | (1,542)                  |  | (1,809)                 
|Total stockholders' equity                                                                               | 109,424                  |  | 107,015                 
|                                                                                                         | $ 340,117 
      ======  |  | $ 353,426 
      =======





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



WILD OATS MARKETS, INC.

Consolidated Statements of Operations

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



|                                                     |  | Three Months Ended 
|---------------------------------------------------- |  | -------------------
|                                                     |  | March 30, 2002     
|                                                     |  |                    
|Sales                                                |  | $ 233,013          
|Cost of goods sold and occupancy costs               |  | 165,370            
|Gross profit                                         |  | 67,643             
|Operating expenses:                                  |  |                    
|Direct store expenses                                |  | 50,412             
|Selling, general and administrative expenses         |  | 14,174             
|Pre-opening expenses                                 |  | 368                
|Restructuring and asset impairment income            |  | (652)              
|Income from operations                               |  | 3,341              
|Interest income                                      |  | 180                
|Interest expense                                     |  | (2,435)            
|Income (loss) before income taxes                    |  | 1,086              
|Income tax expense (benefit)                         |  | 418                
|Net income (loss)                                    |  | $ 668 
      ===   
|                                                     |  |                    
|Net income (loss) per common share:                  |  |                    
|Basic                                                |  | $ 0.03             
|Diluted                                              |  | $ 0.03             
|                                                     |  |                    
|Average common shares outstanding, basic             |  | 24,823             
|Dilutive effect of stock options                     |  | 278                
|Average common shares outstanding, assuming dilution |  | 25,101 
      =====

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





WILD OATS MARKETS, INC.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands) (unaudited)



|                                                                                                                                   |  | Three Months Ended
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------
|                                                                                                                                   |  | March 30, 2002    
|                                                                                                                                   |  |                   
|Net income (loss)                                                                                                                  |  | $ 668             
|Other comprehensive income (loss):                                                                                                 |  |                   
|Foreign currency translation adjustments
           arising during the period                                                      |  | 92                
|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 $188 and $38,
           respectively |  | 314               
|Change in market value of cash flow hedge during
           the period, net of tax of $404 and $308, respectively                  |  | (674)             
|Other comprehensive loss                                                                                                           |  | (268)             
|Comprehensive income (loss)                                                                                                        |  | $ 400
      ===   







WILD OATS MARKETS, INC.

Consolidated Statements of Cash Flows

(in thousands) (unaudited)



|                                                             | Three Months Ended  
|------------------------------------------------------------ | --------------------
|                                                             | March 30,
      2002
|                                                             |                     
|Cash Flows from Operating Activities                         |                     
|Net income (loss)                                            | $ 668               
|Adjustments to reconcile net income (loss)                   |                     
|to net cash from operating activities:                       |                     
|Depreciation and amortization                                | 5,314               
|Loss (gain) on disposal of property and equipment            | (45)                
|Deferred tax expense (benefit)                               | 351                 
|Restructuring and asset impairment income                    | (652)               
|Other                                                        | (109)               
|Change in assets and liabilities:                            |                     
|Inventories                                                  | 5,906               
|Receivables and other assets                                 | (502)               
|Accounts payable                                             | 809                 
|Accrued liabilities                                          | 2,303               
|Net cash provided by operating activities                    | 14,043              
|                                                             |                     
|Cash Flows from Investing Activities                         |                     
|Capital expenditures                                         | (2,725)             
|Proceeds from sale of property and equipment                 | 2                   
|Net cash used in investing activities                        | (2,723)             
|                                                             |                     
|Cash Flows from Financing Activities                         |                     
|Net repayments under line-of-credit agreement                | (13,000)            
|Proceeds from notes payable and long-term debt               |                     
|Repayments on notes payable, long-term debt & capital leases | (3,150)             
|Proceeds from issuance of common stock, net                  | 225                 
|Net cash used in financing activities                        | (15,925)            
|                                                             |                     
|Effect of exchange rate changes on cash                      |                     
|Net increase (decrease) in cash and cash equivalents         | (4,605)             
|Cash and cash equivalents at beginning of period             | 18,840              
|Cash and cash equivalents at end of period                   | $ 14,235
      =====
|                                                             |                     
|Non-Cash Investing and Financing Activities                  |                     
|Stock issued in exchange for note receivable                 |                     
|Stock issued in payment of note payable                      | $  1,000
      =====
|Settlement of note payable against accounts receivable       | $     200====       

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





WILD OATS MARKETS, INC.

Notes to Consolidated Financial Statements

(unaudited)

1. Nature of Operations and Basis of Presentation

Wild Oats Markets, Inc. ("Wild Oats" or the
"Company"), headquartered in Boulder, Colorado, owns and operates
natural 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 March 30, 2002, the
consolidated statements of operations and comprehensive income (loss) for the
three months ended March 30, 2002 and March 31, 2001, as well as the
consolidated statements of cash flows for the three months ended March 30, 2002
and March 31, 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

During the three months ended March 30, 2002, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 145 ("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 beginning in fiscal years
beginning after May 15, 2002 and encourages early application of the recission
of SFAS No. 4. During the three months ended March 30, 2002, there were no gains
on early extinguishment of debt.



Goodwill and Other Intangible Assets. Effective December
30, 2002, the Company implemented SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 was issued in July 2001, supersedes Accounting Principles
Bulletin No. 17, Intangible Assets, and is effective for fiscal years
beginning after December 15, 2001. SFAS No. 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to their initial
recognition. SFAS No. 142 (1) prohibits the amortization of goodwill and
indefinite-lived intangible assets, (2) requires testing of goodwill and
indefinite-lived intangible assets on an annual basis for impairment (and more
frequently if the occurrence of an event or circumstance indicates an
impairment), (3) requires that reporting units be identified for the purpose of
assessing potential future impairments of goodwill and (4) removes the 40-year
limitation on the amortization period of intangible assets that have finite
lives.



In conjunction with its purchase acquisitions, the Company
historically had recorded goodwill at the store level; however, based on the
Company's recent consolidation of its brands to increase synergy and
awareness, the Company has changed its goodwill accounting policy and
accordingly has assigned the carrying value of its goodwill to one reporting
unit at the enterprise level to recognize goodwill for the brand, as opposed to
the past practice of recording goodwill at the store level. By June 29, 2002,
the Company plans to complete the two-step process prescribed by SFAS No. 142
for (1) testing for impairment and (2) determining the amount of impairment loss
related to goodwill associated with its enterprise-level reporting unit. 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
|-------------------------------------------------- |  | ------------------
|                                                   |  | March 30, 2002    
|                                                   |  |                   
|Goodwill amortization                              |  | $        --       
|Leasehold interest amortization                    |  | $      73         
|Net income (loss) available to common stockholders |  | $     668         



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



|                                                                    |  | Three Months Ended
|------------------------------------------------------------------- |  | ------------------
|                                                                    |  | March 30, 2002    
|                                                                    |  |                   
|Reported net income (loss) available
        to common stockholders |  | $  668            
|Goodwill amortization                                               |  | --                
|Adjusted net income available to common stockholders                |  | $  668 
      === 
|                                                                    |  |                   
|EARNINGS PER SHARE - BASIC AND DILUTED                              |  |                   
|Reported net income (loss) available
        to common stockholders |  | $  0.03           
|Goodwill amortization                                               |  | --                
|Adjusted net income available to common stockholders                |  | $  0.03
      ====





During the three months ended March 30, 2002, amortization of
intangible assets expense was $118,000. The estimated amortization of intangible assets
for each of the five fiscal years ending in fiscal 2006 is as follows (in
thousands):



| | 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 in September 2000, the Company entered into a swap agreement to hedge
the interest rate on $40.0 million of its borrowings. 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 March 30, 2002 was ($1.7 million), which has been recorded in the
accompanying balance sheet in accrued liabilities.



4. Earnings Per Share

Earnings per share are calculated in accordance with the
provisions of SFAS No. 128, Earnings Per Share.SFAS No. 128 requires the
Company to report both basic earnings per share, which is based on the
weighted-average number of common shares outstanding, and diluted earnings per
share, which is based on the weighted-average number of common shares
outstanding and all dilutive potential common shares outstanding, except where
the effect of their inclusion would be antidilutive (i.e., in a loss period).
Antidilutive stock options of 1,846,789 and 3,115,422 for the three months ended
March 30, 2002 and March 31, 2001, respectively, were not included in the
earnings per share calculations.



5. Restructuring and Asset Impairment Income

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



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



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 site sold during the first quarter of fiscal
    2002 ($253,000 of restructuring 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 three months of fiscal
2002 (in thousands):



> 

|EXIT
      PLANS                                                                     | 1999
      and
      prior |  | Q2
      2000       |  | Q4
      2000        |  | Q2
      2001       |  | Q3
      2001         |  | Q4
      2001       |  | Q1
      2002          |  | Total              
|------------------------------------------------------------------------------------ | -------------------------- |  | ------------------- |  | -------------------- |  | ------------------- |  | --------------------- |  | ------------------- |  | ---------------------- |  | -------------------
|                                                                                     |                            |  |                     |  |                      |  |                     |  |                       |  |                     |  |                        |  |                    
|                                                                                     |                            |  |                     |  |                      |  |                     |  |                       |  |                     |  |                        |  |                    
|Balance, 
      12/29/01                                                             | $2,458                     |  | 2,462               |  | $4,061               |  | $10,102             |  | $      87             |  | $3,879              |  |                        |  | $23,049            
|                                                                                     |                            |  |                     |  |                      |  |                     |  |                       |  |                     |  |                        |  |                    
|New accruals:                                                                        |                            |  |                     |  |                      |  |                     |  |                       |  |                     |  |                        |  |                    
|Severance                                                                            |                            |  |                     |  |                      |  |                     |  |                       |  |                     |  | $    269               |  | 269                
|Lease-
           related 
           liabilities                                    | 216                        |  | (649)               |  | 4                    |  |                     |  |                       |  | (239)               |  |                        |  | (668)              
|Cash 
           rec'd -
           lease-
           related
           liabilities | 459                        |  |                     |  |                      |  |                     |  |                       |  |                     |  |                        |  | 459                
|Note 
           receivable 
           in lieu of 
           cash                  | 375                        |  |                     |  |                      |  |                     |  |                       |  |                     |  |                        |  | 375                
|Cash 
           paid - 
           severance                                        |                            |  |                     |  |                      |  | (95)                |  |                       |  | (55)                |  | (213)                  |  | (363)              
|Cash 
           paid - 
           lease-
           related
           liabilities | (346)                      |  | (137)               |  | (502)                |  | (219)               |  | (31)                  |  | (330)               |  |                        |  | (1,565)            
|                                                                                     |                            |  |                     |  |                      |  |                     |  |                       |  |                     |  |                        |  |                    
|Balance,
      3/30/02                                                               | $3,1621
      =====        |  | $1,6761
      ===== |  | $3,5631
      ====== |  | $9,7882
      ===== |  | $     561
      ===== |  | $3,2553
      ===== |  | $      564
      ===== |  | $21,556
      =====

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

2 The restructuring accrual balance consists of $9.7 million for
lease-related liabilities and $40,000 for employee termination benefits.

3 The restructuring accrual balance consists of $3.3 million for
lease-related liabilities and $2,000 for employee termination benefits.

4 The restructuring accrual balance consists of employee termination
benefits.



As of March 30, 2002, the components of the accruals related to the Company's
restructuring activities are accrued liabilities ($5.5 million) and other
long-term obligations ($16.1 million).



1. Income Taxes



The Company has a $23.8 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 March 30, 2002,
the Company recorded $418,000 of income tax expense, primarily as a result of
income before income taxes of $1.1 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.

7. Related Party Transactions

Elizabeth C. Cook and Michael C. Gilliland, former executive
officers and directors of the Company, each own a one-third interest in Pretty
Good Groceries, Inc. ("PGG"), which in the past operated two grocery
stores, and currently operates one store in Boulder, Colorado. Through January
2002, PGG purchased certain items through the Company's volume purchase
discount programs with its distributors, and also purchased items from the
Company's commissaries and warehouses at cost. The Company had a receivable of
approximately $80,000 at December 29, 2001 related to the purchases by PGG of
goods from the Company or its suppliers. At December 29, 2001, the Company also
had a receivable for certain personal expenses of Mr. Gilliland and Ms. Cook,
the amount of which was in dispute. All receivables related to these items were
paid as part of the settlement of litigation described below.



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

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

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

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

In May 2002, the Company's Board of Directors agreed to
amend the Employment Agreement of Perry D. Odak, the Company's CEO and
President, to extend through December 2002 the period during which the issuance
by the Company of additional securities as part of an equity financing will
entitle Mr. Odak to receive up to 300,000 stock options exercisable for the
Company's common stock, to allow Mr. Odak to maintain his 5% equity ownership
in the Company.

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

This report on Form 10-Q contains certain forward-looking
statements regarding our future results of operations and performance. Important
factors that could cause differences in results of operations include, but are
not limited to, the timing and success of the Fresh Look program; 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 promotional and advertising campaigns; the impact of
competition; changes in product supply or suppliers; changes in management
information needs; changes in customer needs and expectations; governmental and
regulatory actions; general industry or business trends or events; changes in
economic or business conditions in general or affecting the natural foods
industry in particular; the ability to raise additional equity financings; 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

Fresh Look Program and Operational Improvements. During
the second and third quarters of fiscal 2001, we conducted extensive consumer
research to determine how to broaden our customer base and increase per-customer
sales. Based on the results of the research, we formulated our Fresh Look
program - a comprehensive advertising, pricing and merchandising program. We
initiated a phased roll-out of the complete Fresh Look program to the 42 stores
in 2001. The program includes weekly, as opposed to monthly, flyer advertising
through direct mail, in-store distribution and newspaper insertion,
remerchandising to emphasize produce, grocery and meat and seafood offerings,
and lowered pricing on selected merchandise throughout the stores. As part of
the program, we are also consolidating our banner names in selected areas across
the country to convert stores bearing individually different names to the
"Wild Oats Market" name, to increase advertising synergy and brand
awareness. The 42 Wild Oats Market natural foods supermarket format stores that
currently participate in the Fresh Look program generated comparable store sales
and customer count increases in the mid-single digits in the first quarter of
fiscal 2002. In addition, average transaction size in these stores increased in
the first quarter of fiscal 2002, both sequentially and year-over-year. Average
number of items per transaction also continued to increase. Due to the positive
results of the program, the Company will gradually add additional Wild Oats
Market stores to the Fresh Look program through fiscal 2002.



In fiscal 2001 and the first quarter of fiscal 2002, we
instituted new programs to improve customer service and store-level execution.
We also implemented inventory reduction programs, centralized product ordering
to refocus store management energies on store-level operations, and reset store
merchandise for customer convenience in many stores. We believe these programs
also contributed to overall operational improvements that increased store sales,
customer counts and average transaction sizes in the first quarter of fiscal
2002.



Store format and clustering strategy. We operate two
store formats: the natural foods supermarket and farmers market formats. The
natural foods supermarket format store, operated under the Wild Oats(R)
Natural Marketplace and Nature's(R) - A Wild Oats Market tradenames, is
generally 20,000 to 35,000 gross square feet, and the farmers market store,
operated under the Henry's Marketplace(R) and Sun
Harvest(TM) tradenames, is generally 15,000 to 25,000
gross square feet. Our profitability has been and will continue to be affected
by the mix of natural foods supermarkets and farmers market stores opened,
acquired or relocated and whether stores are being opened in markets where we
have an existing presence. In fiscal 2001, we redesigned the natural foods
supermarket format store layout and design, and in April 2002, we opened the
first of our redesigned natural foods supermarket format stores in Long Beach,
California. We also plan to expand the farmers market store format as our
second, parallel store format. We believe this format, which is primarily
located in metropolitan San Diego, California and Texas, appeals to a more
value-conscious customer. This format has historically produced higher
comparable store sales results than the natural foods supermarket format stores,
although margins are lower. The format also appears to perform better in the
face of new competition, whether from conventional or natural foods supermarket
competitors.



In the past, we have pursued a strategy of clustering stores
in each of our markets to increase overall sales, reduce operating costs and
increase customer awareness. In prior years, when we opened a store in a market
where we had an existing presence, our sales and operating results declined at
certain of our existing stores in that market. However, over time, the affected
stores generally achieved store contribution margins comparable to prior levels
on the lower base of sales. Certain new stores opened in the past two years have
caused a greater degree of cannibalization than previously expected, and the
store contribution margins at the older affected stores in these regions have
not rebounded to their prior levels. In certain existing markets, the sales and
operating results trends for other stores may continue to experience temporary
declines related to the clustering of stores. We are currently reevaluating our
clustering strategy in response to greater-than-expected sales cannibalization
in certain existing markets where we opened new stores.



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



- general economic conditions

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

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

- the timing of advertising and promotional events

- 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. Substantial uncertainty in the current U.S.
economy in the wake of the events of September 11, 2001 make it more difficult
to determine future performance of certain of our stores, although generally,
food sales are not dramatically impacted by economic recessions.



Our comparable store sales results have been negatively
affected in the past by, among other factors, planned cannibalization, which is
the loss of sales at an existing store when we open a new store nearby,
resulting from the implementation of our store clustering strategy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Store
format and clustering strategy."Comparable store sales results in
previous years were negatively affected by higher-than-expected cannibalization
due to the openings of new or relocated stores in several of our existing
markets. The farmers market format stores, which depend heavily on produce
sales, are more susceptible to sales fluctuations resulting from the
availability and price of certain produce items. As a result of operational
improvements, the introduction of the Fresh Look marketing program in selected
regions and store closures of certain weaker stores, comparable store sales
increased by 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. We
expect comparable store sales to increase modestly throughout fiscal 2002,
although as the Company continues to improve store-level execution and expands
the implementation of its Fresh Look program to additional natural foods
supermarket stores, the Company projects that comparable store sales in those
regions in which the initiatives are implemented may increase slightly more as
such initiatives increase total store sales. 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 first quarter of fiscal 2002, we opened no new stores,
although we have opened one new store in Long Beach, California, as of the date
of this report. We postponed the opening of three additional stores originally
planned to be opened in fiscal 2001, to allow for the redesign of the interiors
of such stores to incorporate feedback received during extensive customer
interviews and focus groups conducted in the second quarter of fiscal 2001, to
improve the operating efficiency of certain departments and to shift the guests'
focus to the meat and seafood, produce and grocery departments. The opening
dates for the three stores have been rescheduled during fiscal 2002 or early
fiscal 2003.



In the first quarter of fiscal 2002 we closed two
underperforming stores in Boca Raton, Florida and Chesterfield, Missouri, sold
two stores in Berkeley and Sunnyvale, California to the same purchaser of two
other stores in northern California sold in the fourth quarter of fiscal 2001,
and sold a store in Victoria, British Columbia, Canada. We also terminated a
lease obligation for one location never opened in Kansas City, Missouri. In the
first quarter of fiscal 2001, we opened four new stores in Cleveland, Ohio;
Irvine, California; Westport, Connecticut; and Omaha, Nebraska; and we closed
one store that did not meet our strategic objectives in Denver, Colorado.



The Company currently has an inventory of 18 vacant sites,
comprising both 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 first quarter of fiscal 2002, we disposed of two locations, in
Santa Fe, New Mexico and West Hartford, Connecticut, both in transactions where
the landlord took a reassignment of the space in exchange for payment to the
Company of cash or rent abatements. In some cases we have negotiated lease
terminations with the landlords in exchange for a cash payment by us. Where
appropriate, we have made vacant space available for use by charitable
organizations that cover the utilities costs for the space while we continue to
pay the rent obligation.



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



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



Pre-opening expenses. Pre-opening expenses include labor,
rent, advertising, utilities, supplies and certain other costs incurred prior to
a store's opening. Historically, pre-opening expenses for natural foods
supermarket format stores have averaged approximately $250,000 to $350,000 per
store, and farmers market format stores have averaged approximately $75,000 per
store, although the amount per store may vary depending on whether the store is
the first to be opened in a market or is part of a cluster of stores in that
market. As part of the Fresh Look advertising initiatives implemented by the
Company, we expect that pre-opening expenses will increase to $400,000 per
natural foods supermarket store, and $150,000 per farmers market store, as we
boost grand opening and weekly advertising. Consolidation of store banners,
which was implemented in the last half of fiscal 2001, should improve
advertising synergies in many regions of the country.



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



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



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



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



The consolidation of our brands to increase synergy and
awareness has resulted in an anticipated change to our goodwill accounting
policy. The Company will record 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
the Company's 2001 Annual Reportfiled 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.





Factors Impacting Results of Operations



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



- the number, timing and mix of store openings, acquisitions, relocations,
    remodels or closings
- availability of capital
- fluctuations in quarterly results of operations
- impact of the Fresh Look program roll-out to additional stores
- economic conditions
- competition
- labor issues
- loss of key management
- government regulations
- changes in suppliers, distributors and manufacturers
- volatility in our stock price



New stores build their sales volumes and refine their
merchandise selection gradually and, as a result, generally have lower gross
margins and higher operating expenses as a percentage of sales than more mature
stores. We anticipate that the new stores opened in fiscal 2002 will experience
operating losses for the first six to 12 months of operation, in accordance with
historical trends. Further, acquired stores, while generally profitable as of
the acquisition date, generate lower gross margins and store contribution
margins than our company average due to their substantially lower volume
purchasing discounts and the integration of the acquired stores into our
operating systems. Over time, we expect the gross margin and store contribution
margin of acquired stores to approach our company average. Other factors that
could cause acquired stores to perform at lower-than-expected levels include,
among other things, turnover of regional and store management, disruption of
advertising, changes in product mix and delays in the integration of purchasing
programs.



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



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



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



As discussed above, we propose to implement the Fresh Look
program in additional natural foods supermarket stores in fiscal 2002. There can
be no assurances that the program will be successful in those stores, nor that
the cost of the program roll-out will be at or below the costs incurred in
fiscal 2001.



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



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



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



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



We are subject to a myriad of local, state and federal
regulations governing the operation of our stores and support facilities,
including licensing laws governing the sale of particular categories of
products, health and sanitation laws, laws governing the manufacture, labeling
and importation of private label products, labor laws controlling wages,
benefits and employment conditions of our employees and advertising regulations
governing the manner in which we may advertise products we sell. In addition, in
the fall of 2002, the National Organic Standards, a comprehensive program of
regulations governing the growing, production, handling and sale of goods
advertised as "organic", will be fully implemented. Modifications in
existing laws and the implementation of new laws governing components of our
business operations may be triggered by consumer and regulatory concerns
regarding food safety issues, new technology or competitive pressures. 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 purchase 28.2% of our total goods from one distributor
under an agreement that expires in August 2002. We are currently negotiating
with that distributor and others for a new distribution agreement. There is no
assurance that we may not experience significant disruption in our operations
through shortages of goods and services if we change our distribution
relationship. Any significant disruption in the supply of goods could have a
material impact on our overall sales volume and cost of goods.



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 us, our competitors, our vendors or our industry. Volatility in
our stock price may affect our future ability to raise proceeds from equity
financings, renegotiate our existing credit agreement or enter into a new
borrowing relationship, or affect our ability to obtain new store sites on
favorable economic terms.



Results of Operations



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



|                                             |  | Three Months Ended
|-------------------------------------------- |  | ------------------
|                                             |  | March 30, 2002    
|                                             |  |                   
|Sales                                        |  | 100.0%            
|Cost of goods sold and occupancy costs       |  | 71.0              
|Gross margin                                 |  | 29.0              
|Direct store expenses                        |  | 21.6              
|Selling, general and administrative expenses |  | 6.1               
|Pre-opening expenses                         |  | 0.1               
|Restructuring and asset impairment charges   |  | (0.3)             
|Income from operations                       |  | 1.5               
|Interest expense, net                        |  | 1.0               
|Income (loss) before income taxes            |  | 0.5               
|Income tax expense (benefit)                 |  | 0.2               
|Net income (loss)                            |  | 0.3%              



Sales. Sales for the three months ended March 30, 2002,
increased 6.2% to $233.0 million from $219.5 million in the same period in
fiscal 2001. The year-to-date increase was primarily attributed to improvements
in same-store sales resulting from the positive impact of the Fresh Look program
and overall operational improvements. Comparable store sales increased 7.3% for
the first quarter of fiscal 2002 from a 5.7% increase in the fourth quarter of
fiscal 2001, as compared to a 1.0% increase in the first quarter of fiscal 2001,
due to operational improvements in a number of stores; the implementation of new
marketing programs, including the Fresh Look program, in selected regions; and
store closures or sales of certain weaker stores. We are continuing the phased
roll-out of a number of strategic initiatives which are projected to increase
overall sales gradually in those regions in which the initiatives are
implemented, through increased advertising, more frequent advertised specials
and modified pricing.



Gross Profit. Gross profit for the three months ended
March 30, 2002 increased 1.9% to $67.6 million from $66.4 million in the same
period in fiscal 2001. As a percentage of sales, gross profit decreased to 29.0%
in the first quarter of fiscal 2002 from 30.3% in the same period in fiscal 2001
due primarily to lower merchandise margins resulting from the implementation of
the Fresh Look program as well as a shift in the sales mix between store
formats. As the Company implements certain strategic initiatives that include
the lowering of prices in selected stores, or in selected regions, gross profit
in the remainder of fiscal 2002 may be negatively affected by lower margins on
certain items.



Direct Store Expenses. Direct store expenses for the
three months ended March 30, 2002 decreased 2.3% to $50.4 million from $51.6
million in the same period in fiscal 2001. As a percentage of sales, direct
store expenses decreased to 21.6% in the first quarter of fiscal 2002 from 23.5%
in the same period in fiscal 2001. The decreases are primarily due to the
reduction of store-level marketing expenses and other cost containment measures.



Selling, General and Administrative Expenses. Selling,
general and administrative expenses for the three months ended March 30, 2002
increased 27.9% to $14.2 million from $11.1 million in the same period in fiscal
2001. As a percentage of sales, selling, general and administrative expenses
increased to 6.1% in the first quarter of fiscal 2002 from 5.1% in the same
period in fiscal 2001. The increases are attributable to severance costs for
former employees, recruiting and relocation costs, as well as increases in
advertising and merchandising expenses related to the Fresh Look program and
expenses for expanded infrastructure at the Company's headquarters to support
the new advertising, merchandising and pricing initiatives. Based on first
quarter results, we have increased our projected level of selling, general and
administrative expenses for the remainder of fiscal 2002 and the first quarter
of fiscal 2003, and now expect that annualized selling, general and
administrative expenses as a percentage of sales will be approximately 6.0% for
at least the next nine to 12 months until such time as sales increase to
leverage the expenses as a percentage of sales. The increases in selling,
general and administrative expenses attributable to the expanded advertising
program are expected to remain constant per store in the future.



Pre-Opening Expenses.



Interest Expense, Net. Net interest expense for the three
months ended March 30, 2002 decreased 8.6% to $2.3 million from $2.5 million in
the same period in fiscal 2001, due to decreased borrowings during the
three-month period. As part of the October 2001 amendment to our credit
facility, our revolving line interest rates on prime-based and LIBOR-based loans
were increased to prime plus 2.25% and one-month LIBOR plus 3.75%, respectively,
both increasing by 0.5% starting January 1, 2002 and each six months thereafter
through January 1, 2003 when the rate will remain constant through the end of
the agreement in August 2003. Due to the current state of the U.S. economy,
management believes that the variable interest rates will remain constant during
the next six to 12 months. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources"below.



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

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



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



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



|                                                     |  | RESTRUCTURING STORE COUNT
|---------------------------------------------------- |  | -------------------------
|                                                     |  | Fiscal Year
      Ending 
|                                                     |  | March 30,                
|                                                     |  | 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 |  |                          
|Identified stores closed or abandoned                |  | (10)                     
|Identified stores sold                               |  | (3)                      
|Reversal of stores identified for closure or sale    |  |                          
|Identified stores remaining at period end            |  | 9                        



Income Tax Expense. For the three months ended March 30,
2002, we recorded $418,000 of income tax expense, primarily as a result of
income before income taxes of $1.1 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 trade payables), bank indebtedness, and the sale of
equity securities. Primary uses of cash have been the financing of new store
development, new store openings, relocations, remodels and acquisitions and
repayment of debt.



Net cash provided by operating activities was $14.0 million
during the first three months of fiscal 2002 as compared to $13.3 million during
the same period in fiscal 2001. Cash from operating activities increased during
this period primarily due to an increase in net income before depreciation and
amortization expense and changes in working capital items. We have not required
significant external financing to support inventory requirements at our existing
and new stores because we have been able to rely on vendor financing for most of
the inventory costs, and we anticipate that vendor financing will continue to be
available for new store openings.



Net cash used in investing activities was $2.7 million during
the first three months of fiscal 2002 as compared to $12.1 million during the
same period in fiscal 2001. The decrease is due to a reduction in capital
expenditures and acquisitions.



Net cash used in financing activities was $15.9 million
during the first three months of fiscal 2002 as compared to $536,000 used in
financing activities during the same period in fiscal 2001. The increase
reflects $15.5 million in debt repayments and $590,000 in partial repayment of a
related-party note.



We have a net deferred tax asset of $23.8 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 is proposing to raise approximately $30.0 million
or more in a private placement of the Company's equity to provide additional
liquidity, although such equity financing is not a requirement of the amended
credit facility. The Company recently engaged JP Morgan Securities Inc. to act
as the advisor to the Company in any equity financing, for which JP Morgan
Securities will receive a percentage of any financing consummated by the
Company. JP Morgan Securities Inc. is affiliated with J.P.
Morgan Partners (SBIC), LLC, which holds approximately 9.4% of our outstanding
common stock. A number of parties have conducted, and
several parties are currently conducting, due diligence on the Company related
to the proposed private placement. We have received several offers for
investment in the Company. Based on the Company's overall improvement in
operational results, and indications that other financing vehicles with a
greater return and lower dilutive effects to the Company may be available, the
Company is currently evaluating all financing alternatives.



We maintain an interest rate risk-management strategy, which
is required by our amended credit facility terms, that uses derivative
instruments to minimize significant, unanticipated earnings fluctuations that
may arise from volatility in interest rates. The Company's specific goals are
to (1) manage interest rate sensitivity by modifying the repricing or maturity
characteristics of some of its debt and (2) lower (where possible) the cost of
its borrowed funds. In accordance with the Company's interest rate
risk-management strategy, and in accordance with the requirements of our credit
facility, the Company has entered into a swap agreement to hedge the interest
rate on $40.0 million of its borrowings. The swap agreement locks in a one-month
LIBOR rate of 6.6% and expires in August 2003.



Capital Expenditures. We spent approximately $2.7 million
during the first three months of fiscal 2002 for new store construction,
development, remodels and other capital expenditures, exclusive of acquisitions.
Capital expenditures originally planned for certain of the stores rescheduled to
open in fiscal 2002 were incurred commencing in the fourth quarter of fiscal
2001. The aggregate amount to construct all five originally scheduled stores was
originally estimated at $15.0 million to $20.0 million, but may be revised
downward as part of our comprehensive review of the business operations and
strategic plan. We have terminated one store's lease obligations. Our average
capital expenditures to open a leased store, including leasehold improvements,
equipment and fixtures, have ranged from approximately $2.0 million to $5.0
million historically, excluding inventory costs and initial operating losses. As
part of our reexamination of our operating strategies, we anticipate that the
average capital expenditures to open a natural foods supermarket format store
will be $2.5 million to $4.0 million in the future, partly because of our
decision to reduce the size or simplify the format of our food service
department in new stores, as well as our decision not to increase store size in
the majority of geographic areas. Our average capital expenditures to open a
farmers market format store are estimated at $1.5 million to $2.25 million in
the future. Delays in opening new stores may result in increased capital
expenditures and increased pre-opening costs for the site, as well as lower than
planned sales for the Company. Under our amended credit facility, we are limited
in our capital expenditures to $3.6 million in the first quarter of fiscal 2002,
increasing to an aggregate $4.7 million in the second quarter and an aggregate
$5.0 million in the third quarter. Proceeds from any equity offering in excess
of $30.0 million may be used to increase our total allowable level of capital
expenditures by $4.0 million per natural foods supermarket format store and
$2.25 million per farmers market format store. If we are successful in raising
the additional equity financing, we plan to use the equity proceeds to complete
the early construction of two stores in fiscal 2002 and execute leases for and
commence capital expenditures on up to 15 new stores through fiscal 2003.
Although there can be no assurance that actual capital expenditures will not
exceed anticipated levels, we believe that cash generated from operations and
available under our existing credit facility will be sufficient to satisfy our
budgeted capital expenditure requirements through the remainder of fiscal 2002.



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



Cautionary Statement Regarding Forward-Looking Statements



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

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. To the extent that
those revenues are repatriated to the United States, the amounts repatriated are
subject to the exchange rate fluctuations between the two currencies. The
Company does not hedge against this risk because of the small amounts of funds
at risk.

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
March 30, 2002, there were $70.5 million in borrowings outstanding under the
$86.2 million revolving line of this facility and $36.3 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. 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 March 30, 2002, would be an annual increase or decrease of
approximately $1.1 million in interest expense and a corresponding decrease or
increase of approximately $657,000 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 March 30, 2002, the notional principal
amount of the interest rate swap agreement was $40.0 million, expiring in August
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 first quarter of fiscal 2002, the loss, net
of taxes, included in other comprehensive loss for this cash flow hedge was
approximately $314,000.





Part II. OTHER INFORMATION

Item 1. Legal Proceedings

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



In October 2000 we were 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 on interest, breached a lease
in 1995 related to certain property in Seattle, Washington. We believe that
Alfalfa's properly terminated the lease pursuant to certain conditions
precedent to its obligations thereunder. Since filing its claim, Plaintiff has
increased its damages claim from $377,000 to $2.4 million. We filed a motion for
summary judgment and the plaintiffs filed a motion for summary judgment. After
hearing, the court denied the Company's motion and granted the plaintiff's
motion, ruling that the Company had anticipatorily breached its lease
obligations. The Company is currently considering a motion for reconsideration.
A trial date for damages has been set in June 2002.



In January 2002, we were named as defendant in Michael C.
Gilliland and Elizabeth C. Cook v. Wild Oats Markets, Inc., a suit filed in
Boulder District Court, Boulder County, Colorado by former officers and
directors, and holders of more than 5% of the Company's outstanding stock, for
$2.0 million in principal on a promissory note, together with interest at a 15%
default rate and attorneys' fees. In March 2002, the parties entered into a
settlement agreement dismissing the suit, pursuant to which the Company agreed
to a repayment schedule for the note, together with interest at 9% per annum,
with cash and by the issuance of equity securities over a five-month period, and the plaintiffs
agreed to a $200,000 offset against the principal balance of the loan for
outstanding receivables alleged to be due to the Company. As of May 9, 2002, all
of the issued shares had been sold.



Item 2.Changes in Securities and Use of
Proceeds



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



The issuance of the shares to Mr. Gilliland and Ms. Cook was
exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(2) of such Act, as a transaction by the Company
not involving any public offering. Mr. Gilliland and Ms. Cook founded the
Company and acted as officers and served on the Company's Board of Directors
until their resignations in 2001. Resale of the shares by Mr. Gilliland and Ms.
Cook was registered by the Company pursuant to a registration statement on Form
S-3 (No. 333-85908). Mr. Gilliland and Ms. Cook may be deemed to be underwriters
in connection with the resale of the shares issued to them pursuant to the
settlement agreement.



Item 3. Defaults Upon Senior Securities

None.



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

Not applicable.



Item 5. Other Information

Not applicable.



Item 6. Exhibits and Reports on Form 8-K



> None.

(b) Reports on Form 8-K:

> Report dated February 1, 2002 on Form 8-K, reported under Item 5,
>         "Other Events," a lawsuit filed by Michael C. Gilliland and
>         Elizabeth C. Cook.

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 14th day of May, 2002.

Wild Oats Markets, Inc.

By: /s/Edward F. Dunlap___________
Edward F. Dunlap
Chief Financial Officer