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 APRIL
    2, 2005.           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                 
|    | OR                                                                                                                                                              
|    |                                                                                                                                                                 
|( ) | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
    __________ TO __________







Commission file number 0-21577





WILD OATS MARKETS, INC.

(Exact name of registrant as specified in its charter)



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












3375 Mitchell Lane

Boulder, Colorado 80301

(Address of principal executive offices, including zip code)







(303) 440-5220

(Registrants telephone number, including area code)







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

Yes       ( X )       No      (
)



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

Yes       ( X )       No      (
)



As of May 6, 2005, there were 28,580,229 shares outstanding of the registrant's common
stock (par value $.001 per share).







---





TABLE OF CONTENTS

|PART I.                    |  | FINANCIAL
    INFORMATION                                                                                                            | Page
|-------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------ | ----
|                           |  |                                                                                                                                      |     
|Item 1.                    |  | Financial Statements:                                                                                                                |     
|                           |  |                                                                                                                                      |     
|                           |  | Consolidated Balance Sheets, April 2, 2005
      (unaudited) 
      and January 1, 2005                                              | 3   
|                           |  |                                                                                                                                      |     
|                           |  | Consolidated Statements of
      Operations (unaudited), 
      Three Months Ended April 2, 2005 and March 27, 2004                  | 4   
|                           |  |                                                                                                                                      |     
|                           |  | Consolidated
      Statements of Comprehensive (Loss) Income (unaudited), 
      Three Months Ended April 2, 2005 and March 27, 2004 | 4   
|                           |  |                                                                                                                                      |     
|                           |  | Consolidated Statements of Cash
      Flows (unaudited), 
      Three Months Ended April 2, 2005 and March 27, 2004                  | 5   
|                           |  |                                                                                                                                      |     
|                           |  | Notes to
      Consolidated Financial Statements (unaudited)                                                                         | 6   
|                           |  |                                                                                                                                      |     
|Item 2.                    |  | Managements Discussion and Analysis of Financial Condition and Results of
      Operations                                          | 14  
|                           |  |                                                                                                                                      |     
|Item 3.                    |  | Quantitative
      and Qualitative Disclosures About Market Risk                                                                     | 23  
|                           |  |                                                                                                                                      |     
|Item 4.                    |  | Controls and Procedures                                                                                                              | 23  
|                           |  |                                                                                                                                      |     
|PART II.                   |  | OTHER
    INFORMATION                                                                                                                |     
|                           |  |                                                                                                                                      |     
|Item 1.                    |  | Legal Proceedings                                                                                                                    | 25  
|                           |  |                                                                                                                                      |     
|Item 2.                    |  | Changes
      in Securities                                                                                                          | 25  
|                           |  |                                                                                                                                      |     
|Item 3.                    |  | Defaults
      Upon Senior Securities                                                                                                | 25  
|                           |  |                                                                                                                                      |     
|Item 4.                    |  | Submission
      of Matters to a Vote of Security Holders                                                                            | 25  
|                           |  |                                                                                                                                      |     
|Item 5.                    |  | Other Information                                                                                                                    | 25  
|                           |  |                                                                                                                                      |     
|Item 6.                    |  | Exhibits and Reports on Form 8-K                                                                                                     | 27  
|                           |  |                                                                                                                                      |     
|SIGNATURE
    AND EXHIBITS | 
|                           |  |                                                                                                                                      |     
|                           |  | Signatures                                                                                                                           | 28  
|                           |  |                                                                                                                                      |     



---

PART I.  FINANCIAL
INFORMATION





Item
1.  Financial Statements



WILD OATS MARKETS, INC.

ConsolidatedBalance Sheets

(in thousands, except share data)

|                                         |                                                              |                                                                                                                                                                    |                            |          | April 2, 2005 |          | January 1, 2005
|---------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | -------- | ------------- | -------- | ---------------
|                                         |                                                              |                                                                                                                                                                    |                            |          | (unaudited)   |          |                
|                                         |                                                              |                                                                                                                                                                    |                            |          |               |          |                
|ASSETS                                   |                                                              |                                                                                                                                                                    |                            |         
|                                         |                                                              |                                                                                                                                                                    |                            |         
|                                         | Current assets:                                              |                                                                                                                                                                    |                            |          |              
|                                         |                                                              | Cash and cash equivalents                                                                                                                                          |                            | $ 41,163 |               | $ 30,671
|                                         |                                                              | Short-term investments                                                                                                                                             |                            | 1,469    |               | 11,144  
|                                         |                                                              | Inventories (net of reserves of
    $847 and $815, respectively)                                                                                                   |                            | 55,584   |               | 54,960  
|                                         |                                                              | Accounts receivable (net of
    allowance for doubtful accounts of $210 and $153, respectively)                                                                    |                            | 3,081    |               | 3,860   
|                                         |                                                              | Prepaid expenses and other current
    assets                                                                                                                      |                            | 5,484    |               | 5,741   
|                                         |                                                              |                                                                                                                                                                    |                            |          |               |          |                
|                                         |                                                              |                                                                                                                                                                    | Total current assets       |          | 106,781       |          | 106,376        
|                                         |                                                              |                                                                                                                                                                    |                            |          |               |          |                
|                                         | Property and equipment, net                                  |                                                                                                                                                                    | 177,604                    |          | 177,830      
|                                         | Goodwill, net                                                |                                                                                                                                                                    | 105,124                    |          | 106,084      
|                                         | Other intangible assets, net                                 |                                                                                                                                                                    | 6,360                      |          | 6,491        
|                                         | Deposits and other assets                                    |                                                                                                                                                                    | 8,085                      |          | 8,361        
|                                         | Deferred tax asset, net                                      |                                                                                                                                                                    | 809                        |          | 418          
|                                         |                                                              |                                                                                                                                                                    |                            |          |               |          |                
|                                         |                                                              |                                                                                                                                                                    |                            |          | $ 404,763     |          | $ 405,560      
|                                         |                                                              |                                                                                                                                                                    |                            |          |               |          |                
|LIABILITIES AND
    STOCKHOLDERS EQUITY |                                                              |                                                                                                                                                                    |                            |         
|                                         |                                                              |                                                                                                                                                                    |                            |         
|                                         | Current liabilities:                                         |                                                                                                                                                                    |                            |          |              
|                                         |                                                              | Accounts payable                                                                                                                                                   |                            | $ 55,270 |               | $ 54,428
|                                         |                                                              | Book overdraft                                                                                                                                                     |                            | 21,335   |               | 23,325  
|                                         |                                                              | Accrued liabilities                                                                                                                                                |                            | 53,429   |               | 53,154  
|                                         |                                                              | Current portion of debt, capital
    leases and financing obligations                                                                                              |                            | 507      |               | 405     
|                                         |                                                              | Deferred tax liabilities                                                                                                                                           |                            | 345      |               | -       
|                                         |                                                              |                                                                                                                                                                    |                            |          |               |          |                
|                                         |                                                              |                                                                                                                                                                    | Total current liabilities  |          | 130,886       |          | 131,312        
|                                         |                                                              |                                                                                                                                                                    |                            |          |               |          |                
|                                         | Long-term debt, capital leases and
    financing obligations |                                                                                                                                                                    | 148,718                    |          | 148,675      
|                                         | Other long-term obligations                                  |                                                                                                                                                                    | 24,714                     |          | 24,472       
|                                         |                                                              |                                                                                                                                                                    |                            |          |               |          |                
|                                         |                                                              |                                                                                                                                                                    | 304,318                    |          | 304,459      
|                                         |                                                              |                                                                                                                                                                    |                            |          |               |          |                
|                                         | Commitments and contingencies                                |                                                                                                                                                                    |                            |          |              
|                                         |                                                              |                                                                                                                                                                    |                            |          |               |          |                
|                                         | Stockholders equity:                                        |                                                                                                                                                                    |                            |          |              
|                                         |                                                              | Preferred stock, $0.001 par value;
    5,000,000 shares authorized, no shares issued and outstanding                                                               |                            | -        |               | -       
|                                         |                                                              | Common stock, $0.001 par value;
    60,000,000 shares authorized, 30,550,285 and 30,466,701 shares issued; 28,572,485 and
    28,488,901 outstanding, respectively |                            | 31       |               | 30      
|                                         |                                                              | Treasury stock, at cost: 1,977,800
    shares as of April 2, 2005 and January 1, 2005                                                                              |                            | (24,999) |               | (24,999)
|                                         |                                                              | Additional paid-in capital                                                                                                                                         |                            | 221,766  |               | 221,029 
|                                         |                                                              | Note receivable, related party                                                                                                                                     |                            | (11,572) |               | (11,416)
|                                         |                                                              | Accumulated deficit                                                                                                                                                |                            | (85,660) |               | (84,509)
|                                         |                                                              | Accumulated other comprehensive
    income                                                                                                                         |                            | 879      |               | 966     
|                                         |                                                              |                                                                                                                                                                    |                            |          |               |          |                
|                                         |                                                              |                                                                                                                                                                    | Total stockholders equity |          | 100,445       |          | 101,101        
|                                         |                                                              |                                                                                                                                                                    |                            |          |               |          |                
|                                         |                                                              |                                                                                                                                                                    |                            |          | $ 404,763     |          | $ 405,560      
|                                         |                                                              |                                                                                                                                                                    |                            |          |               |          |                
|                                         |                                                              |                                                                                                                                                                    |                            |          |               |          |                





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



---



WILD OATS MARKETS, INC.

Consolidated Statements of Operations

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

|                                                                            |                                                     |                                   |          |           | THREE MONTHS
    ENDED |      
|--------------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------- | -------- | --------- | ---------------------- | -----
|                                                                            |                                                     |                                   |          |           |                        |      
|                                                                            |                                                     |                                   |          |           | April 2, 2005          |      
|                                                                            |                                                     |                                   |          |           |                        |      
|Sales                                                                       |                                                     | $ 278,079                         |          | $ 263,795 |                       
|Cost of goods sold and occupancy
    costs                                  |                                                     | 197,823                           |          | 186,389   |                       
|                                                                            |                                                     |                                   |          |           |                        |      
|Gross profit                                                                |                                                     | 80,256                            |          | 77,406    |                       
|Operating expenses:                                                         |                                                     |                                   |          |           |                       
|                                                                            | Direct store expenses                               |                                   | 60,371   |           | 57,043                 |      
|                                                                            | Selling, general and
    administrative expenses    |                                   | 14,975   |           | 15,521                 |      
|                                                                            | Gain on disposal of assets, net                     |                                   | (9)      |           | (117)                  |      
|                                                                            | Pre-opening expenses                                |                                   | 1,917    |           | 599                    |      
|                                                                            | Restructuring and asset impairment
    charges, net |                                   | 1,551    |           | 269                    |      
|                                                                            |                                                     |                                   |          |           |                        |      
|                                                                            |                                                     | Income from operations            |          | 1,451     |                        | 4,091
|                                                                            | Loss on early extinguishment of
    debt            |                                   | (624)    |           | -                      |      
|                                                                            | Interest income                                     |                                   | 324      |           | 186                    |      
|                                                                            | Interest expense                                    |                                   | (2,167)  |           | (1,035)                |      
|                                                                            |                                                     |                                   |          |           |                        |      
|                                                                            |                                                     | (Loss) income before income taxes |          | (1,016)   |                        | 3,242
|                                                                            | Income tax expense                                  |                                   | 135      |           | 1,173                  |      
|                                                                            |                                                     |                                   |          |           |                        |      
|Net (loss) income                                                           |                                                     | $ (1,151)                         |          | $ 2,069   |                       
|                                                                            |                                                     |                                   |          |           |                        |      
|                                                                            |                                                     |                                   |          |           |                       
|Net (loss) income per common
    share:                                     |                                                     |                                   |          |           |                       
|                                                                            | Basic                                               |                                   | $ (0.04) |           | $ 0.07                 |      
|                                                                            | Diluted                                             |                                   | $ (0.04) |           | $ 0.07                 |      
|                                                                            |                                                     |                                   |          |           |                       
|Weighted-average number of common
    shares outstanding, basic             |                                                     | 28,554                            |          | 30,194    |                       
|Dilutive effect of stock options
    and restricted stock units             |                                                     | -                                 |          | 840       |                       
|                                                                            |                                                     |                                   |          |           |                        |      
|Weighted-average number of common
    shares outstanding, assuming dilution |                                                     | 28,554                            |          | 31,034    |                       
|                                                                            |                                                     |                                   |          |           |                       



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



---







WILD OATS MARKETS, INC.

Consolidated Statements
of Comprehensive (Loss) Income

(in thousands) (unaudited)

|                            |                                                      |           |      |         | THREE MONTHS
    ENDED | 
|--------------------------- | ---------------------------------------------------- | --------- | ---- | ------- | ---------------------- | 
|                            |                                                      |           |      |         |                        | 
|                            |                                                      |           |      |         | April 2, 2005          | 
|                            |                                                      |           |      |         |                        | 
|Net (loss) income           |                                                      | $ (1,151) |      | $ 2,069 |                       
|Other comprehensive loss:   |                                                      |           |      |         |                       
|                            | Foreign currency translation
    adjustments         |           | (57) |         | (92)                   | 
|                            | Unrealized loss on
    available-for-sale securities |           | (30) |         | -                      | 
|                            |                                                      |           |      |         |                        | 
|Other comprehensive loss    |                                                      | (87)      |      | (92)    |                       
|                            |                                                      |           |      |         |                        | 
|Comprehensive (loss) income |                                                      | $ (1,238) |      | $ 1,977 |                       
|                            |                                                      |           |      |         |                       



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



---

WILD OATS MARKETS, INC.

Consolidated Statements of Cash Flows

(in thousands) (unaudited)



|                                                                           |                                                                                              |                                                     |                                                         |          | THREE MONTHS
    ENDED
|-------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | --------------------------------------------------- | ------------------------------------------------------- | -------- | ----------------------
|                                                                           |                                                                                              |                                                     |                                                         |          |                       
|                                                                           |                                                                                              |                                                     |                                                         |          | April 2,              
|                                                                           |                                                                                              |                                                     |                                                         |          | 2005                  
|                                                                           |                                                                                              |                                                     |                                                         |          |                       
|CASH FLOWS FROM OPERATING
    ACTIVITIES:                                  |                                                                                              |                                                     |                                                         |         
|                                                                           | Net (loss) income                                                                            |                                                     | $ (1,151)                                               |          | $ 2,069               
|                                                                           | Adjustments to reconcile net
    (loss) income to net cash provided by operating activities: |                                                     |                                                         |          |                       
|                                                                           |                                                                                              | Depreciation and amortization                       |                                                         | 6,735    |                       
|                                                                           |                                                                                              | Gain on disposal of property and
    equipment      |                                                         | (9)      |                       
|                                                                           |                                                                                              | Deferred tax (benefit) expense                      |                                                         | (2)      |                       
|                                                                           |                                                                                              | Restructuring and asset impairment
    expense, net |                                                         | 1,551    |                       
|                                                                           |                                                                                              | Interest on related party
    receivable            |                                                         | (156)    |                       
|                                                                           |                                                                                              | Stock based compensation                            |                                                         | 104      |                       
|                                                                           |                                                                                              | Accretion of debt issuance costs                    |                                                         | 259      |                       
|                                                                           |                                                                                              | Loss on early extinguishment of
    debt            |                                                         | 624      |                       
|                                                                           | Change in assets and liabilities:                                                            |                                                     |                                                         |          |                       
|                                                                           |                                                                                              | Inventories, net                                    |                                                         | (646)    |                       
|                                                                           |                                                                                              | Receivables, net, and other assets                  |                                                         | 391      |                       
|                                                                           |                                                                                              | Accounts payable                                    |                                                         | 856      |                       
|                                                                           |                                                                                              | Accrued liabilities and other
    liabilities       |                                                         | (21)     |                       
|                                                                           |                                                                                              |                                                     |                                                         |          |                       
|                                                                           |                                                                                              |                                                     | Net cash provided by operating
    activities           |          | 8,535                 
|                                                                           |                                                                                              |                                                     |                                                         |          |                       
|                                                                           |                                                                                              |                                                     |                                                         |          |                       
|CASH FLOWS FROM INVESTING
    ACTIVITIES:                                  |                                                                                              |                                                     |                                                         |         
|                                                                           | Capital expenditures                                                                         |                                                     | (6,171)                                                 |          | (12,289)              
|                                                                           | Proceeds from sale of short-term
    investments                                             |                                                     | 9,645                                                   |          | -                     
|                                                                           | Proceeds from sale of property and
    equipment                                             |                                                     | 17                                                      |          | 964                   
|                                                                           |                                                                                              |                                                     |                                                         |          |                       
|                                                                           |                                                                                              |                                                     | Net cash provided by (used in)
    investing activities |          | 3,491                 
|                                                                           |                                                                                              |                                                     |                                                         |          |                       
|                                                                           |                                                                                              |                                                     |                                                         |          |                       
|CASH FLOWS FROM FINANCING
    ACTIVITIES:                                  |                                                                                              |                                                     |                                                         |         
|                                                                           | Net decrease in book overdraft                                                               |                                                     | (1,991)                                                 |          | (3,980)               
|                                                                           | Repayments on notes payable,
    long-term debt and capital leases                           |                                                     | (117)                                                   |          | (5,973)               
|                                                                           | Proceeds from issuance of common
    stock, net                                              |                                                     | 634                                                     |          | 2,038                 
|                                                                           |                                                                                              |                                                     |                                                         |          |                       
|                                                                           |                                                                                              |                                                     | Net cash used in financing
    activities               |          | (1,474)               
|                                                                           |                                                                                              |                                                     |                                                         |          |                       
|                                                                           |                                                                                              |                                                     |                                                         |          |                       
|Effect of exchange rate changes
    on cash                                |                                                                                              | (60)                                                |                                                         | (27)    
|                                                                           |                                                                                              |                                                     |                                                         |          |                       
|Net increase (decrease) in cash
    and cash equivalents                   |                                                                                              | 10,492                                              |                                                         | (4,499) 
|Cash and cash equivalents at
    beginning of period                       |                                                                                              | 30,671                                              |                                                         | 17,400  
|                                                                           |                                                                                              |                                                     |                                                         |          |                       
|Cash and cash equivalents at
    end of period                             |                                                                                              | $ 41,163                                            |                                                         | $ 12,901
|                                                                           |                                                                                              |                                                     |                                                         |          |                       
|SUPPLEMENTAL DISCLOSURE OF
    NONCASH INVESTING AND FINANCING ACTIVITIES:
|                                                                           | Equipment acquired through capital
    lease                                                 |                                                     | $ 262                                                   |          | $ 105                 
|                                                                           |                                                                                              |                                                     |                                                         |          |                       





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



---

WILD OATS MARKETS, INC.

Notes to
Consolidated Financial Statements

(unaudited)



|1. | Nature of Operations and
    Basis of Presentation
|-- | --------------------------------------------------



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



The Consolidated Balance Sheet as of April 2, 2005, the Consolidated
Statements of Operations and Comprehensive (Loss) Income for the three months ended April
2, 2005 and March 27, 2004, as well as the Consolidated Statements of Cash Flows for the
three months ended April 2, 2005 and March 27, 2004 have been prepared without an audit.
In the opinion of management, all adjustments, consisting only of normal, recurring
adjustments necessary for a fair statement thereof, have been made.



The financial statements have been prepared by the Company in
accordance with the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to SEC regulations,
therefore, these consolidated financial statements should be read in conjunction with
financial statements and notes thereto included in the Company's 2004 Annual Report on
Form 10-K, as amended. The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities,
revenue, expenses and related disclosures of contingent assets and liabilities. Examples
include accounting for self-insurance reserves, restructuring charges and store closing
costs, asset impairment charges, goodwill, inventory valuation, and contingencies. Actual
results may differ from these estimates. The results of operations for interim periods
presented are not necessarily indicative of the operating results for the full year.



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



The unaudited information included in the consolidated financial
statements for the periods ended April 2, 2005 and March 27, 2004 includes the results of
operations of the Company for the 13 weeks then ended.





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





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





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



At April 2, 2005, the Company had six stock-based employee compensation
plans, which are described more fully in Note 9  Stock Plans and Options in
our fiscal 2004 Annual Report filed on Form 10-K, as amended, for the period ended January
1, 2005. These plans allow for awards of both stock options and restricted stock units
("RSUs"). The Company accounts for those plans in accordance with the intrinsic
value based method in Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. Some stock-based
compensation expense is reflected in net income for options issued at a discount and for
RSUs issued as Board of Directors compensation. All other options granted under the
plans had an exercise price equal to the market value of the underlying common stock on
the date of grant; therefore, no stock-based compensation expense is reflected in net
income for these grants. Reflected in results of operations for the first fiscal quarter
ended April 2, 2005, and March 27, 2004, respectively, is compensation expense of $104,000
and $315,000, respectively.



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



|                               |                                                                                                                        |                             |       |           | THREE MONTHS
    ENDED |        
|------------------------------ | ---------------------------------------------------------------------------------------------------------------------- | --------------------------- | ----- | --------- | ---------------------- | -------
|                               |                                                                                                                        |                             |       |           |                        |        
|                               |                                                                                                                        |                             |       |           | April 2, 2005          |        
|                               |                                                                                                                        |                             |       |           |                        |        
|                               |                                                                                                                        |                             |       |           |                        |        
|Net (loss) income, as reported |                                                                                                                        | $ (1,151)                   |       | $ 2,069   |                       
|                               | Add: Stock-based compensation
    expense included in reported net income, net of tax                                  |                             | 76    |           | 226                    |        
|                               | Deduct: Total stock-based
    compensation expense determined under fair value based method for all awards, net of tax |                             | (965) |           | (587)                  |        
|                               |                                                                                                                        |                             |       |           |                        |        
|                               |                                                                                                                        | Pro forma net (loss) income |       | $ (2,040) |                        | $ 1,708
|                               |                                                                                                                        |                             |       |           |                        |        
|                               |                                                                                                                        |                             |       |           |                        |        
|                               | (Loss) earnings per share:                                                                                             |                             |       |           |                        |        
|                               |                                                                                                                        | Basic - as reported         |       | $ (0.04)  |                        | $ 0.07 
|                               |                                                                                                                        |                             |       |           |                        |        
|                               |                                                                                                                        | Basic - pro forma           |       | $ (0.07)  |                        | $ 0.06 
|                               |                                                                                                                        |                             |       |           |                        |        
|                               |                                                                                                                        |                             |       |           |                        |        
|                               |                                                                                                                        | Diluted - as reported       |       | $ (0.04)  |                        | $ 0.07 
|                               |                                                                                                                        |                             |       |           |                        |        
|                               |                                                                                                                        | Diluted - pro forma         |       | $ (0.07)  |                        | $ 0.06 
|                               |                                                                                                                        |                             |       |           |                        |        
|                               |                                                                                                                        |                             |       |           |                        |        







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



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





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





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

|                                         |  |           |  |           | THREE MONTHS
    ENDED | 
|---------------------------------------- |  | --------- |  | --------- | ---------------------- | 
|                                         |  |           |  |           |                        | 
|                                         |  |           |  |           | April 2, 2005          | 
|                                         |  |           |  |           |                        | 
|                                         |  |           |  |           |                        | 
|Machinery and equipment                  |  | $ 131,787 |  | $ 131,133 |                       
|Buildings and leasehold
    improvements |  | 157,188   |  | 156,829   |                       
|Construction in progress                 |  | 13,645    |  | 14,283    |                       
|                                         |  |           |  |           |                        | 
|                                         |  | 302,620   |  | 302,245   |                       
|Less: accumulated depreciation           |  | (125,016) |  | (124,415) |                       
|                                         |  |           |  |           |                        | 
|                                         |  | $ 177,604 |  | $ 177,830 |                       
|                                         |  |           |  |           |                        | 
|                                         |  |           |  |           |                       



Depreciation expense during the first fiscal quarter of 2005 was $6.6 million as
compared to $7.2 million in the same period of 2004.



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



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



The debentures are callable and convertible into the Company's common
stock prior to maturity at the option of the holders under the following circumstances:
(1) during any calendar quarter commencing after June 30, 2004 and before March 31, 2029,
if the last reported sale price of the Companys common stock is greater than or
equal to 130% of the conversion price of $17.70 per share; (2) at any time on or after
April 1, 2029 if the last reported sale price of the Companys common stock on any
date on or after March 31, 2029 is greater than or equal to 130% of the conversion price;
(3) subject to certain limitations, during the five business-day period after any five
consecutive trading-day period in which the trading price per debenture for each day of
that period was less than 98% of the product of the conversion rate and the last reported
sale price of the Company's common stock; (4) if the Company calls the debentures for
redemption; (5) upon the occurrence of certain corporate transactions; or (6) if the
Company obtains credit ratings for the debentures, at any time when the credit ratings
assigned to the debentures are below specified levels. The debentures are initially
convertible into 56.4972 shares of the Company's common stock per $1,000 principal amount,
which is equivalent to approximately $17.70 per share, for total initial underlying shares
of 6,497,175. The conversion rate will be subject to adjustment upon the occurrence of
specified events. Upon conversion, the Company has the right to deliver, in lieu of common
stock, cash or any combination of cash and common stock. Pursuant to the underwriting
agreement and within 90 days of issuance, the Company filed a shelf registration statement
covering resales of the debentures and the common stock issuable upon conversion thereof.



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



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



There are no financial covenants within the debenture indenture,
however, the Company paid penalty interest of 0.25% for the first 90 days of 2005 and paid
or will be paying 0.50% thereafter until the resale of the debentures are publicly
registered.



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





Credit facility. On March 31, 2005, the Company entered into a
five-year revolving secured credit facility with Bank of America, N.A. (the "B of A
Facility"). Concurrent with the execution of the B of A Facility, the Company
terminated its existing $95 million credit facility with Wells Fargo Bank N.A. as
administrative agent. The B of A Facility allows borrowings and letters of credit up to a
maximum of $40 million, with an option to increase borrowings up to $100 million, subject
to a borrowing base determined by the value of certain inventory, credit card receivables,
invested cash and, at the Companys discretion, mortgaged leaseholds. The B of A
Facility is secured by certain assets including, but not limited to, cash, inventory and
fixed assets. Borrowings under the B of A Facility bear interest, at the Companys
election, at the prime rate or at LIBOR plus a margin ranging from 1.00% to 1.50%,
depending on the excess borrowing availability over amounts borrowed. Interest rates are
determined quarterly. The Company is charged a commitment fee on the unused portion of the
B of A Facility. There are no financial covenants, other than the obligation to maintain a
certain percentage of minimum excess availability (as defined in the agreement) at all
times. The B of A Facility requires compliance on a monthly basis with certain
non-financial covenants, including limitations on incurring additional indebtedness and
making investments, the use and disposition of collateral, changes of control, as well as
cash management provisions. In conjunction with the debt refinancing, the Company incurred
a noncash charge of approximately $624,000 to write off the remaining unamortized debt
issuance cost from its prior credit facility and capitalized debt issuance costs of
approximately $96,000 in the first quarter of 2005, to be amortized over the life of the
agreement using the effective interest method.



The Companys prior credit facility was entered into in February
of 2003, with Wells Fargo Bank N.A. acting as lead bank and administrative agent (the
"Wells Facility"). The Wells Facility had a $95 million limit and a three-year
term with a one-year renewal option.



As part of the Wells Facility, the Company gave its lenders collateral
in the form of cash, equipment and fixtures, inventory and other assets. The Company also
granted leasehold mortgages in certain leasehold interests. The Wells Facility required
compliance as of the last day of each fiscal quarter, with certain financial covenants,
including the following: an adjusted leverage ratio (as described below); a fixed charge
coverage ratio, which is the ratio of EBITDAR, as defined, for the last four fiscal
quarters minus certain maintenance capital expenditures and taxes to fixed charges for the
four fiscal quarters; a minimum stockholders equity of $125 million plus a portion
of cumulative net income, adjusted for stock issuances and repurchases; a limitation on
new leases per fiscal year, and a cap on capital expenditures per fiscal year. The Company
was also obligated, on a continuous basis, to maintain a minimum cash balance. In
connection with the debenture offering in June 2004, the Wells Facility was amended to,
among other things, (1) increase the maximum allowable leverage ratio, (2) permit the
repurchase of our common stock, within specified limits, (3) increase the annual limits on
capital expenditures and new leases, (4) raise the limit on the value of acquisitions and
divestitures the Company can make without the consent of the lending group, and (5)
increase the maximum percentage rate to either prime plus 0.1% or one month LIBOR plus
2.5%. The Wells Facility was subsequently amended in August and November 2004. As amended,
the interest rate on the Wells Facility was either prime plus 1.25% or one-month LIBOR
plus 2.75%, at the Companys election, and the rates modified depending on an
adjusted leverage ratio equal to the ratio of average total funded debt, as defined under
the credit facility, plus six times rent expense, to EBITDAR for the four fiscal quarter
periods then ended, as calculated on the Companys quarterly compliance certificate.
The Company was charged a commitment fee on the unused portion of the line based on
defined performance objectives. The outstanding balance on the Wells Facility was repaid
in June 2004 from the proceeds of the debenture issuance. As of January 1, 2005, and as of
the date of termination of the Wells Facility, there were no outstanding borrowings under
the Wells Facility, and letters of credit outstanding totaled $9.1 million.





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



The Company does not have any derivative financial instruments as of
April 2, 2005 that meet the criteria of SFAS No. 133,Accounting for Derivative
Instruments and Hedging Activities.





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



Earnings per share are calculated in accordance with the provisions of
SFAS No. 128, Earnings Per Share.("SFAS No. 128") requires the Company
to report both basic earnings per share, which is based on the weighted-average number of
common shares outstanding, and diluted earnings per share, which is based on the
weighted-average number of common shares outstanding and all dilutive potential common
shares outstanding, except where the effect of their inclusion would be anti-dilutive.
Anti-dilutive stock options of 2,382,570 and 354,259 for the three months ended April 2,
2005 and March 27, 2004, respectively, were not included in the earnings per share
calculations.



The Emerging Issues Task Force ("the Task Force") of the FASB
reached a conclusion on Issue No. 04-8, The Effect of Contingently Convertible Debt on
Diluted Earnings per Share. The Task Force has concluded that contingently convertible
debt should be included in diluted earnings per share computations using the if-converted
method regardless of whether any of the conversion contingencies have been met. In
calculating diluted earnings per share for the three months ending April 2, 2005, the
effect of an additional 6,497,175 shares in the earnings per share calculation would have
been anti-dilutive.





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



During the first quarter of fiscal 2005, goodwill, net of accumulated
amortization of $960,000, was written off resulting in an ending balance of $105,124 as of
April 2, 2005. See Note 9 - Restructuring and Asset Impairment Charges for
further details. No other changes in the carrying amount of goodwill occurred.



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



| |  |                                        |  |         | April 2, 2005 |         | January 1, 2005
| |  | -------------------------------------- |  | ------- | ------------- | ------- | ---------------
| |  |                                        |  |         |               |         |                
| |  |                                        |  |        
| |  | Leasehold interests                    |  | $ 8,388 |               | $ 8,388
| |  | Less accumulated amortization          |  | (2,303) |               | (2,200)
| |  |                                        |  |         |               |         |                
| |  | Leasehold interests, net               |  | 6,085   |               | 6,188  
| |  | Liquor licenses (indefinite
    lived) |  | 275     |               | 303    
| |  |                                        |  |         |               |         |                
| |  |                                        |  | $ 6,360 |               | $ 6,491
| |  |                                        |  |         |               |         |                
| |  |                                        |  |         |               |        





Amortization expense related to finite lived intangible assets was
$103,000 and $129,000 for the three months ended April 2, 2005 and March 27, 2004,
respectively. The estimated amortization of finite lived intangible assets for each of the
five fiscal years ending in fiscal 2009 is as follows (in thousands):



| | FISCAL 
    YEAR |  | AMORTIZATION EXPENSE | 
| | ---------------- |  | -------------------- | 
| |                  |  |                      | 
| |                  |  |                      | 
| | 2005             |  | $ 287                | 
| | 2006             |  | 358                  | 
| | 2007             |  | 358                  | 
| | 2008             |  | 358                  | 
| | 2009             |  | 358                  | 





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



During the first quarter of fiscal 2005, the Company recorded net
restructuring and asset impairment charges of $1,551,000 consisting of the following
components (in thousands):



| | Change in estimate related to
    lease-related liabilities for sites previously identified for closure or sale |                                                      | $ 140   | 
| | --------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------- | 
| | Lease-related liability and
    asset impairments for sites closed and relocated during the quarter             |                                                      | 120     | 
| | Severance for employees
    terminated during the first quarter of fiscal 2005                                  |                                                      | 217     | 
| | Accretion expense on lease
    related liabilities                                                              |                                                      | 114     | 
| | Write off of goodwill                                                                                           |                                                      | 960     | 
| |                                                                                                                 |                                                      |         | 
| |                                                                                                                 | Total restructuring and asset
    impairment expense | $ 1,551 | 
| |                                                                                                                 |                                                      |         | 







Details of the significant components are as follows:

- Changes in estimate related to lease-related liabilities for sites previously identified
    for closure or sale ($140,000)



- Lease-related liability and asset impairments for sites closed and relocated during the
    first quarter ($120,000)



- Severance for employees notified of termination in the first quarter of fiscal 2005
    ($217,000)



- Accretion expense on lease-related liabilties ($114,000)



- Write off of goodwill ($960,000)



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



During the fiscal quarter ended April 2, 2005 and March 27, 2004, the
Company incurred $393,000 and $1.8 million, respectively, of charges for accelerated
depreciation related to planned store closures. These costs are included in the "Cost
of goods sold and occupancy costs" line of the Consolidated Statements of Operations.





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



|                          |  | 2001 and |  |       |  |        |  |        |  | 1st Qtr |  |        
|------------------------- |  | -------- |  | ----- |  | ------ |  | ------ |  | ------- |  | -------
|EXIT PLANS                |  | Prior    |  | 2002  |  | 2003   |  | 2004   |  | 2005    |  | Total  
|                         
|                          |  |          |  |       |  |        |  |        |  |         |  |        
|Balance at                |  |          |  |       |  |        |  |        |  |         |  |        
|December 27, 2003:        |  | $ 8,615  |  | $ 421 |  | $ 224  |  | $ -    |  | $ -     |  | $ 9,260
|                          |  |          |  |       |  |        |  |        |  |         |  |        
|New accruals:             |  |          |  |       |  |        |  |        |  |         |  |        
|Severance                 |  | -        |  | -     |  | -      |  | 754    |  | -       |  | 754    
|Lease-related liabilities |  | (522)    |  | 344   |  | 70     |  | 600    |  | -       |  | 492    
|                          |  |          |  |       |  |        |  |        |  |         |  |        
|Cash paid:                |  |          |  |       |  |        |  |        |  |         |  |        
|Severance                 |  | -        |  | (7)   |  | (59)   |  | (544)  |  | -       |  | (610)  
|Lease-related liabilities |  | (1,429)  |  | (757) |  | (235)  |  | (48)   |  | -       |  | (2,469)
|                          |  |          |  |       |  |        |  |        |  |         |  |        
|Balance at                |  |          |  |       |  |        |  |        |  |         |  |        
|January 1, 2005:          |  | $ 6,664  |  | $ 1   |  | $ -    |  | $ 762  |  | $ -     |  | $ 7,427
|                          |  |          |  |       |  |        |  |        |  |         |  |        
|New accruals:             |  |          |  |       |  |        |  |        |  |         |  |        
|Severance                 |  | -        |  | -     |  | -      |  | -      |  | 217     |  | 217    
|Lease-related liabilities |  | 114      |  | -     |  | 140    |  | -      |  | 113     |  | 367    
|                          |  |          |  |       |  |        |  |        |  |         |  |        
|Cash paid:                |  |          |  |       |  |        |  |        |  |         |  |        
|Severance                 |  | -        |  | -     |  | -      |  | (88)   |  | (99)    |  | (187)  
|Lease-related liabilities |  | (429)    |  | -     |  | (35)   |  | (99)   |  | 21      |  | (542)  
|                          |  |          |  |       |  |        |  |        |  |         |  |        
|Balance at                |  |          |  |       |  |        |  |        |  |         |  |        
|April 2, 2005:            |  | $ 6,3491 |  | $ 11  |  | $ 1051 |  | $ 5752 |  | $ 2523  |  | $ 7,282
|                          |  |          |  |       |  |        |  |        |  |         |  |        
|                          |  |          |  |       |  |        |  |        |  |         |  |        



|Note: | 1. The restructuring accrual balance
    consists of lease-related liabilities.                                      
|----- | ---------------------------------------------------------------------------------------------------------------------
|      | 2. The restructuring accrual balance
    consists of lease-related liabilities and $122,000 for employee termination.
|      | 3. The restructuring accrual balance
    consists of $118,000 for employee termination benefits.                     





As of April 2, 2005, the Companys restructuring balances consist of $2.6 million
in accrued liabilities and other long-term obligations of $4.7 million.



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





The effective income tax rate of -13.3% for the three months ended
April 2, 2005 differed from the federal statutory rate of 35% primarily due to the
valuation allowance (-42.5%), state and foreign taxes (2.8%), permanent items (-6.4%) and
other provision adjustments (-2.2%). For the three months ended March 27, 2004, the
difference between the effective rate of 36.2% and the statutory rate of 35% related
primarily to the effects of state and foreign taxes.



For the three months ended April 2, 2005, the Company recorded $135,000
of income tax expense, as a result of loss before income taxes of $1.0 million during the
period. The Company has a $464,000 net deferred tax asset, primarily as a result of net
income from Canadian operations. The Company performs assessments of the realization of
its net deferred tax assets considering all available evidence, both positive and
negative. As a result of this assessment, the Company concluded that it was more likely
than not that its net tax assets would not be realized and therefore established a
valuation allowance against its net deferred tax assets for the year ended January 1,
2005. The valuation allowance was increased during first quarter 2005. The valuation
allowance was recorded as a result of the Companys analysis of the facts and
circumstances, including an evaluation of its pre-tax income and losses for historical
periods, which led the Company to conclude that it could no longer forecast taxable income
utilizing the more likely than not theory present in SFAS No. 109, Accounting for
Income Taxes.





|11. | Change in Primary
    Distributor
|--- | ---------------------------------





During the fourth quarter of 2003, the Company and Tree of Life, Inc.
agreed to terminate their primary distribution relationship, and in January 2004, the
Company signed a five year primary distribution agreement with United Natural Foods, Inc.
("UNFI"). The UNFI agreement states that UNFI will pay the Company a conversion
fee to cover the costs of the transition to UNFI, which is payable over the period of the
contract, subject to the Company meeting certain minimum purchase requirements. These
transition costs include, but are not limited to, the cost of retagging store shelves,
modification of product inventory, disposal of discontinued products, resetting of
products on store shelves and training of store personnel in new procedures. The Company
completed the process of transitioning to UNFI from its prior primary distributor in the
first quarter of 2004.





|12. | Related Party
    Transactions
|--- | ------------------------------







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



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



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





Other. Mark A. Retzloff is a current member of the Companys
Board of Directors, and sits on its Real Estate Committee. Mr. Retzloff is Chief Organic
Officer of Aurora Organic Dairy, which derives 8% of its total revenues from sales of
organic milk to the Company under the Companys private label brand. Mr. Retzloff
sits on the boards of directors of several other natural or organic companies that derive
5% of their revenues from sales of products to the Company. Stacey J. Bell, a current
member of the Companys Board of Directors, is an employee of Ideasphere, Inc., which
manufactures certain of the Companys private label vitamins and supplements. Total
purchases from these vendors for the first quarters ending April 2, 2005, and March 27,
2004 were, $1.0 million and $605,000, respectively. Purchases of grocery products are made
primarily through our primary distributor, UNFI and therefore are indirect in nature. As
of the fiscal quarters ending April 2, 2005 and March 27, 2004, the associated accounts
payable balances were $106,000 and $19,000, respectively.





|13. | Contingencies
|--- | -------------





Wild Oats Markets Canada, Inc., as successor to Alfalfa's Canada, Inc.,
a Canadian subsidiary of the Company, is a defendant in Helen Fakhri and Ady Aylon, as
Representative Plaintiffs v. Alfalfa's Canada, Inc., a class action suit for monetary
damages brought in the Supreme Court of British Columbia, Canada by the representative
plaintiffs on behalf of two groups of claimants - those who claim to have contracted
Hepatitis A allegedly through the consumption of food purchased at a Capers Community
Market in the spring of 2002, and those who were inoculated against Hepatitis A in March
and April, 2002, after handling and/or consuming food products from Capers that were or
might have been contaminated with Hepatitis A. In December 2004, the Plaintiffs brought a
motion for a summary trial of certain issues, and such motion was denied in January 2005.
The Company and plaintiffs counsel have engaged in mediation. The Company's insurers
have acknowledged coverage for defense costs and liability, and the Company has exhausted
its deductible.



Tim Auchterlonie, individually and on behalf of all others similarly
situated and the general public, and Roes 1 to 1000 vs. Wild Oats Markets, Inc. and Does 1
through 100, is a purported class action suit brought in August 2004 in the Superior
Court, County of Los Angeles, for payment of overtime and damages relating to alleged
violations of the California Business and Professions Code by a former managerial
employee, on behalf of himself and all other similarly situated California employees,
claiming that store directors at the Companys California stores should have been
classified as non-exempt employees and paid on an hourly basis. Plaintiff also alleges
that the Companys incentive bonus program is illegal based upon deductions for items
outside of the employees control. The Company believes that the employee, a former
store director, was properly classified as an exempt employee based upon his job duties,
and intends to vigorously defend the suit. At this time, the Company does not have
sufficient facts to estimate any potential damages. The case has been designated
non-complex and trial has been scheduled for October 2005.



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







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

This report on Form 10-Q contains certain forward-looking statements
regarding our future results of operations and performance. Important factors that could
cause differences in results of operations include, but are not limited to, the timing,
execution and performance of new store openings; relocations, remodels, the timing and
liability resulting from sales and closures; amount of time before new stores become
profitable; merchandising strategies; 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; 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."



Introduction

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



Executive Summary



Wild Oats Markets, Inc. is one of the largest natural foods supermarket
chains in North America. As of the date of this report, we operated 111 natural foods
stores in 24 states and British Columbia, Canada. We operate in the retail grocery
industry with two store formats: the natural foods supermarket format, under the Wild Oats
Natural Marketplace(R)name
nationwide and the Capers Community Market(R)name in Canada; and the farmers market format, under the Henrys Farmers
Market(R)name in southern
California and Phoenix, Arizona, and the Sun Harvest name in Texas. Both formats
emphasize natural and organic products with a wide selection of products in a full-service
environment. The formats share a core demographic customer profile. We manage support
services provided to the stores centrally from our Boulder, Colorado headquarters. All of
our stores, regardless of format, purchase from the same primary distributor based on
centralized negotiations, merchandising and marketing strategies. Our perishables
distribution facility, opened in February 2004, supplies produce and other perishables for
approximately 70 stores in the western United States.



In 2005, we are refining our product mix and marketing strategies to
maximize the potential of all of our stores with an expanded product offering that we
believe will better appeal to our customer demographics of our existing store sites. We
intend to broaden our product offerings to include a limited number of convenience items.
In early 2005, we began to introduce more gourmet and epicurean items to reach the
specialty foods customer, and in anticipation of the 2005 release of the new U.S.
Department of Agriculture "food pyramid" dietary guidelines, we launched our
Superfoods program in all of our stores. Store signage helped identify 20 nutrient-dense
foods, and brochures and recipes emphasizing the benefits of incorporation of Superfoods
into our customers daily diet were offered by trained staff at all stores. We
continue to expand our private label line of products, including the Wild Oats(R)and the Henrys Marketplace(R)branded products and plan to introduce
hundreds of additional private label products during 2005. We continue to focus on growth
through new store development. In 2005, we plan to open 10 to 12 stores in areas where we
already have a market presence.



As of the end of the first quarter of fiscal 2005, we had 110 stores
located in 24 states and Canada, as compared to 101 stores in 24 states and Canada at the
end of the first quarter of fiscal 2004.



| |                                    |  | TOTAL
    STORE COUNT 
| | ---------------------------------- |  | ----------------------
| |                                    |  | THREE
    MONTHS ENDED
| |                                    |  | April 2,
    2005     
| |                                    |  |                       
| | Store count at beginning of period |  | 108                   
| | Stores opened                      |  | 4                     
| | Stores closed                      |  | (2)                   
| | Stores sold                        |  | -                     
| |                                    |  |                       
| | Store count at end of period       |  | 110                   
| |                                    |  |                       
| |                                    |  |                       



*includes the closure of one store in Phoenix, Arizona, for format
conversion.



In the first quarter of fiscal 2005, we opened four new stores, two in
Arizona, one in Salt Lake City, Utah, and one relocation in Scottsdale, Arizona.







Results of Operations



Our net loss for the first quarter of fiscal 2005 was $1.2 million, or
$0.04 per diluted share, compared with net income of $2.1 million, or $0.07 per diluted
share, in the same period in fiscal 2004. The following table sets forth, for the periods
indicated, certain selected income statement data expressed as a percentage of sales and
in dollars (in thousands - percentages may not add due to rounding):



| |                                                 | THREE MONTHS ENDED
| | ----------------------------------------------- | ------------------
| |                                                 |                   
| |                                                 | April 2,          
| |                                                 | 2005              
| |                                                 |                   
| | Sales                                           | $ 278,079         
| | Cost of goods sold and occupancy costs          | 197,823           
| |                                                 |                   
| | Gross profit                                    | 80,256            
| | Direct store expenses                           | 60,371            
| | Selling, general and administrative expenses    | 14,975            
| | Gain on disposal of assets                      | (9)               
| | Pre-opening expenses                            | 1,917             
| | Restructuring and asset impairment charges, net | 1,551             
| |                                                 |                   
| | Income from operations                          | 1,451             
| |                                                 |                   
| | Loss on early extinguishment of debt            | (624)             
| | Interest income                                 | 324               
| | Interest expense                                | (2,167)           
| |                                                 |                   
| | Income before income taxes                      | (1,016)           
| | Income tax expense                              | 135               
| |                                                 |                   
| | Net income (loss)                               | $ (1,151)         
| |                                                 |                   
| |                                                 |                   



Sales. Sales for the three months ended April 2, 2005 increased
5.4% as compared to the same period in fiscal 2004. This increase was primarily driven by
the increase in the number of stores opened since the end of the first quarter of last
year. Total square feet of open stores increased 13.6% over the first quarter of 2004, as
the first fiscal quarter 2005 ended with 2.5 million total square feet as compared to 2.2
million total square feet in the first fiscal quarter of 2004. Comparable store sales
decreased 0.4% for the quarter as compared to an 8.5% increase in the same period last
year, which was positively impacted by the southern California conventional grocery store
labor strike. Comparable store sales, excluding the strike-affected stores, were positive
7.0% in the first quarter of 2005 compared to positive 2.9% in last years first
quarter. Comparable store basket size grew 4.4% for the fiscal quarter ended April 2, 2005
as compared to the same period last year, while customer traffic for the same period
decreased 4.5%.





Gross profit. Gross profit consists of sales less cost of goods
sold and store occupancy costs. Occupancy costs include store related depreciation, rent
and utilities. As a percentage of sales, gross profit decreased to 28.9% in the first
quarter of fiscal 2005 from 29.3% in the same period in fiscal 2004, due primarily to the
impact of the lower gross profit at new stores, which is estimated at 70 basis points.
Offsetting this decrease was margin improvement in our existing store base of
approximately 30 basis points, due primarily to department mix changes. New stores
historically carry lower margins after opening due to higher shrink and heavy promotional
activity.





Direct store expenses. Direct store expenses include the following:
payroll, payroll taxes and benefits, store supplies and maintenance, in-store community
marketing and other store-specific contract costs. As a percentage of sales, direct store
expenses increased to 21.7% in the fiscal quarter ended April 2, 2005, from 21.6% in the
same period last year. Direct store expenses, excluding new stores, were 21.4% of sales in
the first quarter, compared to 21.4% in last years first quarter.





Selling, general and administrative expenses. Selling, general and
administrative expenses include: corporate and regional administrative support services,
purchasing, marketing and travel. Selling, general and administrative expenses for the
quarter ended April 2, 2005 decreased 0.5% as compared to the same period in fiscal 2004.
Selling, general and administrative expenses in the first quarter of 2005 also included
approximately $600,000 in incremental accounting and legal fees related to the
Companys lease accounting restatement. The decrease in expenses from the prior year
is the result of the Companys third quarter 2004 reorganization and ability to
achieve greater operating efficiency through information technology investments.





Gain on disposal of assets. We recorded a $9,000 gain on disposal
of assets for the three months ended April 2, 2005 compared to a $117,000 gain in the same
period in fiscal 2004, due primarily to the sale of the remaining pharmacy in one of our
Portland, Oregon stores.





Pre-opening expenses. Pre-opening expenses include labor, rent,
advertising, utilities, supplies and certain other costs incurred prior to a stores
opening. Pre-opening expenses for the first quarter of fiscal 2005 increased to $1.9
million compared to $599,000 during the same period in fiscal 2004, due to the opening of
four new stores in the first quarter of fiscal 2005 compared to the opening of one new
store during the first quarter of last year.





Restructuring and asset impairment charges, net. During the first
quarter of fiscal 2005, we recorded net restructuring and asset impairment expense of
$1,551,000. Details of the significant components are as follows:

- Changes in estimate related to lease-related liabilities for sites previously identified
    for closure or sale ($140,000)



- Lease-related liability and asset impairments for sites closed and relocated during the
    first quarter ($120,000 )



- Severance for employees notified of termination in the first quarter of fiscal 2005
    ($217,000)



- Accretion expense on lease-related liabilties ($114,000)



- Write off of goodwill ($960,000)



During the first quarter of fiscal 2005, there were no asset impairment
charges. In determining whether an impairment exists, we estimate each stores future
cash flows on an undiscounted basis, and if the cash flows are not sufficient to recover
the carrying value, we then use a discounted cash flow based on a risk-adjusted discount
rate, to adjust its carrying value of assets, and record a provision for impairment as
appropriate. We continually reevaluate our stores performance to monitor the
carrying value of our long-lived assets in comparison to projected cash flows.





Loss on early extinguishment of debt. During the first quarter of
fiscal 2005, we had a loss on the early extinguishment of debt of $624,000 due to the
write off of remaining unamortized debt issuance. There was no such activity during the
first quarter of fiscal 2004.





Interest income. Interest income was $324,000 for the fiscal
quarter ended April 2, 2005 compared to $186,000 for the fiscal quarter ended March 27,
2004. This is due to the increase in average cash and short-term investment balances over
prior year.





Interest expense. Interest expense for the fiscal quarter ended
April 2, 2005 increased 120% to $2.2 million from $1.0 million in the same period in
fiscal 2004, as a result of the increase of average borrowings due to the $115.0 million
debentures.





Income tax expense. For the quarter ended April 2, 2005, we
recorded $135,000 of income tax expense, as a result of taxable foreign income during the
period. The tax benefit resulting from the loss on domestic operations has been fully
offset by the tax valuation allowance that was established at fiscal 2004 year end.





Earnings before interest, taxes, depreciation and amortization
("EBITDA"). EBITDA, as defined by the Company, which includes gains or
losses on early extinguishment of debt, gains or losses on asset disposals, and
restructuring and asset impairment charges, was $9.7 million in the first quarter of 2005
as compared to $11.6 million in the first quarter of 2004. EBITDA was adversely impacted
due to a $1.3 million increase in pre-opening expenses and $596,000 in incremental
accounting and legal fees related to the lease restatement. For an explanation and
reconciliation of EBITDA, see "Non GAAP Financial Information - EBITDA."







Critical Accounting Policies and Estimates



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



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



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



We believe the following critical accounting policies affect our most
significant judgments and estimates used in the preparation of our consolidated financial
statements. There have been no changes in 2004 in the application of these policies:





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



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





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



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





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



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





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



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





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





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



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

Remainder of 2005. Comparable store sales for fiscal 2005 are
expected to be in the range of 3% to 4%.







Liquidity and Capital Resources

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



Net cash generated by operating activities decreased to $8.5 million
during the first three months of fiscal 2005, as compared to $14.8 million during the same
period in fiscal 2004. This decrease is primarily due to the net loss of $1.2 million
offset by noncash increases to restructuring charges. Other factors include the decrease
in cash flow to accounts payable and accrued liabilities, as compared to first quarter
2004.



Net cash provided by investing activities was $3.5 million during the
first three months of fiscal 2005 as compared to an $11.3 million use of cash during the
same period in fiscal 2004, due to a decrease in capital expenditures and the sale of
short-term investments during the first quarter of fiscal 2005.



Net cash used in financing activities of $1.5 million during the first
three months of 2005 was less than the $7.9 million reported during the same period in
fiscal 2004. The increase in cash flows from financing activities is the direct result of
a decrease in the amount of cash required to make repayments on notes payable, long-term
debt and capital leases.





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



The debentures are callable and convertible into our common stock prior
to maturity at the option of the holders under the following circumstances: (1) during any
calendar quarter commencing after June 30, 2004 and before March 31, 2029, if the last
reported sale price of our common stock is greater than or equal to 130% of the conversion
price of $17.70 per share; (2) at any time on or after April 1, 2029 if the last reported
sale price of our common stock on any date on or after March 31, 2029 is greater than or
equal to 130% of the conversion price; (3) subject to certain limitations, during the five
business-day period after any five consecutive trading-day period in which the trading
price per debenture for each day of that period was less than 98% of the product of the
conversion rate and the last reported sale price of our common stock; (4) if we call the
debentures for redemption; (5) upon the occurrence of certain corporate transactions; or
(6) if we obtain credit ratings for the debentures, at any time when the credit ratings
assigned to the debentures are below specified levels. The debentures are initially
convertible into 56.4972 shares of our common stock per $1,000 principal amount, which is
equivalent to approximately $17.70 per share, for total initial underlying shares of
6,497,175. The conversion rate will be subject to adjustment upon the occurrence of
specified events. Upon conversion, we have the right to deliver, in lieu of common stock,
cash or any combination of cash and common stock. Pursuant to the underwriting agreement
and within 90 days of issuance, we filed a shelf registration statement covering resales
of the debentures and the common stock issuable upon conversion thereof.



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



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



There are no financial covenants within the debenture indenture,
however, we paid penalty interest of 0.25% for the first 90 days of 2005 and paid or will
be paying 0.50% thereafter until the resale of the debentures are publicly registered.



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





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



Our prior credit facility was entered into in February of 2003, with
Wells Fargo Bank N.A. acting as lead bank and administrative agent (the "Wells
Facility"). The Wells Facility had a $95.0 million limit and a three-year term with a
one-year renewal option.



As part of the Wells Facility, we gave our lenders collateral in the
form of cash, equipment and fixtures, inventory and other assets. We also granted
leasehold mortgages in certain leasehold interests. The Wells Facility required compliance
as of the last day of each fiscal quarter, with certain financial covenants, including the
following: an adjusted leverage ratio (as described below); a fixed charge coverage ratio,
which is the ratio of EBITDAR, as defined, for the last four fiscal quarters minus certain
maintenance capital expenditures and taxes to fixed charges for the four fiscal quarters;
a minimum stockholders equity of $125 million plus a portion of cumulative net
income, adjusted for stock issuances and repurchases; a limitation on new leases per
fiscal year, and a cap on capital expenditures per fiscal year. We were also obligated, on
a continuous basis, to maintain a minimum cash balance. As of January 1, 2005 and as of
the date of our termination of the Wells Facility, there were no outstanding borrowings
and letters of credit outstanding totaled $9.1 million.



As of April 2, 2005, we had no off-balance sheet arrangements,
unconsolidated subsidiaries, commitments or guarantees, except as disclosed in the notes
to the consolidated financial statements. As of April 2, 2005, we had a working capital
deficit of $24.1 million, or an improvement of $800,000 over fiscal 2004 year-end.





Capital expenditures. We spent approximately $6.2 million during
the first fiscal quarter of fiscal 2005 for new store construction, remodels and other
capital expenditures. Our average capital expenditures to open a leased store, including
leasehold improvements, equipment and fixtures, have ranged from approximately $2.0
million to $5.0 million historically, excluding inventory costs and initial operating
losses. We anticipate that the average capital expenditures to open a natural foods
supermarket format store will be $2.1 million to $3.9 million in the future, on a turnkey
lease basis. Turnkey leases are properties that are ready for a tenant to begin business
by having the tenant furnish only furniture and inventory. Our average capital
expenditures to open a farmers market format store are estimated at $1.6 million to
$3.0 million in the future. Delays in opening new stores may result in increased
pre-opening costs for the site, as well as lower than planned sales for the Company.



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







Cautionary Statement Regarding Forward-Looking Statements



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







Non GAAP Financial Information





EBITDA. The following supplemental financial data presented for the
three months ended April 2, 2005 and March 27, 2004 is a reconciliation of EBITDA, a non
Generally Accepted Accounting Principles ("GAAP") financial measure, which is
intended to facilitate analysis of our business and operating performance and is a
regularly applied industry measure. This information is not and should not be viewed as a
substitute for financial measures determined under GAAP. Other companies may calculate
this non GAAP financial measure differently.



EBITDA is calculated as (in thousands):



| |                                                     |  | THREE MONTHS
    ENDED
| | --------------------------------------------------- |  | ----------------------
| |                                                     |  |                       
| |                                                     |  | April 2, 2005         
| |                                                     |  |                       
| |                                                     |  |                       
| | Net (loss) income                                   |  | $ (1,151)             
| | Interest expense, net of
    interest income        |  | 1,843                 
| | Income tax expense                                  |  | 135                   
| | Depreciation and
    amortization                   |  | 6,735                 
| | Loss on early
    extinguishment of debt            |  | 624                   
| | Gain on asset disposals,
    net                    |  | (9)                   
| | Restructuring and asset
    impairment charges, net |  | 1,551                 
| |                                                     |  |                       
| | EBITDA                                              |  | $ 9,728               
| |                                                     |  |                       
| |                                                     |  |                       







We believe EBITDA is a meaningful measure of performance as it is
commonly utilized by management and investors to analyze operating performance and entity
valuation. Our management, the investment community and the banking institutions routinely
use EBITDA, together with other measures, to measure our operating performance relative to
the grocery industry. EBITDA should not be construed as income from operations, net income
or cash flow from operating activities as determined under GAAP.





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







Item
3.  Quantitative and Qualitative Disclosures about Market Risk

In the normal course of business, the Company is exposed to
fluctuations in 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.





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





Item 4. Controls and
Procedures



Evaluation
of Disclosure Controls and Procedures



We maintain a system of disclosure controls and procedures designed to
provide reasonable assurance as to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from unauthorized use
or disposition. We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as defined in the Exchange Act Rule 13a-15(e) under
supervision and with the participation of management, including our Chief Executive
Officer and Chief Financial Officer, as of the end of the period covered by this report.
Based upon that evaluation and the remediation steps described below, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures
are effective in timely alerting them to material information required to be included in
our periodic Securities and Exchange Commission filings.



Changes
in Internal Control Over Financial Reporting



In our annual report on Form 10-K, as amended, for the year ended
January 1, 2005 (the "2005 Form 10-K"), we disclosed that our Chief Executive
Officer and Chief Financial Officer had concluded that our disclosure controls and
procedures were not effective due to three material weaknesses in our internal control
over financial reporting, as described below. These weaknesses were remediated during our
fiscal quarter ended April 2, 2005 (the "First Quarter"), as a result of changes
in the Companys internal controls described below.





Restructuring reserves. In 2004, management determined that the
restructuring reserves for the quarter ended June 28, 2003, were understated by $500,000.
An accrual had not been made for the remaining lease obligation for a closed store site in
Phoenix, Arizona. The error occurred because unrelated accruals relating to litigation and
lease reserves had been incorrectly combined in the restructuring analysis. During the
quarter ended December 27, 2003, we recorded a $500,000 adjustment to accrue for
additional litigation related restructuring reserves for the closed store site. We
reported the error in a filing on February 11, 2005, on Form 8-K, and restated our interim
financial statements and related disclosures for the fiscal year ended December 27, 2003
in our 2005 Form 10-K.



During the first quarter, we changed our internal controls over
financial reporting to address the restructuring reserve error by reconstructing the
supporting detailed restructuring reserve schedule by specific site and type of
restructuring reserve.





Lease accounting. On February 15, 2005, management of the Company
discussed with the Chairman of the Audit Committee of the Board of Directors a February 7,
2005 a summary of existing GAAP applicable to lease accounting articulated by the Office
of the Chief Accountant of the SEC, as well as recent restatements by several other
issuers related to the same accounting issue. The Chairman of the Audit Committee
instructed management to review the Company's accounting practices. On February 17, 2005,
after discussing the preliminary results of this review, management and the Audit
Committee concluded that our previously issued consolidated financial statements should no
longer be relied upon because of lease accounting errors, and we disclosed the same on
Form 8-K filed on February 18, 2005. Management completed its review of its lease
accounting, and determined that the controls over the selection of appropriate assumptions
and factors affecting its lease accounting were not effective as of January 1, 2005, as
those selections were not consistent with GAAP in regards to the following areas: (1)
amortization of leasehold improvements and leasehold interests, (2) straight-line rent
expense, (3) landlord incentives and allowances, (4) sale-leaseback transactions, and (5)
classification of leases as capital or operating in accordance with SFAS No. 13. We
restated our financial statements for the fiscal years ended December 27, 2003 and
December 28, 2002 as presented in our Form 10-K, as amended.



The errors related to improper lease accounting resulted from our
incorrect interpretation of existing GAAP, as clarified by the SEC staff. To remediate
this material weakness, we developed controls to strengthen our ongoing compliance with
generally accepted accounting principles related to leasing issues, as well as implemented
additional review procedures over the selection and monitoring of appropriate assumptions
and estimates affecting lease accounting practices. These controls included reviews of all
lease terms and the associated lives of additions to our capitalized assets and
straight-line calculations, two independent and separate capital versus operating analyses
to validate the accounting treatment, regular communication between the accounting and
capital asset groups to validate occupancy dates for accounting purposes and reviews of
every new or modified lease undertaken by two people within the accounting function to
ensure all components were accounted for consistently and in accordance with GAAP.





Accounting and finance personnel. In conjunction with filing our
Form 10-K/A, which included the restatement concerning the treatment of lease accounting
as discussed above, management concluded that we did not have sufficient personnel with
technical tax and accounting expertise to review and resolve non-routine and/or complex
accounting matters within the framework of our internal control structure, as designed. We
identified a material weakness in the operation of controls over the review and oversight
of its tax accounts. Specifically, due to the lack of technical expertise related to
accounting for taxes, the controls, as designed, were not operating effectively to
adequately reduce potential misstatements and ensure appropriate tax disclosures were
being made in our consolidated financial statements. Additionally, due to the lack of
sufficient technical resources related to accounting and financial statement disclosure
matters and as a result of errors identified by our independent auditors in the
disclosures and amounts in our annual report on Form 10-K/A, we concluded that controls
over the financial reporting process were not effective. All identified adjustments were
made to the consolidated financial statements for the year ended January 1, 2005.

To correct this material weakness, we hired a tax consultant with
requisite knowledge to ensure the deficiencies noted above related to taxes will be
addressed going forward. The work of the consultant will be reviewed and monitored by a
member of the finance department with knowledge of tax accounting matters.We also
hired three additional Certified Public Accountants into the accounting and finance
departments to ensure both the controls over financial reporting are operating effectively
as well as to ensure our internal controls continue to be appropriately assessed. We have
ongoing efforts to recruit and retain qualified personnel to staff our finance and
accounting departments.



Part II.  OTHER INFORMATION





Item 1.  Legal Proceedings

Wild Oats Markets Canada, Inc., as successor to Alfalfa's Canada, Inc.,
a Canadian subsidiary of the Company, is a defendant in Helen Fakhri and Ady Aylon, as
Representative Plaintiffs v. Alfalfa's Canada, Inc., a class action suit for monetary
damages brought in the Supreme Court of British Columbia, Canada by the representative
plaintiffs on behalf of two groups of claimants - those who claim to have contracted
Hepatitis A allegedly through the consumption of food purchased at a Capers Community
Market in the spring of 2002, and those who were inoculated against Hepatitis A in March
and April, 2002, after handling and/or consuming food products from Capers that were or
might have been contaminated with Hepatitis A. In December 2004, the Plaintiffs brought a
motion for a summary trial of certain issues, and such motion was denied in January 2005.
We and the plaintiffs counsel have engaged in mediation. Our insurers have
acknowledged coverage for defense costs and liability, and we have exhausted our
deductible.





Tim Auchterlonie, individually and on behalf of all others similarly
situated and the general public, and Roes 1 to 1000 vs. Wild Oats Markets, Inc. and Does 1
through 100, is a purported class action suit brought in August 2004 in the Superior
Court, County of Los Angeles, for payment of overtime and damages relating to alleged
violations of the California Business and Professions Code by a former managerial
employee, on behalf of himself and all other similarly situated California employees,
claiming that store directors at our California stores should have been classified as
non-exempt employees and paid on an hourly basis. Plaintiff also alleges that our bonus
program is illegal based upon deductions for items outside of the employees control.
We believe that the employee, a former store director, was properly classified as an
exempt employee based upon his job duties, and intend to vigorously defend the suit. At
this time, we do not have sufficient facts to estimate any potential damages. The case has
been designated non-complex and trial has been scheduled for October 2005.



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







Item
2.  Changes in Securities, Use of Proceeds and Issuer Purchase of Equity
Securities.

None.





Item
3.  Defaults Upon Senior Securities

None.





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

None.





Item 5.  Other Information

The following information is being provided in lieu of filing a Form
8-K to report our entry into an amendment to a material definitive agreement under Item
1.01.



On May 10, 2005, Wild Oats Markets, Inc. and Perry D. Odak, President
and Chief Executive Officer, and greater than 5% shareholder of the Company, entered into
the Fourth Amendment to Employment Agreement to modify the provisions thereof related to
the payment of the Supplemental Bonus thereunder and to correct certain errors in the
Employment Agreement dated March 6, 2001, as amended by a First Amendment to Employment
Agreement dated December 29, 2001, a Second Amendment to Employment Agreement dated June
19, 2002, and a Third Amendment to Employment Agreement dated August 12, 2002.



The Fourth Amendment to Employment Agreement provides for a
modification to Mr. Odak's employment agreement to provide for (a) the payment of the
existing $9.2 million supplemental bonus in the event of Mr. Odak's death or disability
while employed by the Company, and the definition of "disability" was modified
to extend the period during which Mr. Odak is unable to work from 90 to 365 consecutive
days; (b) the payment of a bonus of approximately $1.6 million: (i) in the event Mr. Odak
terminates his employment for Good Reason, as defined in his employment agreement; (ii) in
the event Mr. Odak is terminated without Cause, as defined in the agreement; or (iii) in
the event his employment agreement is not renewed at the end of its initial term in March,
2006. The Fourth Amendment to Employment Agreement is filed as an exhibit hereto.





Item 6.  Exhibits

|                                      | Exhibit Number | Description                                                                                                                                                                                                                                                                                                    
|------------------------------------- | -------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                      |                |                                                                                                                                                                                                                                                                                                                
|                                      |                |                                                                                                                                                                                                                                                                                                                
|                                      | 10.1+          | Loan and
    Security Agreement, dated March 31, 2005, by and among Wild Oats Markets, Inc., Bank of
    America, N.A., as agent, and the lenders identified therein.                                                                                                                                          
|                                      | 10.2+          | Termination and Release Agreement, dated March 31, 2005, under the
    Second Amended and Restated Credit Agreement, dated as of February 26, 2003, as amended by
    and among Wild Oats Markets, Inc., the lenders identified therein and Wells Fargo Bank
    National Association, as administrative agent.
|                                      | 10.3+          | Waiver, dated March 28, 2005, to the Second Amended and Restated
    Credit Agreement, dated as of February 26, 2003, as amended by and among Wild Oats
    Markets, Inc., the lenders identified therein and Wells Fargo Bank National Association,
    as administrative agent.                              
|                                      | 10.4+          | Waiver, dated March 31, 2005, to the Second Amended and Restated
    Credit Agreement, dated as of February 26, 2003, as amended by and among Wild Oats
    Markets, Inc., the lenders identified therein and Wells Fargo Bank National Association,
    as administrative agent.                              
|                                      | 10.5#+         | Employment Agreement dated April 26, 2005 between Robert B. Dimond
    and the Registrant.                                                                                                                                                                                                                     
|                                      | 10.6#+         | Robert B. Dimond Equity Incentive Plan                                                                                                                                                                                                                                                                         
|                                      | 10.7#+         | Severance Agreement dated May 9, 2005 between Robert B. Dimond and
    Registrant.                                                                                                                                                                                                                             
|                                      | 10.8#+         | Fourth Amendment to Employment Agreement, dated May 10, 2005,
    between Perry D. Odak and the Registrant.                                                                                                                                                                                                    
|                                      | 31.1+          | CEO
    Certification under Section 302 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                          
|                                      | 31.2+          | CFO
    Certification under Section 302 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                          
|                                      | 32.1+          | CEO
    Certification under Section 906 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                          
|                                      | 32.2+          | CFO
    Certification under Section 906 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                          
|                                      |                |                                                                                                                                                                                                                                                                                                                
|#    Management
    Compensation Plan
|+    Included
    herewith.          
|                                     



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 12th of May 2005.



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