UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended July 6, 2008; or

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to .

Commission File Number: 0-19797

WHOLE FOODS MARKET, INC.

(Exact name of registrant as specified in its charter)

Texas		74-1989366
(State of		(IRS employer
incorporation)		identification no.)

550 Bowie St.

Austin, Texas 78703

(Address of principal executive offices)

512-477-4455

(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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

	Large accelerated filer x		Accelerated filer o
	Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes

The number of shares of the registrant’s common stock, no par value, outstanding as of July 6, 2008 was 140,285,434 shares.

Table of Contents

Part I. Financial Information

Item 1. Financial Statements

Whole Foods Market, Inc.

Consolidated Balance Sheets (unaudited)

July 6, 2008 and September 30, 2007

(In thousands)

	2008		2007
Assets
Current assets:
Cash and cash equivalents	$	24,917	$	—
Restricted cash	2,367		2,310
Accounts receivable	127,618		105,209
Proceeds receivable for divestiture	—		165,054
Merchandise inventories	316,086		288,112
Prepaid expenses and other current assets	35,538		40,402
Deferred income taxes	73,275		66,899
Total current assets	579,801		667,986
Property and equipment, net of accumulated depreciation and amortization	1,847,453		1,666,559
Goodwill	682,758		668,850
Intangible assets, net of accumulated amortization	82,297		97,683
Deferred income taxes	111,258		104,877
Other assets	10,439		7,173
Total assets	$	3,314,006	$	3,213,128

	2008		2007
Liabilities and Shareholders’ Equity
Current liabilities:
Current installments of long-term debt and capital lease obligations	$	372	$	24,781
Accounts payable	179,749		225,728
Accrued payroll, bonus and other benefits due team members	201,124		181,290
Dividends payable	28,057		25,060
Other current liabilities	305,189		315,491
Total current liabilities	714,491		772,350
Long-term debt and capital lease obligations, less current installments	840,093		736,087
Deferred lease liabilities	189,725		152,552
Other long-term liabilities	64,871		93,335
Total liabilities	1,809,180		1,754,324
Shareholders’ equity:
Common stock, no par value, 300,000 shares authorized, 140,286 and 143,787 shares issued, 140,285 and 139,240 shares outstanding in 2008 and 2007, respectively	1,062,546		1,232,845
Common stock in treasury, at cost	—		(199,961		)
Accumulated other comprehensive income	4,360		15,722
Retained earnings	437,920		410,198
Total shareholders’ equity	1,504,826		1,458,804
Commitments and contingencies
Total liabilities and shareholders’ equity	$	3,314,006	$	3,213,128

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

Table of Contents

Whole Foods Market, Inc.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share amounts)

	Twelve weeks ended						Forty weeks ended
	July 6,			July 1,			July 6,			July 1,
	2008			2007			2008			2007
Sales	$	1,841,242		$	1,514,420		$	6,164,993		$	4,848,361
Cost of goods sold and occupancy costs	1,208,495			976,130			4,054,290			3,154,840
Gross profit	632,747			538,290			2,110,703			1,693,521
Direct store expenses	490,188			394,713			1,631,466			1,256,805
General and administrative expenses	60,689			49,003			215,759			150,591
Pre-opening and relocation costs	17,781			14,995			49,789			46,913
Operating income	64,089			79,579			213,689			239,212
Interest expense	(8,094		)	(24		)	(28,113		)	(31		)
Investment and other income	1,495			2,223			5,430			8,837
Income before income taxes	57,490			81,778			191,006			248,018
Provision for income taxes	23,571			32,711			77,984			99,207
Net income	$	33,919		$	49,067		$	113,022		$	148,811

Basic earnings per share	$	0.24		$	0.35		$	0.81		$	1.06
Weighted average shares outstanding	140,231			140,061			139,766			140,411

Diluted earnings per share	$	0.24		$	0.35		$	0.81		$	1.05
Weighted average shares outstanding, diluted basis	140,322			141,250			140,308			142,366

Dividends declared per share	$	0.20		$	0.18		$	0.60		$	0.69

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

Table of Contents

Whole Foods Market, Inc.

Consolidated Statements of Shareholders’ Equity and Comprehensive Income (unaudited)

Forty weeks ended July 6, 2008 and fiscal year ended September 30, 2007

(In thousands)

									Accumulated
						Common			Other						Total
	Shares		Common			Stock in			Comprehensive			Retained			Shareholders’
	Outstanding		Stock			Treasury			Income (Loss)			Earnings			Equity
Balances at September 24, 2006	139,607		$	1,147,872		$	(99,964	)	$	6,975		$	349,260		$	1,404,143
Net income	—		—			—			—			182,740			182,740
Foreign currency translation adjustments	—		—			—			8,824			—			8,824
Change in unrealized loss on investments, net of income taxes	—		—			—			(77		)	—			(77		)
Comprehensive income															191,487
Dividends ($0.87 per share)	—		—			—			—			(121,802		)	(121,802		)
Issuance of common stock pursuant to team member stock plans	1,961		52,925			—			—			—			52,925
Purchase of treasury stock	(2,542	)	—			(99,997		)	—			—			(99,997		)
Excess tax benefit related to exercise of team member stock options	—		13,187			—			—			—			13,187
Share-based payments expense	—		13,175			—			—			—			13,175
Conversion of subordinated debentures	214		5,686			—			—			—			5,686
Balances at September 30, 2007	139,240		1,232,845			(199,961		)	15,722			410,198			1,458,804
Net income	—		—			—			—			113,022			113,022
Foreign currency translation adjustments	—		—			—			(3,619		)	—			(3,619		)
Change in unrealized loss on cash flow hedge instruments, net of income taxes	—		—			—			(7,743		)	—			(7,743		)
Comprehensive income															101,660
Dividends ($0.60 per share)	—		—			—			—			(84,012		)	(84,012		)
Issuance of common stock pursuant to team member stock plans	1,039		17,206			—			—			—			17,206
Retirement of treasury stock	—		(199,961		)	199,961			—			—			—
Excess tax benefit related to exercise of team member stock options	—		4,442			—			—			—			4,442
Share-based payments expense	—		7,599			—			—			—			7,599
Cumulative effect of new accounting standard adoption (Note 8)	—		—			—			—			(1,288		)	(1,288		)
Other	6		415			—			—			—			415
Balances at July 6, 2008	140,285		$	1,062,546		$	—		$	4,360		$	437,920		$	1,504,826

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

Table of Contents

Whole Foods Market, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

	Forty weeks ended
	July 6,			July 1,
	2008			2007
Cash flows from operating activities:
Net income	$	113,022		$	148,811
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	189,386			137,643
Loss on disposition of fixed assets	2,823			3,562
Share-based payments expense	7,599			10,687
Deferred income tax benefit	(6,693		)	(13,553		)
Excess tax benefit related to exercise of team member stock options	(5,162		)	(11,609		)
Deferred lease liabilities	35,044			9,950
Other	6,240			6,507
Net change in current assets and liabilities:
Accounts receivable	(22,382		)	3,066
Merchandise inventories	(36,006		)	(42,278		)
Prepaid expense and other current assets	1,240			2,828
Accounts payable	(49,335		)	16,128
Accrued payroll, bonus and other benefits due team members	19,144			11,976
Other current liabilities	16,990			17,460
Net change in other long-term liabilities	(4,719		)	807
Net cash provided by operating activities	267,191			301,985
Cash flows from investing activities:
Development costs of new store locations	(282,529		)	(272,923		)
Other property and equipment expenditures	(109,671		)	(109,937		)
Proceeds from hurricane insurance	1,500			—
Acquisition of intangible assets	(1,502		)	(22,351		)
Purchase of available-for-sale securities	(194,316		)	(270,206		)
Sale of available-for-sale securities	194,316			440,818
Decrease (increase) in restricted cash	(57		)	57,785
Payment for purchase of acquired entities, net	(20,130		)	(3,841		)
Proceeds received from divestiture, net	163,913			—
Other investing activities	(3,175		)	(451		)
Net cash used in investing activities	(251,651		)	(181,106		)
Cash flows from financing activities:
Dividends paid	(81,015		)	(71,711		)
Issuance of common stock	18,019			47,742
Purchase of treasury stock	—			(99,997		)
Excess tax benefit related to exercise of team member stock options	5,162			11,609
Proceeds from long-term borrowings	174,000			—
Payments on long-term debt and capital lease obligations	(107,050		)	(65		)
Other financing activities	261			—
Net cash provided by (used in) financing activities	9,377			(112,422		)
Net change in cash and cash equivalents	24,917			8,457
Cash and cash equivalents at beginning of period	—			2,252
Cash and cash equivalents at end of period	$	24,917		$	10,709

Supplemental disclosures of cash flow information:
Interest paid	$	33,230		$	232
Federal and state income taxes paid	$	85,119		$	107,926
Non-cash transactions:
Conversion of convertible debentures into common stock, net of fees	$	154		$	5,686

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

Table of Contents

Whole Foods Market, Inc.

Notes to Consolidated Financial Statements (unaudited)

July 6, 2008

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements of Whole Foods Market, Inc. and its consolidated subsidiaries (collectively “Whole Foods Market,” “Company,” or “We”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis, the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The Company reports its results of operations on a fifty-two or fifty-three week fiscal year ending on the last Sunday in September. The first fiscal quarter is sixteen weeks, the second and third quarters each are twelve weeks, and the fourth quarter is twelve or thirteen weeks. Fiscal year 2008 is a fifty-two week and fiscal year 2007 was a fifty-three week fiscal year. We operate in one reportable segment, natural and organic food supermarkets. Where appropriate, we have reclassified prior year financial statements to conform to current year presentation.

(2) Summary of Significant Accounting Policies

Derivative Instruments

The Company accounts for derivatives pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133.” SFAS No. 133 and SFAS No. 138 require that all derivative financial instruments are recorded on the balance sheet at their respective fair value.

The Company currently utilizes an interest rate swap agreement to manage well-defined interest rate risks. The Company does not use financial instruments or derivatives for any trading or other speculative purposes.

Income Taxes

On October 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, as amended, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income tax positions recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on measurement, classification, interest and penalties associated with tax positions, and income tax disclosures. See Note 8 to the consolidated financial statements, “Income Taxes,” for further discussion of the impact of adopting FIN 48.

(3) Business Combination

Effective August 28, 2007, the Company completed the acquisition of Wild Oats Markets, Inc. (“Wild Oats”), a leading natural and organic foods retailer in North America, in a cash tender offer of $18.50 per share, or approximately $565 million plus the assumption of approximately $148 million in existing debt. At the date of acquisition, Wild Oats had 109 stores in 23 states and British Columbia, Canada operating under four banners: Wild Oats Marketplace nationwide, Henry’s Farmers Market (“Henry’s”) in Southern California, Sun Harvest in Texas and Capers Community Market in British Columbia. To fund the transaction, we entered into a five-year $700 million senior term loan agreement. We also signed a new five-year $250 million revolving credit agreement that was increased to $350 million during the third quarter of fiscal year 2008, which replaced our existing $200 million revolver. Wild Oats results of operations are included in our consolidated financial statements for the period beginning August 28, 2007 through July 6, 2008. In connection with the acquisition of Wild Oats, the Company separately entered into an agreement to sell certain assets and liabilities, consisting primarily of fixed assets, inventories and operating leases, related to all 35 Henry’s and Sun Harvest stores and a related distribution center in Riverside, CA to a wholly owned subsidiary of Smart & Final, Inc., a Los Angeles-based food retailer for approximately $165 million. This sale was completed effective September 30, 2007. During fiscal year 2008, the Company finalized the sale price, which effectively reduced total proceeds by approximately $1.1 million. Regarding the other 74 Wild Oats and Capers banner stores the Company acquired in the Wild Oats Markets transaction, the Company has closed 17 stores, and currently

Table of Contents

intends to close one additional store and relocate an additional five stores as existing Whole Foods Market sites in development open through fiscal year 2010.

Whole Foods Market and Wild Oats have similar missions and core values, and the Company believes the synergies gained from this business combination will create long term value for our customers, vendors and shareholders as well as exciting opportunities for our new and existing team members by making us better positioned to compete in this rapidly changing food retailing environment. All of our 11 operating regions gained stores in the acquisition, with three of our smallest regions, the Florida, Rocky Mountain, and Pacific Northwest regions, gaining critical mass. The acquisition provided us with immediate entry into five new states: Arkansas, Indiana, Oklahoma, Tennessee and Utah, and 14 new markets: Bend, OR; Cincinnati, OH; Indianapolis, IN; Lexington, KY; Little Rock, AR; Memphis, TN; Naples, FL; Nashville, TN; Reno, NV; Salt Lake City, UT; Tampa, FL; Tucson, AZ; Tulsa, OK; and Westport, CT.

On July 29, 2008, the United States Court of Appeals for the District of Columbia Circuit reversed the August 16, 2007 decision of the United States District Court for the District of Columbia which had denied the Federal Trade Commission’s (“FTC”) motion for a preliminary injunction against the acquisition of Wild Oats Markets by Whole Foods Market, and remanded the case to the District Court for further proceedings consistent with the appellate decision. On the same day, the Court of Appeals issued an Order directing the Clerk of the Court of Appeals to withhold issuance of the mandate in the case until seven days after disposition of any timely petition for rehearing or petition for rehearing en banc. D.C. Circuit rules provide that any petition for rehearing or petition for rehearing en banc in this case be made within 45 days after entry of judgment, unless an order shortens or extends the time. Further proceedings in the District Court cannot take place until after issuance of this mandate. Whole Foods Market has not yet determined whether to file a petition for rehearing or petition for rehearing en banc.

On August 8, 2008, the FTC issued an Order rescinding the stay of its administrative proceeding against Whole Foods Market, requiring Whole Foods Market and Complaint Counsel to file a joint case management statement by August 14, 2008, and setting a scheduling conference for August 18, 2008. The FTC had previously filed a complaint commencing its administrative proceeding on June 28, 2007. This complaint included a notice of contemplated relief indicating that, should the FTC prevail in its administrative proceeding, it would seek relief against Whole Foods Market, which could include (i) an order directing Whole Foods Market to divest Wild Oats in a manner that restores Wild Oats as a viable independent competitor in specified markets, (ii) a prohibition against any transaction between Whole Foods Market and Wild Oats that combines their operations in specified markets except with prior FTC approval, (iii) a requirement that Whole Foods Market provide prior notice to the FTC of any contemplated acquisition, merger, consolidation or other business combination with a company operating premium and natural organic supermarkets, (iv) the filing by Whole Foods Market of periodic compliance reports with the FTC or (v) any other relief appropriate to remedy the anticompetitive effects of the transaction between Whole Foods Market and Wild Oats. The FTC stayed its administrative proceeding on August 7, 2007 in light of the pendency of the federal court proceedings.

Direct Costs of the Acquisition

Direct costs of the acquisition include investment banking fees, legal and accounting fees and other external costs directly related to the acquisition.

At July 6, 2008, the Company had approximately $13.7 million accrued for legal and professional fees associated with the FTC proceedings.

Purchase Price Allocation

The purchase price of the acquired operations was comprised of (in thousands):

Cash payment to Wild Oats shareholders	$	564,726
Direct costs of the acquisition	51,642
Total purchase price	$	616,368

Table of Contents

The acquisition was accounted for under the purchase method of accounting with Whole Foods Market treated as the acquiring entity in accordance with SFAS No. 141, “Business Combinations.” Accordingly, the consideration paid by Whole Foods Market to complete the acquisition has been allocated to the assets and liabilities acquired based upon their estimated fair values as of the date of the acquisition. The excess of the purchase price over the estimated fair values of assets acquired and liabilities assumed was recorded as goodwill. Goodwill is non-amortizing for financial statement purposes and is not tax deductible.

The following summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date, including purchase price adjustments since the initial purchase price allocation (in thousands):

	Initial					Purchase
	Purchase		Purchase			Price
	Price		Price			Allocation
	Allocation		Adjustments			at July 6, 2008
Current assets	$	52,094	$	(55	)	$	52,039
Property and equipment	77,107		(12,636		)	64,471
Goodwill	558,056		11,209			569,265
Intangible assets	40,607		(7,254		)	33,353
Deferred income taxes	67,793		2,416			70,209
Other assets	339		—			339
Assets held for sale	172,256		(1,141		)	171,115
Total assets acquired	968,252		(7,461		)	960,791
Current liabilities	145,666		483			146,149
Long-term debt	134,126		—			134,126
Other liabilities	82,321		(25,375		)	56,946
Liabilities held for sale	7,202		—			7,202
Total liabilities assumed	369,315		(24,892		)	344,423
Net assets acquired	$	598,937	$	17,431		$	616,368

The purchase price adjustments relate primarily to the completion of evaluations of the physical and market condition of acquired locations as of August 28, 2007 resulting in the Company’s decision to close seven additional Wild Oats store locations, and adjustments to the fair values of certain assets and store closure reserves. The store closure reserves related to Wild Oats locations were reduced by approximately $25.0 million as discussed in Note 5 to the consolidated financial statements, “Reserves for Closed Properties.” Additional adjustments to the purchase price allocation, totaling approximately $4.3 million, include changes in certain tax assets and liabilities primarily related to amounts finalized in connection with tax filings.

Estimated fair values of intangible assets acquired are as follows (in thousands):

			Weighted Average
	Estimated		Useful Lives
	Fair Value		(Years)
Non-amortizing:
Liquor licenses	$	1,165
Amortizing:
Trade and brand names	6,579		1
Favorable operating leases	25,609		18
Total amortizing	32,188		14
Total	$	33,353

Amortizing intangible assets are amortized on a straight-line basis over their remaining expected useful lives of approximately one to 33 years.

In connection with the acquisition, the Company recognized liabilities totaling approximately $8.4 million for estimated costs associated with plans to involuntarily terminate certain team members of Wild Oats, contract termination fees and other legal reserves totaling approximately $11.4 million, and estimated costs to close certain store locations totaling approximately $67.6 million. There have been no adjustments to date to the team member termination liabilities. Estimated contract termination fees and other legal reserves increased approximately $2.3 million during fiscal year 2008. As of July 6, 2008,

Table of Contents

team member termination liabilities and contract termination fee and other legal reserves were approximately $0.1 million and $8.4 million, respectively, as a result of adjustments and payments made during the fiscal year. We expect involuntary team member terminations and contract termination activities to be substantially completed by the end of fiscal year 2008. Store closure reserves are discussed further in Note 5 to the consolidated financial statements, “Reserves for Closed Properties.”

The Company assumed debt totaling approximately $148 million in the acquisition consisting primarily of convertible subordinated debentures and capital lease obligations. The estimated fair value of the debt assumed by the Company was approximately $134 million. Excluding capital lease obligations, all debt assumed as part of the Wild Oats acquisition was fully repaid by the end of the first quarter of fiscal year 2008. Debt is discussed further in Note 6 to the consolidated financial statements, “Long-Term Debt.”

The estimated values of operating leases with unfavorable terms compared with current market conditions totaled approximately $1.2 million. These leases have an estimated weighted average life of approximately 14 years and are included in other liabilities.

Henry’s and Sun Harvest Divestiture

In connection with the acquisition of Wild Oats, the Company separately entered into an agreement to sell certain assets and liabilities, consisting primarily of fixed assets, inventories and operating leases, related to all 35 Henry’s and Sun Harvest stores and a related distribution center in Riverside, CA to a wholly owned subsidiary of Smart & Final, Inc., a Los Angeles-based food retailer for approximately $165 million. This sale was completed effective September 30, 2007. During the first quarter of fiscal year 2008, the Company received proceeds totaling approximately $165 million. As of September 30, 2007 the proceeds receivable are included on the accompanying Consolidated Balance Sheets under the caption “Proceeds receivable for divestiture.” As part of purchase accounting for the Wild Oats acquisition, the Henry’s and Sun Harvest net assets were adjusted to fair value and therefore no gain or loss was recognized related to this divestiture. During fiscal year 2008, the Company finalized the sale price, which effectively reduced total proceeds by approximately $1.1 million.

Transition Services Agreement

In connection with the sale of the Henry’s and Sun Harvest stores, Whole Foods Market entered into a transition services agreement (“TSA”) with Smart & Final under which Whole Foods Market has and will continue to provide certain general and administrative services for the 35 stores for up to two years. The TSA provides for payments to the Company calculated for each service area as a certain percentage of total monthly sales of the Henry’s and Sun Harvest locations, initially totaling 1.75% of total monthly sales for all services provided under the agreement. The Company anticipates that the revenue associated with the agreement will be approximately equal to its incremental cost of providing the support. During the forty weeks ended July 6, 2008, the Company earned approximately $3.4 million in TSA fees which are included on the accompanying Consolidated Statements of Operations under the caption “General and administrative expenses.” At the end of the third quarter of fiscal year 2008, all services related to the support agreement were substantially complete, except the licensure of the Wild Oats private label brand which will end no later than September 29, 2009.

Unaudited Pro Forma Financial Information

The following pro forma financial information presents the combined historical results of the operations of Whole Foods Market and Wild Oats as if the Wild Oats acquisition and the sale of the Henry’s and Sun Harvest stores had occurred at the beginning of fiscal year 2007. Certain adjustments have been made to reflect changes in depreciation, amortization and income taxes based on the Company’s preliminary estimates of fair values recognized in the application of purchase accounting, and interest expense on borrowings to finance the acquisition. These adjustments are subject to change as the initial estimates are refined over time.

Due to differences in accounting calendars, the third quarter of fiscal year 2007 pro forma results of operations combines the twelve weeks ended July 1, 2007 for Whole Foods Market with the thirteen weeks ended June 30, 2007 for Wild Oats and the year-to-date pro forma results of operations for fiscal year 2007 combines the forty weeks ended July 1, 2007 for Whole Foods Market with the thirteen weeks ended December 30, 2006 and the twenty-six weeks ended June 30, 2007 for Wild Oats.

Table of Contents

Pro forma results of operations are as follows (in thousands):

	Quarter-to-date		Year-to-date
	3rd Qtr 2007		3rd Qtr 2007
Sales	$	1,722,380	$	5,469,059
Net income	39,873		113,152
Earnings per share:
Basic	$	0.28	$	0.81
Diluted	$	0.28	$	0.79
Weighted average shares outstanding:
Basic	140,061		140,411
Diluted	141,250		142,366

This pro forma financial information is not intended to represent or be indicative of what would have occurred if the transactions had taken place on the dates presented and are not indicative of what Whole Foods Market’s actual results of operations would have been had the acquisition and sale been completed on the dates indicated above. Further, the pro forma combined results do not reflect one-time costs to fully merge and operate the combined organization more efficiently, or anticipated synergies expected to result from the combination and should not be relied upon as being indicative of the future results that Whole Foods Market will experience.

(4) Goodwill and Other Intangible Assets

Goodwill and indefinite-lived intangible assets are reviewed for impairment annually on the first day of the fourth fiscal quarter, or more frequently if impairment indicators arise. We allocate goodwill to one reporting unit for goodwill impairment testing. Given the challenging retail environment the Company is experiencing that appears to be negatively impacting our sales, goodwill and indefinite-lived intangible assets were evaluated for impairment during the third quarter of fiscal year 2008. There were no impairments of goodwill or indefinite-lived intangible assets during the forty week period ended July 6, 2008.

Definite-lived intangible assets are amortized over the useful life of the related agreement. We acquired definite-lived intangible assets totaling approximately $0.6 million, consisting primarily of debt origination fees, and approximately $1.5 million, consisting primarily of acquired leasehold rights and debt origination fees, during the twelve and forty week periods ended July 6, 2008, respectively. During the twelve and forty week periods ended July 1, 2007, we acquired definite-lived intangibles, consisting primarily of acquired leasehold rights, totaling approximately $4.7 million and $22.3 million, respectively. Amortization associated with intangible assets totaled approximately $3.0 million and $10.0 million for the twelve and forty week periods ended July 6, 2008, respectively, and approximately $0.4 million and $1.3 million, respectively, for the same periods of the prior fiscal year. The components of intangible assets were as follows (in thousands):

	July 6, 2008					September 30, 2007
	Gross carrying		Accumulated			Gross carrying		Accumulated
	amount		amortization			amount		amortization
Indefinite-lived contract-based	$	1,966	$	—		$	1,943	$	—
Definite-lived contract-based	95,524		(16,717		)	103,661		(14,650		)
Definite-lived marketing-related and other	8,319		(6,795		)	8,519		(1,790		)
	$	105,809	$	(23,512	)	$	114,123	$	(16,440	)

Amortization associated with the net carrying amount of intangible assets at July 6, 2008 is estimated to be $2.9 million for the remainder of fiscal year 2008, $6.4 million in fiscal year 2009, $6.3 million in fiscal year 2010, $6.2 million in fiscal year 2011, $6.1 million in fiscal year 2012 and $5.0 million in fiscal year 2013.

(5) Reserves for Closed Properties

The Company maintains reserves for retail stores and other properties that are no longer being utilized in current operations. The Company provides for closed property operating lease liabilities using a discount rate to calculate the present value of the remaining noncancelable lease payments and lease termination fees after the closing date, net of estimated subtenant income. The closed property lease liabilities are expected to be paid over the remaining lease terms, which generally range from one to 17 years. The Company estimates subtenant income and future cash flows based on the Company’s experience and knowledge of the market in which the closed property is located, the Company’s previous efforts to dispose of similar assets, existing economic conditions and when necessary utilizes local real estate brokers. Adjustments to closed property reserves primarily

Table of Contents

relate to changes in estimated subtenant income or actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the changes become known.

Following is a summary of store closure reserves during the forty week periods ended July 6, 2008 and July 1, 2007 (in thousands):

	2008			2007
Beginning balance	$	96,967		$	39
Additions	4,460			2,416
Usage	(18,562		)	(286		)
Adjustments	(24,867		)	(7		)
Ending Balance	$	57,998		$	2,162

The beginning balance of fiscal year 2008 includes approximately $92.7 million of store closure reserves for Wild Oats locations that were recorded in connection with the acquisition during the fourth quarter of fiscal year 2007. During the forty week period ended July 6, 2008, the Wild Oats store closure reserves were adjusted by approximately $25.0 million as part of the final purchase price allocation. The purchase price adjustments relate primarily to the completion of evaluations of the physical and market condition of acquired locations as of August 28, 2007, resulting in the Company’s decision to close seven additional Wild Oats store locations and adjustments to the fair values of certain assets and store closure reserves.

(6) Long-Term Debt

During fiscal year 2007, we also replaced our previous revolving credit facility with a new $250 million revolving line of credit that extends to 2012. During the third quarter of fiscal year 2008, the Company exercised the accordion feature available under the revolving credit facility to increase the aggregate commitment to $350 million and amend certain debt covenants contained in the agreement. All outstanding amounts borrowed under this agreement bear interest at our option of the alternative base rate or the LIBOR plus an applicable margin, 1.125% at July 6, 2008, based on the Company’s Moody’s and S&P rating. As of July 6, 2008 and September 30, 2007, the Company had $106 million and $17 million, respectively, drawn under the revolving credit facility. The amount available to the Company under the agreement was effectively reduced to $164.0 million by outstanding letters of credit totaling approximately $80.0 million and amounts drawn at July 6, 2008. At July 6, 2008 and September 30, 2007, we were in compliance with all applicable debt covenants. Subsequent to the end of the third quarter of fiscal year 2008, the Company made additional draws on the line and currently has $136.0 million outstanding and approximately $134.7 million available on its revolving credit facility. Additionally, the LIBOR margin applicable to our revolving credit facility increased to 1.5% due to a downgrade in our corporate credit rating.

During the forty week periods ended July 6, 2008 and July 1, 2007, approximately 250 and 10,000 of the Company’s zero coupon convertible subordinated debentures, respectively, were converted at the option of the holders to approximately 6,000 and 215,000 shares, respectively, of Company common stock. The Company assumed convertible debentures totaling approximately $115.0 million in the Wild Oats acquisition, of which approximately $21.8 million were outstanding at September 30, 2007 and were repaid during the first quarter of fiscal year 2008. The zero coupon convertible subordinated debentures had a carrying amount of approximately $2.7 million and $24.5 million at July 6, 2008 and September 30, 2007, respectively.

(7) Derivative Instruments

During the first quarter of fiscal year 2008, the Company entered into a three-year interest rate swap agreement with a notional amount of $490 million to effectively fix the interest rate on $490 million of the term loan at 4.718%, excluding the applicable margin and associated fees, to help manage exposure to interest rate fluctuations.

The Company had accumulated net derivative losses of approximately $7.7 million, net of taxes, in other comprehensive income as of July 6, 2008, related to this effective cash flow hedge.

Table of Contents

(8) Income Taxes

On October 1, 2007, the Company adopted FIN 48, which clarifies the accounting for uncertainty in income tax positions recognized in the financial statements in accordance with SFAS No. 109. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on measurement, classification, interest and penalties associated with tax positions, and income tax disclosures.

The cumulative effect of applying FIN 48 has been recorded as a decrease of approximately $1.3 million to the Company’s fiscal 2008 opening retained earnings. The Company also recorded an increase of approximately $7.2 million to income tax assets, and increase to income taxes payable of approximately $8.4 million. As of the date of adoption the Company’s gross unrecognized tax benefits totaled approximately $20.6 million of which approximately $15.8 million, if recognized, would affect the effective tax rate.

The Company and its subsidiaries are subject to income tax in the U.S. federal jurisdiction, multiple state and local jurisdictions, Canada and the United Kingdom. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for fiscal years prior to 2003.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits within its global operations as a component of income tax expense. The total amount of interest and penalties accrued as of October 1, 2007 is approximately $3.6 million, which is included as a component of the $20.6 million gross unrecognized tax benefit noted above. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

We are currently under audit by various tax authorities. During the third quarter of fiscal year 2008, we finalized certain state income tax examinations which resulted in a reduction of $1.1 million to the Company’s unrecognized tax benefits. However, with regard to the remaining open examinations, and the protocol of finalizing audits by the relevant tax authorities, which could include formal legal proceedings, it is not possible to estimate the impact of such changes, if any, to previously recorded uncertain tax positions.

(9) Shareholders’ Equity

Dividends

Following is a summary of dividends declared during the forty weeks ended July 6, 2008 and fiscal year 2007 (in thousands, except per share amounts):

Date of	Dividend		Date of	Date of	Total
Declaration	per Share		Record	Payment	Amount
Fiscal year 2008:
November 20, 2007	$	0.20	January 11, 2008	January 22, 2008	$	27,901
March 10, 2008	0.20		April 11, 2008	April 22, 2008	28,041
June 11, 2008	0.20		July 11, 2008	July 22, 2008	28,057		(1)

Fiscal year 2007:
September 27, 2006	$	0.15	October 13, 2006	October 23, 2006	$	20,971
November 2, 2006	0.18		January 12, 2007	January 22, 2007	25,303
March 5, 2007	0.18		April 13, 2007	April 24, 2007	25,448
June 5, 2007	0.18		July 13, 2007	July 24, 2007	25,019
September 20, 2007	0.18		October 12, 2007	October 23, 2007	25,071

(1) Dividend accrued at July 6, 2008

Subsequent to the end of the third quarter of fiscal year 2008, the Company’s Board of Directors suspended it quarterly cash dividend for the foreseeable future.

Treasury Stock

Table of Contents

common stock. The average price per share paid for shares held in treasury at September 30, 2007 was $43.98, for a total of approximately $200 million. During the first quarter of fiscal year 2008, the Company retired all shares held in treasury. The specific timing and repurchase of future amounts will vary based on market conditions, securities law limitations and other factors and will be made using the Company’s available resources. The repurchase program may be suspended or discontinued at any time without prior notice.

(10) Comprehensive Income

Our comprehensive income was comprised of net income, unrealized losses on marketable securities, unrealized losses on cash flow hedge instruments, and foreign currency translation adjustments, net of income taxes. Comprehensive income, net of related tax effects, was as follows (in thousands):

	Twelve weeks ended				Forty weeks ended
	July 6,		July 1,		July 6,			July 1,
	2008		2007		2008			2007
Net income	$	33,919	$	49,067	$	113,022		$	148,811
Foreign currency translation adjustment, net	352		4,989		(3,619		)	4,345
Unrealized gain (loss) on investments, net	—		9		—			(77		)
Unrealized gain (loss) on cash flow hedge instruments, net	7,031		—		(7,743		)	—
Comprehensive income	$	41,302	$	54,065	$	101,660		$	153,079

At July 6, 2008, accumulated other comprehensive income consisted of foreign currency translation adjustment gains of approximately $12.1 million and unrealized losses on cash flow hedge instruments of approximately $7.7 million, net of related income tax effect of approximately $4.9 million.

(11) Earnings per Share

The computation of basic earnings per share is based on the number of weighted average common shares outstanding during the period. The computation of diluted earnings per share includes the dilutive effect of common stock equivalents consisting of common shares deemed outstanding from the assumed exercise of stock options and the assumed conversion of zero coupon convertible subordinated debentures.

A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations follows (in thousands, except per share amounts):

	Twelve weeks ended				Forty weeks ended
	July 6,		July 1,		July 6,		July 1,
	2008		2007		2008		2007
Net income (numerator for basic earnings per share)	$	33,919	$	49,067	$	113,022	$	148,811
Interest on 5% zero coupon convertible subordinated debentures, net of income taxes	18		19		61		77
Adjusted net income (numerator for diluted earnings per share)	$	33,937	$	49,086	$	113,083	$	148,888
Weighted average common shares outstanding (denominator for basic earnings per share)	140,231		140,061		139,766		140,411
Potential common shares outstanding:
Assumed conversion of 5% zero coupon convertible subordinated debentures	91		97		92		122
Assumed exercise of stock options	—		1,092		450		1,833
Weighted average common shares outstanding and potential additional common shares outstanding (denominator for diluted earnings per share)	140,322		141,250		140,308		142,366

Basic earnings per share	$	0.24	$	0.35	$	0.81	$	1.06

Diluted earnings per share	$	0.24	$	0.35	$	0.81	$	1.05

The computations of diluted earnings per share for twelve and forty week periods ended July 6, 2008 does not include options to purchase approximately 13.6 million shares and 12.2 million shares of common stock, respectively, due to their antidilutive

Table of Contents

effect and approximately 10.5 million shares and 10.7 million shares, respectively, for the same periods of the prior fiscal year.

(12) Share-Based Payments

Our Company maintains several stock based incentive plans. We grant options to purchase common stock under our Whole Foods Market 2007 Stock Incentive Plan. Under this plan, options are granted at an option price equal to the market value of the stock at the grant date and are generally exercisable ratably over a four-year period beginning one year from grant date and have a five-year term. The market value of the stock is determined as the closing stock price at the grant date. On July 6, 2008 and September 30, 2007 there were approximately 4.2 million and 5.5 million shares, respectively, of our common stock available for future stock option grants.

As of July 6, 2008 there was approximately $32.3 million of unrecognized share-based payments expense related to nonvested stock options, net of estimated forfeitures, related to approximately 3.6 million shares. We anticipate this expense to be recognized over a weighted average period of 2.05 years. To the extent the forfeiture rate is different than what we have anticipated, share-based payments expense related to these awards will differ from our expectations.

Share-based payments expense recognized during the twelve and forty weeks ended July 6, 2008 totaled approximately $2.2 million and $7.6 million, respectively, and consisted entirely of stock option expense. Share-based payments expense recognized during the twelve and forty weeks ended July 1, 2007 totaled approximately $4.2 million and $10.7 million, respectively. During the forty weeks ended July 1, 2007, share-based payments expense consisted of stock option expense of approximately $10.4 million and team member stock purchase plan discounts of $0.3 million. Included in total share-based payments expense for the twelve and forty weeks ended July 1, 2007 is $2.0 million and $4.4 million, respectively, related to the acceleration of stock options in September 2005.

Share-based payments expense was included in the following line items on the Consolidated Statements of Operations for the periods indicated (in thousands):

	Twelve weeks ended				Forty weeks ended
	July 6,		July 1,		July 6,		July 1,
	2008		2007		2008		2007
Cost of goods sold and occupancy costs	$	49	$	209	$	148	$	424
Direct store expenses	982		2,339		3,899		5,790
General and administrative expenses	1,216		1,620		3,552		4,473
Share-based payments expense before income taxes	2,247		4,168		7,599		10,687
Income tax benefit	735		1,245		2,871		3,168
Net share-based payments expense	$	1,512	$	2,923	$	4,728	$	7,519

On May 23, 2008, the Company issued its annual grant of options to team members and directors. The Company also issued 4,500 stock options to the Whole Planet Foundation. Share-based payments expense of approximately $35,000 was recognized during the twelve and forty weeks ended July 6, 2008 for the grant to the Whole Planet Foundation which was included in the line item “General and administrative expenses” in the table above. The following table summarizes option activity during the first three quarters of fiscal year 2008:

					Weighted
	Number		Weighted		Average	Aggregate
	of Options		Average		Remaining	Intrinsic
	Outstanding		Exercise Price		Contractual Life	Value
	(in thousands)				(in years)	(in thousands)
Outstanding options at September 30, 2007	17,211		$	49.80
Options granted	2,239		27.63
Options exercised	(973	)	15.73
Options forfeited	(128	)	47.21
Options expired	(695	)	55.71
Outstanding options at July 6, 2008	17,654		$	48.65	3.58	$	53
Options vested and expected to vest	17,143		$	49.06	3.55	$	53
Exercisable options at July 6, 2008	13,566		$	51.90	3.37	$	53

Table of Contents

The weighted average fair value of options granted during fiscal year 2008 was $6.44. The aggregate intrinsic value of stock options at exercise, represented in the table above, was $20.9 million for the forty week period ended July 6, 2008.

The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	2008		2007
Expected dividend yield	2.90	%	1.80	%
Risk-free interest rate	2.32	%	4.75	%
Expected volatility	36.73	%	31.22	%
Expected life, in years	3.38		3.29

Risk-free interest rate is based on the US Treasury yield curve on the date of the grant for the time period equal to the expected term. Expected volatility is calculated using a ratio of implied volatility based on comparable Long-Term Equity Anticipation Securities (“LEAPS”) and four-year historical volatilities. The Company determined the use of both implied volatility and historical volatility represents a more consistent and accurate calculation of option fair value. Expected life is calculated in two tranches based on weighted average percentage of unexpired options and exercise-after-vesting information over the last four years. Unvested options are included in the term calculation using the “mid-point scenario” which assumes that unvested options will be exercised halfway between vest and expiration date. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and experience.

In addition to the above valuation assumptions, SFAS No. 123R “Share-Based Payment” requires the Company to estimate an annual forfeiture rate for unvested options and true up fair value expense accordingly. The Company monitors actual forfeiture experience and adjusts the rate from time to time as necessary.

(13) Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” as amended. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and requires additional disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements that are already required or permitted by other accounting standards, except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value and does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is amended by Financial Statement Position (“FSP”) No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13,” which excludes from the scope of this provision arrangements accounted for under SFAS No. 13, “Accounting for Leases.” The provisions of SFAS No. 157, as amended by FSP No. 157-2 are effective for the specified fair value measures for financial statements issued for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for items within scope. SFAS No. 157 is effective for the Company’s first quarter of fiscal year ending September 27, 2009. We are currently evaluating the impact, if any, that the adoption of SFAS No. 157 will have on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 applies to all entities that elect the fair value option. However, the amendment to SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” applies to all entities with available-for-sale and trading securities. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. SFAS No. 159 is effective for the Company’s fiscal year ending September 27, 2009. We are currently evaluating the impact, if any, that the adoption of SFAS No. 159 will have on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which replaces SFAS No. 141, “Business Combinations,” and applies to all transactions or other events in which an entity obtains control of one or more businesses, including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration. SFAS No. 141R establishes principles and requirements for how the acquirer recognizes and measures identifiable assets acquired, liabilities assumed, any noncontrolling interest and goodwill acquired. The Statement also provides for disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The provisions of SFAS No. 141R are effective for fiscal years beginning after December 15, 2008 and are applied prospectively to business combinations completed on or after that date. SFAS No. 141R is effective for the Company’s fiscal year ending September 26, 2010. We will evaluate the impact, if any, that the adoption of SFAS No. 141R could have on our consolidated financial statements.

Table of Contents

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS No. 160 establishes accounting and reporting standards for noncontrolling interests (“minority interests”) in subsidiaries. Additionally, SFAS No. 160 amends certain consolidation procedures contained in Accounting Reporting Bulletin No. 51 “Consolidated Financial Statements” to make them consistent with the requirements of SFAS No. 141 “Business Combinations,” as revised. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary should be accounted for as a component of equity separate from the parent’s equity. The provisions of SFAS No. 160 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008 and are applied prospectively, except for presentation and disclosure requirements, which will apply retrospectively. SFAS No. 160 is effective for the Company’s first quarter of fiscal year ending September 26, 2010. We are currently evaluating the impact, if any, that the adoption of SFAS No. 160 will have on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” by establishing, among other things, the disclosure requirements for derivative instruments and hedging activities. This Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The provisions of SFAS No. 161 are effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 is effective for the Company’s second quarter of fiscal year ending September 27, 2009. We are currently evaluating the impact, if any, that the adoption of SFAS No. 161 will have on our consolidated financial statements.

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” The intent of the position is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R, and other U.S. generally accepted accounting principles. The provisions of FSP No. FAS 142-3 are effective for fiscal years beginning after December 15, 2008. FSP No. FAS 142-3 is effective for the Company’s fiscal year ending September 26, 2010. We will evaluate the impact, if any, that the adoption of FSP No. FAS 142-3 could have on our consolidated financial statements.

In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Deb Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” FSP No. APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” and specifies that such users should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The provisions of FSP No. APB 14-1 are effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. FSP No. APB 14-1 is effective for the Company’s first quarter of fiscal year ending September 26, 2010. We are currently evaluating the impact, if any, that the adoption of FSP No. APB 14-1 will have on our consolidated financial statements.

(14) Commitments and Contingencies

From time to time we are a party to legal proceedings including matters involving personnel and employment issues, personal injury, intellectual property and other proceedings arising in the ordinary course of business which have not resulted in any material losses to date. Although management does not expect that the outcome in these proceedings will have a material adverse effect on our financial condition or results of operations, litigation is inherently unpredictable. Therefore, we could incur judgments or enter into settlements of claims that could materially impact our results.

The Company has been contacted by the staff of the Securities and Exchange Commission advising the Company that it has concluded its inquiry related to online financial message board postings related to Whole Foods Market and Wild Oats Markets and that no enforcement action has been recommended against the Company or any individual.

Table of Contents

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

General

Whole Foods Market, Inc. and its consolidated subsidiaries own and operate the largest chain of natural and organic foods supermarkets. Our Company mission is to promote vitality and well-being for all individuals by supplying the highest quality, most wholesome foods available. Through our growth, we have had a large and positive impact on the natural and organic foods movement throughout the United States, helping lead the industry to nationwide acceptance. We opened our first store in Texas in 1980 and, as of July 6, 2008, we operated 271 stores organized into 11 geographic operating regions: 259 stores in 37 U.S. states and the District of Columbia; six stores in Canada; and six stores in the United Kingdom. We operate in one reportable segment, natural and organic foods supermarkets.

Effective August 28, 2007, the Company completed the acquisition of Wild Oats Markets, Inc. (“Wild Oats”), a leading natural and organic foods retailer in North America, in a cash tender offer of $18.50 per share, or approximately $565 million plus the assumption of approximately $148 million in existing debt. At the date of acquisition, Wild Oats had 109 stores in 23 states and British Columbia, Canada operating under four banners: Wild Oats Marketplace nationwide, Henry’s Farmers Market (“Henry’s”) in Southern California, Sun Harvest in Texas, and Capers Community Market in British Columbia. In connection with the acquisition of Wild Oats, the Company separately entered into an agreement to sell certain assets and liabilities, consisting primarily of fixed assets, inventories and operating leases, related to all 35 Henry’s and Sun Harvest stores and a related distribution center. This sale was completed effective September 30, 2007 and the Company received net proceeds totaling approximately $164 million in fiscal year 2008. As of July 6, 2008, the Company has permanently closed 17 Wild Oats stores. The Company currently has 57 continuing Wild Oats stores. The Company is making investments to raise the Wild Oats stores up to our high standards, including investments in repairs and maintenance of the stores, lower prices, an expanded perishables offering and increased labor. Wild Oats results of operations are included in our Consolidated Statements of Operations for the forty weeks ended July 6, 2008 and are not included in our Consolidated Statements of Operations for the forty weeks ended July 1, 2007.

Our results of operations have been and may continue to be materially affected by the timing and number of new store openings. Stores typically open within 12 to 24 months after entering the store development pipeline. New stores generally become profitable during their first year of operation, although some new stores may incur operating losses for the first several years of operation.

The Company reports its results of operations on a fifty-two or fifty-three week fiscal year ending on the last Sunday in September. The first fiscal quarter is sixteen weeks, the second and third quarters each are twelve weeks, and the fourth quarter is twelve or thirteen weeks. Fiscal year 2008 is a fifty-two week year and fiscal year 2007 was a fifty-three week year.

Overview

Whole Foods Market is experiencing a challenging retail environment caused by a number of ongoing factors including the general economic environment in the United States. Consumer confidence measures in June 2008 hit their lowest levels in more than a decade. We believe American consumers are spending less as they are faced with more expensive fuel and food costs, lower home values and less available credit. Our growth in comparable stores and identical store sales was 2.6 percent and 1.9 percent, respectively, in the third quarter of fiscal year 2008. Our comparable store sales increase for the third quarter was almost entirely driven by increased average basket size with only a slight increase year over year in our transaction count. We believe that the economic hardships consumers are facing are impacting their behavior in various ways, from making fewer trips to making more conscious value decisions.

The Company’s business model has been highly successful, and we remain very confident in our growth prospects as the market for natural and organic products continues to grow and as our Company continues to evolve. However, the challenging current economic environment appears to be negatively impacting our sales. Current economic factors, combined with our commitment to maintaining financial flexibility and investing prudently in our long-term growth, have led the Company to take a more conservative approach to our growth and business strategy over the short term. The Company recently announced a conservative growth and fiscal strategy over the short term including the following key components:

· Reducing the number of stores expected to open in fiscal year 2009 to approximately 15 and reducing all discretionary capital expenditure budgets not related to new stores by 50%. The Company is committed to actively managing its capital expenditures and does not intend to access the capital markets for additional funding in the foreseeable future;

Table of Contents

· Implementing certain cost containment measures for the remainder of fiscal year 2008 and reducing expected general and administrative expenses to approximately 3.2% of sales in fiscal year 2009; and

· Suspending the Company’s quarterly cash dividend for the foreseeable future.

On August 12, 2008, the FTC issued an Order extending the time for submission of the joint case management statement to August 28, 2008 and rescheduling the proposed scheduling conference for September 8, 2008. Whole Foods Market cannot at this time predict the likely outcome of these judicial and administrative proceedings or assess the financial implications of any judgment or order that may arise from them. The Company has not accrued any loss related to the outcome of these proceedings as of July 6, 2008.

Executive Summary

Sales for the third quarter of fiscal year 2008 increased approximately 21.6% to approximately $1.8 billion over approximately $1.5 billion for the same period of the prior fiscal year. Comparable store sales growth was 2.6%. Sales in identical stores increased approximately 1.9% for the twelve weeks ended July 6, 2008 over the same period of the prior fiscal year. Identical store sales exclude two relocated stores and two major store expansions from the comparable calculation to reduce the impact of square footage growth on the comparison.

General and administrative expenses as a percentage of sales increased to 3.3% in the third quarter of fiscal year 2008 over 3.2% for the same period of the prior fiscal year. This increase was largely due to the costs of integrating and supporting the Wild Oats stores, as well as front-loaded general and administrative expenditures to support future growth.

Net income for the third quarter totaled approximately $33.9 million and diluted earnings per share was $0.24.

Our capital expenditures for the quarter totaled approximately $124.9 million, of which approximately $109.9 million was for new store development and approximately $15.0 million was for remodels and other additions. During the third quarter, we opened four new stores in Hillsboro, OR; Orlando, FL; St. Louis, MO and Reno, NV and re-opened a remodeled Wild Oats store in Medford, MA. We closed five Wild Oats stores during the third quarter, including two in connection with the opening of new Whole Foods Market stores. We ended the quarter with 271 stores totaling approximately 9.6 million square feet. Subsequent to the end of the quarter, the Company opened two new stores in New York City, NY and Naperville, IL and relocated one store in Rochester Hills, MI.

Table of Contents

At the end of the third quarter of fiscal year 2008, the Company had total debt of approximately $840.5 million, including $106 million in borrowings on the Company’s revolving line of credit.

On June 11, 2008, the Company’s Board of Directors approved a quarterly dividend of $0.20 per share, totaling approximately $28.1 million that was paid subsequent to the end of the third quarter on July 22, 2008 to shareholders of record on July 11, 2008.

Effective August 28, 2007, the Company completed the acquisition of Wild Oats, a leading natural and organic foods retailer in North America. Sales at the Wild Oats stores in operation during the third quarter were $168.3 million, or 9.1% of total sales, and comparable store sales increased 5.4%. The Company closed five Wild Oats stores during the quarter, two of which were in connection with the opening of new Whole Foods Market stores, and re-opened one Wild Oats store that had been closed for a major renovation. Sales for the 57 continuing stores were $164.2 million in the third quarter, and comparable store sales growth was 5.4%. In the 38 stores we have rebranded thus far, sales growth has increased from 6% before rebranding to 12% after.

Results of Operations

The following table sets forth the Company’s statements of operations data expressed as a percentage of sales:

	Twelve weeks ended				Forty weeks ended
	July 6,		July 1,		July 6,		July 1,
	2008		2007		2008		2007
Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold and occupancy costs	65.6		64.5		65.8		65.1
Gross profit	34.4		35.5		34.2		34.9
Direct store expenses	26.6		26.1		26.5		25.9
General and administrative expenses	3.3		3.2		3.5		3.1
Pre-opening and relocation costs	1.0		1.0		0.8		1.0
Operating income	3.5		5.3		3.5		4.9
Interest expense	(0.4	)	—		(0.5	)	—
Investment and other income	0.1		0.1		0.1		0.2
Income before income taxes	3.1		5.4		3.1		5.1
Provision for income taxes	1.3		2.2		1.3		2.0
Net income	1.8	%	3.2	%	1.8	%	3.1	%

Figures may not add due to rounding.

Sales increased approximately 21.6% and 27.2% for the twelve and forty weeks ended July 6, 2008, respectively, over the same periods of the prior fiscal year. Comparable store sales increased approximately 2.6% and 6.4% for the twelve and forty weeks ended July 6, 2008, respectively. Perishable product sales accounted for approximately 67% of our total retail sales during the third quarter of fiscal year 2008. Acquired stores will enter the comparable store sales base in the fifty-third full week following the date of the merger. As of July 6, 2008, there were 195 locations in the comparable store base. Identical store sales for the twelve weeks ended July 6, 2008, which exclude two relocated stores and two major expansions, increased approximately 1.9%. Identical store sales for the forty weeks ended July 6, 2008, which exclude five relocated stores and three major expansions, increased approximately 4.9%. The sales increase contributed by stores open less than fifty-two weeks totaled approximately $139.4 million and $549.8 million for the twelve and forty weeks ended July 6, 2008. Sales at Wild Oats stores totaled approximately $168.3 million and $582.5 million for the twelve and forty weeks ended July 6, 2008. For the first four weeks of the fourth quarter of fiscal year 2008, comparable store sales increased 1.5% and identical store sales increased 0.9%. Comparable sales at the 57 continuing Wild Oats stores increased 7.2% over the same period. If the Company’s comparable store sales growth for the fourth quarter is in line with or slightly below these results, comparable store sales growth for fiscal year 2008 would be approximately 5%. Total sales growth, on a 52-week to 52-week basis, would be approximately 12% for the fourth quarter and approximately 23% for fiscal year 2008. Sales in the fourth quarter of fiscal year 2007 included five weeks of the continuing Wild Oats stores, all subsequently closed Wild Oats stores, and divested Henry’s and Sun Harvest stores.

Gross profit consists of sales less cost of goods sold and occupancy costs plus contribution from non-retail distribution and food preparation operations. The Company’s gross profit as a percentage of sales for the twelve and forty weeks ended July 6, 2008 was approximately 34.4% and 34.2%, respectively, compared to approximately 35.5% and 34.9%, respectively for the same periods of the prior fiscal year. Factors contributing to these decreases in gross profit for the twelve and forty weeks ended July 6, 2008 compared to the same periods of the prior fiscal year include some delays in passing on higher commodity

Table of Contents

costs to consumers, higher utility costs and increased promotional activity year over year. We are continuing to make selective price investments. We believe that strengthening our price image on commodity-type branded products to broaden our appeal is not only the right long-term strategy, but the right short-term strategy particularly in today’s market. We are fortunate that we continue to find many opportunities to lower our cost of goods sold to help offset these price investments and minimize the gross margin impact. Additionally, our gross profit may increase or decrease slightly depending on the mix of sales from new stores, seasonality, the impact of weather or a host of other factors, including inflation. Due to seasonality, the Company’s gross profit margin is typically lower in the first quarter than the remaining three quarters of the fiscal year. Gross profit margins tend to be lower for new stores and increase as stores mature, reflecting lower shrink as volumes increase, as well as increasing experience levels and operational efficiencies of the store teams.

Direct store expenses as a percentage of sales were approximately 26.6% and 26.5% for the twelve and forty weeks ended July 6, 2008, respectively, compared to approximately 26.1% and 25.9%, respectively, for the same periods of the prior fiscal year. Factors contributing to these increases in direct store expenses for the twelve and forty weeks ended July 6, 2008 compared to the same periods of the prior fiscal year include relatively higher percentages of sales from new and acquired stores, which have a lower contribution than existing stores, investments in labor and benefits at the acquired stores and increases in health care costs as a percentage of sales. Direct store expenses as a percentage of sales tend to be higher for new and acquired stores and decrease as stores mature, reflecting increasing operational productivity of the store teams.

General and administrative expenses as a percentage of sales were approximately 3.3% and 3.5% for the twelve and forty weeks ended July 6, 2008, respectively, compared to approximately 3.2% and 3.1%, respectively, for the same periods of the prior fiscal year. This year-over-year increase is due mainly to the costs of integrating and supporting the Wild Oats stores, including an increase in headcount in the global and regional offices related primarily to the cost of fully staffing the Company’s three smallest regions which gained the greatest number of stores in the merger as a percentage of their existing store base; and an increase in legal and professional fees as a percentage of sales. In connection with the Company’s recently announced conservative growth and fiscal strategy over the short term, the Company has implemented certain cost containment measures for the remainder of fiscal year 2008 and reducing expected general and administrative expenses to approximately 3.2% of sales in fiscal year 2009.

Pre-opening costs include rent expense incurred during construction of new stores and other costs related to new store openings, which include costs associated with hiring and training personnel, supplies and other miscellaneous costs. Rent expense is generally incurred for six to 12 months prior to a store’s opening date. Other pre-opening costs are incurred primarily in the 30 days prior to a new store opening. Relocation costs consist of moving costs, remaining lease payments, accelerated depreciation costs and other costs associated with replaced stores or facilities. Store closure costs, including interest accretion related to store closing reserves of approximately $1.0 million and $4.2 million for the twelve and forty weeks ended July 6, 2008, respectively, are also included in relocation costs. Pre-opening and relocation costs as a percentage of sales were approximately 1.0% and 0.8% for the twelve and forty weeks ended July 6, 2008, respectively, compared to approximately 1.0% for each of the same periods of the prior fiscal year. The numbers of stores opened and relocated were as follows:

	Twelve weeks ended		Forty weeks ended
	July 6,	July 1,	July 6,	July 1,
	2008	2007	2008	2007
New stores	4	2	12	10
Relocated stores	—	1	—	3

Interest expense for the twelve and forty weeks ended July 6, 2008 increased approximately $8.1 million and $28.1 million, respectively, over the same periods of the prior fiscal year due primarily to interest expense related to the $700 million term loan to finance the acquisition of Wild Oats Markets and increased borrowings on the Company’s revolving line of credit. Investment and other income for the twelve and forty weeks ended July 6, 2008 totaled approximately $1.5 million and $5.4 million, respectively, compared to approximately $2.2 million and $8.8 million, respectively, for the same periods of the prior fiscal year.

Share-based payments expense recognized during the twelve and forty weeks ended July 6, 2008 totaled approximately $2.2 million and $7.6 million, respectively compared to approximately $4.2 million and $10.7 million respectively, for the same periods of the prior fiscal year. Included in total share-based payments expense during the forty weeks ended July 1, 2007 is a $4.4 million charge related to the acceleration of stock options in September 2005 to adjust for actual experience.

Table of Contents

Share-based payments expense was included in the following line items on the Consolidated Statements of Operations for the periods indicated (in thousands):

	Twelve weeks ended				Forty weeks ended
	July 6,		July 1,		July 6,		July 1,
	2008		2007		2008		2007
Cost of goods sold and occupancy costs	$	49	$	209	$	148	$	424
Direct store expenses	982		2,339		3,899		5,790
General and administrative expenses	1,216		1,620		3,552		4,473
Share-based payments expense before income taxes	2,247		4,168		7,599		10,687
Income tax benefit	735		1,245		2,871		3,168
Net share-based payments expense	$	1,512	$	2,923	$	4,728	$	7,519

The Company expects share-based payments expense of approximately $3 million to $4 million in the fourth quarter of fiscal year 2008.

The Company intends to keep its broad-based stock option program in place, but also intends to limit the number of shares granted in any one year so that annual earnings per share dilution from share-based payments expense will not exceed 10%. The Company believes this strategy is best aligned with its stakeholder philosophy because it limits future earnings per share dilution from options and at the same time retains the broad-based stock option plan, which the Company believes is important to team member morale, its unique corporate culture and its success.

Liquidity and Capital Resources and Changes in Financial Condition

We generated cash flows from operating activities totaling approximately $267.2 million during the forty weeks ended July 6, 2008 compared to approximately $302.0 million during the same period of the prior fiscal year. Cash flows from operating activities resulted primarily from our net income plus non-cash expenses and changes in operating working capital. During the forty weeks ended July 6, 2008, cash flows from operating activities were driven by a decline net income, offset by higher non-cash expenses and changes in operating working capital.

Net cash used in investing activities was approximately $251.7 million for the forty weeks ended July 6, 2008 compared to approximately $181.1 million for the same period of the prior fiscal year. During the forty weeks ended July 6, 2008 the Company received net proceeds totaling approximately $163.9 million from the sale of certain assets and liabilities related to the 35 Henry’s and Sun Harvest stores and a related distribution center in Riverside, CA acquired in the purchase of Wild Oats. Our principal historical capital requirements have been the funding of the development or acquisition of new stores and acquisition of property and equipment for existing stores. The required cash investment for new stores varies depending on the size of the new store, geographic location, degree of work performed by the landlord and complexity of site development issues. Capital expenditures for the forty weeks ended July 6, 2008 totaled approximately $392.2 million, of which approximately $282.5 million was for new store development and approximately $109.7 million was for remodels and other additions. Capital expenditures for the forty weeks ended July 1, 2007 totaled approximately $382.9 million, of which approximately $272.9 million was for new store development and approximately $110.0 million was for remodels and other additions. The Company expects capital expenditures in the range of $160 million to $165 million in the fourth quarter of fiscal year 2008, resulting in a range of $552 million to $557 million for the full fiscal year, below the Company’s prior full-year estimated range of $575 million to $625 million due primarily to certain measures implemented in the third quarter to reduce discretionary capital expenditures not related to new stores. In connection with the Company’s recently announced conservative growth and fiscal strategy over the short term, the Company is reducing the number of stores expected to open in fiscal year 2009 to approximately 15 and reducing all discretionary capital expenditure budgets not related to new stores by 50%. The Company is committed to actively managing its capital expenditures and does not intend to access the capital markets for additional funding in the foreseeable future.

Table of Contents

The following table provides additional information about the Company’s store openings in fiscal year 2007 and fiscal year-to-date through August 5, 2008, leases currently tendered but not opened, and total leases signed for stores scheduled to open through fiscal year 2012:

	Stores		Stores		Leases		Total Leases
	Opened		Opened		Tendered		Signed
	During		Through		as of		as of
	Fiscal Year		August 5,		August 5,		August 5,
	2007		2008		2008		2008(1)
Number of stores (including relocations)	21		14		20		80
Number of relocations	5		—		5		18
Number of lease acquisitions, ground leases, and acquired properties	4		4		7		10
New markets	3		—		4		14
Average store size (gross square feet)	56,500		54,400		47,600		51,000
As a percentage of existing store average size	167	%	153	%	134	%	143	%
Total square footage	1,185,800		761,500		952,000		4,135,000
As a percentage of existing square footage	13	%	8	%	10	%	43	%
Average tender period, in months	8.8		10.0
Average pre-opening expense per store (incl. rent)	$2.6 million	(2)
Average pre-opening rent per store	$0.9 million	(2)
Average development cost (excl. pre-opening)	$15.1 million	(2)
Average development cost per square foot	$278	(2)

(1) Includes leases tendered

(2) Pre-opening and development costs exclude Kensington in London, England.

The Company expects total pre-opening and relocation costs for the fourth quarter of fiscal year 2008 to be in the range of $20 million to $22 million.

Net cash provided by financing activities was approximately $9.4 million for the forty weeks ended July 6, 2008 compared to net cash used in financing activities totaling approximately $112.4 million for the same period of the prior fiscal year. Proceeds from long-term borrowings during the forty weeks ended July 6, 2008 totaled $174.0 million. Payments on long-term debt and capital lease obligations totaled approximately $107.1 million for the forty weeks ended July 6, 2008. Repurchases of Company common stock into treasury totaled approximately $100.0 million for the forty weeks ended July 1, 2007. Net proceeds to the Company from the exercise of team members’ stock options for the forty weeks ended July 6, 2008 totaled approximately $18.0 million compared to approximately $47.7 million for the same period of the prior fiscal year.

During fiscal year 2007, the Company entered into a $700 million, five-year term loan agreement to finance the acquisition of Wild Oats Markets. The loan bears interest at our option of the alternative base rate or the LIBOR rate plus an applicable margin, 1% as of July 6, 2008, based on the Company’s Moody’s and S&P corporate credit rating. Subsequent to the end of the third quarter of fiscal year 2008, the LIBOR margin applicable to our term loan increased to 1.375% due to a downgrade in our corporate credit rating. Our term loan does not give rise to significant fair value risk because it is a variable interest rate loan with revolving maturities which reflect market changes to interest rates. During the first quarter of fiscal year 2008, the Company entered into a three-year interest rate swap agreement with a notional amount of $490 million to fix the interest rate at 4.718%, excluding the applicable margin and associated fees, to help manage our exposure to interest rate fluctuations.

During fiscal year 2007, we also replaced our previous revolving credit facility with a new $250 million revolving line of credit that extends to 2012. During the third quarter of fiscal year 2008, the Company exercised the accordion feature available under the revolving credit facility to increase the aggregate commitment to $350 million and amend certain debt covenants contained in the agreement. All outstanding amounts borrowed under this agreement bear interest at our option of the alternative base rate or the LIBOR plus an applicable margin, 1.125% at July 6, 2008, based on the Company’s Moody’s and S&P corporate credit rating. Subsequent to the end of the third quarter of fiscal year 2008, the LIBOR margin applicable to our revolving credit facility increased to 1.5% due to a downgrade in our corporate credit rating. At July 6, 2008 and September 30, 2007, the Company had $106 million and $17 million, respectively, drawn under the revolving credit facility. The amount available to the Company under the agreement was effectively reduced to approximately $164.0 million by outstanding letters of credit totaling approximately $80.0 million and amounts drawn at July 6, 2008. At July 6, 2008 and September 30, 2007, we were in compliance with all applicable debt covenants. Subsequent to the end of the third quarter of

Table of Contents

fiscal year 2008, the Company made additional draws on the line and currently has $136.0 million outstanding and approximately $134.7 million available on its revolving credit facility.

During the forty week periods ended July 6, 2008 and July 1, 2007, approximately 250 and 10,000 of the Company’s zero coupon convertible subordinated debentures, respectively, were converted at the option of the holders to approximately 6,000 and 215,000 shares, respectively, of Company common stock. The zero coupon convertible subordinated debentures had a carrying amount of approximately $2.7 million and $24.5 million at July 6, 2008 and September 30, 2007, respectively. The Company assumed convertible debentures totaling approximately $115.0 million in the Wild Oats acquisition, of which approximately $21.8 million were outstanding at September 30, 2007 and were repaid during the first quarter of fiscal year 2008.

The Company is committed under certain capital leases for rental of certain equipment, buildings and land. These leases expire or become subject to renewal clauses at various dates through 2028.

The Company expects interest expense, net of investment and other income, in the range of $8 million to $9 million in the fourth quarter of fiscal year 2008.

Following is a summary of dividends declared during the forty weeks ended July 6, 2008 and fiscal year 2007 (in thousands, except per share amounts):

Date of	Dividend		Date of	Date of	Total
Declaration	per Share		Record	Payment	Amount
Fiscal year 2008:
November 20, 2007	$	0.20	January 11, 2008	January 22, 2008	$	27,901
March 10, 2008	0.20		April 11, 2008	April 22, 2008	28,041
June 11, 2008	0.20		July 11, 2008	July 22, 2008	28,057		(1)

Fiscal year 2007:
September 27, 2006	$	0.15	October 13, 2006	October 23, 2006	$	20,971
November 2, 2006	0.18		January 12, 2007	January 22, 2007	25,303
March 5, 2007	0.18		April 13, 2007	April 24, 2007	25,448
June 5, 2007	0.18		July 13, 2007	July 24, 2007	25,019
September 20, 2007	0.18		October 12, 2007	October 23, 2007	25,071

(1) Dividend accrued at July 6, 2008

Subsequent to the end of the third quarter of fiscal year 2008, the Company’s Board of Directors suspended the quarterly cash dividend for the foreseeable future.

On July 31, 2008, the Company’s Board of Directors approved a $100 million increase in the Company’s stock repurchase program, bringing the total authorization to $400 million through November 8, 2009 and the current remaining authorization to approximately $200 million. At September 30, 2007, the Company held in treasury approximately 4.5 million shares of common stock. The average price per share paid for shares held in treasury at September 30, 2007 was $43.98, for a total of approximately $200 million. During the first quarter of fiscal year 2008, the Company retired all shares held in treasury. The specific timing and repurchase of future amounts will vary based on market conditions, securities law limitations and other factors and will be made using the Company’s available resources. The repurchase program may be suspended or discontinued at any time without prior notice.

Our principal historical sources of liquidity have been cash generated by operations, available unrestricted cash and cash equivalents, short term investments, and amounts available under our revolving line of credit. There can be no assurance, however, that we will continue to generate cash flows at or above current levels or that our revolving line of credit or other sources of capital will be available to us in the future. We continually evaluate the need to establish other sources of working capital and will seek those considered appropriate based upon the Company’s needs and market conditions. Absent any significant cash acquisition or significant change in market condition, we expect planned expansion and other anticipated working capital, capital expenditure, and debt service requirements for the next twelve months will be funded by these sources.

Table of Contents

Contractual Obligations

The following table shows payments due by period on contractual obligations as of July 6, 2008 (in thousands):

			Less than 1		1-3		3-5		More than 5
	Total		Year		Years		Years		Years
Long term debt obligations	$	808,667	$	—	$	—	$	808,667	$	—
Estimated interest on long term debt obligations	164,415		43,174		79,685		41,556		—
Capital lease obligations (including interest)	41,620		2,087		4,178		4,186		31,169
Operating lease obligations (1)	6,268,637		260,205		645,623		660,603		4,702,206
Total	$	7,283,339	$	305,466	$	729,486	$	1,515,012	$	4,733,375

(1) Amounts exclude taxes, insurance and other related expense

The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”) on October 1, 2007, the first day of fiscal year 2008. The amount of gross unrecognized tax benefits and related interest at July 6, 2008 was approximately $20.6 million. These amounts have been excluded from the contractual obligations table because a reasonably reliable estimate of the period of cash settlement with the respective taxing authorities cannot be determined due to the high degree of uncertainty regarding the timing of future cash outflows associated with these liabilities.

We periodically make other commitments and become subject to other contractual obligations that we believe to be routine in nature and incidental to the operation of the business. Management believes that such routine commitments and contractual obligations do not have a material impact on our business, financial condition or results of operations.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements at July 6, 2008 consist of operating leases disclosed in the above contractual obligations table and outstanding letters of credit discussed in Note 6 to the consolidated financial statements, “Long-Term Debt.” We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on our consolidated financial statements or financial condition.

Critical Accounting Policies

The preparation of our financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. Actual amounts may differ from these estimates. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances.

We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our significant accounting policies are summarized in Item 8. “Financial Statements and Supplementary Data” Note 2 to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the year ended September 30, 2007. We believe that the following accounting policies are the most critical in the preparation of our financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.

Insurance and Self-Insurance Liabilities

The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. While we believe that our assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.

We have not made any material changes in the accounting methodology used to establish our insurance and self-insured liabilities during the past three fiscal years.

We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our insurance and self-insured liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 10% change in our insurance and self-insured

Table of Contents

liabilities at July 6, 2008, would have affected the Wild Oats purchase price allocation by approximately $1.2 million and would have affected net income by approximately $4.5 million for the forty weeks ended July 6, 2008.

Reserves for Closed Properties

Adjustments to closed property reserves primarily relate to changes in estimated subtenant income or actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the changes become known.

We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our closed property reserves. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to adjustments that could be material. A 10% change in our closed property reserves at July 6, 2008, would have affected the Wild Oats purchase price allocation by approximately $5.7 million and would not have a material effect on net income for the forty weeks ended July 6, 2008.

Inventory Valuation

We value our inventories at the lower of cost or market. Cost was determined using the last-in, first-out (“LIFO”) method for approximately 94.2% and 81.7% of inventories at July 6, 2008 and September 30, 2007, respectively. Under the LIFO method, the cost assigned to items sold is based on the cost of the most recent items purchased. As a result, the costs of the first items purchased remain in inventory and are used to value ending inventory. The excess of estimated current costs over LIFO carrying value, or LIFO reserve, was approximately $28.0 million and $20.0 million at July 6, 2008 and September 30, 2007, respectively. Costs for remaining inventories are determined by the first-in, first-out (“FIFO”) method. Cost was determined using the retail method and the item cost method for inventories in fiscal years 2008 and 2007. Under the retail method, the valuation of inventories at cost and the resulting gross margins are determined by counting each item in inventory, then applying a cost-to-retail ratio for various groupings of similar items to the retail value of inventories. Inherent in the retail inventory method calculations are certain management judgments and estimates which could impact the ending inventory valuation at cost as well as the resulting gross margins. The item cost method involves counting each item in inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances) of each item and recording the actual cost of items sold. The item cost method of accounting enables management to more precisely manage inventory and purchasing levels when compared to the retail method of accounting.

Our cost-to-retail ratios contain uncertainties because the calculation requires management to make assumptions and to apply judgment regarding inventory mix, inventory spoilage and inventory shrink. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our cost-to-retail ratios. However, if estimates are inaccurate, we may be exposed to losses or gains that could be material. A 10% difference in our cost-to-retail ratios at July 6, 2008, would have affected net income by approximately $3.4 million for the forty weeks ended July 6, 2008.

Goodwill and Intangible Assets

Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed. Goodwill is reviewed for impairment annually at the beginning of the Company’s fourth fiscal quarter, or more frequently if impairment indicators arise, on a reporting unit level. We allocate goodwill to one reporting unit for goodwill impairment testing. We determine fair value utilizing both a market value method and discounted projected future cash flows compared to our carrying value for the purpose of identifying impairment. Our annual impairment review requires extensive use of accounting judgment and financial estimates. Application of alternative assumptions and definitions, such as reviewing goodwill for impairment at a different organizational level, could produce significantly different results. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill and other intangible assets. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.

Table of Contents

Income Taxes

We recognize deferred income tax assets and liabilities by applying statutory tax rates in effect at the balance sheet date to differences between the book basis and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Deferred tax assets and liabilities are adjusted to reflect changes in tax laws or rates in the period that includes the enactment date. Significant accounting judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. In addition, we are subject to periodic audits and examinations by the IRS and other state and local taxing authorities. Although we believe that our estimates are reasonable, actual results could differ from these estimates.

On October 1, 2007, the Company adopted FIN 48, which clarifies the accounting for uncertainty in income tax positions recognized in the financial statements in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 109. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on measurement, classification, interest and penalties associated with tax positions, and income tax disclosures.

To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of our cash and would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution.

Share-Based Payments

Our Company maintains several stock based incentive plans. We grant options to purchase common stock under our Whole Foods Market 2007 Stock Incentive Plan. Options are granted at an option price equal to the market value of the stock at the grant date and are generally exercisable ratably over a four-year period beginning one year from grant date and have a five-year term. The grant date is established once the Company’s Board of Directors approves the grant and all key terms have been determined. The exercise prices of our stock option grants are the closing price on the grant date. Stock option grant terms and conditions are communicated to team members within a relatively short period of time. Our Company generally approves one primary stock option grant annually, occurring during a trading window.

Our Company offers a team member stock purchase plan to all full-time team members with a minimum of 400 hours of service. Participating team members may purchase our common stock through payroll deductions. At our 2007 annual meeting, shareholders approved a new Team Member Stock Purchase Plan (“TMSPP”) which became effective on April 1, 2007. The TMSPP replaces all previous stock purchase plans and provides for a 5% discount on the shares purchase date market value which meets the “Safe Harbor” provisions of SFAS No. 123R, “Share-Based Payment” and therefore is non-compensatory. Under the previous plans, participating team members could elect to purchase unrestricted shares at 100% of market value or restricted shares at 85% of market value on the purchase date.

Effective the beginning of the first quarter of fiscal year 2006, the Company adopted the provisions of SFAS No. 123R using the modified prospective transition method. Under this method, prior periods were not restated. The Company uses the Black-Scholes multiple option pricing model which requires extensive use of accounting judgment and financial estimates, including estimates of the expected term team members will retain their vested stock options before exercising them, the estimated volatility of the Company’s common stock price over the expected term, and the number of options that will be forfeited prior to the completion of their vesting requirements. The related share-based payments expense is recognized on a straight-line basis over the vesting period. Application of alternative assumptions could produce significantly different estimates of the fair value of share-based payments and consequently, the related amounts recognized in the Consolidated Statements of Operations. The provisions of SFAS No. 123R apply to new stock options and stock options outstanding, but not yet vested, on the effective date.

SFAS No. 123R requires the Company to value unvested stock options granted prior to its adoption of SFAS No. 123 under the fair value method and expense these amounts in the income statement over the stock option’s remaining vesting period. In the fourth quarter of fiscal year 2005, the Company accelerated the vesting of all outstanding stock options, except options held by the members of the executive team and certain options held by team members in the United Kingdom, in order to prevent past option grants from having an impact on future results. The Company intends to keep its broad-based stock option

Table of Contents

program in place, but also intends to limit the number of shares granted in any one year so that annual earnings per share dilution from share-based payments expense will not exceed 10%.

Prior to the adoption of SFAS No. 123R, the Company presented the tax savings resulting from tax deductions resulting from the exercise of stock options as an operating cash flow, in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-15, “Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option.” SFAS No. 123R requires the Company to reflect the tax savings resulting from tax deductions in excess of expense reflected in its financial statements as a financing cash flow.

In November 2005, the FASB issued Staff Position No. FAS 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” (“FSP FAS 123R-3”). The Company has elected to adopt the transition guidance for the additional paid-in-capital pool (“APIC pool”) in paragraph 81 of SFAS No. 123R. The prescribed transition method is a detailed method to establish the beginning balance of the APIC pool related to the tax effects of share-based payments, and to determine the subsequent impact on the APIC pool and Consolidated Statement of Cash Flows of the tax effects of share-based payment awards that are outstanding upon adoption of SFAS No. 123R.

We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine share-based payments expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in share-based payments expense that could be material.

If actual results are not consistent with the assumptions used, the share-based payments expense reported in our financial statements may not be representative of the actual economic cost of the share-based payments. A 10% change in our share-based payments expense for the forty weeks ended July 6, 2008, would have affected net income by approximately $0.5 million.

Recent Accounting Pronouncements

Recent accounting pronouncements are included in Part I. Item 1. Note 13 “Recent Accounting Pronouncements” to the consolidated financial statements.

Risk Factors

We wish to caution you that there are risks and uncertainties that could cause our actual results to be materially different from those indicated by forward-looking statements that we make from time to time in filings with the Securities and Exchange Commission (“SEC”), news releases, reports, proxy statements, registration statements and other written communications, as well as oral forward-looking statements made from time to time by representatives of our Company. These risks and uncertainties include, but are not limited to, those listed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007. These risks and uncertainties and additional risks and uncertainties not presently known to us or that we currently deem immaterial may cause our business, financial condition, operating results and cash flows to be materially adversely affected. Except for the historical information contained herein, the matters discussed in this analysis are forward-looking statements that involve risks and uncertainties, including but not limited to general business conditions, the successful integration of acquired businesses into our operations, changes in overall economic conditions that impact consumer spending, the impact of competition, the ability to access additional capital as needed, the successful resolution of ongoing FTC matters, and other factors which are often beyond the control of the Company. The Company does not undertake any obligation to update forward-looking statements except as required by law.

Table of Contents

Part II. Other Information

Item 1. Legal Proceedings

The Company has been contacted by the staff of the Securities and Exchange Commission (“SEC”) advising the Company that it has concluded its inquiry related to online financial message board postings related to Whole Foods Market and Wild Oats Markets and that no enforcement action has been recommended against the Company or any individual.

Table of Contents

Item 5. Other Information

(a) The following recent developments are reported in this Form 10-Q:

Code of Business Conduct

On August 13, 2008, the Company’s Board of Directors amended our Code of Business Conduct in the following principal respects:

· To expand the scope of the “Gifts and Entertainment” section,

· To make the “Financial Interest in a Competitor” and “Media Inquiries” sections consistent with policies applicable to our Directors,

· To clarify and add additional restrictions relating to the “Donations and Other Payments” section, and

· To provide greater specificity to the “Online Forum” section.

A copy of our Code of Business Conduct, as amended, is publicly available on our Company website at www.wholefoodsmarket.com/investor/corporategovernance.

Amendment to Bylaws

On August 13, 2008, the Board of Directors approved certain amendments to the Company’s Bylaws, which are effective as of August 13, 2008. The principal features of the amendments are as follows:

Advance Notice

The Bylaws were amended to modify Sections 3, 12 and 13 of Article II and to add a new Section 14 to Article II. The amendments clarify the applicability of the Bylaws’ advance notice provisions to all shareholder nominations or recommendations and proposals of business (whether in respect of annual meetings or special meetings) and specify that these Bylaws are the exclusive means for a shareholder to submit business at a meeting, other than proposals governed by Rule 14a-8 of the federal proxy rules (which provide its own procedural requirements).

The procedures by which shareholders can nominate directors for election have been revised to provide that at special meetings at which the nomination of directors is on the meeting agenda, the shareholder seeking to nominate a director will be required to provide advance written notice of the nomination. Notice would be required to be given not less than 120 calendar days prior to the date of the special meeting; however, if the first public announcement of the date of a special meeting is less than 130 days prior to the date of such special meeting, notice by the shareholder will be required to be so provided not later than 10 days following the day of the first public announcement of the special meeting.

In addition, the advance notice requirements with respect to annual and special meetings have been amended to require certain additional disclosures regarding the shareholders making proposals, nominations or recommendations, including disclosures of all ownership interests (including derivative interests) and rights to vote any shares of any security of the Company. The amended Bylaws also require disclosures regarding the business proposed, or in the case of a nomination or recommendation of a director, all information that would be required to be disclosed in a proxy filing in a contested election, any compensation, agreements, arrangements and understandings between the nominee and the proposing shareholder, and a signed nominee questionnaire. The amended Bylaws require that a shareholder making a director nomination or bringing other business at a shareholder meeting must not only be a shareholder at the time of notice, but also at the time of the meeting.

Written Consent Procedures

Under the Company’s Articles of Incorporation, shareholders may take corporate action by written consent. Article II, Section 6 of the Bylaws sets forth procedures for fixing record dates for taking corporate action by written consent. The Bylaw has been amended to require that (i) shareholders to act by written consent must request that the Company’s Board of Directors set a record date for shareholders entitled to consent, and (ii) the shareholder request must contain all information that the shareholder would be required to provide if the shareholder had been making a nomination or proposing business to be considered at a meeting of shareholders. The Board of Directors is required to set a record date within 10 days of receiving a request. If the Board of Directors does not set a record date within 10 days of receiving a request, the record date would be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Company. In addition, Article II, Section 10 of the Bylaws has been amended to provide for the engagement of nationally recognized independent inspectors of election upon delivery to the Company of written consent(s).

Exhibit	3.1	Amended and Restated Bylaws of the Registrant adopted August 13, 2008
Exhibit	10.1	First Amendment, dated June 2, 2008, of Revolving Credit Agreement dated August 28, 2007 by and among Registrant, JP Morgan Chase Bank, N.A.; Royal Bank of Canada; Wells Fargo Bank, N.A.; J.P. Morgan Securities Inc.; and RBC Capital Markets (Portions of this Agreement have been omitted pursuant to a request for Confidential Treatment filed with the Securities and Exchange Commission.)
Exhibit	10.2	Amendment No. One to the Whole Foods Market 2007 Stock Incentive Plan
Exhibit	14.1	Code of Business Conduct of the Registrant, as amended August 13, 2008
Exhibit	31.1	Certification of Chief Executive Officer Pursuant to 17 CFR 240.13a – 14(a)
Exhibit	31.2	Certification of Chief Financial Officer Pursuant to 17 CFR 240.13a – 14(a)
Exhibit	32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
Exhibit	32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

		WHOLE FOODS MARKET, INC.

Date:	August 15, 2008	By:	/s/ Glenda Chamberlain
		Glenda Chamberlain
		Executive Vice President and
		Chief Financial Officer
		(Duly authorized officer and
		principal financial officer)

	Page
	Number

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets (unaudited), July 6, 2008 and September 30, 2007	3

Consolidated Statements of Operations (unaudited), for the twelve and forty weeks ended July 6, 2008 and July 1, 2007	4

Consolidated Statements of Shareholders’ Equity and Comprehensive Income (unaudited), for the forty weeks ended July 6, 2008 and fiscal year ended September 30, 2007	5

Consolidated Statements of Cash Flows (unaudited), for the forty weeks ended July 6, 2008 and July 1, 2007	6

Notes to Consolidated Financial Statements (unaudited)	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3. Quantitative and Qualitative Disclosures About Market Risk	30

Item 4. Controls and Procedures	30

Part II. Other Information

Item 1. Legal Proceedings	31

Item 5. Other Information	32

Item 6. Exhibits	34

Signature	35

FORM 10-Q

The following table shows payments due by period on contractual obligations as of July 6, 2008 (in thousands):

Item 4. Controls and Procedures

Part II. Other Information