<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-Q
                                        


(X)  QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
     EXCHANGE ACT  OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 27, 1998

                                      OR


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

Commission file number 0-21577


                            WILD OATS MARKETS, INC.
            (Exact name of registrant as specified in its charter)


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


                                 1645 BROADWAY
                            BOULDER, COLORADO 80302
         (Address of principal executive offices, including zip code)


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


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

     Yes  (X)          No  (_)

As of August 3, 1998, there were 13,038,639 shares outstanding of the 
Registrant's Common Stock (par value $0.001 per share).
<PAGE>
 
                               TABLE OF CONTENTS


                                                                            PAGE

PART I.    FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
            Consolidated Balance Sheet
              June 27, 1998 (Unaudited) and December 27, 1997                 3
 
            Consolidated Statement of Operations (Unaudited)
              Three and Six Months Ended June 27, 1998 and June 28, 1997      4
 
            Consolidated Statement of Cash Flows (Unaudited)
              Six Months Ended June 27, 1998 and June 28, 1997                5
 
            Notes to Consolidated Financial Statements (Unaudited)            6
 
Item 2.  Management's Discussion and Analysis of
           Financial Condition and Results of Operations                      8

Item 3.  Quantitative and Qualitative Disclosures 
           about Market Risks                                                13

PART II.   OTHER INFORMATION
 
Item 1.  Legal Proceedings                                                   14
Item 2.  Changes in Securities                                               14
Item 3.  Defaults Upon Senior Securities                                     14
Item 4.  Submission of Matters to a Vote of Security Holders                 14
Item 5.  Other Information                                                   14
Item 6.  Exhibits and Reports on Form 8-K                                    14
 
SIGNATURES                                                                   16
 

                                       2
<PAGE>
 
PART I.    FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
 
                            WILD OATS MARKETS, INC.
                          CONSOLIDATED BALANCE SHEET
                       (IN THOUSANDS, EXCEPT SHARE DATA)

 
                                                  JUNE 27,      DECEMBER 27,
                                                    1998            1997
                                                 (Unaudited)
ASSETS
Current assets:
  Cash and cash equivalents                        $ 20,895       $ 46,686
  Accounts receivable (less allowance
     for doubtful accounts of $177 and
     $214, respectively)                              1,346            674
  Inventories                                        24,224         21,539
  Income tax receivable                                 343            317
  Prepaid expenses and other current assets           1,538            735
  Deferred income taxes                               1,143          1,447
                                                   --------       --------
     Total current assets                            49,489         71,398
                                                   --------       --------
Property and equipment, net                          78,771         56,285
Intangible assets, net                               52,643         44,389
Deposits and other assets                               890            841
Deferred income taxes                                   154            154
                                                   --------       --------
                                                   $181,947       $173,067
                                                   ========       ========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                 $ 22,267       $ 22,487
  Accrued liabilities                                12,481         11,848
                                                   --------       --------
     Total current liabilities                       34,748         34,335
Long-term debt                                          167            467
Deferred income taxes                                 2,460          2,341
Other liabilities                                     1,133            801
                                                   --------       --------
                                                     38,508         37,944
                                                   --------       --------
 
Stockholders' equity:
  Preferred stock, $.001 par value; 5,000,000
     shares authorized; no shares
     issued and outstanding
  Common stock, $.001 par value; 20,000,000
     shares authorized; 13,013,809 and
     12,745,971 shares issued and outstanding            13             13
  Additional paid-in capital                        139,606        136,815
  Retained earnings (accumulated deficit)             3,922         (1,574)
  Accumulated other comprehensive income               (102)          (131)
                                                   --------       --------
     Total stockholders' equity                     143,439        135,123
                                                   --------       --------
                                                   $181,947       $173,067
                                                   ========       ========


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

                                       3
<PAGE>
 
                            WILD OATS MARKETS, INC.
                     CONSOLIDATED STATEMENT OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER-SHARE DATA)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
 
 
                                                                 THREE MONTHS ENDED   SIX MONTHS ENDED
                                                                 JUNE 27,  JUNE 28,  JUNE 27,  JUNE 28,
                                                                   1998      1997      1998      1997
<S>                                                               <C>       <C>      <C>       <C>
 
Sales                                                             $98,663   $76,677  $190,266  $146,405
Cost of goods sold and occupancy costs                             67,877    53,403   130,824   101,188
                                                                  -------   -------  --------  --------
  Gross profit                                                     30,786    23,274    59,442    45,217
Operating expenses:
  Direct store expenses                                            21,948    17,646    42,249    33,671
  Selling, general and administrative expenses                      3,856     2,878     7,627     6,089
  Pre-opening expenses                                                432                 981       183
  Non-recurring expenses                                              393                 393
                                                                  -------   -------  --------  --------
     Income from operations                                         4,157     2,750     8,192     5,274
  Interest income, net                                                140        77       524       232
                                                                  -------   -------  --------  --------
     Income before income taxes                                     4,297     2,827     8,716     5,506
     Income tax expense                                             1,693     1,150     3,408     2,273
                                                                  -------   -------  --------  --------
Net income                                                          2,604     1,677     5,308     3,233
                                                                  -------   -------  --------  --------
Other comprehensive income:
Foreign currency translation adjustment, net                            8        26        30         5
                                                                  -------   -------  --------  --------
 
Comprehensive income                                              $ 2,612   $ 1,703  $  5,338  $  3,238
                                                                  =======   =======  ========  ========
 
Basic net income per common share                                 $  0.20   $  0.16  $   0.41  $   0.31
                                                                  =======   =======  ========  ========
 
Diluted net income per common share                               $  0.19   $  0.16  $   0.39  $   0.31
                                                                  =======   =======  ========  ========
 
Average common shares outstanding                                  12,997    10,418    12,954    10,369
Dilutive effect of stock options                                      491       244       486       191
                                                                  -------   -------  --------  --------
Average common shares outstanding assuming dilution                13,488    10,662    13,440    10,560
                                                                  =======   =======  ========  ========
 
</TABLE>



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

                                       4
<PAGE>
 
                            WILD OATS MARKETS, INC.
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
 
                                                                SIX MONTHS ENDED
                                                               JUNE 27,   JUNE 28,
                                                                  1998       1997
<S>                                                            <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                     $  5,308   $  3,233
Adjustments to reconcile net
  income to net cash provided
  by operating activities:
  Depreciation and amortization                                   5,985      4,110
  Loss (gain) on disposal of property and equipment                (106)      (487)
  Deferred tax provision                                            426        833
  Deferred severance payment                                                   476
  Change in assets and liabilities:
     Inventories                                                 (1,149)        40
     Receivables and other assets                                (1,017)         7
     Accounts payable                                              (494)      (793)
     Accrued liabilities                                          1,526     (1,073)
                                                               --------   --------
       Net cash provided by operating activities                 10,479      6,346
                                                               --------   --------
 
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures                                            (27,138)    (7,993)
Payment for purchase of acquired
  entities, net of cash acquired                                 (9,585)    (8,892)
Proceeds from sales of equipment                                               566
                                                               --------   --------
  Net cash used by investing activities                         (36,723)   (16,319)
                                                               --------   --------
 
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt                                         (705)    (1,099)
Proceeds from issuance of common stock                            1,128      1,861
                                                               --------   --------
  Net cash provided by financing activities                         423        762
                                                               --------   --------
 
Effect of exchange rate changes on cash                              30          6
                                                               --------   --------
Net decrease in cash and cash equivalents                       (25,791)    (9,205)
Cash and cash equivalents at beginning of period                 46,686     16,404
                                                               --------   --------
Cash and cash equivalents at end of period                     $ 20,895   $  7,199
                                                               ========   ========
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for interest                                       $      6   $     51
                                                               ========   ========
  Cash paid for income taxes                                   $  2,575   $    929
                                                               ========   ========

Supplemental schedule of noncash investing 
  and financing activities:
  Short-term note receivable for sale of property              $    365
                                                               ========
  Acquisition of property with
     seller-financed long-term debt                                       $    480
                                                                          ========
</TABLE> 

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

                                       5
<PAGE>
 
                            WILD OATS MARKETS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                                        
1.   ACCOUNTING POLICIES

     The consolidated balance sheet as of June 27, 1998, the consolidated
     statement of operations for the three and six months ended June 27, 1998
     and June 28, 1997, as well as the consolidated statement of cash flows for
     the six months ended June 27, 1998 and June 28, 1997 have been prepared
     without an audit. In the opinion of management, all adjustments, consisting
     only of normal, recurring adjustments necessary for a fair presentation
     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. It is suggested that these
     consolidated financial statements be read in conjunction with financial
     statements and notes thereto included in the Company's 1997 Annual Report
     to Stockholders. The results of operations for interim periods presented
     are not necessarily indicative of the operating results for the full year.

2.   NEW ACCOUNTING PRONOUNCEMENTS

     In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
     of Financial Accounting Standards ("FAS") No. 130, Reporting Comprehensive
     Income, and FAS No. 131, Disclosure about Segments of an Enterprise and
     Related Information. The Company adopted FAS No. 130 in 1998, and the
     required presentation is shown in the consolidated balance sheet and
     consolidated statement of operations herein. The Company will adopt FAS No.
     131 effective January 2, 1999; however, the Company does not expect FAS No.
     131 to materially affect financial statement presentation.

     In March 1998, the American Institute of Certified Public Accountants
     ("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the
     Costs of Computer Software Developed or Obtained for Internal Use. 
     SOP 98-1, which is effective for transactions in fiscal years beginning 
     after December 15, 1998, provides guidance on accounting for the costs of
     computer software developed or obtained for internal use. The Company will
     adopt SOP 98-1 for the 1999 fiscal year, but does not expect such adoption
     to have a material effect on its reported financial results.

     In April 1998, the AICPA issued SOP 98-5, Accounting for the Costs of 
     Start-Up Activities. SOP 98-5 provides guidance on how entities should
     account for start-up costs, such as pre-opening costs, pre-operating costs,
     organization costs and start-up costs. SOP 98-5 requires that the costs of
     start-up activities be expensed as incurred. SOP 98-5 is effective for
     fiscal years beginning after December 15, 1998, and the initial application
     should be reported as a cumulative effect of a change in accounting
     principle. The Company will adopt SOP 98-5 in fiscal 1999 and does not
     expect such adoption to have a material impact on the Company's results of
     operations.

     In June 1998, the FASB issued FAS No. 133, Accounting for Derivative
     Instruments and Hedging Activities. FAS No. 133, which is effective for
     fiscal years beginning after June 15, 1999, requires all derivatives to be
     recognized in the balance sheet as either assets or liabilities and
     measured at fair value. In addition, all hedging relationships must be
     reassessed and documented pursuant to the provisions of FAS No. 133. The
     Company will adopt FAS No. 133 for the 2000 fiscal year, but does not
     expect such adoption to materially affect financial statement presentation.

3.   BUSINESS COMBINATIONS

     During the second quarter of 1998, the Company acquired the assets of three
     operating natural foods grocery stores in New York, New York, Santa
     Barbara, California, and Victoria, British Columbia in exchange for $7.4
     million in cash. The acquisitions were accounted for using the purchase
     method, and the excess cost over the fair value of the net assets acquired
     of $6.3 million was allocated to goodwill, which is being amortized on a
     straight-line basis over 40 years.

     Also during the second quarter of 1998, the Company issued 133,363 shares
     of the Company's common stock in exchange for all of the common stock of
     two companies operating natural foods grocery stores in Columbus, Ohio and
     Little Rock, Arkansas. The acquisitions were accounted for as poolings of
     interests, and, accordingly, the Company's consolidated financial
     statements for the six months ended June 27, 1998 include the operations of
     the acquired stores, adjusted to conform with the Company's accounting
     policies and presentation. The Company's financial statements prior to 1998
     were not restated based on the immaterial effect of the poolings. Non-
     recurring, acquisition-related expenses of $393,000 were recorded in
     conjunction with the poolings.

4.   EARNINGS PER SHARE

     Earnings per share are calculated in accordance with the provisions of FAS
     No. 128, Earnings Per Share. FAS 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).

                                       6
<PAGE>
 
5.   STOCKHOLDER RIGHTS PLAN

     The Company has adopted a stockholder rights plan having both "flip-in" and
     "flip-over" provisions. Stockholders of record as of May 22, 1998 received
     the right ("Right") to purchase a fractional share of preferred stock at a
     purchase price of $145 for each share of common stock held. In addition,
     until the Rights become exercisable as described below and in certain
     limited circumstances thereafter, the Company will issue one Right for each
     share of common stock issued after May 22, 1998. For the "flip-in
     provision," the Rights would become exercisable only if a person or group
     acquires beneficial ownership of 15% (the "Threshold Percentage") or more
     of the outstanding common stock. Holdings of certain existing affiliates of
     the Company are excluded from the Threshold Percentage. In that event, all
     holders of Rights other than the person or group who acquired the Threshold
     Percentage would be entitled to purchase shares of common stock at a
     substantial discount to the then-current market price. This right to
     purchase common stock at a discount would be triggered as of a specified
     number of days following the passing of the Threshold Percentage. For the
     "flip-over" provision, if the Company was acquired in a merger or other
     business combination or transaction, the holders of such Rights would be
     entitled to purchase shares of the acquiror's common stock at a substantial
     discount.

                                       7
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

This Form 10-Q contains forward-looking statements within the context of Section
21E of the Securities Exchange Act of 1934, as amended. Each and every forward-
looking statement involves a number of risks and uncertainties, including the
Risk Factors specifically delineated and described in the Company's 1997 Annual
Report to Stockholders and those Risk Factors that have been specifically
expanded or modified below. The actual results that the Company achieves may
differ materially from any forward-looking statements due to such risks and
uncertainties. Words such as "believes", "anticipates", "expects", "intends",
and similar expressions are intended to identify forward-looking statements, but
are not the exclusive means of identifying such statements. 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.

Certain of the Risk Factors are hereby restated, modified and expanded in
accordance with the following section references that correlate to the
corresponding sections of the Company's 1997 Annual Report to Stockholders:

UNCERTAIN ABILITY TO EXECUTE GROWTH STRATEGY

The Company's business has grown considerably in size and geographic scope,
increasing from 11 stores in 1993, to its current size of 57 stores in 16 states
and Canada. The Company acquired six operating natural foods stores, opened
three new stores, and relocated one store during the six months ended June 27,
1998. The Company also closed two stores in anticipation of relocations to new
sites and sold two stores, both in Colorado, during the six months ended June
27, 1998. During 1997, the Company opened four stores, relocated one store and
acquired nine stores. The Company's ability to implement its growth strategy
depends to a significant degree upon its ability to open or acquire stores in
existing and new markets and to integrate and operate those stores profitably.
While the Company plans to expand primarily through the opening of new stores,
it will continue to pursue acquisitions of natural foods retailers where
attractive opportunities exist. The Company's growth strategy is dependent upon
a number of factors, including its ability to: (i) access adequate capital
resources; (ii) expand into regions where it has no operating experience; (iii)
identify markets that meet its site selection criteria; (iv) locate suitable
store sites and negotiate acceptable lease terms; (v) locate acquisition targets
and negotiate acceptable acquisition terms; (vi) hire, train and integrate
management and store employees; (vii) recruit, train and retain regional pre-
opening and support teams; and (viii) expand its distribution and other
operating systems. In addition, the Company pursues a strategy of clustering
stores in each of its markets to increase overall sales, achieve operating
efficiencies and further penetrate markets. In the past, when the Company has
opened a store in a market where it had an existing presence, the Company has
experienced a decline in the sales and operating results at certain of its
existing stores in these markets. The Company intends to continue to pursue its
store clustering strategy and expects the sales and operating results trends for
other stores in an expanded market to continue to experience temporary declines
related to the clustering of stores. Further, acquisitions involve a number of
additional risks, such as short-term negative effects on the Company's reported
operating results, diversion of management's attention, unanticipated problems
or legal liabilities, and the integration of potentially dissimilar operations,
some or all of which could have a material adverse effect on the Company's
business, results of operations and financial condition. There can be no
assurance that the Company will achieve its planned expansion in existing
markets, enter new markets, or operate or integrate its existing, newly-opened
or newly-acquired stores profitably. If the Company fails to do so, the
Company's business, results of operations and financial condition will be
materially and adversely affected. In addition, the Company's ability to execute
its growth strategy is partially dependent upon the demographic trends and
market conditions in the natural foods industry and any change in those trends
and conditions could adversely affect the Company's future growth rate.

COMPETITION

As Wild Oats enters new geographic markets, its success will depend in part on
its ability to gain market share from established competitors and to compete
effectively with the entry of natural foods grocery competitors into its
existing markets. In addition, traditional and specialty grocery stores may
expand more aggressively in marketing a broader range of natural foods and
related products and thereby compete directly with the Company for products,
customers and locations. The Company expects competition from both new and
existing competitors to increase in its markets, and there can be no assurance
that the Company will be able to compete effectively in the future. The Company
believes its primary competitor in the natural foods grocery store market is
Whole Foods Market, Inc. ("Whole Foods"), a publicly-traded company based in
Texas. Whole Foods opened a 39,000-square-foot store in Boulder, Colorado, the
location of the Company's headquarters and two of its stores, in late February
1998. The impact on sales at the Company's Boulder stores has been similar to
the impact of the Company's opening of a store in a market where the Company has
an existing presence. While the impact on sales at the Company's Boulder stores
has been within the level expected by management, at this time the Company
cannot evaluate what long-term impact increased competition from Whole Foods
will have on its overall sales. The Company's Boulder, Colorado stores account
for less than 10% of the Company's overall sales revenues. Whole Foods'
management also has announced that it intends to seek additional store sites in
other cities in which the Company has stores, and has announced it has acquired
sites in Denver, Colorado and Santa Fe, New Mexico, cities in which the Company
has several stores. If Whole Foods is successful in opening stores in locations
in which the Company has or intends to open stores, the Company's sales and
operating results at such stores may be materially adversely affected.

FLUCTUATIONS IN FINANCIAL RESULTS

The Company's results of operations may fluctuate significantly from period-to-
period as the result of a variety of factors, including: (i) the number, timing,
mix and cost of store openings, acquisitions or closings; (ii) the ratio of
stores opened to stores acquired; (iii) the opening of stores by the Company or
its competitors in markets where the Company has existing stores; (iv)
comparable store sales results; (v) the ratio of urban format to supermarket
format stores; and (vi) seasonality in sales volume and sales mix in certain
geographic regions. The Company incurs significant pre-opening expenses, and new
stores typically experience an initial period of operating losses. As a result,
the opening of a significant number of stores in a single quarter will have an
adverse effect on the 

                                       8
<PAGE>
 
Company's results of operations. Additionally, the opening of competing stores
may have a similar adverse effect on results of operations. Due to the foregoing
factors, the Company believes that period-to-period comparisons of its operating
results are not necessarily meaningful and that such comparisons cannot be
relied upon as indicators of future financial performance.

A variety of factors affect the Company's comparable store sales results,
including, among others, the relative proportion of new stores to mature stores,
the opening of stores by the Company or its competitors in markets where the
Company has existing stores, the timing of promotional events, the Company's
ability to execute its operating strategy effectively, changes in consumer
preferences for natural foods and general economic conditions. Past increases in
comparable store sales may not be indicative of future performance. The
Company's comparable store sales results have been negatively affected in the
past by planned cannibalization (the loss of sales at an existing store when the
Company opens a new store nearby) resulting from the implementation of the
Company's store clustering strategy. The Company's comparable store sales
increases during the second quarter of 1998 were negatively affected by planned
cannibalization in its Boulder and Denver, Colorado and Phoenix, Arizona
markets, as well as by new competition in Boulder, Colorado. The Company expects
that comparable store sales increases will be negatively affected by planned
cannibalization in the third and fourth quarters of 1998 due to the opening of
new stores in existing markets in Santa Monica, California and Denver, Colorado.
There can be no assurance that comparable store sales for any particular period
will not decrease in the future. 

GOVERNMENT REGULATION

The Company is subject to numerous federal, state and local laws, regulations
and ordinances regulating health and sanitation standards, food labeling and
handling, equal employment, minimum wages and licensing for the sale of food and
alcoholic beverages. Difficulties or failures in complying with these
regulations could adversely affect the operations of an existing store or delay
the opening of a new store.

In December 1997, the United States Department of Agriculture ("USDA")
published, pursuant to the Organic Food Production Act of 1990, its proposed
National Organic Program rules, under which the USDA proposes to regulate the
production, handling, labeling and sale of products bearing the "organic" label.
The Company believes that the rules as published substantially weaken the
current standards for organic food production and labeling, and may undermine
consumer confidence in the quality of certain of the foods sold in its stores.
The rules also may add additional expense to the Company's cost of private label
and in-store prepared foods sold by the Company. The Company submitted a
detailed response to the USDA during the comment period. If the rules are
adopted as currently proposed, such rules could have an adverse effect on the
Company's business, results of operations and financial condition.

In April 1998, the United States Food and Drug Administration ("FDA") published
a proposed amendment to the Dietary Supplement Health and Education Act of 1994.
The Company believes the proposed amendments could substantially limit the
consumer's access to important information on vitamins and supplements. The
Company intends to submit a response to the proposed amendment before the end of
the FDA comment period in August 1998. The Company also has launched a consumer
education campaign to encourage consumers to comment to the FDA on the proposed
amendments. If the proposed amendments are adopted as currently drafted,
information about, and perhaps access to, vitamins and supplements could be
restricted, which could have an adverse effect on the Company's business,
results of operations and financial condition.

OWNERSHIP AND SALE OF REAL PROPERTY

In 1996 and 1997 and in the first six months of 1998, the Company purchased, or
entered into contracts to purchase, parcels of real property for the
construction or remodeling of new stores or the relocation of existing stores.
The Company also purchased a ground lease on undeveloped real property. The
Company has constructed one, and intends to construct three new stores on
undeveloped real property purchased by the Company or subject to a ground lease
acquired by the Company. There can be no assurance that the Company will be
successful in constructing the planned stores within the Company's projected
budgets or on the schedules currently anticipated. Failure to complete these
projects on time or within budget could have a material adverse impact on the
Company's business, results of operations and financial condition. The Company
anticipates that, after construction or remodeling of stores on certain of the
acquired properties is completed, it will sell the land and buildings in one or
more sale-leaseback transactions under which the Company will lease the stores
from the purchaser of the property. There can be no assurance that the Company
will be successful in locating and negotiating acceptable transactions with one
or more parties for the sale-leaseback of the properties currently owned by the
Company, which may result in unplanned long-term uses of the Company's cash that
would otherwise be available to fund operations.

ANTI-TAKEOVER CONSIDERATIONS

The Company has adopted a stockholder rights plan having both "flip-in" and
"flip-over" provisions. Stockholders of record as of May 22, 1998 received the
right ("Right") to purchase a fractional share of preferred stock at a purchase
price of $145 for each share of common stock held. In addition, until the Rights
become exercisable as described below and in certain limited circumstances
thereafter, the Company will issue one Right for each share of common stock
issued after May 22, 1998. For the "flip-in provision," the Rights would become
exercisable only if a person or group acquires beneficial ownership of 15% (the
"Threshold Percentage") or more of the outstanding common stock. Holdings of
certain existing affiliates of the Company are excluded from the Threshold
Percentage. In that event, all holders of Rights other than the person or group
who acquired the Threshold Percentage would be entitled to purchase shares of
common stock at a substantial discount to the then-current market price. This
right to purchase common stock at a discount would be triggered as of a
specified number of days following the passing of the Threshold Percentage. For
the "flip-over" provision, if the Company was acquired in a merger or other
business combination or transaction, the holders of such Rights would be
entitled to purchase shares of the acquiror's common stock at a substantial
discount.

                                       9
<PAGE>
 
RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
 
 
                                                 THREE MONTHS ENDED      SIX MONTHS ENDED
                                                 JUNE 27,   JUNE 28,   JUNE 27,   JUNE 28,
                                                    1998       1997       1998       1997
<S>                                                <C>        <C>        <C>        <C>
 
Sales                                              100.0%     100.0%     100.0%     100.0%
Cost of goods sold and occupancy costs              68.8       69.6       68.8       69.1
                                                   -----      -----      -----      -----
Gross margin                                        31.2       30.4       31.2       30.9
Direct store expenses                               22.3       23.0       22.2       23.0
Selling, general and administrative expenses         3.9        3.8        4.0        4.2
Pre-opening expenses                                 0.4                   0.5        0.1
Non-recurring expenses                               0.4                   0.2   
                                                   -----      -----   --------   --------
Income from operations                               4.2        3.6        4.3        3.6
Interest income, net                                 0.1        0.1        0.3        0.2
                                                   -----      -----      -----      -----
Income before income taxes                           4.3        3.7        4.6        3.8
Income tax expense                                   1.7        1.5        1.8        1.6
                                                   -----      -----      -----      -----
Net income                                           2.6%       2.2%      2.8 %       2.2%
                                                   =====      =====      =====      =====
 
</TABLE>

STORE OPENINGS, CLOSINGS, REMODELS, RELOCATIONS and ACQUISITIONS. During the
second quarter of 1998, the Company opened two new stores in Princeton, New
Jersey and Columbus, Ohio and acquired five stores, one each in Columbus, Ohio
(which was subsequently relocated), New York, New York, Victoria, British
Columbia, Santa Barbara, California and Little Rock, Arkansas, and sold one
store in Boulder, Colorado. The Company also closed two stores in Fort Collins,
Colorado and Denver, Colorado in anticipation of relocations to new sites. The
Company plans to open as many as five additional new stores and relocate three
stores during the remainder of 1998. The Company anticipates that it also may
acquire one or more operating natural foods grocery stores during the remainder
of 1998. The Company's results of operations have been and will continue to be
affected by, among other things, the number, timing and mix of store openings,
acquisitions or closings. 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. The Company anticipates that the new stores opened in 1998 will
experience operating losses for the first six to 12 months of operation, in
accordance with historic trends. Further, acquired stores, while generally
profitable as of acquisition date, generate lower gross margins and store
contribution margins than the Company average, due to their substantially lower
volume purchase discounts. Over time, typically six months, as the Company sells
through the acquired inventories and implements its volume purchase discounts,
the Company expects that the gross margin and store contribution margin of the
acquired stores will approach the Company average. The Company anticipates that
a high concentration of acquired stores, such as that seen in the first six
months of 1997, will have a temporary negative impact on the Company's
consolidated gross margin and store contribution margin. The Company is actively
upgrading and remodeling some of its older stores, including four remodels
commenced in the first six months of 1998. Remodels typically cause short-term
disruption in sales volume and related increases in certain expenses as a
percentage of sales, such as payroll. Remodels on average take between 90 and
120 days to complete. The Company cannot predict whether sales disruptions and
the related impact on earnings may be greater in time or volume than projected
in certain remodeled stores. The Company will continue to evaluate the
profitability of all of its stores on an ongoing basis and may, from time to
time, make decisions regarding closures, disposals, relocations or remodels in
accordance with such evaluations. As part of this strategy, during the first six
months of 1998, the Company sold two stores in Colorado, and consolidated its
stores in Fort Collins, Colorado by closing one store located there.

SALES.  Sales for the three months ended June 27, 1998 increased 28.7% to $98.7
million from $76.7 million for the same period in 1997. Sales for the six months
ended June 27, 1998 increased 30.0% to $190.3 million from $146.4 million for
the same period in 1997. The increases were primarily due to the opening of
three new stores, the acquisition of six stores, and the relocation of one store
in the first six months of 1998, and the inclusion of four new stores opened,
one relocated store, and nine stores acquired in 1997. Comparable store sales
increased 2% for the second quarter of 1998 and 4% for the first six months of
1998, based on both new and acquired stores that have been operating longer than
12 months. The Company expects its comparable store sales increases to fluctuate
from 4% to 6% in the remaining quarters of 1998 due to planned cannibalization
in certain markets as well as competition. See "Risk Factors--Fluctuations in
Financial Results".

GROSS PROFIT.  Gross profit for the three months ended June 27, 1998 increased
32.3% to $30.8 million from $23.3 million for the same period in 1997. Gross
profit for the six months ended June 27, 1998 increased 31.5% to $59.4 million
from $45.2 million for the same period in 1997. The increases in gross profit
are primarily attributable to the increase in the number of stores operated by
the Company. Gross profit as a percentage of sales for the three months ended
June 27, 1998 increased to 31.2% from 30.4% for the same period in 1997. Gross
profit as a percentage of sales for the six months ended June 27, 1998 increased
to 31.2% from 30.9% for the same period in 1997. The increases are primarily
attributable to the maturation of the Company's store base, the Company's volume
purchase discounts, and enhanced inventory management.

DIRECT STORE EXPENSES.  Direct store expenses for the three months ended June
27, 1998 increased 24.4% to $21.9 million from $17.6 million for the same period
in 1997. Direct store expenses for the six months ended June 27, 1998 increased
25.5% to $42.2 million from $33.7 million for the same period in 1997. The
increases in direct store expenses are attributable to the increase in the
number of stores operated by the Company. Direct store expenses as a percentage
of sales for the three months ended June 27, 1998 

                                       10
<PAGE>
 
decreased to 22.2% from 23.0% for the same period in 1997. Direct store expenses
as a percentage of sales for the six months ended June 27, 1998 decreased to
22.2% from 23.0% for the same period in 1997. The decreases are due to the
matured performance of the new stores opened in 1997, as well as improved
control of direct store expenses, particularly payroll and benefits costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended June 27, 1998 increased 34.0%
to $3.9 million from $2.9 million for the same period in 1997. Selling, general
and administrative expenses for the six months ended June 27, 1998 increased
25.3% to $7.6 million from $6.1 million for the same period in 1997. Selling,
general and administrative expenses as a percentage of sales for the three
months ended June 27, 1998 increased to 3.9% from 3.8% for the same period in
1997. The increases are the result of additional central and regional support
staff and infrastructure that the Company has added to support its increased
number of stores. For the six months ended June 27, 1998, selling, general and
administrative expenses as a percentage of sales decreased to 4.0% from 4.2% as
compared to the same period in 1997. The decrease is the result of greater
leverage of overhead expenses over higher sales volumes. Selling, general and
administrative expenses have been running higher than expected in the first six
months of 1998 due to additional personnel costs in the information
technologies, marketing and purchasing departments needed to support the
Company's growth plans, as well as additional costs to distribute the Company's
monthly marketing materials, such as its specials flyers, to its customers. The
Company anticipates that the higher levels of selling, general and
administrative expenses will continue through 1998. In addition, the Company
will be moving its corporate offices in the third quarter of 1998 to a larger
facility to accommodate an increased support staff for its larger base of
stores. It is anticipated that there will be additional selling, general and
administrative expenses for rent and utilities on the new facility, and the
costs of relocating the information systems currently used by the Company.

PRE-OPENING EXPENSES. Pre-opening expenses for the three months ended June 27,
1998 were $432,000. Pre-opening expenses as a percentage of sales for the three
months ended June 27, 1998 were 0.4%. There were no pre-opening expenses for the
same period in 1997. Pre-opening costs for the six months ended June 27, 1998
increased 436.1% to $981,000 from $183,000 for the same period in 1997. For the
six months ended June 27, 1998, pre-opening costs as a percentage of sales
increased to 0.5% from 0.1% due to the opening of three new stores and the
relocation of one store in the first six months of 1998 as compared to one new 
store in the same period in 1997.

NON-RECURRING EXPENSES.  In conjunction with the Company's pooling-of-interests
transactions during the three months ended June 27, 1998, the Company recorded a
non-recurring charge of $393,000. The charge is attributable to severance costs,
lease termination costs, and asset write-downs.

NET INTEREST INCOME.  Net interest income for the three months ended June 27,
1998 increased 81.8% to $140,000 from $77,000 for the same period in 1997. Net
interest income for the six months ended June 27, 1998 increased 125.9% to
$524,000 from $232,000 for the same period in 1997. Net interest income as a
percentage of sales for the three months ended June 27, 1998 remained constant
at 0.1% for the same period in 1997. Net interest income as a percentage of
sales for the six months ended June 27, 1998 increased to 0.3% from 0.2% for the
same period in 1997. The change is attributable to the investment of the net
proceeds from the Company's public offerings in December 1997 and October 1996
and to lower levels of indebtedness incurred to fund new store openings and
acquisitions.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of capital have been cash flow from operations,
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, acquisitions and purchases of real property.

Net cash provided by operating activities was $10.5 million during the six
months ended June 27, 1998 as compared to $6.3 million during the same period in
1997. Cash provided by operating activities increased during this period
primarily due to increases in net income before depreciation and amortization
expense and increases in accrued liabilities. The Company has not required
significant external financing to support inventory requirements at its existing
and new stores because it has been able to rely on vendor financing for most of
the inventory costs, and anticipates that vendor financing will continue to be
available for new store openings.

Net cash used by investing activities was $36.7 million during the six months
ended June 27, 1998 as compared to $16.3 million during the same period in 1997.
The increase is due to the opening of four new stores, the acquisition of six
stores, the purchase of certain parcels of real property, and six store remodels
in the first six months of 1998 as compared to one new store and six acquired
stores in the first six months of 1997, as well as the construction costs
incurred for new stores in development which are expected to open in the
remainder of 1998.

Net cash provided by financing activities was $423,000 during the six months
ended June 27, 1998 as compared to $762,000 during the same period in 1997. The
change reflects decreased issuance of common stock during the first six months
of 1998.

The Company has a revolving line of credit of $40.0 million. The facility has a
seven-year term and bears interest, at the Company's option, at the prime rate
or LIBOR plus 1.25%. The line of credit agreement includes certain financial and
other covenants, as well as restrictions on payments of dividends. As of August
6, 1998, there were no borrowings outstanding under this facility.

The Company spent approximately $15.5 million during the second quarter of 1998
for new store development, remodels and maintenance capital expenditures,
exclusive of any acquisitions. The Company anticipates that it will spend
approximately $35.0 million during 1998 for new store development, remodels and
maintenance capital expenditures, exclusive of any acquisitions. Five new store
openings and three store relocations are planned for the remainder of 1998. The
Company's average capital expenditures to open a store, including leasehold
improvements, equipment and fixtures, have ranged from approximately $1.0
million to $3.0 million over the past 24 months, excluding inventory costs and
initial operating losses. The Company expects to increase the average size of
its new stores and increase the number of its new store openings over time, and
is using a greater proportion of new and custom

                                       11
<PAGE>
 
equipment in its stores. Therefore, the Company anticipates that its average
capital expenditures per store will increase over time by approximately
$500,000.

In 1996 and 1997 and in the first two quarters of 1998, the Company purchased,
or entered into contracts to purchase, real property or ground leases on which
it intends to construct new stores or remodel or relocate certain existing
stores. The Company constructed one new store that opened in March 1998, is
currently constructing two stores planned to open in the fourth quarter of 1998
or first quarter of 1999, and plans to commence construction on one additional
new store in early 1999. Construction of stores requires substantially greater
cash outlays than the remodeling of existing buildings (i.e., $3.5 to $6.0
million as compared to $1.0 to $3.0 million). The Company intends to sell
certain of the acquired real properties in one or more sale-leaseback
transactions in order to recover the cash expended for the purchase of the
underlying real property and the building construction costs. If the Company is
not successful in locating and negotiating acceptable transactions with one or
more parties for the sale and leaseback of certain of the properties currently
owned by the Company, this may result in unplanned, long-term uses of the
Company's cash that otherwise would be available to fund operations. 
Additionally, unexpected permitting and construction delays could result in
greater or longer-term cash outlays.

The cost of initial inventory for a new store has historically been
approximately $500,000; however, the Company relies on vendor financing for most
of this cost. Pre-opening costs are approximately $250,000 per store and are
expensed when the new store opens. 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 the Company, 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.
The Company believes that the net proceeds of its public stock offering in
December 1997, together with cash generated from operations and funds available
under the revolving line will be sufficient to satisfy its cash requirements,
exclusive of acquisitions, through 1998.

YEAR 2000 ISSUES

As the Year 2000 approaches, the Company recognizes the need to ensure its
operations will not be adversely impacted by Year 2000 software or hardware
failures. The Company has determined that, with the exception of the Company's
current headquarters voicemail system, all of its major software and hardware
systems at its corporate headquarters are Year 2000 compliant. The cost for a
Year 2000-compliant voicemail system is not material. The Company is in the
process of installing point-of-sale hardware in its stores that are Year 2000
compliant. The existing point-of-sale hardware is being replaced to accommodate
a point-of-sale system previously acquired by the Company, and not solely
because such hardware is not Year 2000 compliant. The Company also is in the
process of verifying whether its major suppliers, service providers, and
financial institutions are Year 2000 compliant. One of the Company's
distributors has disclosed that certain of its warehouse facilities' systems are
not Year 2000 compliant, but that it will be purchasing compliant systems in
1998 and 1999. The Company cannot currently evaluate what, if any, impact a
failure by the distributor to install compliant systems will have on the
Company's operations. The Company has commenced review of the various individual
mechanical systems, such as HVAC, refrigeration and security systems, in its
stores to determine whether any Year 2000 compliance issues exist as to these
systems. The Company will contact the suppliers of certain store systems where
Year 2000 compliance may be an issue to obtain confirmation of compliance or
instructions for reprogramming in the event of a compliance problem. The Company
does not anticipate that any major store systems will require replacement
because of Year 2000 compliance concerns. The Company will continue to make
certain investments in its software systems and applications to ensure that they
are Year 2000 compliant. The financial impact to the Company is not anticipated
to be material in any single year.

NEW ACCOUNTING PRONOUNCEMENTS

In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("FAS") No. 130, Reporting Comprehensive Income.
FAS No. 130 establishes standards for the reporting and presentation of
comprehensive income and its components in a full set of general-purpose
financial statements. FAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. The Company adopted FAS No. 130 in 1998.

Also in 1997, the FASB issued FAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. FAS No. 131 revises the current requirements
for reporting business segments by redefining such segments according to
management's disaggregation of the business for purposes of making operating
decisions and allocating internal resources. The Company will adopt FAS No. 131
effective January 2, 1999; however, the Company does not expect FAS No. 131 to
materially affect financial statement presentation.

In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1, which is effective
for transactions in fiscal years beginning after December 15, 1998, provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The Company will adopt SOP 98-1 for the 1999 fiscal year, but
does not expect such adoption to have a material effect on its reported
financial results.

In April 1998, the AICPA issued SOP 98-5, Accounting for the Costs of Start-Up
Activities. SOP 98-5 provides guidance on how entities should account for start-
up costs, such as pre-opening costs, pre-operating costs, organization costs and
start-up costs. SOP 98-5 requires that the costs of start-up activities be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, and the initial application should be reported as a
cumulative effect of a change in accounting principle. The Company will adopt
SOP 98-5 in fiscal 1999 and does not expect adoption to have a material effect
on the Company's results of operations.

In June 1998, the FASB issued FAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. FAS No. 133, which is effective for fiscal years
beginning after June 15, 1999, requires all derivatives to be recognized in the
balance sheet as either assets or

                                       12
<PAGE>
 
liabilities and measured at fair value. In addition, all hedging relationships
must be reassessed and documented pursuant to the provisions of FAS No. 133. The
Company will adopt FAS No. 133 for the 2000 fiscal year, but does not expect
such adoption to materially affect financial statement presentation.

ITEM 3.   QUANTITATIVE AND QUALITATIVE 
          DISCLOSURES ABOUT MARKET RISK

Not applicable.







                                       13
<PAGE>
 
PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Alfalfa's Canada, Inc., the Company's Canadian subsidiary, is a defendant in a
suit brought in the Supreme Court of British Columbia, by one of its
distributors, Waysafer Wholefoods Limited and one of its principals, seeking
monetary damages for breach of contract and injunctive relief to enforce a
buying agreement for the three Canadian stores entered into by a predecessor of
Alfalfa's Canada, Inc. Under the buying agreement, the stores must buy products
carried by the plaintiff if such are offered at the current advertised price of
its competitors. The suit was filed in September 1996. In June 1998, the Company
filed a Motion for Dismissal on the grounds that the contract in dispute
constituted a restraint of trade. The Motion was subsequently denied. The
Company does not believe its potential exposure in connection with the suit to
be material. There are no other material pending legal proceedings to which the
Company or its subsidiaries are a party. From time to time, the Company is
involved in lawsuits that the Company considers to be in the normal course of
its business.

ITEM 2.  CHANGES IN SECURITIES

On May 1, 1998, the Company acquired all of the outstanding capital stock of an
Ohio corporation that owned an operating natural foods store in Columbus, Ohio,
for 28,433 shares of the Company's common stock and the assumption of certain
liabilities. On June 19, 1998, the Company acquired all of the outstanding
capital stock of an Arkansas corporation that owned an operating natural foods
store in Little Rock, Arkansas, for 104,930 shares of the Company's common stock
and the assumption of certain liabilities. In each of the described
transactions, the Company's common stock was issued in a non-public transaction
to a limited number of unaccredited investors pursuant to an exemption from
registration under Rule 506 of Regulation D promulgated under the Securities Act
of 1933, as amended.

On May 5, 1998, the Company's Board of Directors adopted a Stockholder Rights
Plan and declared a dividend distribution of one right to purchase one one-
hundredth of a share of a new series of junior participating preferred stock for
each share of common stock held. The non-taxable distribution was made on May
22, 1998, to stockholders of record on that date.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Company's Annual Meeting of Stockholders, held on May 4, 1998, the
Company's stockholders elected the following directors for a three-year term:
John A. Shields and Brian K. Devine. The directors were elected by the following
number of votes:

                                       For              Withheld
                                       ---              --------

     John A. Shields                10,992,487           17,251
     Brian K. Devine                10,001,844           17,894


The remaining directors whose terms continue after the meeting date are
Elizabeth C. Cook, David L. Ferguson, James B. McElwee, Michael C. Gilliland and
David M. Chamberlain.

The Stockholders also ratified the Amendment to the 1996 Equity Incentive Plan
to increase by 825,000 shares the number of shares of Company common stock
reserved for issuance under the Company's 1996 Equity Incentive Plan by a vote
of 7,919,546 for, 785,640 against, 36,267 abstained and 2,268,284 Broker non-
votes. In addition, the stockholders also ratified the appointment of Price
Waterhouse LLP as the Company's independent accountants for fiscal 1998 by a
vote of 10,978,591 for, 12,765 against, 17,832 abstained and 550 Broker non-
votes.

ITEM 5.  OTHER INFORMATION

Not applicable.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits

              EXHIBIT
              NUMBER      DESCRIPTION OF DOCUMENT
              -------     -----------------------

              3(i).1.(a)  Amended and Restated Certificate of Incorporation of
                          Registrant.*

              3(i).1.(b)  Certificate of Correction to Amended and Restated
                          Certificate of Incorporation of the Registrant.*

                                       14
<PAGE>
 
              3(ii).1     Amended and Restated By-Laws of Registrant.*

              4.1         Reference is made to Exhibits 3(i).1 through 3(ii).1.*

              4.2         Rights Agreement dated as of May 22, 1998 between 
                          Wild Oats Markets, Inc. and Norwest Bank Minnesota 
                          N.A.**

              27.1        Financial Data Schedule.

*   Incorporated by reference to the Company's Annual Report on Form 10-K for
    the year ended December 27, 1997 (File Number 0-21577).

**  Incorporated by reference to the Company's Registration Statement on 
    Form 8-A dated May 21, 1998.

    (b)  Reports on Form 8-K.

    The Company filed a report on Form 8-K dated May 21, 1998, covering the
    adoption by the Company of the Stockholder Rights Plan on May 5, 1998.

                                       15
<PAGE>
 
                                  SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boulder, County of
Boulder, State of Colorado, on the 11th day of August 1998.


                                  WILD OATS MARKETS, INC.



                                  By  /s/ Mary Beth Lewis
                                      -------------------
                                          Mary Beth Lewis
                                  Executive Officer, Vice President of Finance,
                                  Treasurer and Chief Financial Officer
                                  (Principal Financial and Accounting Officer)

                                       16