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|(Mark
      one) | 
|---------------- | 
|þ                | 
|                 | 
|                 | 
|                 | 
|                 | 
|OR              
|o                | 
|                 | 
|                 | 
|                 | 

Commission file number
001-16485

KRISPY KREME DOUGHNUTS,
INC.(Exact name of registrant as
specified in its charter)

|North
      Carolina                                                                                                                                                                                                                                                                                                                                                                             | 56-2169715                                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------
|(State or other
      jurisdiction of                                                                                                                                                                                                                                                                                                                                                            | (I.R.S. Employer
      Identification No.)
|incorporation or
      organization)                                                                                                                                                                                                                                                                                                                                                             |                                           
|                                                                                                                                                                                                                                                                                                                                                                                                 |                                           
|370 Knollwood
      Street,                                                                                                                                                                                                                                                                                                                                                                      | 27103                                     
|Winston-Salem,
      North Carolina                                                                                                                                                                                                                                                                                                                                                              | (Zip
      Code)                          
|(Address of
      principal executive offices)                                                                                                                                                                                                                                                                                                                                                   |                                           
|                                                                                                                                                                                                                                                                                                                                                                                                
|Registrants telephone number, including area
    code:                                                                                                                                                                                                                                                                                                                                         
|(336) 725-2981                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                
|Securities registered pursuant to Section 12(b) of the
      Act:                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                 | Name
    of                               
|                                                                                                                                                                                                                                                                                                                                                                                                 | Each
      Exchange                       
|                                                                                                                                                                                                                                                                                                                                                                                                 | on
      Which                            
|Title of Each Class                                                                                                                                                                                                                                                                                                                                                                              | Registered                                
|Common Stock, No Par
      Value                                                                                                                                                                                                                                                                                                                                                                 | New York Stock
      Exchange             
|Preferred Share
      Purchase Rights                                                                                                                                                                                                                                                                                                                                                            | New York Stock
      Exchange             
|                                                                                                                                                                                                                                                                                                                                                                                                
|Securities
      registered pursuant to Section 12(g) of the Act:None                                                                                                                                                                                                                                                                                                                           
|Indicate by check mark if the
      registrant is a well-known seasoned issuer, as defined in Rule 405 of the
      Securities Act.  Yes oNo þ                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                
|Indicate by check mark if the registrant is not required to file reports
      pursuant to Section 13 or Section 15(d) of the Act.  Yes oNoþ                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                
|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
      þNoo
|                                                                                                                                                                                                                                                                                                                                                                                                
|Indicate by check mark if disclosure of delinquent filers pursuant to Item
      405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,
      and will not be contained, to the best of registrants knowledge, in
      definitive proxy or information statements incorporated by reference in
      Part III of this Form 10-K or any amendment to this Form 10-K.þ      
|                                                                                                                                                                                                                                                                                                                                                                                                
|Indicate by check mark whether the registrant is a large
      accelerated filer, an accelerated filer, a non-accelerated filer, or a
      smaller reporting company. See the definitions of large accelerated
      filer, accelerated filer and smaller reporting company in Rule 12b-2
      of the Exchange Act. (Check one):                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                
|Large accelerated filer
      o     Accelerated filer þ     Non-accelerated filer o     Smaller
      Reporting Company o                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                
|Indicate by check mark whether the registrant is a shell
      company (as defined in Rule 12b-2 of the Act).  Yes oNo þ                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                
|The aggregate market value of voting and
      non-voting common equity of the registrant held by nonaffiliates of the
      registrant as of July 27, 2007 was $449.8 million.                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                
|Number of shares of Common Stock, no par value, outstanding as of March
      28, 2008: 65,370,272.                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                
|DOCUMENTS INCORPORATED BY
      REFERENCE:                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                
|Portions of the
      definitive proxy statement for the registrants 2008 Annual Meeting of
      Shareholders to be held on June 17, 2008 are incorporated by reference
      into Part III hereof.                                                                                                                                                                                           

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TABLE OF CONTENTS

|                           |     |                                                                                                   | **Page**
|-------------------------- | --- | ------------------------------------------------------------------------------------------------- | --------
|FORWARD-LOOKING STATEMENTS | 1  
|                           |     | PART
      I                                                                                      |         
|Item 1.                    |     | Business                                                                                          | 3       
|Item
      1A.             |     | Risk
      Factors                                                                                | 14      
|Item 1B.                   |     | Unresolved Staff Comments                                                                         | 21      
|Item
      2.              |     | Properties                                                                                        | 21      
|Item 3.                    |     | Legal Proceedings                                                                                 | 22      
|Item
      4.              |     | Submission of
      Matters to a Vote of Security Holders                                         | 24      
|                           |     | PART II                                                                                           |         
|Item
      5.              |     | Market for
      Registrants Common Equity, Related Stockholder Matters                          |         
|                           |     | and Issuer Purchases of Equity
      Securities                                                   | 25      
|Item 6.                    |     | Selected Financial Data                                                                           | 27      
|Item
      7.              |     | Managements
      Discussion and Analysis of Financial Condition and Results of
      Operations | 28      
|Item 7A.                   |     | Quantitative and Qualitative Disclosures about Market
      Risk                                  | 57      
|Item
      8.              |     | Financial
      Statements and Supplementary Data                                                 | 59      
|Item 9.                    |     | Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure        | 104     
|Item
      9A.             |     | Controls and
      Procedures                                                                     | 104     
|Item 9B.                   |     | Other Information                                                                                 | 105     
|                           |     | PART
      III                                                                                    |         
|Item 10.                   |     | Directors, Executive Officers and Corporate Governance                                            | 106     
|Item
      11.             |     | Executive
      Compensation                                                                      | 106     
|Item 12.                   |     | Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder      |         
|                           |     | Matters                                                                                           | 106     
|Item
      13.             |     | Certain
      Relationships and Related Transactions, and Director
      Independence             | 106     
|Item 14.                   |     | Principal Accountant Fees and Services                                                            | 106     
|                           |     | PART
      IV                                                                                     |         
|Item 15.                   |     | Exhibits and Financial Statement Schedules                                                        | 107     
|SIGNATURES                 | 114

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As used
herein, unless the context otherwise requires, Krispy Kreme, the Company,
we, us and our refer to Krispy Kreme Doughnuts, Inc. and its subsidiaries.
References contained herein to fiscal 2004, fiscal 2005, fiscal 2006, fiscal
2007, fiscal 2008 and fiscal 2009 mean the fiscal years ended February 1, 2004,
January 30, 2005, January 29, 2006, January 28, 2007, February 3, 2008 and
February 1, 2009, respectively. Please note that fiscal 2008 contained 53
weeks.

FORWARD-LOOKING STATEMENTS

This Annual
Report on Form 10-K contains statements about future events and expectations,
including our business strategy and trends in or expectations regarding the
Companys operations, financing abilities and planned capital expenditures that
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are based
on managements beliefs, assumptions and expectations of our future economic
performance, considering the information currently available to management.
These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties that may cause our actual results,
performance or financial condition to differ materially from the expectations of
future results, performance or financial condition we express or imply in any
forward-looking statements. The words believe, may, will, should,
anticipate, estimate, expect, intend, objective, seek, strive or
similar words, or the negative of these words, identify forward-looking
statements. Factors that could contribute to these differences include, but are
not limited to:

- the outcome of pending governmental
  investigations, including by the Securities and ExchangeCommission (the SEC) and the United States Attorneys
  Office for the Southern District of New York;
- potential indemnification obligations and
  limitations of our director and officer liability insurance;
- the quality of Company and franchise store
  operations;
- our ability, and our dependence on the ability of
  our franchisees, to execute on our and their business plans;
- our relationships with our
  franchisees;
- our ability to implement our international growth
  strategy;
- our ability to implement our new domestic
  operating model and refranchising strategy;
- currency, economic, political and other risks
  associated with our international operations;
- the price and availability of raw materials needed
  to produce doughnut mixes and other ingredients;
- compliance with government regulations relating to
  food products and franchising;
- our relationships with wholesale
  customers;
- our ability to protect our
  trademarks;
- risks associated with our high levels of
  indebtedness;
- restrictions on our operations and compliance with
  covenants contained in our secured credit facilities;
- changes in customer preferences and
  perceptions;
- significant changes in our
  management;
- risks associated with competition;
  and
- other factors discussed below in Item 1A, Risk
  Factors and in Krispy Kremes periodic reports and other information filed with the SEC.

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All such
factors are difficult to predict, contain uncertainties that may materially
affect actual results and may be beyond our control. New factors emerge from
time to time, and it is not possible for management to predict all such factors
or to assess the impact of each such factor on the Company. Any forward-looking
statement speaks only as of the date on which such statement is made, and we do
not undertake any obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is
made.

We caution
you that any forward-looking statements are not guarantees of future performance
and involve known and unknown risks, uncertainties and other factors which may
cause our actual results, performance or achievements to differ materially from
the facts, results, performance or achievements we have anticipated in such
forward-looking statements.

2

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PART I

Item 1. BUSINESS.

Overview

Krispy Kreme
is a leading branded retailer and wholesaler of high-quality doughnuts. Our
principal business, which began in 1937, is owning and franchising Krispy Kreme
doughnut stores where over 20 varieties of doughnuts, including our hot Original
Glazed® doughnut, are made, sold and distributed and where a broad
array of coffees and other beverages are offered.

As of
February 3, 2008, there were 449 Krispy Kreme stores operated systemwide in 37
U.S. states and in the District of Columbia, Australia, Canada, Hong Kong,
Indonesia, Japan, Kuwait, Mexico, the Philippines, Qatar, Saudi Arabia, South
Korea, the United Arab Emirates and the United Kingdom, of which 105 were owned
by us and 344 were owned by franchisees. Of the 449 total stores, there were 295
factory stores and 154 satellites. Of the Krispy Kreme factory stores and
satellites in operation at February 3, 2008, 210 and 35, respectively, were
located in the United States.

Factory
stores (stores which contain a doughnut-making production line) typically
support multiple sales channels to more fully utilize production capacity and
reach various consumer segments. These sales channels are comprised of
on-premises sales (sales to customers visiting our factory and satellite stores)
and off-premises sales (sales to convenience stores, grocery stores/mass
merchants and other food service and institutional accounts) as described
further under Business Operations  Company Stores. Satellite stores consist
primarily of the fresh shop, kiosk and hot shop store formats. Hot shop stores
contain doughnut heating technology that allows customers to have a hot doughnut
experience throughout the day. Fresh shops and free-standing kiosk locations do
not contain doughnut heating technology.

Business Operations

We generate
revenues from three distinct sources: stores we operate, which we refer to as
Company Stores; franchise fees and royalties from our franchise stores, which we
refer to as Franchise; and a vertically integrated supply chain, which we refer
to as KK Supply Chain. Company Stores, Franchise and KK Supply Chain comprise
our three reportable segments under generally accepted accounting principles
(GAAP).

Company Stores.The principal
source of revenue for our stores is the production and distribution of
doughnuts. Many of our factory stores are both retail outlets and wholesale
producers of our doughnuts and, as a result, can sell their products through
multiple channels.

- On-premises sales.On-premises sales consist of sales to customers visiting our
  factory and satellite stores, including sales made through drive-through
  windows, along with discounted sales to community organizations that in turn
  sell doughnuts for fundraising purposes. Each of our factory stores offers at
  least 15 of our more than 20 varieties of doughnuts, including our signature
  hot Original Glazed® doughnut. We also sell beverages, including
  drip coffees, espresso-based coffees, both coffee-based and noncoffee-based
  frozen drinks and packaged and fountain beverages. The majority of the sales
  by stores outside the United States are on-premises.
- Off-premises sales.In addition to on-premises sales, we have developed multiple
  channels of sales outside our stores, which we refer to as off-premises sales.
  Off-premises sales consist of sales of fresh doughnuts, primarily on a branded
  basis (i.e., bearing the Krispy Kreme brand name), to a variety of retail
  customers, such as convenience stores, grocery stores/mass merchants and other
  food service and institutional accounts. Doughnuts are sold to these customers
  on trays for display and sale in glass-enclosed cases and in packages for
  display and sale on both stand-alone display units and on our customers
  shelves.These sales channels are
  designed to generate incremental sales, increase market penetration and brand
  awareness, increase consumer convenience and optimize utilization of our
  stores production capacity. We accomplish off-premises sales through our
  direct store delivery system, or DSD, through which we deliver

3

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fresh doughnuts,
both packaged and unpackaged, to our retail customers. Our off-premises
customers include Amerada Hess, BiLo/Brunos, Exxon/Mobil, Food Lion, Kroger,
QuikTrip, Sheetz, Speedway SuperAmerica, Wal-Mart and Wilco/Hess. Our route
drivers are capable of taking customer orders and delivering products directly
to our customers retail locations, where they are typically merchandised from
Krispy Kreme branded displays. We have also developed national account
relationships and implemented electronic invoicing and payment systems with many
large DSD customers.

Franchise.Through our Franchise
segment, we generate revenues through the collection of franchise fees and
royalties. Franchisees sell doughnuts and other products through the same
channels discussed above under  Company Stores and, as a result, our royalty
revenues are dependent on the on-premises and off-premises sales of our
franchisees.

KK
Supply Chain.KK Supply Chain produces
doughnut mixes and manufactures our doughnut-making equipment, which all factory
stores are required to purchase. Additionally, KK Supply Chain operates two
distribution centers that provide Krispy Kreme stores with supplies for the
critical areas of their business. KK Supply Chain generates revenues on sales of
doughnut mixes, supplies, ingredients and equipment to franchisees and supports
both Company and franchisee stores through product knowledge and technical
skills, control of critical production and distribution processes and collective
buying power.

The primary
raw materials used in our products are flour, sugar and shortening. We routinely
obtain ingredients under forward purchase agreements and in the commodity spot
markets; market risks associated with our purchases of ingredients are discussed
in Item 7A, Quantitative and Qualitative Disclosures About Market Risk.
Although we own the recipe for our glaze flavoring  a key ingredient in many of
our doughnuts  we currently utilize a sole source for our supply.

KK Supply Chain has four business
units:

- Mix manufacturing.We produce all of our proprietary doughnut mixes, which our
  franchisees are required to purchase, at our manufacturing facility in
  Winston-Salem, North Carolina. For certain international franchisees, we
  produce a concentrate which is shipped internationally where it is then
  combined with other ingredients sourced locally pursuant to the terms of
  agreements with contract manufacturers. We control production of this critical
  component in order to ensure that our products meet quality expectations. Our
  mixes are produced according to our high quality standards, which
  include:

 Receiving
truckloads of shipment of our main ingredients regularly;

 Testing each
incoming shipment of key ingredients; and

 Testing each
batch of mix.

We closed our
mix manufacturing operation in Effingham, Illinois, and sold the facility in
January 2008. In connection with the closure, we consolidated mix manufacturing
operations into our Winston-Salem facility. We currently are in discussions and
conducting product testing with third party mix manufacturers regarding contract
mix production for regions outside the southeastern United States.

- Equipment.We manufacture doughnut-making equipment, which our franchisees are
  required to purchase. Our equipment, when combined with our proprietary mixes
  and operated in accordance with our standard procedures, produces doughnuts
  with uniform consistency and quality. Manufacturing our equipment results in
  several advantages, including:

Flexibility. We manufacture several models, with varying capacities,
which are capable of producing multiple products and fitting varying store
configurations; and

Efficiency. We continually refine our equipment design to improve automation in
order to manage labor costs and/or improve consistency.

4

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Our line of
doughnut-making machines includes machines that produce doughnuts at rates of
approximately 65, 150, 270, 600 and 1,000 dozen doughnuts per hour. The largest
of these machines (the 600 and 1,000 dozen per hour machines) are used primarily
in a subset of our factory stores called commissaries, which are production
facilities used principally to serve off-premises customers domestically and to
supplement factory stores focused on on-premises sales
internationally.

We also sell
smaller machines, which we refer to as tunnel ovens and which are used in hot
shops, that are manufactured by others and that complete the final steps of the
production process by preparing unglazed doughnuts for the glazing process. We
also refurbish for resale used machines that we have as a result of store
closings.

- Beverage program.We provide many of the beverages offered in our stores, all
  of which are purchased from third parties. We have implemented in the majority
  of our stores a complete beverage program, including drip coffees, a complete
  line of espresso-based coffees including flavors, both coffee-based and
  noncoffee-based frozen drinks and packaged and fountain beverages. See 
  Products  Beverages.
- Distribution centers.We operate distribution centers in Winston-Salem, North
  Carolina, and greater Los Angeles, California, which are capable of supplying
  our domestic stores and certain of our international stores with key supplies,
  including mixes, icings and fillings, other food ingredients, coffee, juices,
  signage, display cases, uniforms and various other items. We closed our
  distribution center in Effingham, Illinois, and sold the facility in January
  2008. In connection with the closure, we consolidated distribution operations
  into our Winston-Salem and Los Angeles facilities. The lease on our Los
  Angeles facility expires in May 2008, and we currently are considering either
  relocating the facility or outsourcing distribution in the western United
  States to a third party. Most of our domestic store operators have agreed
  contractually through our Supply Chain Alliance Program to purchase all of
  their requirements for the critical areas of their business from KK Supply
  Chain. We believe that our ability to distribute supplies to our operators
  produces several advantages, including:

Economies of
scale.We are able to purchase key supplies at volume discount prices, which we
believe are often lower than those that would be available to our operators
individually. In addition, we are selective in choosing our suppliers and
require that they meet certain standards with regard to quality and reliability.
Also, inventory is managed on a systemwide basis rather than at the store
level.

Convenience.Our distribution centers carry the key
items necessary for store operation. We believe this strategy of having one
ordering and delivery system for store operations enables the store operators to
focus their time and energies on running their stores, rather than managing
multiple supplier and distribution relationships.

Krispy Kreme Brand
Elements

Krispy Kreme
has several important brand elements which we believe have created a bond with
many of our customers. The key elements are:

- One-of-a-kind taste.The taste experience of our doughnuts is the foundation of
  our concept and the common thread that binds generations of our loyal
  customers. Our doughnuts are made based on a secret recipe that has been in
  our Company since 1937. We use premium ingredients, which are blended by our
  custom equipment in accordance with our standard operating procedures, to
  create this unique and very special product.
- Doughnut-making theater.Our factory stores typically showcase
  our doughnut-making theater, which is designed to produce a multi-sensory
  customer experience and establish a brand identity. Our goal is to provide our
  customers with an entertainment experience and to reinforce our commitment to
  quality and freshness.

5

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- ***Hot Krispy Kreme Original Glazed
  Now***®*********sign.***The Hot Krispy Kreme Original
  Glazed Now®sign, when illuminated, is a signal that our hot
  Original Glazed®doughnuts are being made. The Hot Krispy
  Kreme Original Glazed Now®sign is an
  impulse purchase generator and an integral contributor to our brand. Our hot Original Glazed®doughnuts are
  made for several hours every morning and evening, and at other times during the day.
- Community relationships.We are committed to local community
  relationships. Our store operators support their local communities through
  fundraising programs and the sponsorship of charitable events. Many of our
  loyal customers have memories of selling Krispy Kreme doughnuts to raise money
  for their schools, clubs and community organizations.

Store Format and
Development

Store
Format.We classify a store as either a
factory store or a satellite store. Our traditional factory store has the
capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily.
Commissaries, which are production facilities used principally to serve
off-premises customers domestically and to supplement factory stores focused on
on-premises sales internationally, have the highest production capabilities of
our factory stores. As of February 3, 2008, there were 22 commissaries
systemwide, six of which were operated by the Company. Our other factory stores
generally engage in both on-premises and off-premises sales.

Satellite
stores consist primarily of the hot shop, fresh shop and kiosk store formats,
each of which is substantially smaller than a traditional factory store. Hot
shop stores contain tunnel oven doughnut heating technology that allows
customers to have a hot doughnut experience throughout the day. Our fresh shops
and our free-standing kiosk locations do not contain doughnut heating
technology. In each of these formats, we typically sell fresh doughnuts and
beverages, but the doughnuts are supplied by nearby factory stores. Each of
these formats requires less space than our traditional factory store. We began
our tests of the fresh shop concept during fiscal 2004 and our tests of the hot
shop store and kiosk formats in fiscal 2005. As of February 3, 2008, 67 fresh
shops, 48 hot shop stores and 39 kiosks were open systemwide. We continue to
view the fresh shop, hot shop store and kiosk formats as additional ways to
achieve market penetration in a variety of market sizes and settings.

Domestic Store Development.As of
February 3, 2008, there were a total of 245 domestic stores, of which 210 were
factory stores and 35 were satellite stores. These store numbers reflect the
opening in fiscal 2008 of four domestic stores and the closing of 31 domestic
stores. Of the four stores opened in fiscal 2008, one was a Company store. Of
the 31 stores closed in fiscal 2008, eight were Company stores. As we work to
improve our operations and to refine our store format for new domestic stores,
we do not expect that we or our franchisees will open a significant number of
domestic factory stores in the near future, although we plan to begin
construction of a limited number of Company-operated satellite stores in fiscal
2009, and domestic franchisees also may open satellite stores.

We have
converted several of the stores we operate from traditional factory stores to
hot shops using tunnel oven technology to reduce operating costs and increase
the number of hours each day we offer our hot Original Glazed®
doughnuts. Certain of our franchisees also have converted factory stores to hot
shops. We have converted additional factory stores to hot shops in fiscal 2009.

International Store Development.Markets outside the United States are a source of growth. As of February
3, 2008, there were a total of 204 Krispy Kreme stores (including 119
satellites) operated internationally, which were located in Australia, Canada,
Hong Kong, Indonesia, Japan, Kuwait, Mexico, the Philippines, Qatar, Saudi
Arabia, South Korea, the United Arab Emirates and the United Kingdom. In fiscal
2008, 85 new international stores were opened, and four international
stores were closed. Based upon our continued research and experience with our
international stores, we are focusing additional international development
efforts primarily on opportunities in markets in Asia and the Middle East. We
are focusing on these two geographic areas because of their favorable population
demographics, relatively high levels of consumer sweet goods consumption and the
popularity of Western brands in these markets. The development and franchise
agreements for territories outside the United States (which include the
countries listed above) provide for the development of over 170 additional
stores in fiscal 2009 and thereafter. Our ability to expand in these or other
international markets, however, will depend on a number of factors, including
attracting experienced and well capitalized franchisees, demand for our product,
our ability to supply or obtain the ingredients and equipment necessary to
produce our products and local laws or policies of the particular
countries.

6

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Set forth
below is a table containing certain store information as of the end of fiscal
2008, fiscal 2007 and fiscal 2006.

|                           |  | At
      February 3, |     | At
      January 28, |  | At
      January 29,
|-------------------------- |  | -------------------- | --- | -------------------- |  | --------------------
|                           |  | 2008                 |     | 2007                 |  | 2006                
|By Owner:                  |  |                      |     |                      |  |                     
|Company Stores             |  |                      | 105 |                      |  |                     
|Franchise
      Stores     |  |                      | 344 |                      |  |                     
|Total
      Systemwide     |  |                      | 449 |                      |  |                     
|By Type:                   |  |                      |     |                      |  |                     
|Factory Stores             |  |                      |     |                      |  |                     
|Company                    |  |                      | 97  |                      |  |                     
|Franchise                  |  |                      | 198 |                      |  |                     
|Total Factory Stores       |  |                      | 295 |                      |  |                     
|Satellites                 |  |                      |     |                      |  |                     
|Company                    |  |                      | 8   |                      |  |                     
|Franchise                  |  |                      | 146 |                      |  |                     
|Total Satellites           |  |                      | 154 |                      |  |                     
|Total
      Systemwide     |  |                      | 449 |                      |  |                     
|By Location:               |  |                      |     |                      |  |                     
|Domestic Stores            |  |                      |     |                      |  |                     
|Company                    |  |                      | 100 |                      |  |                     
|Franchise                  |  |                      | 145 |                      |  |                     
|Total Domestic Stores      |  |                      | 245 |                      |  |                     
|International Stores:      |  |                      |     |                      |  |                     
|Company                    |  |                      | 5   |                      |  |                     
|Franchise                  |  |                      | 199 |                      |  |                     
|Total International Stores |  |                      | 204 |                      |  |                     
|Total
      Systemwide     |  |                      | 449 |                      |  |                     

Store Operations

General store operations.We
outline uniform specifications and designs for each Krispy Kreme store format
and require compliance with our standards regarding the operation of each store,
including, but not limited to, varieties of products, product specifications,
sales channels, packaging, sanitation and cleaning, signage, furniture and
fixtures, image and use of logos and trademarks, training and marketing and
advertising. We also require the use of a computer and cash register system with
specified capabilities to ensure the collection of sales information necessary
for effective store management. Our franchisees are required to provide us with
weekly sales reports.

We generally
assist our franchisees with issues such as operating procedures, advertising and
marketing programs, public relations, store design, training and technical
matters. We also provide an opening team to provide on-site training and
assistance both for the week prior to and during the first week of operation for
each initial store opened by a new franchisee. The number of opening team
members providing this assistance is reduced with each subsequent store opening
for an existing franchisee.

Our stores
generally operate seven days a week, excluding some major holidays.
Traditionally, our sales have been slower during the winter holiday season and
the summer months.

Quality standards and customer service.We encourage our employees to be courteous, helpful, knowledgeable and
attentive. We emphasize the importance of performance by linking a portion of
both a Company store managers and an assistant Company store managers
incentive compensation to profitability and customer service. We also encourage
high levels of customer service and the maintenance of our quality standards

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by frequently monitoring our stores
through a variety of methods, including periodic quality audits, mystery
shoppers and a toll-free number. In addition, our customer experience
department handles customer comments and conducts routine satisfaction surveys
of our off-premises customers.

Management and staffing.Our
Senior Vice President and General Manager of U.S. Operations, along with other
corporate officers responsible for store operations, is responsible for
corporate interaction with our store operations divisional directors and store
management. Through our divisional directors, each of whom is responsible for a
specific geographic region, we communicate frequently with all store managers
and their staff using store audits, weekly communications by telephone or e-mail
and both scheduled and surprise store visits.

We offer a
comprehensive manager training program covering the critical skills required to
operate a Krispy Kreme store and a training program for all positions in the
store. The manager training program, conducted both at our headquarters and at
certified training stores, includes classroom instruction, computer-based
training modules and in-store training.

Our staffing
varies depending on a stores size, volume of business and number of sales
channels. Stores, depending on the sales channels they serve, have employees
handling on-premises sales, processing, production, bookkeeping, sanitation and
delivery. Hourly employees, along with delivery personnel, are trained by local
store management through hands-on experience and training manuals.

Store Ownership

We divide
our stores into three categories: Company stores, associate stores and area
developer stores. We refer to associates and area developers collectively as
franchisees. The store counts below include both factory stores and
satellites.

Company stores.As of February 3,
2008, Krispy Kreme owned 105 stores. Many of these stores were developed between
1937 and 1996 and are located predominantly in the Southeastern United States.
These stores were designed as wholesale bakeries and generate a majority of
their revenues through off-premises sales. Through acquisitions of associate and
area developer franchisees market rights and related stores, as well as through
new store construction, the number of Company stores located outside the
Southeast has increased. In the past three fiscal years, we have examined the
performance of each of our Company stores and closed 70 underperforming stores.

Franchisee stores.Our franchisees
generally consist of associates who operate under our original franchising
program developed in the 1940s and area developers who operate under our
franchising program developed in the mid-1990s. We prefer that franchisees have
ownership and successful operating experience in multi-unit food operations
within the territory they propose for development. To ensure a consistent
high-quality product, we require each franchisee to purchase our proprietary
mixes and doughnut-making equipment. We devote resources to providing our
franchisees with assistance in site selection, store design, employee training
and marketing. We expect that in the near term the majority of franchisee growth
will be primarily through international rather than domestic
expansion.

As of
February 3, 2008, a total of 44 franchisees operated 344 stores systemwide.
Approximately 60% of those franchisees are area developers, and those area
developers operated approximately 85% of the total number of franchise
stores.

Associates.Associate stores have
attributes which are similar to those of Company stores located in the
Southeast, and associates typically have many years of experience operating
Krispy Kreme stores. This group generally concentrates on growing sales within
the current base of stores rather than developing new stores or new territories.
Generally, our associates are not obligated to develop additional stores within
their territories. We cannot grant licenses to other franchisees within an
associates territory during the term of the license agreement.

Associates
are typically parties to 15-year licensing agreements that are renewed
automatically for successive five-year periods, unless previously terminated by
either party. These licensing agreements generally permit associates to operate
stores using the Krispy Kreme system within a specific territory. Associates
generally pay royalties of 3.0% of on-premises sales and 1.0% of all other
sales. Some associates also contribute 1.0% of all sales

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to the Company-administered public
relations and advertising fund, which we refer to as the Brand Fund. The Company
has informed its associate franchisees that it will reduce the brand fund
contribution rate to 0.75% for fiscal 2009. Our associates who were shareholders
prior to our initial public offering in April 2000 have license agreements which
were extended for a period of 20 years following that offering. We do not plan
to license any new Krispy Kreme franchisees under the terms of the associate
license agreement.

Area
developers.Under our area developer
franchise program, which we introduced in the mid-1990s to strategically expand
into new territories in the United States and Canada, we licensed territories,
usually defined by metropolitan statistical areas, to area developers which we
believed were capable of developing a prescribed number of stores within a
specified time period. We have also used area developers through a modified
franchise program to expand outside of the United States and Canada.

As of
February 3, 2008, we had an equity interest in seven of the area developers. We
do not currently expect to own any equity interests in any area developers that
may be formed in the future.

Many of our
area developers are multi-unit food operators with knowledge about their local
territory or territories. Our area developer program includes a royalty and fee
structure that is more attractive to Krispy Kreme than that of our associate
program.

Each of our
domestic and Canadian area developers has been required to enter into two types
of agreements: a development agreement, which establishes the number of stores
to be developed in an area, and a franchise agreement for each store opened.
With respect to our international area developers, most have entered into one
agreement covering both store development and store operations for each store
opened. Area developers typically pay development and franchise fees ranging
from $20,000 to $50,000 for each store they develop. Domestic and international
area developers generally pay royalties of 4.5% and 6.0%, respectively, of all
sales. The Company has informed its area developers that it will reduce the
royalty rate on off-premises sales to 3.5% in fiscal 2009. Off-premises sales
represented approximately 37% of domestic area developer sales and less than 1%
of international area developer sales in fiscal 2008.

Our current
standard franchise agreement for domestic and Canadian area developers provides
for a 15-year term. Upon expiration of the term, an area developer typically has
the right to acquire a successor franchise on terms and conditions of the
franchise agreement that we are then using and subject to certain conditions.
The agreement can be terminated for a number of reasons, including the failure
of the franchisee to comply with system standards or to make timely payments
within applicable grace periods, subject to state law. Domestic area developers
are required to contribute 1.0% of their sales to the Brand Fund. The Company
has informed its domestic area developer franchisees that it will reduce the
brand fund contribution rate to 0.75% for fiscal 2009. International area
developers generally are required to contribute 0.25% of their sales to the
Brand Fund.

In addition
to a franchise agreement, all domestic area developers have signed development
agreements which require them to develop a specified number of stores on or
before specific dates. Generally, these agreements expire upon the conclusion of
the store development schedule stated in the agreement, which schedule varies
among area developers. Most international franchisees have executed a single
agreement that includes both franchise rights and development obligations. If
franchisees fail to develop their stores on schedule, we have the right to
terminate the agreement and develop Company stores or develop stores through
other franchisees in their territories. Currently, we have several area
developers that are not in compliance with their development schedules and a
number of domestic development agreements have expired.

Where we are
an equity investor in an area developer, we contribute equity or guarantee debt
or lease commitments of the franchisee generally proportionate to our ownership
interest. See Note 18 to the consolidated financial statements appearing
elsewhere herein for additional information on our franchisee investments.

Franchisee financial performance.Over the past several years, domestic franchisees have closed a large
number of stores in an effort to improve overall financial performance. Several
franchisees have been experiencing financial pressures which, in certain
instances, became exacerbated during fiscal 2008. On August 22, 2007, Great
Circle, the Companys franchisee in Southern California, filed for
reorganization under Chapter 11 of the Bankruptcy Code. At the time of the
filing, Great Circle operated 11 franchise stores, which it continues to

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operate. On September 4, 2007, Sweet
Traditions, the Companys franchisee in Northeastern Illinois and in Eastern
Missouri, filed for reorganization under Chapter 11 of the Bankruptcy Code. At
the time of the filing, Sweet Traditions operated 23 franchise stores. On
February 7, 2008, the bankruptcy court authorized Sweet Traditions to sell
substantially all of its assets, including 20 Krispy Kreme stores, to Hot Light
Brands, L.L.C., an affiliate of Allied Capital Corporation. Krispy Kreme
consented to the sale and the assignment of the franchise agreements to Hot
Light Brands, L.L.C., which currently operates these 20 stores. The Company
believes franchisees will close additional stores in the future, and the number
of such closures may be significant. Royalty revenues and most KK Supply Chain
revenues are directly correlated to sales by franchise stores and, accordingly,
franchise store closures have an adverse effect on the Companys revenues,
results of operations and cash flows.

Products

Doughnuts and Related Products.We
currently make and sell over 20 varieties of high-quality doughnuts, including
our hot Original Glazed® doughnut. Generally a product is first
tested in our Company stores and then rolled out to our franchise stores. We
have introduced doughnuts in non-traditional shapes and packaged doughnut
snacks, as well as non-traditional packaging offerings including doughnut hole
cups, for distribution through convenience stores.

In December
2007, we completed the process of reducing artificial trans fats in our
doughnuts, which now contain zero grams of artificial trans fats per serving at
all U.S. and most international locations.

Beverages.We have implemented in
the majority of our stores a complete beverage program, including drip coffees,
a complete line of espresso-based coffees including flavors, both coffee-based
and noncoffee-based frozen drinks and packaged and fountain beverages, and we
continue to seek to improve our beverage program. These drinks are designed to
complement our existing juices, sodas, milks and water. In September 2007, we
ceased production at our coffee roasting facility and sold our coffee roasting
assets, and we simultaneously entered into an agreement with the purchaser to
supply our coffee needs.

Marketing

Krispy
Kremes approach to marketing is a natural extension of our brand equity, brand
attributes, relationship with our customers and our values. To build our brand
and drive our sales in a manner aligned with our brand values, we have focused
our marketing activities in the following areas:

***Store Experience.***Our factory stores and hot shops
are where most customers first experience a hot Original Glazed®
doughnut. Customers know that when our Hot Krispy Kreme Original Glazed
Now® sign in the store window is illuminated, they can see our
doughnuts being made and enjoy a hot Original Glazed® doughnut within
seconds after it is made. We believe this begins our relationship with our
customers and forms the foundation of the Krispy Kreme experience.

Relationship Marketing.Many of
our brand-building activities are grassroots-based and focus on developing
relationships with various constituencies, including consumers, local non-profit
organizations, communities and businesses. Specific initiatives
include:

- Good neighbor product deliveries to create trial
  uses;
- Sponsorship of local events and nonprofit
  organizations;
- Friends of Krispy Kreme eNewsletters sent to those
  customers that have registered to receive monthly updates about new products, promotions and store openings;
  and
- Fundraising programs that assist local charitable
  organizations to raise money for their non-profit causes.

Public
Relations.We utilize media relations,
product placement and event marketing as vehicles to generate brand awareness
and trial usage for our products. In the years following our initial public
offering, there were numerous product placements and references to our products
on leading television programs and films and favorable media mentions in print
publications. In recent years, there have been fewer such product placements,
references and favorable media mentions.

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Advertising and Sales Promotions.Grass roots marketing has been central to building our brand awareness.
Although our marketing strategy has not historically employed traditional
advertising, we have occasionally utilized free-standing newspaper inserts,
direct mail, radio, television and sales promotions to generate awareness and
usage of our products.

Brand
Fund.We administer a public relations
and advertising fund, which we refer to as the Brand Fund. We contribute 1.0% of
sales from Company stores to the Brand Fund. Domestic area developers are
required to contribute 1.0% of their sales to the Brand Fund. International area
developers generally are required to contribute 0.25% of their sales to the
Brand Fund. Some associates contribute 1.0% of their sales to the Brand Fund.
The Company has informed its associate and domestic area developer franchisees
that it will reduce the brand fund contribution rate to 0.75% for fiscal 2009,
and the Company also will reduce the contribution rate for its stores to this
amount. Proceeds from the Brand Fund are utilized to develop programs to
increase sales and brand awareness and build brand affinity. Brand Fund proceeds
are also utilized to measure consumer feedback and the performance of our
products and stores. In fiscal 2008, we and our franchisees contributed
approximately $3.4 million to the Brand Fund.

Management Information
Systems

Krispy Kreme
has a management information system that allows for communication among our
corporate office, support operations, Company stores, associates and area
developers. Our franchisees and other affiliates connect to this system through
our extranet and have access to e-mail and the ability to provide financial
reporting.

An enterprise resource planning
system supports major financial and operating functions within theCompany, including financial reporting and inventory control.
A data warehouse system supports the financial and operating needs of our
Company Stores and KK Supply Chain segments.

All Company
stores have been retrofitted with a point of sale, or POS, system. This POS
system provides each store with the ability to manage on-premises sales. We
retrieve the sales information from each stores POS system, which gives us the
ability to analyze data. Two-way electronic communication with our stores
permits sales transactions to be uploaded and price changes to be downloaded to
in-store POS systems.

Direct store
delivery sales operations have access to an internally-developed route
accounting system connected into the corporate network. Information from these
systems is retrieved at multiple times weekly and aggregated into the corporate
data warehouse.

The Company
maintains business continuity plans for its locations to protect against
business interruption in the event of a system failure resulting from a
catastrophe, natural disaster, security breach, power loss, telecommunications
failure or other similar event. These plans include daily system backup
procedures and use of offsite data recovery centers.

Competition

Our
competitors include retailers of doughnuts and snacks sold through convenience
stores, supermarkets, restaurants and retail stores. We compete against Dunkin
Donuts, which has the largest number of outlets in the doughnut retail industry,
as well as against Tim Hortons and regionally and locally owned doughnut shops
and distributors. Dunkin Donuts and Tim Hortons have substantially greater
financial resources than we do and are expanding to other geographic regions,
including areas where we have a significant store presence. We also compete
against other retailers who sell sweet treats such as cookie stores and ice
cream stores. We compete on elements such as food quality, concept, convenience,
location, customer service and value. Customer service, including frequency of
deliveries and maintenance of fully stocked shelves, is an important factor in
successfully competing for convenience store and grocery/mass merchant business.
There is an industry trend moving towards expanded fresh product offerings at
convenience stores during morning and evening drive times, and products are
either sourced from a central commissary or brought in by local
bakeries.

In the
packaged doughnut market, an array of doughnuts is typically merchandised on a
free-standing branded display. We compete primarily with other well-known
producers of baked goods, such as Dolly Madison, Entenmanns and Hostess, and
some regional brands.

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Trademarks and Trade
Names

Our doughnut
shops are operated under the Krispy Kreme name, and we use over 40 federally
registered trademarks and service marks, including Krispy Kreme® and
Hot Krispy Kreme Original Glazed Now® and the logos associated with
these marks. We have also registered some of our trademarks in approximately 40
other countries. We generally license the use of these trademarks to our
franchisees for the operation of their doughnut shops. We also license the use
of certain trademarks to convenience stores and groceries/mass merchants in
connection with the sale of some of our products at those locations.

Although we
are not aware of anyone else using Krispy Kreme or Hot Krispy Kreme Original
Glazed Now as a trademark or service mark, we are aware that some businesses
are using Krispy or a phonetic equivalent, such as Crispie Creme, as part of
a trademark or service mark associated with retail doughnut stores. There may be
similar uses we are unaware of which could arise from prior users. When
necessary, we aggressively pursue persons who use our trademarks unlawfully and
without our consent.

Government Regulation

Local
regulation.Our stores, both those in the
United States and those in international markets, are subject to licensing and
regulation by a number of government authorities, which may include health,
sanitation, safety, fire, building and other agencies in the states or
municipalities in which the stores are located. Developing new doughnut stores
in particular areas could be delayed by problems in obtaining the required
licenses and approvals or by more stringent requirements of local government
bodies with respect to zoning, land use and environmental factors. Our
agreements with our franchisees require them to comply with all applicable
federal, state and local laws and regulations, and indemnify us for costs we may
incur attributable to their failure to comply.

Food
product regulation.Our doughnut mixes
are produced at our manufacturing facility in Winston-Salem, North Carolina. We
closed our mix manufacturing operation in Effingham, Illinois and sold the
facility in January 2008. Production at and shipments from our Winston-Salem
facility are subject to the applicable federal and state governmental rules and
regulations. Similar state regulations may apply to products shipped from our
doughnut stores to convenience stores or groceries/mass merchants. Many of our
convenience store and grocery/mass merchant customers require us to guarantee
our products compliance with applicable food regulations.

As is the
case for other food producers, numerous other government regulations apply to
our products. For example, the ingredient list, product weight and other aspects
of our product labels are subject to state and federal regulation for accuracy
and content. Most states periodically check products for compliance. The use of
various product ingredients and packaging materials is regulated by the United
States Department of Agriculture and the Federal Food and Drug Administration.
Conceivably, one or more ingredients in our products could be banned, and
substitute ingredients would then need to be found.

In
connection with our international operations, we typically export our products,
principally our doughnut mixes (or concentrate which is combined with other
ingredients sourced locally to manufacture mix) to our franchisees in markets
outside the United States. Numerous government regulations apply to both the
export of food products from the United States as well as the import of food
products into other countries. If one or more of the ingredients in our products
are banned, alternative ingredients would need to be found. Although we intend
to be proactive in addressing any product ingredient issues, such requirements
may delay our ability to open stores in other countries in accordance with our
desired schedule.

Franchise regulation.We must
comply with regulations adopted by the Federal Trade Commission (the FTC) and
with several state and foreign laws that regulate the offer and sale of
franchises. The FTCs Trade Regulation Rule on Franchising (FTC Rule) and
certain state and foreign laws require that we furnish prospective franchisees
with a franchise disclosure document containing information prescribed by the
FTC Rule and applicable state and foreign laws and regulations. We have amended
our Franchise Disclosure Document (FDD) to conform it to new FTC disclosure
requirements. We have submitted the amended FDD for registration in those states
in which we have registered our franchise offering. We currently are able to
offer franchises in all states except Maryland.

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We also must
comply with a number of state and foreign laws that regulate some substantive
aspects of the franchisor-franchisee relationship. These laws may limit a
franchisors ability to: terminate or not renew a franchise without good cause;
interfere with the right of free association among franchisees; disapprove the
transfer of a franchise; discriminate among franchisees with regard to charges,
royalties and other fees; and place new stores near existing
franchises.

Bills
intended to regulate certain aspects of franchise relationships have been
introduced into the United States Congress on several occasions during the last
decade, but none has been enacted.

Employment regulations.We are
subject to state and federal labor laws that govern our relationship with
employees, such as minimum wage requirements, overtime and working conditions
and citizenship requirements. Many of our on-premises and delivery personnel are
paid at rates related to the federal minimum wage. Accordingly, further
increases in the minimum wage could increase our labor costs. Furthermore, the
work conditions at our facilities are regulated by the Occupational Safety and
Health Administration and are subject to periodic inspections by this
agency.

Other
regulations.We are subject to a variety
of consumer protection and similar laws and regulations at the federal, state
and local level. Failure to comply with these laws and regulations could subject
us to financial and other penalties. We have several contracts to serve United
States military bases, which require compliance with certain applicable
regulations. The stores which serve these military bases are subject to health
and cleanliness inspections by military authorities. We are also subject to
federal and state environmental regulations, but we currently believe that these
will not have a material effect on our operations.

Employees

As of
February 3, 2008, we employed 4,033 people. Of these, 190 were employed in our
headquarters and administrative offices and 143 were employed in our
manufacturing and distribution centers. In our Krispy Kreme stores, we had 3,700
employees. Of our total workforce, 3,288 were full-time employees, including 549
managers and administrators.

We are not a
party to any collective bargaining agreement although we have experienced
occasional unionization initiatives. We believe our relationships with our
employees are good.

Available Information

Krispy Kreme
files annual reports, quarterly reports, proxy statements and other documents
with the SEC under the Securities Exchange Act of 1934 (the Exchange Act). The
public may read and copy any materials that the Company files with the SEC at
the SECs Public Reference Room at 100 F Street N.E., Washington, D.C. 20549 or
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. Additionally, the SEC maintains a website that contains
reports, proxy statements, information statements and other information
regarding issuers, including the Company, that file electronically with the SEC
at: http://www.sec.gov.

We make
available free of charge through our website at:
http://www.krispykreme.com our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments
to those reports filed or furnished pursuant to the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
provide it to, the SEC.

In addition,
many of our corporate governance documents are available on our website.
Specifically, our Nominating and Corporate Governance Committee Charter is
available at: http://www.krispykreme.com/gov_charter.pdf, our
Compensation Committee Charter is available at:
http://www.krispykreme.com/comp_charter.pdf, our Audit Committee Charter
is available at: http://www.krispykreme.com/audit_charter.pdf, our
Corporate Governance Guidelines are available at:
http://www.krispykreme.com/corpgovernance.pdf, our Code of Business
Conduct and Ethics is available at:
http://www.krispykreme.com/code_of_ethics.pdf, and our Code of Ethics for
Chief Executive and Senior Financial Officers is available at:
http://www.krispykreme.com/officers_ethics.pdf. Each of these documents
is available in print to any shareholder who requests it by sending a written
request to Krispy Kreme Doughnuts, Inc., 370 Knollwood Street, Suite 500,
Winston-Salem, NC 27103, Attention: Secretary.

The content
on our website is available for information purposes only and shall not be
deemed to be a part of this Annual Report.

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Item 1A. RISK FACTORS.

Our
business, operations and financial condition are subject to various risks. Some
of these risks are described below, and you should take such risks into account
in evaluating us or any investment decision involving our Company. This section
does not describe all risks that may be applicable to us, our industry or our
business, and it is intended only as a summary of certain material risk factors.
More detailed information concerning the risk factors described below is
contained in other sections of this Annual Report on Form 10-K.

RISKS RELATING TO OUR
BUSINESS

| | We are subject to ongoing
      governmental investigations which could require us to pay substantial
      fines or other penalties or otherwise have a material adverse effect on
      us.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We and
certain of our former executive officers, directors and other employees are
currently subject to investigations by the SEC and the United States Attorneys
Office for the Southern District of New York. While we are cooperating with each
of these investigations, adverse developments in connection with the
investigations, including any expansion of the scope of the investigations,
could negatively impact us and could divert the efforts and attention of our
management team from our ordinary business operations. In connection with these
investigations, it is possible that we will be required to pay criminal or civil
fines, consent to injunctions on future conduct or suffer other penalties, any
of which could have a material adverse effect on us. See Item 3, Legal
Proceedings for a more detailed description of these investigations.

| | Our potential indemnification
      obligations and limitations of our director and officer liability
      insurance could have a material adverse effect on our results of
      operations and financial condition.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As discussed
elsewhere herein, several of our former directors, officers and employees are
the subject of criminal, administrative and civil investigations and lawsuits.
Under North Carolina law, our bylaws and certain indemnification agreements, we
may have an obligation to indemnify our former officers and directors in
relation to these matters. Some of these indemnification obligations would be
covered by certain insurers under applicable directors and officers liability
policies. In connection with the settlement of the securities class action and
the partial settlement of the derivative litigation described below under Item
3, Legal Proceedings, however, we have agreed with these insurers to limit our
claims for reimbursement for legal fees and costs incurred in connection with
those proceedings, and the related criminal and administrative investigations,
to a specified reserve fund in the amount of $3.4 million (which currently has
approximately $1.4 million remaining). Two of our former officers have agreed to
limit their claims for indemnity from us in connection with these investigations
to a portion of the amount deposited into the reserve fund. This portion is not
available to us for our claims for reimbursement of the legal fees and costs
described above. If the sums provided for in this fund are not sufficient to
provide for reimbursement to us or if we incur significant uninsured indemnity
obligations, our indemnity obligations could have a material adverse effect on
our results of operations and financial condition. In addition, counsel for the
plaintiffs in several settled shareholder derivative actions have deferred their
application for fees until conclusion of the derivative actions and there can be
no assurance as to the amount that we will be required to pay to such counsel or
whether the remaining reserve fund at such time will be sufficient to reimburse
us for such amount.

| | We have experienced declines in
      revenues and have incurred net losses in each of the last three fiscal
      years and may experience further declines and losses in the
      future.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We incurred
net losses of $135.8 million, $42.2 million and $67.1 million in fiscal 2006,
2007 and 2008, respectively. We also experienced a decline in revenues in each
of the last three fiscal years. The revenue decline reflects fewer Company
stores in operation, a decline in domestic royalty revenues and in sales of
mixes and other ingredients resulting from lower sales by the Companys domestic
franchisees. Lower revenues have adversely affected operating margins because of
the fixed or semi-fixed nature of many of our direct operating expenses. In
addition, we have recorded significant asset impairment charges, principally
related to underperforming Company stores and, in fiscal 2008, a manufacturing
and distribution facility we divested. Total impairment charges and lease
termination costs for fiscal 2008 were $62.1 million. We may experience further
revenue declines, asset impairments and net losses in the future.

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**Store profitability is sensitive to
changes in sales volume.**

Each factory
store has significant fixed or semi-fixed costs, and margins and profitability
are significantly affected by doughnut production volume and sales. While our
average weekly sales per store have risen over the past three years, the
improvement has been driven principally by the closure of underperforming
locations. We are in the process of reevaluating our business and have taken
steps to improve our sales. There can be no assurance, however, that these steps
will produce the desired results. Because significant fixed and semi-fixed costs
prevent us from reducing our operating expenses in proportion with declining
sales, our earnings are negatively impacted if sales decline.

A number of
factors have historically affected, and will continue to affect, our sales
results, including, among other factors:

- Consumer trends;
- Our ability to execute our business strategy
  effectively;
- Competition;
- General regional and national economic conditions;
  and
- Weather conditions.

Changes in our sales results could
cause the price of our common stock to fluctuate substantially.

| | We rely in part on our
      franchisees. Disputes with our franchisees, or failures by our franchisees
      to operate successfully, to develop or finance new stores or build them on
      suitable sites or open them on schedule, could adversely affect our growth
      and our operating results.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Area
developers and associates, which are all independent contractors and not Krispy
Kreme employees, contributed (including through purchases from KK Supply Chain)
approximately 29% of our total revenues in fiscal 2008. We rely in part on these
area developers and associates and the manner in which they operate their
locations to develop and promote our business. We occasionally have disputes
with franchisees. Future disputes could materially adversely affect our
business, financial condition and results of operations. We provide training and
support to area developers and associates, but the quality of franchised store
operations may be diminished by any number of factors beyond our control. The
failure of our area developers and associates to operate franchises successfully
could have a material adverse effect on us, our reputation and our brands and
could materially adversely affect our business, financial condition and results
of operations. In addition, although we do not control our franchisees and they
operate as independent contractors, actions taken by any of our franchisees may
be seen by the public as actions taken by us, which, in turn could adversely
affect our reputation or brands.

Reduced
access to financing by our franchisees on reasonable terms could adversely
affect our future operations by leading to additional store closures by our
franchisees, which would in turn reduce our franchise revenues and KK Supply
Chain revenues. Most area development agreements specify a schedule for opening
stores in the territory covered by the agreement. These schedules form the basis
for our expectations regarding the number and timing of new Krispy Kreme store
openings. In the past, Krispy Kreme has agreed to extend or modify development
schedules for certain area developers and may do so in the future.

Several
franchisees have been experiencing financial pressures which, in certain
instances, became more exacerbated during fiscal 2008. We have guaranteed
certain obligations of franchisees in which we have an equity interest.
Financial pressures on these franchisees increase the likelihood that we would
be required to perform under these guarantees. In fiscal 2008, two of our other
franchisees filed for reorganization under Chapter 11 of the United States
Bankruptcy Code. Franchisees closed 26 stores in fiscal 2008. We believe
franchisees will close additional stores in the future, and the number of such
closures may be significant. Royalty revenues and most of KK Supply Chain
revenues are directly correlated to sales by franchise stores and, accordingly,
franchise store closures have an adverse effect on our revenues, results of
operations and cash flows.

15

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| | A portion of our growth strategy
      depends on opening new Krispy Kreme stores internationally. Our ability to
      expand our store base is influenced by factors beyond our and our
      franchisees control, which may slow store development and impair our
      strategy.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As we work
to stabilize our operations and to refine our store format for new domestic
stores, we do not expect that we or our franchisees will open a significant
number of domestic factory stores in the near future, although we plan to begin
construction of a limited number of Company-operated satellite stores in fiscal
2009, and domestic franchisees also may open satellite stores. Our recent growth
strategy has depended on the opening of new Krispy Kreme stores internationally.
Our ability to expand our store base both domestically and internationally is
influenced by factors beyond our and our franchisees control, which may slow
store development and impair our strategy. The success of these new stores will
be dependent in part on a number of factors, which neither we nor our
franchisees can control.

**Our new domestic store operating model
and refranchising strategy may not be successful.**

We are
working to refine our domestic store operating model to focus on a hub and
spoke system, under which multiple satellite stores in a market are provided
doughnuts from a single traditional factory store or commissary at which all
doughnut production for the market takes place. Because the hub and spoke
concept has not been completely refined, we do not expect that the Company or
its franchisees will open a significant number of domestic factory stores in the
near future. In addition, we cannot predict whether this new model will be
successful in increasing our profitability.

In addition,
we are developing a strategy to refranchise certain geographic markets. Because
we have not completed the development of our detailed refranchising plans and
have not entered into any new domestic franchise agreements in several years, we
cannot predict the likelihood of refranchising any such markets or the amount of
any proceeds which might be received therefrom, including the amounts which
might be realized from the sale of store assets and the execution of any related
franchise agreements. Refranchising could result in the recognition of
impairment losses on the related assets.

| | Currency, economic, political and
      other risks associated with our international operations could adversely
      affect our operating results.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

As of
February 3, 2008, there were 204 Krispy Kreme stores operated outside of the
United States. Such operations are transacted in the respective local currency.
Amounts payable to us by our international franchisees are based on a conversion
of the royalties and other fees to U.S. dollars using the prevailing exchange
rate. In particular, the royalties are based on a percentage of net sales
generated by our foreign franchisees operations. Our revenues from
international franchisees are exposed to the potentially adverse effects of our
franchisees operations, currency exchange rates, local economic conditions,
political instability and other risks associated with doing business in foreign
countries. To the extent that the portion of our revenues generated from
international operations increases in the future, our exposure to changes in
foreign economic conditions and currency fluctuations will increase.

In
connection with our international operations, we typically export our products,
principally our doughnut mixes and doughnut mix concentrates, to our franchisees
in markets outside the United States. Numerous government regulations apply to
both the export of food products from the United States as well as the import of
food products into other countries. If one or more of the ingredients in our
products are banned, alternative ingredients would need to be found. Although we
intend to be proactive in addressing any product ingredient issues, such
requirements may delay our ability to open stores in other countries in
accordance with our desired schedule.

**Our profitability is sensitive to
changes in the cost of raw materials.**

Although we
utilize forward purchase contracts and futures contracts and options on such
contracts to mitigate the risks related to commodity price fluctuations, such
contracts do not fully mitigate commodity price risk, particularly over the
longer term. In addition, the portion of our anticipated future commodity
requirements that is subject to such contracts varies from time to
time.

16

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Flour and
shortening are our two most significant raw materials. The prices of wheat and
soybean oil, which are the principal components of flour and shortening
respectively, reached record highs in fiscal 2008 and have continued to rise in
fiscal 2009. Continued high prices or further adverse changes in commodity
prices could adversely affect our profitability and liquidity and that of our
franchisees.

| | We are the exclusive supplier of
      doughnut mixes, other key ingredients and flavors to all domestic Krispy
      Kreme Company stores. If we have any problems supplying these ingredients,
      our and our franchisees ability to make doughnuts will be negatively
      affected. In addition, changes in vendor credit terms could adversely
      affect our profitability and liquidity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We are the
exclusive supplier of doughnut mixes and other key ingredients and flavors to
all domestic Company stores and most domestic franchise stores. We supply the
doughnut mixes and other key ingredients and flavors out of our mix
manufacturing facility located in Winston-Salem, North Carolina. Although we
have a backup source to manufacture our doughnut mixes in the event of the loss
of our Winston-Salem plant, we do not have a contract with that source and its
facilities do not regularly produce our doughnut mixes. Any interruption of
existing or planned production capacity at our manufacturing plants could impede
our ability or that of our franchisees to make doughnuts. In addition, in the
event that any of our supplier relationships terminate unexpectedly, even where
we have multiple suppliers for the same ingredient, we may not be able to obtain
adequate quantities of the same high-quality ingredient at competitive
prices.

| | We are the only manufacturer of
      our doughnut-making equipment. If we have any problems producing this
      equipment, our stores ability to make doughnuts will be negatively
      affected.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
manufacture our custom doughnut-making equipment in one facility in
Winston-Salem, North Carolina. Although we have limited backup sources for the
production of our equipment, obtaining new equipment quickly in the event of the
loss of our Winston-Salem plant would be difficult and would jeopardize our
ability to supply equipment to new stores or new parts for the maintenance of
existing equipment in established stores on a timely basis.

| | We have only one supplier of
      glaze flavoring, and any interruption in supply could impair our ability
      to make our signature hot Original Glazed®
      doughnut.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We utilize a
sole supplier for our glaze flavoring. Any interruption in the distribution from
our current supplier could affect our ability to produce our signature hot
Original Glazed® doughnut.

| | We are subject to franchise laws
      and regulations that govern our status as a franchisor and regulate some
      aspects of our franchise relationships. Our ability to develop new
      franchised stores and to enforce contractual rights against franchisees
      may be adversely affected by these laws and regulations, which could cause
      our franchise revenues to decline.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We, as a
franchisor, are subject to both regulation by the FTC and state laws regulating
the offer and sale of franchises. Our failure to obtain or maintain approvals to
offer franchises would cause us to lose franchise revenues and KK Supply Chain
revenues. In addition, state laws that regulate substantive aspects of our
relationships with franchisees may limit our ability to terminate or otherwise
resolve conflicts with our franchisees. Because we plan to grow primarily
through franchising, any impairment of our ability to develop new franchise
stores will negatively affect us and our growth strategy.

| | Off-premises sales represent a
      significant portion of our sales. The infrastructure necessary to support
      off-premises sales results in significant fixed and semi-fixed costs.
      Also, the loss of one of our large wholesale customers could adversely
      affect our financial condition and results of
  operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company
operates a fleet network to support off-premises sales. Declines in off-premises
sales without a commensurate reduction in operating expenses, as well as rising
fuel costs, may adversely affect our business.

17

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We have
several large wholesale customers. Our top two such customers accounted for
approximately 10.2% of total Company store sales during fiscal 2008. The loss of
one of our large national wholesale customers could adversely affect our results
of operations across all business segments. These customers do not enter into
long-term contracts; instead, they make purchase decisions based on a
combination of price, product quality, consumer demand and service quality. They
may in the future use more of their shelf space, including space currently used
for our products, for other products, including private label products. If our
sales to one or more of these customers are reduced, this reduction may
adversely affect our business.

**Our failure or inability to enforce our
trademarks could adversely affect the value of our brands.**

We own
certain common law trademark rights in the United States, as well as numerous
trademark and service mark registrations in the United States and in other
jurisdictions. We believe that our trademarks and other intellectual property
rights are important to our success and our competitive position. We therefore
devote appropriate resources to the protection of our trademarks and proprietary
rights and aggressively pursue persons who unlawfully and without our consent
use or register our trademarks. The protective actions that we take, however,
may not be sufficient, in some jurisdictions, to secure our trademark rights for
some of the goods and services that we offer and/or to prevent imitation by
others, which could adversely affect the value of our trademarks and service
marks.

In
jurisdictions outside the United States, specifically Costa Rica, Guatemala,
Indonesia, Nigeria, Peru, the Philippines, Thailand and Venezuela, we are aware
that some businesses have registered, used and/or may be using Krispy Kreme
(or its phonetic equivalent) in connection with doughnut-related goods and
services. There may be similar such uses or registrations of which we are
unaware and which could perhaps arise from prior users. These uses and/or
registrations could limit our operations and possibly cause us to incur
litigation costs, or pay damages or licensing fees to a prior user or registrant
of similar intellectual property.

| | We have substantial indebtedness
      under our secured credit facilities that could adversely impact cash
      availability for growth and operations and may increase our vulnerability
      to general adverse economic and industry
  conditions.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
indebtedness for borrowed money as of February 3, 2008 was approximately $76.7
million, including $76.1 million under our secured credit facilities. Our debt
service obligations with respect to this indebtedness could have an adverse
impact on our earnings and cash flow for as long as the indebtedness is
outstanding.

Our
substantial level of indebtedness could have important consequences, including
the following:

- our ability to obtain additional financing for
  working capital, capital expenditures, acquisitions or general corporate
  purposes may be impaired;
- our use of a substantial portion of our cash flow
  from operations to make debt service payments under our secured credit
  facilities, which will reduce the funds available to us for other purposes
  such as potential acquisitions and capital expenditures;
- our level of indebtedness may put us at a
  competitive disadvantage and reduce our flexibility in planning for, or
  responding to, changing conditions in our business; and
- our level of indebtedness may increase our
  vulnerability to general economic downturns and adverse developments in our
  industry.

If our cash
flows and capital resources are insufficient to fund our debt service
obligations, we may be forced to reduce or delay capital expenditures, sell
assets, seek additional capital or restructure or refinance our indebtedness.
These alternative measures may not be successful and may not permit us to meet
our scheduled debt service obligations. In the absence of such operating results
and resources, we could face substantial liquidity problems and might be
required to dispose of material assets to meet our debt service
requirements.

18

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| | Our secured credit facilities
      impose restrictions and obligations upon us that significantly limit our
      ability to operate our business, and in the past we have sought and
      received waivers relating to these restrictions and
      obligations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our secured
credit facilities impose financial and other restrictive covenants that limit
our ability to plan for and respond to changes in our business. Under our
secured credit facilities, we are required to meet certain financial tests,
including a maximum leverage ratio and a minimum interest coverage ratio. In
addition, we must comply with covenants which, among other things, limit the
incurrence of additional indebtedness, liens, investments, dividends,
transactions with affiliates, asset sales, acquisitions, capital expenditures,
mergers and consolidations, prepayments of other indebtedness and other matters
customarily restricted in such agreements. Any failure to comply with these
covenants could result in an event of default under our secured credit
facilities.

We have
sought and received waivers of defaults and amendments to covenants from the
lenders under our current and former secured credit facilities. While we were
able to obtain these waivers and amendments, in some cases at a significant
additional cost, there is no assurance that we will not require additional
waivers or amendments or that any future waivers or amendments will be granted.
In the event of a default, the absence of waivers or amendments could result in
acceleration of all or substantially all of our indebtedness and the loss of
earning assets securing our indebtedness. As a result of amendments and waivers
in fiscal 2008 and 2009, we have paid fees of approximately $835,000 and the
interest rate on the loans has increased from LIBOR + 2.75% to LIBOR + 5.50%
(with a LIBOR floor of 3.25%). Any future amendments or waivers could result in
additional fees or rate increases, which could have a material adverse effect on
our financial position, results of operations and cash flows.

RISKS RELATING TO THE FOOD SERVICE
INDUSTRY

| | The food service industry is
      affected by consumer preferences and perceptions. Changes in these
      preferences and perceptions may lessen the demand for our doughnuts, which
      would reduce sales and harm our
business.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Food service
businesses are often affected by changes in consumer tastes, national, regional
and local economic conditions and demographic trends. Individual store
performance may be adversely affected by traffic patterns, the cost and
availability of labor, purchasing power, availability of products and the type,
number and location of competing stores. Our sales have been and may continue to
be affected by changing consumer tastes, such as health or dietary preferences,
including the reduction of consumption of food products containing high levels
of carbohydrates, that cause consumers to avoid doughnuts in favor of foods that
are perceived as healthier. Moreover, because we are primarily dependent on a
single product, if consumer demand for doughnuts should decrease, our business
would suffer more than if we had a more diversified menu.

| | The food service industry is
      affected by litigation, regulation and publicity concerning food quality,
      health and other issues, which can cause customers to avoid our products
      and result in liabilities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Food service
businesses can be adversely affected by litigation, by regulation and by
complaints from customers or government authorities resulting from food quality,
illness, injury or other health concerns or operating issues stemming from one
store or a limited number of stores, including stores operated by our
franchisees. In addition, class action lawsuits have been filed and may continue
to be filed against various food service businesses (including quick service
restaurants) alleging, among other things, that food service businesses have
failed to disclose the health risks associated with high-fat foods and that
certain food service business marketing practices have encouraged obesity.
Adverse publicity about these allegations may negatively affect us and our
franchisees, regardless of whether the allegations are true, by discouraging
customers from buying our products. Because one of our competitive strengths is
the taste and quality of our doughnuts, adverse publicity or regulations
relating to food quality or other similar concerns affects us more than it would
food service businesses that compete primarily on other factors. We could also
incur significant liabilities if such a lawsuit or claim results in a decision
against us or as a result of litigation costs regardless of the
result.

19

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**Our success depends on our ability to
compete with many food service businesses.**

We compete
with many well-established food service companies. At the retail level, we
compete with other doughnut retailers and bakeries, specialty coffee retailers,
bagel shops, fast-food restaurants, delicatessens, take-out food service
companies, convenience stores and supermarkets. At the wholesale level, we
compete primarily with grocery store bakeries, packaged snack foods and vending
machine dispensers of snack foods. Aggressive pricing by our competitors or the
entrance of new competitors into our markets could reduce our sales and profit
margins. Moreover, many of our competitors offer consumers a wider range of
products. Many of our competitors or potential competitors have substantially
greater financial and other resources than we do which may allow them to react
to changes in pricing, marketing and the quick service restaurant industry
better than we can. As competitors expand their operations, we expect
competition to intensify. In addition, the start-up costs associated with retail
doughnut and similar food service establishments are not a significant
impediment to entry into the retail doughnut business. We also compete with
other employers in our markets for hourly workers and may be subject to higher
labor costs.

RISKS RELATING TO OWNERSHIP OF OUR
COMMON STOCK

| | The market price of our common
      stock has been volatile and may continue to be volatile, and the value of
      any investment may decline.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

The market
price of our common stock has been volatile and may continue to be volatile.
This volatility may cause wide fluctuations in the price of our common stock,
which is listed on the New York Stock Exchange (NYSE). The market price may
fluctuate in response to many factors including:

- The results of the ongoing governmental
  investigations and civil litigation described under Item 3, Legal
  Proceedings;
- Changes in general conditions in the economy or
  the financial markets;
- Variations in our quarterly operating results or
  our operating results failing to meet the expectations of securities analysts
  or investors in a particular period;
- Changes in financial estimates by securities
  analysts;
- Other developments affecting Krispy Kreme, our
  industry, customers or competitors; and
- The operating and stock price performance of
  companies that investors deem comparable to Krispy Kreme.

| | Our charter, bylaws and
      shareholder rights agreement contain anti-takeover provisions that may
      make it more difficult or expensive to acquire us in the future or may
      negatively affect our stock price.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our articles
of incorporation, bylaws and shareholder rights agreement contain several
provisions that may make it more difficult for a third party to acquire control
of us without the approval of our board of directors. These provisions may make
it more difficult or expensive for a third party to acquire a majority of our
outstanding voting common stock. They may also delay, prevent or deter a merger,
acquisition, tender offer, proxy contest or other transaction that might
otherwise result in our shareholders receiving a premium over the market price
for their common stock.

20

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Item 1B. UNRESOLVED STAFF COMMENTS.

None.

Item 2. PROPERTIES.

Stores.As of February 3, 2008,
there were 449 Krispy Kreme stores systemwide, of which 105 were Company stores
and 344 were operated by franchisees.

- As of February 3, 2008, all of our Company stores,
  except commissaries, had on-premises sales, and approximately 75 of our
  Company factory stores also engaged in off-premises sales.
- Of the 105 Company stores as of February 3, 2008,
  we owned the land and building for 47 stores, we owned the building and leased
  the land for 49 stores and leased both the land and building for 9
  stores.

KK
Supply Chain facilities.We own a 147,000
square foot mix manufacturing plant and distribution center in Winston-Salem,
North Carolina. We lease a 102,000 square foot facility near Los Angeles,
California, which is used as a distribution center, under a lease that expires
on May 31, 2008. We currently are considering either relocating the Los Angeles
facility or outsourcing distribution in the western United States to a third
party. Additionally, we own a 103,000 square foot facility in Winston-Salem,
which we use primarily as our equipment manufacturing facility and training
facility.

Other
properties.Our corporate headquarters is
located in Winston-Salem, North Carolina. We occupy approximately 59,000 square
feet of this multi-tenant facility under a lease that expires on September 30,
2012, with one five-year renewal option.

21

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Item 3. LEGAL PROCEEDINGS.

From time to
time we are subject to claims and suits arising in the course of our business.
We maintain customary insurance policies against certain kinds of claims and
suits which arise in the course of our business, including insurance policies
for workers compensation and personal injury, some of which provide for
relatively large deductible amounts.

Except as disclosed below, we are
currently not a party to any material legal proceedings.

Governmental
Investigations

SEC
Investigation.On October 7, 2004, the staff
of the SEC advised us that the SEC had entered a formal order of investigation
concerning the Company. The Company is cooperating with the
investigation.

United
States Attorney Investigation.On February
24, 2005, the United States Attorneys Office for the Southern District of New
York advised us that it would seek to conduct interviews of certain current and
former officers and employees of the Company. The Company is cooperating with
the investigation.

Litigation

Federal
Securities Class Actions and Settlement Thereof and Federal Court Shareholder
Derivative Actions and Partial Settlement Thereof.On May 12, 2004, a purported securities class action was filed on behalf
of persons who purchased the Companys publicly traded securities between August
21, 2003 and May 7, 2004 against the Company and certain of its former officers
in the United States District Court for the Middle District of North Carolina,
alleging violations of federal securities law in connection with various public
statements made by the Company and seeking damages in an unspecified amount.
Thereafter, 14 substantially identical purported class actions were filed in the
same court. All the actions ultimately were consolidated. The court appointed
lead plaintiffs in the consolidated action, who filed a second amended complaint
on May 23, 2005, alleging claims under federal securities law on behalf of
persons who purchased the Companys publicly-traded securities between March 8,
2001 and April 18, 2005.

In addition
to the purported securities class action, three shareholder derivative actions
were filed in the United States District Court for the Middle District of North
Carolina against certain current and former directors of the Company, certain
former officers of the Company, including Scott Livengood (the Companys former
Chairman and Chief Executive Officer), as well as certain persons or entities
that sold franchises to the Company. The complaints in these actions alleged
that the defendants breached their fiduciary duties in connection with their
management of the Company and the Companys acquisitions of certain franchises.
The complaints sought damages, rescission of the franchise acquisitions,
disgorgement of the proceeds from these acquisitions and other unspecified
relief.

In October
2004, the Companys Board of Directors elected Michael Sutton and Lizanne Thomas
to the Board and appointed them members and co-chairpersons of a Special
Committee to investigate the matters raised in connection with a formal
investigation of the Company by the SEC described below, the allegations in the
purported derivative lawsuits, issues raised by the Companys independent
auditors and other matters relevant to the foregoing.

On October
31, 2006, the Company and the Special Committee entered into a Stipulation and
Settlement Agreement (the Stipulation) with the lead plaintiffs in the
securities class action, the derivative plaintiffs and all defendants named in
the class action and derivative litigation, except for Mr. Livengood, providing
for the settlement of the securities class action and a partial settlement of
the derivative action. On February 14, 2007, the Court granted final approval of
the proposed partial settlement in the derivative action and entered final
judgment dismissing all claims with respect to all defendants, except for claims
that the Company may assert against Mr. Livengood. On February 15, 2007, the
court granted final approval of the proposed settlement in the securities class
action and entered final judgment dismissing all claims with respect to all
defendants. The final judgments were entered as contemplated by the terms of the
Stipulation.

22

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With respect
to the securities class action, the Stipulation provided for the certification
of a class consisting of all persons who purchased the Companys publicly-traded
securities between March 8, 2001 and April 18, 2005, inclusive. The settlement
class received total consideration of approximately $76.0 million, consisting of
a cash payment of approximately $35.0 million made by the Companys directors
and officers insurers, cash payments of $100,000 each made by John Tate (the
Companys former Chief Operating Officer) and Randy Casstevens (a former Chief
Financial Officer), a cash payment of $4 million made by the Companys
independent registered public accounting firm and common stock and warrants to
purchase common stock issued by the Company having an estimated aggregate value
of approximately $36.9 million as of their issuance on March 2, 2007. Claims
against all defendants were dismissed with prejudice; however, claims that the
Company may have against Mr. Livengood that may be asserted by the Company in
the derivative action for contribution to the securities class action settlement
or otherwise under applicable law are expressly preserved. The Stipulation
contained no admission of fault or wrongdoing by the Company or the other
defendants.

With respect
to the derivative litigation, the Stipulation provided for the settlement and
dismissal with prejudice of claims against all defendants except for claims
against Mr. Livengood. The Company, acting through its Special Committee,
settled claims against Mr. Tate and Mr. Casstevens for the following
consideration: Messrs. Tate and Casstevens each agreed to contribute $100,000 in
cash to the settlement of the securities class action; Mr. Tate agreed to cancel
his interest in 6,000 shares of the Companys common stock; and Messrs. Tate and
Casstevens agreed to limit their claims for indemnity from the Company in
connection with future proceedings before the SEC or by the United States
Attorney for the Southern District of New York to specified amounts. The
Company, acting through its Special Committee, has been in negotiations with Mr.
Livengood but has not reached agreement to resolve the derivative claims against
him. All other claims against defendants named in the derivative actions were
dismissed with prejudice without paying any consideration. However, counsel for
the derivative plaintiffs have deferred their application for fees until
conclusion of the derivative actions against Mr. Livengood. See Other
Contingencies and Commitments below.

On March 2,
2007, the Company issued 1,833,828 shares of its common stock and warrants to
purchase 4,296,523 shares of its common stock at a price of $12.21 per share in
connection with the Stipulation. The warrants expire on March 2,
2012.

The Company
recorded a non-cash charge to earnings in fiscal 2006 of approximately $35.8
million, representing the estimated fair value, as of late October 2006, of the
common stock and warrants to be issued by the Company. In addition, the Company
recorded a related receivable from its insurers in the amount of approximately
$35.0 million, because the Company considered receipt of this amount to be
probable based on the insurance companies agreements to contribute this amount
to the settlement and the Companys assessment of the insurance companies
financial condition. Simultaneously, the Company recorded a liability in the
amount of $70.8 million representing the then estimated aggregate fair value of
the securities to be issued by the Company and the cash to be paid by the
insurers. In the fourth quarter of fiscal 2007, the Company recorded an
additional non-cash charge to earnings and an increase in the related liability
of approximately $16.0 million, representing the increase from October 2006 to
January 28, 2007 in the estimated fair value of the securities issued by the
Company in connection with the Stipulation. The provision for settlement costs
was adjusted downward by approximately $14.9 million in the first quarter of
fiscal 2008 to reflect the decrease in the fair value of the securities from
January 28, 2007 until their issuance on March 2, 2007. The fair value of the
common shares was determined based upon the market price of the Companys common
stock on March 2, 2007, and the fair value of the warrants to acquire common
shares was estimated as of that date as described in Note 16 to the consolidated
financial statements appearing elsewhere herein.

State
Court Books and Records Action.On February
21, 2005, a lawsuit was filed against the Company in a North Carolina court
seeking an order requiring the Company to permit the plaintiff to inspect and
copy the books and records of the Company. On February 14, 2007, the federal
district court approved the partial settlement of the consolidated derivative
actions described above and entered an order dismissing those actions. On
February 14, 2007, the North Carolina court filed a copy of that order and, on
March 23, 2007, administratively dismissed the plaintiffs books and records
action.

23

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FACTA
litigation.On October 3, 2007, a purported
nationwide class action (Peter Jackson v. Krispy Kreme Doughnut
Corporation (Case No. CV07-06449 ABC (VBC)), United States District Court,
Central District of California) was filed against the Company and ten
fictitiously named defendants. Plaintiff asserts a single cause of action for
alleged willful violation of the federal Fair and Accurate Credit Transactions
Act (FACTA). Specifically, plaintiff alleges a violation concerning electronic
printing of certain credit card and debit card receipts that were not in
compliance with the applicable information truncation provisions of FACTA.
Plaintiff seeks statutory and punitive damages for these alleged violations, as
well as injunctive relief on behalf of a putative nationwide class. The Company
intends to defend vigorously against the claims asserted.

TAG
Litigation.In February 2008, the Company
filed suit in the U.S. District Court for the Middle District of North Carolina
against The Advantage Group Enterprise, Inc. (TAG), alleging that TAG failed
to properly account for and pay the Company on sales of equipment that the
Company consigned to TAG. Based on these allegations, the Company asserted
various claims including breach of fiduciary duty and conversion, and it seeks
an accounting and constructive trust. In addition, the Company seeks a
declaration that it does not owe TAG approximately $1 million for storage fees
and alleged lost profits. In March 2008, TAG answered the complaint, denying
liability and asserting counterclaims against the Company. TAG alleges that the
Company acted improperly by failing to execute a written contract between the
companies and claims damages for breach of contract, services rendered, unjust
enrichment, violation of the North Carolina Unfair Trade Practices Act and fraud
in the inducement. TAG seeks approximately $1 million of actual damages as well
as punitive and treble damages. The Company intends to vigorously prosecute
its claims against TAG and to vigorously defend against the counterclaims, which
the Company believes are without merit.

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

No matters were submitted to a vote
of security holders during the fourth quarter of fiscal 2008.

24

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PART II

|**Item
      5.** |  | MARKET FOR REGISTRANTS COMMON
      EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
      SECURITIES.
|----------------- |  | -------------------------------------------------------------------------------------------------------------------------

Market Information

Our common
stock is listed on the NYSE under the symbol KKD. The following table sets
forth the high and low sales prices for our common stock in composite trading as
reported by the NYSE for the fiscal periods shown.

High
    
    LowYear Ended January 28, 2007:First
      Quarter
    
    $
    9.57
    
    $
    5.30Second Quarter
    
    
    12.11
    
    
    7.14Third
      Quarter
    
    
    10.25
    
    
    7.50Fourth Quarter
    
    
    13.93
    
    
    9.01Year Ended
      February 3, 2008:First Quarter
    
    $
    13.20
    
    $
    9.71Second
      Quarter
    
    
    10.49
    
    
    6.80Third Quarter
    
    
    7.33
    
    
    2.91Fourth
      Quarter
    
    
    4.19
    
    
    2.23


Holders

As of April 10, 2008, there were
approximately 14,494 shareholders of record of our common stock.

Dividends

We did not
pay any dividends in fiscal 2007 or 2008. We intend to retain any earnings to
finance our business and do not anticipate paying cash dividends in the
foreseeable future. Furthermore, the terms of our secured credit facilities
prohibit the payment of dividends on our common stock.

Securities Authorized for Issuance
Under Equity Compensation Plans

The
information required by Item 201(d) of Regulation S-K is provided under Item 12,
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters, which is incorporated herein by reference.

Recent Sales of Unregistered
Securities

None.

Purchases of Equity
Securities

No purchases were made by or on
behalf of the Company of its equity securities in fiscal 2008.

25

---

Stock Performance Graph

The
performance graph shown below compares the percentage change in the cumulative
total shareholder return on our common stock against the cumulative total return
of the NYSE Composite Index and Standard & Poors Restaurants Index for the
period from January 31, 2003 through February 1, 2008. The graph assumes an
initial investment of $100 and the reinvestment of dividends.

Comparison of Cumulative Total Return



|                                   | January        | January        | January        | January        | January        | February     
|---------------------------------- | -------------- | -------------- | -------------- | -------------- | -------------- | -------------
|                                   | 31,
      2003 | 30,
      2004 | 28,
      2005 | 27,
      2006 | 26,
      2007 | 1,
      2008
|Krispy Kreme
      Doughnuts, Inc. | $100.00        | $117.20        | $28.48         | $17.53         | $42.35         | $9.50        
|NYSE Composite
      Index         | 100.00         | 134.57         | 144.43         | 166.29         | 188.02         | 190.56       
|S&P 500
      Restaurants Index    | 100.00         | 161.60         | 211.89         | 248.69         | 291.57         | 307.75       

26

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Item 6. SELECTED FINANCIAL
DATA.

The
following selected financial data should be read in conjunction with Item 7,
Managements Discussion and Analysis of Financial Condition and Results of
Operations, and the Companys consolidated financial statements appearing
elsewhere herein.

|                                                           |  | Year Ended                                                      
|---------------------------------------------------------- |  | ----------------------------------------------------------------
|                                                           |  | Feb. 3,                                                         
|                                                           |  | 2008                                                            
|                                                           |  | (In Thousands, except per share and number of stores
      data)
|STATEMENT OF OPERATIONS DATA:                              |  |                                                                 
|Revenues                                                   |  | $                                                               
|Operating expenses:                                        |  |                                                                 
|Direct operating expenses                                  |  |                                                                 
|General and administrative expenses                        |  |                                                                 
|Depreciation and amortization expense                      |  |                                                                 
|Impairment charges and lease termination costs             |  |                                                                 
|Settlement of litigation                                   |  |                                                                 
|Other operating (income) and expenses, net                 |  |                                                                 
|Operating income
      (loss)                              |  |                                                                 
|Interest income                                            |  |                                                                 
|Interest
      expense                                     |  |                                                                 
|Loss on extinguishment of debt                             |  |                                                                 
|Equity in
      (losses) of equity method franchisees      |  |                                                                 
|Minority interests in results of consolidated              |  |                                                                 
|franchises                                                 |  |                                                                 
|Other
      non-operating income and (expense), net        |  |                                                                 
|Income (loss) from continuing operations                   |  |                                                                 
|before income taxes                                        |  |                                                                 
|Provision for
      income taxes (benefit)                 |  |                                                                 
|Income (loss) from continuing operations                   |  | $                                                               
|Income (loss)
      from continuing operations             |  |                                                                 
|per common share                                           |  |                                                                 
|Basic                                                      |  | $                                                               
|Diluted                                                    |  | $                                                               
|BALANCE SHEET DATA (AT END OF YEAR):                       |  |                                                                 
|Working capital
      (deficit)(1)                         |  | $                                                               
|Total assets                                               |  | $                                                               
|Long-term debt,
      less current maturities              |  |                                                                 
|Total shareholders equity                                 |  |                                                                 
|Number of
      factory stores at end of year (unaudited): |  |                                                                 
|Company                                                    |  |                                                                 
|Franchise                                                  |  |                                                                 
|Systemwide                                                 |  |                                                                 

|(1) |  | Reflects a liability, net of
      amounts recoverable from insurance companies, of approximately $51.8
      million and $35.8 million as of January 28, 2007 and January 29, 2006,
      respectively, related to the settlement of certain litigation. This
      liability was satisfied in March 2007 through the issuance of shares of
      common stock and warrants to acquire shares of common stock as described
      in Note 12 to the consolidated financial statements appearing elsewhere
      herein.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

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Item 7. MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion of the Companys financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere herein.

Company Overview

Krispy Kreme
is a leading branded retailer and wholesaler of high-quality doughnuts. The
Companys principal business, which began in 1937, is owning and franchising
Krispy Kreme doughnut stores at which over 20 varieties of high-quality
doughnuts, including the Companys signature hot Original Glazed®
doughnut, are made, sold and distributed together with complementary products,
and where a broad array of coffees and other beverages are offered.

The
Companys stores include factory stores and satellite stores. Factory stores
have a doughnut-making production line and are versatile in that many supply
multiple sales channels to more fully utilize production capacity. These sales
channels are comprised of:

- On-premises sales. Sales to customers
  visiting Company and franchise factory and satellite stores, including sales
  made through drive-through windows, along with discounted sales to community
  organizations that in turn sell doughnuts for fundraising
  purposes.
- Off-premises sales. Daily sales of fresh
  doughnuts primarily on a branded basis to a variety of retail customers, such
  as convenience stores, grocery stores/mass merchants and other food service
  and institutional accounts. Doughnuts are sold to these customers on trays for
  display and sale in glass-enclosed cases and in packages for display and sale
  on both stand-alone display units and on customers shelves.

Traditional
factory stores have the capacity to produce from 4,000 dozen to over 10,000
dozen doughnuts daily. Commissaries, which are production facilities used
principally to serve off-premises customers domestically and to supplement
factory stores focused on on-premises sales internationally, have the highest
production capacities of factory stores. As of February 3, 2008, there were 22
commissaries systemwide, six of which were operated by the Company. Other
factory stores often engage in both on-premises and off-premises sales, with the
allocation between such channels dependent on the particular capacity of the
store and the characteristics of the markets in which the stores operate. Each
factory store has significant fixed or semi-fixed costs, and margins and
profitability are significantly affected by doughnut production volume and
sales. As of February 3, 2008, there were 295 Krispy Kreme factory stores
systemwide, consisting of 97 Company stores and 198 franchise stores.

Satellite
stores consist primarily of the hot shop, fresh shop and kiosk formats. The
Company has begun introducing hot shops, which utilize tunnel oven doughnut
heating and finishing technology scaled to accommodate principally on-premises
sales in a store approximately one-half the size of a traditional factory store.
Hot shop technology allows customers to have a hot doughnut experience
throughout the day. Fresh shops and free-standing kiosks are satellite stores
that do not contain doughnut heating technology, and are substantially smaller
than a traditional factory store. In each of these three formats, the Company
typically sells fresh doughnuts and beverages, with the doughnuts supplied by
nearby factory stores. As of February 3, 2008, 48 hot shops, 67 fresh shops and
39 kiosks were open systemwide; the Company operated five of those hot shops and
three of those fresh shops. The Company views the hot shop, fresh shop and kiosk
formats as additional ways to achieve market penetration in a variety of market
sizes and settings.

The Company
is working to refine its domestic store operating model to focus on a hub and
spoke system, under which multiple satellite stores in a market are provided
doughnuts from a single traditional factory store or commissary at which
all doughnut production for the market takes place. The objectives of the hub
and spoke model are to, among other things:

- reduce the investment required to produce a given
  level of sales and reduce operating costs by operating smaller satellite
  stores instead of larger, more expensive factory stores;

28

---

- achieve greater production efficiencies by
  centralizing doughnut production to minimize the burden of fixed
  costs;
- achieve greater consistency of product quality
  through a reduction in the number of doughnut-making
  locations;
- enable store employees to focus on
  achieving excellence in customer satisfaction and in-shop consumer
  experience; and
- stimulate an increase in on-premises sales of
  doughnuts and complementary products by increasing the number of retail
  distribution points to provide customers more convenient access to the
  Companys products.

Because the
hub and spoke concept has not been completely refined, the Company does not
expect that the Company or its franchisees will open a significant number of
domestic factory stores in the near future. The Company has converted several of
its traditional factory stores to hot shops using tunnel oven technology to
reduce operating costs and increase the number of hours each day the stores
offer the Companys hot Original Glazed® doughnuts. Certain
franchisees also have converted factory stores to hot shops. The Company plans
to convert additional factory stores to hot shops in fiscal 2009, and to begin
construction of a limited number of satellite locations in order to
continue development and demonstrate the operation of the hub and spoke
concept.

In addition,
the Company is developing a strategy to refranchise certain geographic markets,
expected to consist principally of, but not necessarily limited to, markets
outside the Companys traditional base in the Southeast. The franchise rights
and other assets in many of these markets were acquired by the Company in
business combinations in prior years. Because the Company has not completed the
development of its detailed refranchising plans and has not entered into any new
domestic franchise agreements in several years, the Company cannot predict the
likelihood of refranchising any such markets or the amount of any proceeds which
might be received therefrom, including the amounts which might be realized from
the sale of store assets and the execution of any related franchise agreements.
Refranchising could result in the recognition of impairment losses on the
related assets.

Like other
retail and restaurant companies, the Company constantly evaluates the
performance of its stores and from time to time decides to close locations whose
performance no longer meets Company standards.

Markets
outside the United States are a source of growth. As of February 3, 2008, there
were a total of 204 Krispy Kreme stores (including 119 satellites) operated
internationally, which were located in Australia, Canada, Hong Kong, Indonesia,
Japan, Kuwait, Mexico, the Philippines, Qatar, Saudi Arabia, South Korea, the
United Arab Emirates and the United Kingdom. The Company owned five of the
Canadian stores and had an equity interest in the franchisees operating stores
in Mexico and Western Canada. The Company currently does not expect to own
equity interests in international area developers formed in the future. Based on
continued research and experience with international stores, the Company is
focusing international development efforts primarily on opportunities in markets
in Asia and the Middle East. The development and franchise agreements for
territories outside the United States (which include the countries listed above)
provide for the development of over 170 additional stores in fiscal 2009 and
thereafter.

The Company
is vertically integrated to help maintain the consistency and quality of
products throughout the Krispy Kreme system. In addition, through vertical
integration, the Company utilizes volume-buying power, which the Company
believes helps lower the cost of supplies to stores and enhances profitability.
The supply chain business unit, KK Supply Chain, produces doughnut mixes and
manufactures doughnut-making equipment, which all factory stores are required to
purchase. Additionally, this business unit operates two distribution centers
that are capable of supplying domestic stores and certain international stores
with key supplies. This business unit is volume-driven, and its economics are
enhanced by the opening of new stores and the growth of sales by existing
stores.

29

---

The Company
has three reportable segments as defined in Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, as described below.

- Company Stores. The Company Stores segment
  is comprised of the operating activities of the stores operated by the
  Company. These stores sell doughnuts and complementary products through the
  sales channels described above under Company Overview. Expenses for this
  business segment include store level expenses along with direct general and
  administrative expenses and certain allocated corporate
  costs.
- Franchise. The Franchise segment consists
  of the Companys store franchise operations. The Company has two principal
  franchise programs: the Associate program, which is the Companys original
  franchising program developed in the 1940s, and the Area Developer program,
  which was developed in the mid-1990s. Associates generally pay royalties of
  3.0% of on-premises sales and 1.0% of all other sales. Area Developers
  typically pay royalties of 4.5% to 6.0% of all sales and one-time development
  and franchise fees ranging from $20,000 to $50,000 per store. The Company has
  informed its area developers that it will reduce the royalty rate on
  off-premises sales to 3.5% in fiscal 2009. Domestic Area Developers are
  required to contribute 1.0% of their sales to the Brand Fund. International
  Area Developers generally are required to contribute 0.25% of their sales to
  the Brand Fund. Some Associates contribute 1.0% of their sales to the Brand
  Fund. The Company is reducing, for an indefinite period, the Brand Fund
  contribution rate for domestic Area Developers and for participating
  Associates to 0.75% effective at the beginning of fiscal 2009. Expenses for
  this business segment include costs incurred to recruit new franchisees, to
  assist with store openings, and to monitor and aid in the performance of these
  stores, as well as direct general and administrative expenses and certain
  allocated corporate costs.
- KK Supply Chain. The KK Supply Chain
  segment buys and processes ingredients it uses to produce doughnut mixes and
  manufactures doughnut-making equipment that all factory stores are required to
  purchase. The KK Supply Chain segment also purchases and sells key supplies,
  including icings and fillings, other food ingredients, juices, signage,
  display cases, uniforms and other items. In October 2007, the Company ceased
  production at its coffee roasting facility and sold its coffee roasting
  assets, and simultaneously entered into an agreement with the purchaser to
  supply the Companys coffee needs. All intersegment sales from the KK Supply
  Chain segment to the Company Stores segment have been eliminated in
  consolidation. Expenses for this business unit include all expenses incurred
  at the manufacturing and distribution level along with direct general and
  administrative expenses and certain allocated corporate costs.

The FTCs
Trade Regulation Rule on Franchising (FTC Rule) and certain state and foreign
laws require the Company to furnish prospective franchisees with a franchise
disclosure document containing information prescribed by the FTC Rule and
applicable state and foreign laws and regulations. The Company has amended its
Franchise Disclosure Document (FDD) to conform it to new FTC disclosure
requirements, and has submitted the amended FDD for registration in those states
in which the Company has registered its franchise offering. The Company
currently is able to offer franchises in all states except Maryland.

Several
franchisees have been experiencing financial pressures which, in certain
instances, became more exacerbated during fiscal 2008. The Company has
guaranteed certain obligations of franchisees in which it has an equity
interest, as described in Other Commitments and Contingencies in Note 12 to
the consolidated financial statements appearing elsewhere herein. In the fourth
quarter of fiscal 2008, the Company recorded a provision for estimated
payments under guarantees related to a franchisee of $3.0 million; during the
quarter, the franchisee defaulted on certain of the obligations guaranteed by
the Company. During the year ended February 3, 2008, two of the Companys other
franchisees filed for reorganization under Chapter 11 of the United States
Bankruptcy Code. One of these bankruptcy cases was substantially concluded in
February 2008 upon the sale of the franchisees assets to, and assumption of
most of its franchise agreements by, a successor franchisee; the other franchise
operation is continuing to operate under court supervision. Franchisees opened
88 stores and closed 26 stores in fiscal 2008. While franchisees have
contractual commitments to open over 170 additional stores in

30

---

fiscal 2009 and thereafter, the Company
believes franchisees also will close additional stores in the future, and the
number of such closures may be significant. Royalty revenues and most of KK
Supply Chain revenues are directly correlated to sales by franchise stores and,
accordingly, franchise store closures have an adverse effect on the Companys
revenues, results of operations and cash flows.

Results of Operations

The
following table presents the Companys operating results for fiscal 2008, 2007
and 2006 expressed as a percentage of total revenues (amounts may not add to
totals due to rounding).

|                                               |  | Year Ended
|---------------------------------------------- |  | ----------
|                                               |  | Feb. 3,   
|                                               |  | 2008      
|Revenues                                       |  | 100.0     
|Operating
      expenses:                      |  |           
|Direct operating expenses                      |  | 88.5      
|General and administrative expenses            |  | 6.1       
|Depreciation and amortization expense          |  | 4.3       
|Impairment charges and lease termination costs |  | 14.5      
|Settlement of litigation                       |  | (3.5      
|Other operating (income) and expense, net      |  |          
|Operating (loss)                               |  | (9.9      

To
facilitate an understanding of the Companys operating results, data on the
number of factory stores (including commissaries) appear in the table
below.

|                              |  | NUMBER OF FACTORY STORES
|----------------------------- |  | ------------------------
|                              |  | COMPANY                 
|JANUARY 30, 2005              |  |                         
|Opened                        |  |                         
|Closed                        |  |                         
|Transferred                   |  |                         
|Converted to satellites       |  |                         
|JANUARY 29,
      2006        |  |                         
|Opened                        |  |                         
|Closed                        |  |                         
|Transferred                   |  |                         
|Converted to
      satellites |  |                         
|JANUARY 28, 2007              |  |                         
|Opened                        |  |                         
|Closed                        |  |                         
|Transferred                   |  |                         
|Converted to satellites       |  |                         
|FEBRUARY 3,
      2008        |  |                         

31

---

Data on the number of satellite
stores appear in the table below.

|                                                                                                                           | NUMBER OF SATELLITE
      STORES
|-------------------------------------------------------------------------------------------------------------------------- | --------------------------------
|                                                                                                                           | COMPANY                         
|JANUARY 30, 2005                                                                                                           |                                 
|Opened                                                                                                                     |                                 
|Closed                                                                                                                     |                                 
|Transferred                                                                                                                |                                 
|Converted from factory stores                                                                                              |                                 
|JANUARY 29,
      2006                                                                                                     |                                 
|Opened                                                                                                                     |                                 
|Closed                                                                                                                     |                                 
|Transferred                                                                                                                |                                 
|Converted from
      factory stores                                                                                        |                                 
|JANUARY 28, 2007                                                                                                           |                                 
|Opened                                                                                                                     |                                 
|Closed                                                                                                                     |                                 
|Converted from
      factory stores                                                                                        |                                 
|FEBRUARY 3, 2008                                                                                                           |                                 
|                                                                                                                          
|Data on the
      aggregate number of factory and satellite stores as of February 3, 2008
      appear in the table below.
|                                                                                                                           |                                 
|                                                                                                                           | NUMBER OF STORES                
|                                                                                                                           | COMPANY                         
|FACTORY STORES:                                                                                                            |                                 
|Domestic                                                                                                                   |                                 
|International                                                                                                              |                                 
|Total factory stores                                                                                                       |                                 
|SATELLITES:                                                                                                                |                                 
|Domestic:                                                                                                                  |                                 
|Hot shops                                                                                                                  |                                 
|Fresh shops                                                                                                                |                                 
|Kiosks                                                                                                                     |                                 
|Total domestic                                                                                                             |                                 
|International:                                                                                                             |                                 
|Hot shops                                                                                                                  |                                 
|Fresh shops                                                                                                                |                                 
|Kiosks                                                                                                                     |                                 
|Total international                                                                                                        |                                 
|Total satellites                                                                                                           |                                 

Franchisees
closed 26 stores in fiscal 2008. The Company believes franchisees will close
additional stores in the future, and the number of such closures may be
significant.

Systemwide
sales, a non-GAAP financial measure, include sales by both Company and franchise
stores. The Company believes systemwide sales data are useful in assessing the
overall performance of the Krispy Kreme brand and, ultimately, the performance
of the Company. The Companys consolidated financial statements appearing
elsewhere herein include sales by Company stores, sales to franchisees by the KK
Supply Chain business segment and royalties and fees received from franchisees,
but exclude sales by franchise stores to their customers.

32

---

The table
below presents average weekly sales per factory store (which represents, on a
Company and systemwide basis, total sales of all stores divided by the number of
operating weeks for factory stores) and average weekly sales per store (which
represents, on a Company and systemwide basis, total sales of all stores divided
by the number of operating weeks for both factory stores and satellites).
Operating weeks represent, on a Company and systemwide basis, the aggregate
number of weeks in the fiscal year that factory stores or both factory and
satellite stores were in operation.

The
Companys fiscal year ends on the Sunday closest to January 31, which
periodically results in a 53-week year. Fiscal 2008 contained 53 weeks. To
enhance comparability among the last three fiscal years, amounts in the table
set forth below for fiscal 2008 have been computed based upon the 52-week period
ended January 27, 2008.

|                                            | Fiscal Year           
|------------------------------------------- | ----------------------
|                                            | 2008                  
|                                            | (Dollars in thousands)
|Average weekly sales per factory store (1): |                       
|Company                                     | $                     
|Systemwide                                  | $                     
|Factory store
      operating weeks:        |                       
|Company                                     |                       
|Systemwide                                  |                       
|Average weekly sales per store (1):         |                       
|Company                                     | $                     
|Systemwide                                  | $                     
|Store operating
      weeks:                |                       
|Company                                     |                       
|Systemwide                                  |                       

(1)      Excludes
intersystem sales between company and franchise stores.

FISCAL 2008 COMPARED TO FISCAL
2007

*Overview*

Excluding
sales for the 53rd week, systemwide sales decreased 0.9% compared to fiscal
2007, reflecting a 5.8% decrease in average weekly sales per store, partially
offset by a 5.2% increase in store operating weeks. The systemwide sales
decrease reflects an 8.4% decrease in Company Stores sales and a 4.4% increase
in franchise store sales. During fiscal 2008, one new Company factory store and
32 new franchise factory stores were opened, nine Company factory stores and 18
franchise factory stores were closed, and three Company factory stores and four
franchise factory stores were converted from factory stores to satellite stores.
The total number of factory stores at the end of fiscal 2008 was 295, consisting
of 97 Company stores and 198 franchise stores. Satellite stores made up 34.3% of
the total systemwide store count as of February 3, 2008 compared to 25.1% at
January 28, 2007. Systemwide average weekly sales per store are lower than
Company average weekly sales per store principally because satellite stores,
which generally have lower average weekly sales than factory stores, are
operated almost exclusively by franchisees. In addition, the increasing
percentage of total stores which are satellite stores has the effect of reducing
the overall systemwide average weekly sales per store.

33

---

*Revenues*

For fiscal
2008, revenues decreased to $429.3 million from $461.2 million in fiscal 2007.
Excluding revenues for the 53rd week, revenues for fiscal 2008 decreased 8.6% to
$421.3 million. Revenues by business segment (expressed in dollars and as a
percentage of total revenues) are set forth in the table below (percentage
amounts may not add to totals due to rounding).

|                                      | Year Ended            
|------------------------------------- | ----------------------
|                                      | Feb. 3,               
|                                      | 2008                  
|                                      | (Dollars in thousands)
|REVENUES BY BUSINESS SEGMENT:         |                       
|Company
      Stores                  | $                     
|Franchise                             |                       
|KK Supply
      Chain:                |                       
|Total revenues                        |                       
|Less  intersegment sales elimination |                       
|External revenues                     |                       
|Total revenues                        | $                     
|                                     
|PERCENTAGE OF TOTAL REVENUES:         |                       
|Company
      Stores                  |                       
|Franchise                             |                       
|KK Supply
      Chain                 |                       
|Total revenues                        |                       

Company
Stores Revenues. Company Stores revenues were
$304.4 million in fiscal 2008. Excluding revenues for the 53rd week, Company
Stores revenues were $298.9 million, a decrease of 8.4% from $326.2 million in
fiscal 2007. The decrease in revenues (measured on a 52-week basis) reflects a
7.6% decline in store operating weeks partially offset by a 0.2% increase in
average weekly sales per store. The decrease in store operating weeks reflects
the sale or closure of 17 factory stores since the end of fiscal 2006. The
increase in the average weekly sales per store reflects, among other things, the
closure of relatively poorer performing locations and the benefits of
consolidating production for wholesale customers into a smaller number of
factory stores, as well as the effects of price increases.

On-premises
sales (which include fundraising sales) comprised approximately 43% and 41% of
total Company Stores revenues in fiscal 2008 and 2007, respectively, with the
balance comprised of off-premises sales.

34

---

The
following table sets forth statistical data with respect to on- and off-premises
sales by Company stores. The data have been computed by comparing the 52 weeks
ended January 27, 2008 to the 52 weeks ended January 28, 2007. The change in
same store sales is computed by dividing the aggregate on-premises sales
(including fundraising sales) during the current year period for all stores
which had been open for more than 56 consecutive weeks during the current year
(but only to the extent such sales occurred in the 57th or later week of each
stores operation) by the aggregate on-premises sales of such stores for the
comparable weeks in the preceding year. Once a store has been open for at least
57 consecutive weeks, its sales are included in the computation of same stores
sales for all subsequent periods. In the event a store is closed temporarily
(for example, for remodeling) and has no sales during one or more weeks, such
stores sales for the comparable weeks during the earlier or subsequent period
are excluded from the same store sales computation. For off-premises sales,
average weekly number of doors represents the average number of customer
locations to which product deliveries are made during a week, and average
weekly sales per door represents the average weekly sales to each such
location.

52
      weeksendedJan. 27,2008ON-PREMISES:Change in same store sales
    0.0
    %OFF-PREMISES:Change in average weekly number of doors
    (1.1
    )%Change in average weekly sales per
      door
    (6.4
    )%


On-premises
same stores sales were flat for the year, generally reflecting an increase in
the average guest check offset by reduced customer traffic. The decrease in the
average weekly number of doors represents a decrease in the grocery/mass
merchant channel, partially offset by an increase in the average weekly number
of doors in the convenience store channel. The average weekly sales per door
fell in both channels. A decrease in average weekly sales per door generally
adversely affects profitability because of the increased significance of
delivery costs in relation to sales. In addition, delivery costs have been
rising due to, among other things, rising fuel costs.

Franchise
Revenues. Franchise revenues consist
principally of royalties payable to the Company by franchisees based upon the
franchisees sales and initial franchise fees earned by the Company in
connection with new store openings by franchisees. The components of Franchise
revenues are as follows:

Year EndedFeb. 3,
    
    Jan. 28,2008
    
    2007(Dollars in thousands)Royalties
    $
    20,377
    
    $
    17,878Development and
      franchise fees
    
    2,341
    
    
    2,891Other
    
    240
    
    
    306Total revenues
    $
    22,958
    
    $
    21,075


Excluding
the 53rd week, franchise revenues were $22.5 million in fiscal 2008, a 6.8%
increase from $21.1 million in fiscal 2007.

Royalty
revenues measured on a 52-week basis rose to $19.9 million in fiscal 2008 from
$17.9 in fiscal 2007. Sales by franchise stores, as reported by the franchisees,
were approximately $476 million (measured on a 52-week basis) in fiscal 2008 and
$456 million in fiscal 2007. The Company did not recognize as revenue
approximately $2.6 million of uncollected royalties which accrued during each of
fiscal 2008 and 2007 because the Company did not believe collection of these
royalties was reasonably assured. All of the growth in franchisee sales in
fiscal 2008 was attributable to an increase in the number of franchise stores
outside the United States. Domestic franchisee sales fell in fiscal 2008,
principally due to store closings in fiscal 2008 and 2007.

35

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Franchisee
fees declined approximately $550,000 in fiscal 2008 compared to fiscal 2007.
Fiscal 2007 franchise fee revenue included approximately $660,000 of fees
related to amendments to agreements with certain international franchisees. The
development and franchise agreements with these franchisees contemplated
development only of factory stores, and were amended to provide for initial
franchise fees for satellite stores and to provide for development of satellite
stores to be partially creditable against the franchisees store development
obligations. The Company did not record initial franchise fees related to these
franchisees satellite stores until the Company agreed with the franchisees on
the amount of initial franchise fee to be paid with respect to these stores.
This decrease in franchise fees was offset by an increase in franchise fees
arising from an increase in store openings by franchisees in 2008 compared to
2007.

Franchisees
opened 88 stores in fiscal 2008. The Company currently expects that the number
of franchise store openings in fiscal 2009 will be fewer than in fiscal 2008.
Franchisees closed 26 stores in fiscal 2008. The Company believes franchisees
will close additional stores in the future, and the number of such closures may
be significant. Royalty revenues are directly correlated to sales by franchise
stores and, accordingly, franchise store closures have an adverse effect on
Franchise revenues.

KK Supply
Chain Revenues.KK Supply Chain revenues were
$101.9 million in fiscal 2008. Excluding the 53rd week, KK Supply Chain revenues
were $99.9 million, a 12.3% decrease from $113.9 million in fiscal 2007. The
most significant reason for the decrease in revenues (measured on a 52-week
basis) was lower sales by domestic franchisees, which resulted in an approximate
13.3% decrease in sales of mixes, icings and fillings, sugar, shortening and
supplies by KK Supply Chain. In addition, an increasing percentage of franchisee
sales is attributable to sales by franchisees outside North America. In certain
instances, instead of selling finished doughnut mix to international
franchisees, the Company sells doughnut mix concentrate, which is combined with
other ingredients sourced locally to produce doughnut mix. While the KK Supply
Chains profit on sales of concentrate is intended to be similar to the profit
which would be earned on the finished mix made from that concentrate, sales of
concentrate generate less revenue than would sales of an equivalent amount of
finished mix. In addition, many of the other ingredients and supplies used by
international franchisees are acquired locally instead of from KK Supply Chain.
The KK Supply Chain revenue decrease was also attributable to a 4.1% decrease in
sales of equipment and equipment services in fiscal 2008 compared to fiscal
2007. Franchisee expansion in fiscal 2008 was comprised principally of satellite
stores, which require less equipment than do factory stores. Sales of equipment
and related services measured on a 52-week basis (including signage, beverage
equipment; furniture, fixtures and similar items sold through the KK Supply
Chain distribution centers) represented approximately 12% and 11% of KK Supply
Chain revenues in fiscal 2008 and 2007, respectively.

Franchisees
opened 88 stores in fiscal 2008. The Company currently expects that the number
of franchise store openings in fiscal 2009 will be fewer than in fiscal 2008.
Franchisees closed 26 stores in fiscal 2008. The Company believes franchisees
will close additional stores in the future, and the number of such closures may
be significant. A significant majority of KK Supply Chains revenues are
directly correlated to sales by franchise stores and, accordingly, franchise
store closures have an adverse effect on KK Supply Chain revenues.

In fiscal
2008, the Company divested a KK Supply Chain manufacturing and distribution
facility (see Note 13 to the consolidated financial statements appearing
elsewhere herein). The business conducted by the divested facility was
transferred to other KK Supply Chain locations and, accordingly, the divestiture
has had no significant effect on KK Supply Chain revenues. The Company also is
evaluating strategic options related to other aspects of the supply chain. In
particular, we currently are in discussions and conducting product testing with
third party mix manufacturers regarding contract mix production for regions
outside the southeastern United States. In addition, the lease on our Los
Angeles facility expires in May 2008, and we currently are considering either
relocating the facility or outsourcing distribution in the western United States
to a third party.

*Direct Operating Expenses*

Direct
operating expenses, which exclude depreciation and amortization expense, were
88.5% of revenues in fiscal 2008 compared to 84.4% of revenues in fiscal 2007.
Direct operating expenses by business segment (expressed in dollars and as a
percentage of applicable segment revenues) are set forth in the table below.
Such operating expenses are consistent with the segment operating income data
set forth in Note 17 to the consolidated

36

---

financial statements appearing elsewhere
herein. Amounts shown below for the Company Stores and KK Supply Chain segments
for fiscal 2007 differ from those amounts as previously reported. As previously
reported, the estimated profit earned by the KK Supply Chain segment on sales to
the Company Stores segment was deducted from Company Stores direct operating
expenses to illustrate the effects of the Companys vertical integration on the
overall profit earned on Company Stores revenues. The Company has discontinued
that profit attribution technique because management concluded that presenting
direct operating expenses on a basis consistent with that used for reporting
segment operating results was more relevant to users of the financial
statements. Amounts previously reported for fiscal 2007 have been reclassified
to be consistent with the presentation for fiscal 2008.

In fiscal
2008, the Company revised its allocation of corporate overhead costs to its
operating segments to make such allocations more consistent with the current
cost of providing support services to the operating segments; such revision
resulted in an increase of $6.0 million in costs allocated to segment direct
operating expenses in fiscal 2008 compared to fiscal 2007, and a corresponding
reduction in general and administrative expenses. The effect of the change in
allocated costs is discussed within the discussion of each segments direct
operating expenses below.

|                                                                                | Year Ended            
|------------------------------------------------------------------------------- | ----------------------
|                                                                                | Feb. 3,               
|                                                                                | 2008                  
|                                                                                | (Dollars in thousands)
|DIRECT OPERATING EXPENSES BY BUSINESS SEGMENT:                                  |                       
|Company
      Stores                                                            | $                     
|Franchise                                                                       |                       
|KK Supply
      Chain:                                                          |                       
|Total direct operating expenses                                                 |                       
|Less  intersegment elimination                                                 |                       
|KK Supply Chain direct operating expenses, less
      intersegment eliminations |                       
|Total direct operating expenses                                                 | $                     
|                                                                               
|DIRECT OPERATING EXPENSES AS A PERCENTAGE OF SEGMENT                            |                       
|REVENUES:                                                                       |                       
|Company Stores                                                                  |                       
|Franchise                                                                       |                       
|KK Supply Chain (before intersegment eliminations)                              |                       
|Total direct operating expenses                                                 |                       

Company
Stores Direct Operating Expenses.Company
Stores direct operating expenses as a percentage of Company Stores revenues
increased to 98.5% in fiscal 2008 from 94.3% in fiscal 2007. The increase
reflects, among other things, higher costs of doughnut mix and certain other
ingredients resulting from price increases instituted by KK Supply Chain in
order to partially offset higher raw materials costs, as well as increased
direct labor and higher delivery vehicle and marketing costs as a percentage of
revenues. KK Supply Chain instituted additional price increases in the first
quarter of fiscal 2009 as a result of a continued rise in the cost of certain
materials, of which flour and shortening are the most significant.

The Company
has been experiencing a decline in the average weekly sales per door in the
off-premises distribution channel. A decrease in average weekly sales per door
generally adversely affects profitability because of the increased significance
of delivery costs in relation to sales. In addition, delivery costs have been
rising due to, among other things, rising fuel costs.

The increase
in Company Stores direct operating expenses as a percentage of Company stores
revenues is also a result of a $3.1 million increase in the allocation of
corporate overhead costs in fiscal 2008 compared to fiscal 2007.

37

---

In fiscal
2008, the Company refined the attribution of the cost of certain insurance and
employee benefits among its business segments and general and administrative
functions in order to attribute these costs to the Companys different
operations more precisely. While the procedural refinement had no effect on
total operating income, the Company estimates the refinement had the effect of
increasing Company Stores direct operating expenses by approximately $3.0
million in fiscal 2008 compared to fiscal 2007, with a corresponding decrease in
general and administrative expenses.

Franchise
Direct Operating Expenses.Franchise direct
operating expenses include costs to recruit new franchisees, to assist in store
openings, and to monitor and aid the performance of franchise stores, as well as
direct general and administrative expenses and allocated corporate costs.
Franchise direct operating expenses rose primarily due to increased costs
associated with recruitment and development of international franchisees and
related store opening assistance. The increase in Franchise direct operating
expenses also reflects a $1.4 million increase in the allocation of corporate
overhead costs in fiscal 2008 compared to fiscal 2007.

KK Supply
Chain Direct Operating Expenses.KK Supply
Chain direct operating expenses as a percentage of KK Supply Chain revenues
before intersegment eliminations increased to 85.0% in fiscal 2008 from 83.3% in
fiscal 2007. The cost of raw materials used in the production of doughnut mix
and of other goods sold to Company and franchise stores was higher in fiscal
2008 compared to fiscal 2007. In particular, the prices of flour and shortening
and the products from which they are made rose significantly in fiscal 2008
compared to fiscal 2007. During 2008, KK Supply Chain increased the prices
charged to Company and franchise stores for doughnut mixes, shortening and other
goods in order to mitigate increased costs; however, those price increases did
not fully offset the rise in KK Supply Chains costs compared to fiscal 2007.
The Company has implemented additional price increases in the first quarter of
fiscal 2009 as a result of continuing increases in the cost of certain raw
materials, particularly flour and shortening.

KK Supply
Chain direct operating expenses include bad debt provisions related to certain
franchisee receivables of approximately $1.5 million (approximately 0.7% of KK
Supply Chain revenues before intersegment eliminations) in fiscal 2008 compared
to approximately $2.9 million (approximately 1.3% of revenues before
intersegment eliminations) in fiscal 2007. As of February 3, 2008, the Companys
allowance for doubtful accounts from affiliated and unaffiliated franchisees
totaled approximately $5.6 million.

KK Supply
Chain direct operating expenses in fiscal 2008 reflect a $1.5 million increase
in the allocation of corporate overhead costs compared to fiscal
2007.

In fiscal
2008, the Company refined the attribution of the cost of certain insurance and
employee benefits among its business segments and general and administrative
functions in order to attribute these costs to the Companys different
operations more precisely. While the procedural refinement had no effect on
total operating income, the Company estimates the refinement had the effect of
increasing KK Supply Chain direct operating expenses by approximately $625,000
for fiscal 2008 compared to fiscal 2007, with a corresponding decrease in
general and administrative expenses.

*General and Administrative
Expenses*

General and
administrative expenses were $26.3 million (6.1% of total revenues) in fiscal
2008 compared to $48.9 million (10.6% of total revenues) in fiscal 2007. General
and administrative expenses include professional fees paid to the interim
management firm engaged by the Company in January 2005 through March 2006, and
professional fees related to the internal and external investigations and
litigation described in Note 12 to the consolidated financial statements
included elsewhere herein, totaling approximately $1.1 million in fiscal 2008
and approximately $9.0 million (net of estimated insurance recoveries of
approximately $4.9 million) in fiscal 2007. The professional fees for fiscal
2007 include approximately $3.9 million related to the warrant to acquire 1.2
million shares of the Companys common stock issued to the interim management
firm as part of its compensation for services rendered to the Company, as more
fully described under Warrant Issued in Exchange for Services in Note 16 to
the consolidated financial statements appearing elsewhere herein. General and
administrative expenses in fiscal 2008 include approximately $2.7 million
recorded in the fourth quarter for severance costs related to the resignation of
the Companys former chief executive officer, of which approximately $1.6
million relates to share-based compensation (including accelerated vesting of
certain equity awards).

38

---

In fiscal
2008, the Company revised its allocation of corporate overhead costs to its
operating segments to make such allocations more consistent with the current
cost of providing support services to the operating segments. Such revision
resulted in an increase of $6.0 million in costs allocated to segment direct
operating expenses in fiscal 2008 compared to fiscal 2007, and a corresponding
reduction in general and administrative expenses. In addition, in fiscal 2008
the Company refined the attribution of the cost of certain insurance and
employee benefits among its business segments and general and administrative
functions in order to attribute these costs to the Companys different
operations more precisely. While the procedural refinement had no effect on
total operating income, the Company estimates the refinement had the effect of
decreasing general and administrative expenses by approximately $3.6 million in
fiscal 2008, with a corresponding increase in segment direct operating expenses,
the substantial majority of which is reflected in Company Stores direct
operating expenses.

Exclusive of
the effects of unusual professional fees, of officer severance pay and of
changes in the allocation of corporate overhead, insurance and benefits costs,
general and administrative expenses were $32.1 million (7.5% of revenues) and
$39.9 million (8.7% of revenues) in fiscal 2008 and fiscal 2007, respectively.
The decrease reflects, among other things, a decline in other professional fees
of $4.2 million. In fiscal 2007, the Company incurred increased accounting,
legal and other costs associated with work on the Companys financial statements
and filings with the Commission, the initial cost of strategic initiatives
related to product, customer and market research and initiatives designed to
achieve cost reductions related to the procurement of goods and services.

*Depreciation and Amortization
Expense*

Depreciation
and amortization expense decreased to $18.4 million in fiscal 2008 from $21.0
million in fiscal 2007. The decline in depreciation and amortization expense is
attributable to the reduction in the number of Company factory stores operating
in fiscal 2008 compared to fiscal 2007 and to a lower depreciable base of
property and equipment resulting from impairment charges in the current and
prior years related to stores which continue to operate. These decreases were
partially offset by approximately $2.3 million of increased depreciation charges
related to the Companys mix manufacturing and distribution facility in
Effingham, Illinois, which the Company divested in January 2008, the estimated
useful life of which was adjusted downward at the end of the second quarter of
fiscal 2008 as a consequence of the Companys decision to divest the facility.
Total depreciation expense related to the Effingham facility was approximately
$4.3 million in fiscal 2008.

*Impairment Charges and Lease Termination
Costs*

Impairment
charges and lease termination costs were $62.1 million in fiscal 2008 compared
to $12.5 million in fiscal 2007.

Impairment
charges related to long-lived assets totaled $56.0 million in fiscal 2008 and
$9.4 million in fiscal 2007, of which approximately $44.1 million and $9.4
million, respectively, related to the Company Stores segment. Approximately
$23.3 million of the fiscal 2008 charges in the Company Stores segment were
recorded in the fourth quarter. The charges relate to stores closed or expected
to be closed, as well as charges with respect to stores management believes will
not generate sufficient future cash flows to enable the Company to recover the
carrying value of the stores assets, but which management has not yet decided
to close. The Company closed nine factory stores in fiscal 2008 and eight
factory stores in fiscal 2007. The Company tests other long-lived assets for
impairment when events or changes in circumstances indicate that their carrying
value may not be recoverable. These events and changes in circumstances include
store closing decisions, the effects of changing costs (including the impact of
rising commodity costs) on current results of operations, observed trends
in operating results, and evidence of a change in circumstances observed as a
part of periodic reforecasts of future operating results and as part of the
Companys annual budgeting process. The Company records impairment charges
associated with stores in the accounting period in which a store closing
decision is made or in which the carrying value of the store is otherwise
determined to be nonrecoverable. In addition, during fiscal 2008 the Company
recorded an impairment charge of approximately $10.4 million related to its
manufacturing and distribution facility in Effingham, Illinois, which the
Company divested as described in Note 13 to the consolidated financial
statements appearing elsewhere herein. Such charge is net of a credit of
approximately $0.6 million recorded upon the sale of the facility in the fourth
quarter to adjust earlier estimates of its net realizable value. Finally, the
Company recorded an impairment charge of approximately $1.5 million fiscal 2008
to reduce the carrying value of its KK Supply Chain coffee roasting assets to
their estimated fair value upon disposition. The Company sold these assets for
approximately $1.9 million during the third quarter of fiscal 2008.

39

---

Impairment
charges related to goodwill were approximately $4.6 million and $1.1 million in
fiscal 2008 and 2007, respectively, substantially all of which relate to the
Company Stores segment. Such charges were recorded in the fourth quarter of each
fiscal year. The goodwill impairment charges were recorded to reduce the
carrying value of goodwill to its estimated fair value, which the Company
estimates using the present value of expected future cash flows. Such charges
reflect reductions in the Companys forecasted sales and earnings in certain of
the reporting units comprising the Company Stores and KK Supply Chain segments,
which caused a reduction in the estimated fair value of those reporting units.
Such reductions reflect current operating results, including the effects of
higher materials and labor costs, as well as recent trends in operating results.
The Company conducts its annual goodwill impairment testing as of December
31.

Lease
termination costs represent the net present value of remaining contractual lease
payments related to closed stores, after reduction by estimated sublease rental,
and are recorded when the lease contract is terminated or, if earlier, the date
on which the Company ceases use of the leased property. Lease termination costs
were approximately $1.0 million and $1.8 million, respectively, in fiscal 2008
and fiscal 2007. The Company received $966,000 in connection with its assignment
of leases related to closed stores in fiscal 2008; lease termination charges
related to other closed stores offset the credit to earnings resulting from
these assignments.

The Company
is developing a strategy to refranchise certain geographic markets, expected to
consist principally of, but not necessarily limited to, markets outside the
Companys traditional base in the Southeast. The franchise rights and other
assets in many of these markets were acquired by the Company in business
combinations in prior years. Because the Company has not completed the
development of its detailed refranchising plans and has not entered into any new
domestic franchise agreements in several years, the Company cannot predict the
likelihood of refranchising any such markets or the amount of any proceeds which
might be received therefrom, including the amounts which might be realized from
the sale of store assets and the execution of any related franchise agreements.
Refranchising could result in the recognition of impairment losses on the
related assets.

*Settlement of Litigation*

On October
31, 2006, the Company agreed to settle a federal securities class action and to
settle, in part, certain shareholder derivative actions, as more fully described
in Item 3, Legal Proceedings, and in Note 12 to the consolidated financial
statements appearing elsewhere herein. As part of the settlement, the Company
issued to the plaintiffs 1,833,828 shares of the Companys common stock and
warrants to acquire 4,296,523 shares of common stock at a price of $12.21 per
share. At the time the settlement was agreed upon, the Companys fiscal 2006
financial statements had not been issued; accordingly, the Company charged a
provision for the settlement of approximately $35.8 million against fiscal 2006
earnings, representing the estimated fair value as of late October 2006 of the
common stock and warrants to be issued by the Company. In the fourth quarter of
fiscal 2007, the Company recorded an additional charge to earnings of
approximately $16.0 million relating to the settlement, representing the
increase from October 2006 to January 28, 2007 in the estimated fair value of
the securities to be issued by the Company. The provision for settlement costs
was adjusted downward by $14.9 million in the first quarter of fiscal 2008 to
reflect the decrease in the fair value of the securities from January 28, 2007
until their issuance on March 2, 2007. The fair value of the common shares was
determined based upon the market price of the Companys common stock on March 2,
2007, and the fair value of the warrants to acquire common shares was estimated
as of that date as described in Note 16 to the consolidated financial statements
appearing elsewhere herein.

*Interest Income*

Interest
income was $1.4 million in fiscal 2008 compared to $1.6 million in fiscal 2007.
The decrease principally reflects lower invested balances in fiscal 2008
compared to fiscal 2007.

*Interest Expense*

Interest
expense decreased to $9.8 million in fiscal 2008 from $20.3 million in fiscal
2007. The decrease principally reflects decreased costs resulting from lower
lender margin and amortization of deferred financing costs in fiscal 2008
compared to fiscal 2007 as a result of the Companys refinancing its long-term
debt in the first quarter of fiscal 2008 as described under Liquidity and
Capital Resources below and in Note 10 to the

40

---

consolidated financial statements
appearing elsewhere herein. The reduction in interest expense also reflects a
reduction in the amount of outstanding indebtedness. Amendments to the Companys
credit facilities effective after February 3, 2008 will increase the Companys
interest expense in fiscal 2009; such amendments also are described in Note 10
and in Liquidity and Capital Resources below.

*Loss on Extinguishment of
Debt*

During the
first quarter of fiscal 2008, the Company refinanced its long-term debt and
revolving credit facilities as more fully described in Note 10 to the
consolidated financial statements appearing elsewhere herein. The Company
recorded a loss on extinguishment of the refinanced term debt of approximately
$9.6 million, consisting of a $4.1 million prepayment fee and a $5.5 million
write-off of unamortized deferred financing costs related to refinanced
facilities.

*Equity in Losses of Equity Method
Franchisees*

The
Companys share of the losses incurred by equity method franchisees totaled
$933,000 in fiscal 2008 compared to $842,000 in fiscal 2007. This caption
represents the Companys share of operating results of equity method franchisees
which develop and operate Krispy Kreme stores.

*Other Non-Operating Income and Expense,
Net*

Other
non-operating income and expense in fiscal 2008 includes a provision of $3.0
million recorded in the fourth quarter for estimated payments under the
Companys guarantees of certain debt and leases related to a franchisee. During
the quarter, the franchisee defaulted on certain of the obligations guaranteed
by the Company and, while there is no current demand on the Company to perform
under the guarantees, the Company believes it is probable that demand will be
made on the Company to perform under some, and potentially all, of them. The
charge is comprised of $2.1 million representing 100% of the portion of
principal balance of the franchisees loans guaranteed by the Company, and
$900,000 representing the guaranteed portion of approximately one years total
payments on the guaranteed leases. The estimated aggregate maximum remaining
potential obligation on guaranteed leases over their remaining lives (which
range from 11 to 16 years) and for which no provision has been recorded is
approximately $8.8 million, assuming no sublease rentals or other loss
mitigation benefits and no reduction for rights of setoff or other defenses the
Company may have to the guarantees. In addition, other non-operating income and
expense in fiscal 2008 includes an impairment charge of approximately $550,000
to reduce the carrying value of the Companys investment in a franchisee to its
estimated fair value, partially offset by a gain of approximately $260,000
resulting from additional proceeds from the prior sale of an interest in another
franchisee.

Other
non-operating income and expense in fiscal 2007 includes gains of approximately
$7.3 million arising principally from the sale of the Companys investments in
Krispy Kreme Australia and Krispy Kreme UK and a charge of approximately
$450,000 for estimated payments under a Company guarantee of certain obligations
of a franchisee.

*Provision for Income Taxes*

The
provision for income taxes was $2.3 million and $1.2 million in fiscal 2008 and
fiscal 2007, respectively. Each of these amounts includes adjustments to the
valuation allowance for deferred income tax assets to maintain such allowance at
an amount sufficient to reduce the Companys aggregate net deferred income tax
assets to zero, as well as a provision for income taxes estimated to be payable
currently.

*Net Loss*

The Company incurred a net loss of
$67.1 million and $42.2 million for fiscal 2008 and fiscal 2007,
respectively.

41

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FISCAL 2007 COMPARED TO FISCAL
2006

*Overview*

Systemwide
sales for fiscal 2007 decreased 11.9% compared to fiscal 2006, reflecting a 4.6%
decrease in average weekly sales per store and a 7.6% decrease in store
operating weeks. The systemwide sales decrease reflects an 18.1% decrease in
Company Stores sales and a 7.0% decrease in franchise store sales.

*Revenues*

Revenues by
business segment (expressed in dollars and as a percentage of total revenues)
are set forth in the table below (percentage amounts may not add to totals due
to rounding). KK Supply Chain revenues exclude intersegment sales eliminated in
consolidation.

|                                            | Year Ended            
|------------------------------------------- | ----------------------
|                                            | Jan. 28,              
|                                            | 2007                  
|                                            | (Dollars in thousands)
|REVENUES BY BUSINESS SEGMENT:               |                       
|Company
      Stores                        | $                     
|Franchise                                   |                       
|KK Supply
      Chain:                      |                       
|Total revenues                              |                       
|Less  intersegment sales
      elimination |                       
|External revenues                           |                       
|Total revenues                              | $                     
|                                           
|PERCENTAGE OF TOTAL REVENUES:               |                       
|Company
      Stores                        |                       
|Franchise                                   |                       
|KK Supply
      Chain                       |                       
|Total revenues                              |                       

Company
Stores Revenues.Company Stores revenues
decreased 18.1% to $326.2 million in fiscal 2007 from $398.5 million in fiscal
2006. The decrease in revenues reflects a 26.2% decrease in store operating
weeks, partially offset by a 10.9% increase in average weekly sales per store.
The decrease in store operating weeks reflects the significant number of factory
stores sold or closed since the end of fiscal 2005. The increase in the average
weekly sales per store reflects, among other things, the closure of relatively
poorer performing locations, the benefits of consolidating production for
wholesale customers into a smaller number of factory stores, the effects of
certain price increases implemented late in the second quarter of fiscal 2007 on
products sold through certain off-premises distribution channels, and improved
sales volume through convenience store outlets, partially offset by lower
volumes through the grocery store and mass merchant channels.

Franchise
Revenues.Franchise revenues, consisting
principally of franchise fees and royalties, increased 14.6% to $21.1 million in
fiscal 2007 from $18.4 million in fiscal 2006. Franchisee fees rose
approximately $2.3 million in fiscal 2007 compared to fiscal 2006, of which
approximately $660,000 represents revenue arising from amendments to agreements
with certain international franchisees. The development and franchise agreements
with these franchisees contemplated development only of factory stores, and were
amended to provide for initial franchise fees for satellite stores and to
provide for development of satellite stores to be partially creditable against
the franchisees store development obligations. The Company did not record
initial franchisee fees related to these franchisees satellite stores until the
Company agreed with the franchisees on the amount of initial franchise fee to be
paid with respect to these stores. The balance of the increase in franchise fees
principally reflects an increase in new store openings in fiscal 2007 compared
to fiscal 2006. In addition, royalty revenues rose to $17.9 million in fiscal
2007 from $17.5 million in fiscal 2006. While sales by franchise stores fell to
approximately $456 million in fiscal 2007 compared to approximately $490 million
in fiscal 2006, the resolution of disputes with two

42

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major franchisees substantially eliminated
collectability concerns with respect to royalties accruing on sales by these
franchisees during fiscal 2007. The amount of royalty revenue not recognized
during fiscal 2007 due to collectability concerns fell to approximately $2.6
million from approximately $3.7 million in fiscal 2006.

KK Supply
Chain Revenues.KK Supply Chain sales to
franchise stores decreased 10.0% to $113.9 million in fiscal 2007 from $126.5
million in fiscal 2006. The most significant reason for the decrease in revenues
was lower sales by franchisees, which resulted in an approximate 13% decrease in
sales of mixes, icings and fillings, sugar, shortening, coffee and supplies by
KK Supply Chain. In addition, an increasing percentage of franchisee sales is
attributable to sales by franchisees outside North America; while the Company
sells the doughnut mixes used by such franchisees, many of the other ingredients
and supplies used by these franchisees are acquired locally instead of from KK
Supply Chain. The decline in sales of mixes and other supplies was partially
offset by a 26% increase in sales of equipment and equipment services in fiscal
2007 compared to fiscal 2006, principally as a result of increased store
expansion by franchisees in fiscal 2007. Franchisees opened 30 new factory
stores in fiscal 2007 compared to 13 in fiscal 2006. Sales of equipment and
related services (including signage, beverage equipment, furniture, fixtures and
similar items sold through the KK Supply Chain distribution centers) represented
approximately 11% and 8% of KK Supply Chain revenues in fiscal 2007 and 2006,
respectively.

*Direct Operating Expenses*

Direct
operating expenses, which exclude depreciation and amortization expense, were
84.4% of revenues in fiscal 2007 compared to 87.3% of revenues in fiscal 2006.
Direct operating expenses by business segment (expressed in dollars and as a
percentage of applicable segment revenues) are set forth in the table below.
Such operating expenses are consistent with the segment operating income data
set forth in Note 17 to the consolidated financial statements appearing
elsewhere herein. Amounts shown below for the Company Stores and KK Supply Chain
segments differ from those amounts as previously reported. As previously
reported, the estimated profit earned by the KK Supply Chain segment on sales to
the Company Stores segment was deducted from Company Stores direct operating
expenses to illustrate the effects of the Companys vertical integration on the
overall profit earned on Company Stores revenues. The Company has discontinued
that profit attribution technique because management concluded that presenting
direct operating expenses on a basis consistent with that used for reporting
segment operating results was more relevant to users of the financial
statements. Amounts previously reported for fiscal 2007 and 2006 have been
reclassified to be consistent with the presentation for fiscal 2008.

|                                                                                | Year Ended            
|------------------------------------------------------------------------------- | ----------------------
|                                                                                | Jan. 28,              
|                                                                                | 2007                  
|                                                                                | (Dollars in thousands)
|DIRECT OPERATING EXPENSES BY BUSINESS SEGMENT:                                  |                       
|Company
      Stores                                                            | $                     
|Franchise                                                                       |                       
|KK Supply
      Chain:                                                          |                       
|Total direct operating expenses                                                 |                       
|Less  intersegment elimination                                                 |                       
|KK Supply Chain direct operating expenses, less
      intersegment eliminations |                       
|Total direct operating expenses                                                 | $                     
|                                                                               
|DIRECT OPERATING EXPENSES AS A PERCENTAGE OF SEGMENT                            |                       
|REVENUES:                                                                       |                       
|Company
      Stores                                                            |                       
|Franchise                                                                       |                       
|KK Supply Chain
      (before intersegment eliminations)                        |                       
|Total direct operating expenses                                                 |                       

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Company
Stores Direct Operating Expenses.Company
Stores direct operating expenses as a percentage of Company Stores revenues
decreased to 94.3% in fiscal 2007 from 95.0% in fiscal 2006. The improvement
reflects the benefits of the sale or closure of relatively poorer performing
locations, the benefits of higher average weekly sales per store resulting, in
part, from consolidating production of products for sale through off-premises
channels into a smaller number of factory stores, and the effects of certain
price increases implemented late in the second quarter of fiscal 2007 on
products sold though certain off-premises distribution channels. Many store
operating costs are fixed or semi-fixed in nature and, accordingly, store profit
margins are sensitive to changes in sales volumes. Company Stores direct
operating expenses for fiscal 2007 include a charge of approximately $1.3
million recorded in the fourth quarter related to the proposed settlement of
claims alleging violation of wage and hour laws by the Company.

Franchise
Direct Operating Expenses.Franchise direct
operating expenses include costs to recruit new franchisees, to assist in store
openings, and to monitor and aid in the performance of franchise stores, as well
as direct general and administrative expenses and allocated corporate costs.
Franchise direct operating expenses as a percentage of Franchise revenues
decreased to 21.8% in fiscal 2007 from 27.3% in fiscal 2006, primarily due to
reduced provisions for uncollectible receivables. Increased costs associated
with recruitment and development of international franchisees were offset by a
reduction in costs associated with domestic franchise expansion.

KK Supply
Chain Direct Operating Expenses.KK Supply
Chain direct operating expenses as a percentage of KK Supply Chain revenues
before intersegment eliminations were 83.3% in fiscal 2007 compared with 85.9%
in fiscal 2006. The improvement reflects the benefit of certain price increases
instituted in the first quarter of fiscal 2007 to offset higher costs, as well
as lower bad debt provisions and lower allocated corporate costs in fiscal 2007
compared to fiscal 2006. KK Supply Chain direct operating expenses include bad
debt provisions relating to receivables from franchisees of approximately $2.9
million in fiscal 2007 (of which approximately $1.4 million was recorded in the
fourth quarter) and $4.8 million for fiscal 2006. These improvements were
partially offset by the adverse effects of lower operating levels in fiscal 2007
compared to fiscal 2006 resulting from lower revenue levels and by increases in
the cost of certain ingredients. In fiscal 2007, KK Supply Chain was adversely
affected by increases in certain raw materials costs, including the cost of
flour and shortening. The prices of these materials and the products from which
they are made were volatile in fiscal 2007 and reached record highs during the
year.

*General and Administrative
Expenses*

General and
administrative expenses were $48.9 million (10.6% of total revenues) in fiscal
2007 compared to $67.7 million (12.5% of total revenues) in fiscal 2006. General
and administrative expenses include professional fees paid to the interim
management firm engaged by the Company in January 2005 and professional fees
related to the internal and external investigations and litigation described in
Note 12 to the consolidated financial statements included elsewhere herein
totaling approximately $9.0 million (net of estimated insurance recoveries of
approximately $4.9 million) in fiscal 2007 and approximately $31.8 million (net
of estimated insurance recoveries of approximately $14.4 million) in fiscal
2006. The professional fees for fiscal 2007 include a credit of approximately
$2.3 million recorded in the fourth quarter of fiscal 2007 resulting from
reimbursements from insurance companies of costs and expenses in excess of
amounts previously estimated. The professional fees for fiscal 2007 and fiscal
2006 include approximately $3.9 million and $2.8 million, respectively, related
to the warrant to acquire 1.2 million shares of the Companys common stock
issued to the interim management firm as part of its compensation for services
rendered to the Company, as more fully described in Note 16 to the consolidated
financial statements appearing elsewhere herein. In addition, general and
administrative expenses in fiscal 2006 include approximately $4.0 million of
out-of-period costs related to stock-based compensation. The Company erroneously
failed to record these costs in prior years, but concluded that such error was
not material to the consolidated financial statements of the affected periods or
to the fiscal 2006 consolidated financial statements. Accordingly, the Company
recorded the costs in the first quarter of fiscal 2006 rather than restating
prior periods financial statements, as more fully described in Note 1 to the
consolidated financial statements. Exclusive of these costs, general and
administrative expenses were 8.7% of revenues in fiscal 2007 compared to 5.9% in
fiscal 2006. The increase in these costs in absolute terms and as a percentage
of revenue reflects, among other things, approximately $3.4 million of stock
compensation costs incurred in fiscal 2007 and included in general and
administrative expenses (resulting, in part, from adoption of FAS 123(R) as
described in Note 16 to

44

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the consolidated financial statements),
increased legal and other costs associated with work on the Companys financial
statements and filings with the SEC, the initial cost of strategic initiatives
related to product, customer and market research and initiatives designed to
achieve cost reductions related to the procurement of goods and services, higher
cash compensation costs, and the effects of the fixed nature of many of these
costs on a smaller revenue base.

*Depreciation and Amortization
Expense*

Depreciation
and amortization expense decreased to $21.0 million, or 4.6% of total revenues,
in fiscal 2007 from $28.9 million, or 5.3% of total revenues, in fiscal 2006.
The decrease in depreciation and amortization expense relates almost entirely to
the Company Stores segment, in which depreciation and amortization expense
declined principally due to the sale and closure of stores.

*Impairment Charges and Lease Termination
Costs*

Impairment
charges and lease termination costs were $12.5 million in fiscal 2007 compared
to $55.1 million in fiscal 2006, including approximately $1.1 million and $3.5
million, respectively, of goodwill impairment charges. The remaining charges in
fiscal 2007 and 2006 consist principally of impairment charges related to
long-lived assets at Company stores of approximately $9.4 million and $49.7
million, respectively, and lease termination costs of approximately $1.8 million
and $1.3 million, respectively. While the majority of the impairment charges
relate to closed stores, in the fourth quarter of fiscal 2007, the Company also
recorded approximately $3.0 million of impairment charges with respect to stores
management believes are unlikely to generate sufficient future cash flows to
enable the Company to recover the carrying value of the stores assets, but
which management has not yet decided to close. The Company closed eight
factory stores in fiscal 2007 and 46 factory stores in fiscal 2006. The Company
generally records impairment charges associated with a decision to close a store
in the accounting period in which the closing decision is made; lease
termination costs are recorded when the lease contract is terminated or, if
earlier, the date on which the Company ceases use of the leased
property.

*Settlement of Litigation*

On October
31, 2006, the Company agreed to settle a federal securities class action and to
settle, in part, certain shareholder derivative actions, as more fully described
in Item 3, Legal Proceedings, and Note 12 to the consolidated financial
statements appearing elsewhere herein. As part of the settlement, the Company
issued to the plaintiffs 1,833,828 shares of the Companys common stock and
warrants to acquire 4,296,523 shares of common stock at a price of $12.21 per
share. At the time the settlement was agreed upon, the Companys fiscal 2006
financial statements had not been issued; accordingly, the Company charged a
provision for the settlement of approximately $35.8 million against fiscal 2006
earnings, representing the estimated fair value as of late October 2006 of the
common stock and warrants to be issued by the Company. In the fourth quarter of
fiscal 2007, the Company recorded an additional charge to earnings of
approximately $16.0 million relating to the settlement, representing the
increase from October 2006 to January 28, 2007 in the estimated fair value of
the securities to be issued by the Company. The provision for settlement costs
was adjusted downward by $14.9 million in the first quarter of fiscal 2008 to
reflect the decrease in the fair value of the securities from January 28, 2007
until their issuance on March 2, 2007. The fair value of the common shares was
determined based upon the market price of the Companys common stock, and the
fair value of the warrants to acquire common shares was estimated as described
in Note 16 to the consolidated financial statements.

*Interest Income*

Interest
income was $1.6 million in fiscal 2007 compared to $1.1 million in fiscal 2006.
The increase principally reflects higher invested balances in fiscal 2007
compared to fiscal 2006.

45

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*Interest Expense*

Interest
expense increased to $20.3 million in fiscal 2007 from $20.2 million in fiscal
2006. The aggregate costs, including interest, fees and amortization of deferred
financing costs, associated with the Companys credit facilities increased
approximately $4.9 million during fiscal 2007 compared to fiscal 2006,
principally reflecting higher interest rates and lender margin in fiscal 2007
compared to fiscal 2006. In addition, interest expense in fiscal 2006 included
one-time fees and expenses of approximately $1.2 million associated with a bank
credit facility prior to its retirement using proceeds of the 2005 Secured
Credit Facilities, the write-off of approximately $840,000 of unamortized
financing costs associated with the retired bank financing and approximately
$640,000 charged to earnings upon termination of an interest rate hedge related
to the retired bank financing. Interest expense in fiscal 2006 also included
approximately $2.0 million of interest expense associated indebtedness of
certain subsidiaries which has since been retired.

*Equity in Losses of Equity Method
Franchisees*

The
Companys share of the losses incurred by equity method franchisees totaled
$842,000 in fiscal 2007 compared to $4.3 million in fiscal 2006. This caption
represents the Companys share of operating results of unconsolidated
franchisees which develop and operate Krispy Kreme stores. The fiscal 2006
losses included approximately $2.4 million of losses related to KremeKo, the
Companys former franchisee in Eastern and Central Canada, which arose from
impairment provisions associated principally with store closures. In addition,
the Companys equity in the losses of equity method franchisees has declined as
a result of the Companys sale or other disposal of these investments in fiscal
2006 and fiscal 2007.

*Minority Interests in Results of
Consolidated Franchisees*

The minority
interest in the results of operations of consolidated franchisees represents the
portion of the income or loss of less than wholly-owned franchise subsidiaries
allocable to other investors interests in those franchisees. In fiscal 2006,
minority investors absorbed losses in such subsidiaries totaling $4.2 million.
There were no minority interests in the results of operations of consolidated
subsidiaries in fiscal 2007 because the minority interests in the franchisee had
been reduced to zero or the franchisee had ceased operations.

*Other Non-Operating Income and Expense,
Net*

Other
non-operating income and expense in fiscal 2007 includes gains of approximately
$7.3 million arising principally from the sale of the Companys investments in
Krispy Kreme Australia and Krispy Kreme UK, and a charge of approximately
$450,000 for estimated payments under a Company guarantee of certain obligations
of an equity method franchisee.

*Provision for Income Taxes*

The
provision for income taxes was $1.2 million in fiscal 2007 and a benefit of
$776,000 in fiscal 2006. Each of these amounts includes adjustments to the
valuation allowance for deferred income tax assets to maintain such allowance at
an amount sufficient to reduce the Companys aggregate net deferred income tax
assets to zero, as well as a provision for income taxes estimated to be payable
currently. The provision for income taxes in fiscal 2006 also includes an
out-of-period credit of approximately $1.5 million. This credit corrects an
overstatement of the valuation allowance for deferred income tax assets recorded
by a charge to earnings in fiscal 2005. The Company concluded that this error
was not material to the consolidated financial statements of the affected
periods or to the fiscal 2006 consolidated financial statements. Accordingly,
the Company recorded the credit in the first quarter of fiscal 2006 rather than
restating prior periods financial statements.

*Net Loss*

The Company
incurred a net loss of $42.2 million in fiscal 2007 compared to a net loss of
$135.8 million in fiscal 2006.

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Liquidity and Capital
Resources

The
following table summarizes the Companys cash flows from operating, investing
and financing activities for fiscal 2008, 2007 and 2006:

|                                                               | Year Ended    
|-------------------------------------------------------------- | --------------
|                                                               | Feb. 3,       
|                                                               | 2008          
|                                                               | (In thousands)
|Net cash provided by operating activities                      | $             
|Net cash
      provided by (used for) investing activities     |               
|Net cash provided by (used for) financing activities           |               
|Effect of
      exchange rate changes on cash                  |               
|Cash balances of subsidiaries at date of
      deconsolidation |               
|Net increase (decrease) in cash and cash
      equivalents     | $             

Cash Flows from Operating
Activities

Net cash
provided by operating activities was $9.7 million in fiscal 2008, $22.1 million
in fiscal 2007 and $1.9 million in fiscal 2006.

Cash
provided by operating activities in fiscal 2008 reflects a cash outflow of
approximately $4.1 million for the prepayment fee associated with the
refinancing of the Companys 2005 Secured Credit Facilities as described below
and in Note 10 to the consolidated financial statements appearing elsewhere
herein. Operating cash flow was adversely affected in fiscal 2008 compared to
fiscal 2007 by a $4.2 million reduction in accrued interest from year end 2007
to year end 2008 arising from the change in the last day of the fiscal year
relative to the last day of January. In addition, receipts of development and
franchise fees were approximately $5.0 million higher in fiscal 2007 than in
fiscal 2008; such fees are deferred and not recognized in earnings until the
related stores are opened.

Cash
provided by operating activities in fiscal 2008, 2007 and 2006 was affected by
professional and other fees related to the investigations and litigation
described in Note 12 to the consolidated financial statements appearing
elsewhere herein. Additionally, fiscal 2006 cash provided by operating
activities was reduced by fees paid to the corporate recovery and advisory firm
engaged by the Company to provide interim management services to the Company
from late January 2005 through March 2006. These fees and expenses, net of
related insurance recoveries, reduced operating cash flow by $4.2 million, $8.4
million and $26.9 million in fiscal 2008, 2007 and 2006,
respectively.

Cash Flows from Investing
Activities

Net cash
provided by investing activities was $13.1 million in fiscal 2008 and $14.0 in
fiscal 2007. Net cash used for investing activities was $11.7 million in fiscal
2006.

Cash used
for capital expenditures increased to $5.5 million in fiscal 2008 from $4.0
million in fiscal 2007. Cash used for capital expenditures decreased in both
fiscal 2008 and fiscal 2007 from $10.4 million in fiscal 2006 because the
Company substantially eliminated store expansion early in fiscal 2006. In fiscal
2008, 2007 and 2006, the Company realized proceeds from the sale of property and
equipment of $18.3 million, $9.7 million and $7.3 million, respectively, which,
except for approximately $10.9 million (net of expenses) received in fiscal 2008
from the sale of a mix manufacturing and distribution facility, related
principally to closed stores.

During
fiscal 2007, the Company recovered $2.5 million related to its investment in
Freedom Rings (a former franchisee which filed for bankruptcy protection in
October 2005) and received approximately $9.6 million from the sale of its
interests in franchisees in Australia and the United Kingdom and from the sale
of the Companys equity interest in another franchisee.

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In addition,
in fiscal 2007, the Company paid approximately $818,000 (net of a recovery of
$282,000) to settle its obligations under its guarantees of a portion of the
indebtedness of Glazed Investments, a subsidiary which filed for bankruptcy
protection in February 2006. In fiscal 2006, the Company advanced approximately
$12.2 million to franchisees in which the Company had an ownership interest,
including approximately $9.3 million paid to settle the Companys obligations
under certain guarantees of indebtedness of KremeKo. Each of these amounts is
included in Investments in and advances to equity method franchisees in the
consolidated statement of cash flows.

During fiscal 2007, the Company
purchased three stores from one of its franchisees for $2.9 million
cash.

Cash Flows from Financing
Activities

Net cash
used for financing activities was $34.4 in fiscal 2008 and $15.5 million in
fiscal 2007. Net cash provided by financing activities was $0.1 million in
fiscal 2006.

In February
2007 the Company closed new secured credit facilities totaling $160 million. At
closing, the Company borrowed the full $110 million available under the 2007
Term Loan , and used the proceeds to retire approximately $107 million of
indebtedness outstanding under the 2005 Secured Credit Facilities (which were
terminated) and to pay prepayment fees under the 2005 Secured Credit Facilities
and fees and expenses associated with the 2007 Secured Credit Facilities. In
fiscal 2008, the Company prepaid approximately $32.8 million of the 2007 Term
Loan, of which $17.8 million was from the proceeds of sales of certain property
and equipment and $15.0 million represented discretionary prepayments made in
order to reduce the likelihood of violating the leverage ratio covenant
contained in the facilities.

During
fiscal 2007, financing activities included scheduled principal payments of
long-term debt. In addition, pursuant to the provisions of the 2005 Secured
Credit Facilities described in Note 10 to the consolidated financial statements
appearing elsewhere herein, in fiscal 2007 the Company prepaid approximately
$7.6 million of the debt thereunder using proceeds from the sale of certain
property and equipment, and repaid an additional $3.6 million using proceeds
from the sale of the Companys interest in its franchisee in the United
Kingdom.

In fiscal
2006, the Company closed the 2005 Secured Credit Facilities. The Company
borrowed $120 million under these facilities at closing, and used approximately
$88 million to repay borrowing outstanding under the credit facility existing at
that time, which was then terminated. The Company paid approximately $9.5
million of fees, costs and expenses associated with the 2005 Secured Credit
Facilities. Other retirements of long-term debt in fiscal 2006 included
approximately $16.2 million related to a majority-owned franchise subsidiary and
payments on capital lease obligations. Cash inflows from financing activities in
fiscal 2006 included a $7.7 million capital contribution to a majority-owned
franchise subsidiary by the minority investors in that franchisee.

Other Balance Sheet
Changes

Other
current assets declined by approximately $6.4 million in fiscal 2008 compared to
fiscal 2007 principally due to the disposal of assets held for sale. Other
accrued liabilities declined by approximately $2.5 million in fiscal 2008,
principally due to the timing of the January 2008 interest payment date relative
to fiscal year end and the payment of certain accrued professional
fees.

Business Conditions, Uncertainties and
Liquidity

The Company
incurred net losses of $135.8 million, $42.2 million and $67.1 million in fiscal
2006, 2007 and 2008, respectively, which include non-cash impairment charges of
$53.7 million, $10.8 million and $61.0 million, respectively.

In addition,
fiscal 2006 and 2007 results include non-cash charges of $35.8 million and $16.0
million, respectively, related to the settlement of certain litigation, and
fiscal 2008 results reflect a non-cash credit of $14.9 million related to the
same settlement, as described in Note 12 to the consolidated financial
statements appearing elsewhere herein.

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The Company
experienced a decline in revenues and incurred net losses in each of the last
three fiscal years. The revenue decline reflects fewer Company stores in
operation, a decline in domestic royalty revenues and lower sales of mixes and
other ingredients resulting from lower sales by the Companys domestic
franchisees. Lower revenues have adversely affected operating margins because of
the fixed or semi-fixed nature of many of the Companys direct operating
expenses. In addition, the Company has recorded significant asset impairment
charges, principally related to underperforming Company stores and, in fiscal
2008, a manufacturing and distribution facility the Company divested. Total
impairment charges and lease termination costs for fiscal 2008 were $62.1
million.

The Company
had net cash flow from operations of $1.9 million, $22.1 million and $9.7
million in fiscal 2006, 2007, and 2008, respectively. Asset dispositions
generated investing cash flows of $9.7 million in fiscal 2007 and $18.3 million
in fiscal 2008, with the majority of such proceeds used to reduce the
outstanding borrowings under the Companys credit facilities.

The Companys fiscal 2009 operating
plan reflects a decline in revenues and an increase in certain costs, including
the impact of commodity prices on its raw materials costs, compared to
fiscal 2008. The Company is taking measures to reduce controllable costs and has
implemented, and, to the extent feasible, plans to implement in the future,
price increases to offset increases in raw material costs. Based on the
Companys current working capital and the fiscal 2009 operating plan, management
believes the Company can meet its projected operating, investing and financing
cash requirements.

In February
2007, the Company completed a refinancing using the proceeds of the 2007 Secured
Credit Facilities described in Note 10 to the consolidated financial statements
appearing elsewhere herein, which are the Companys principal source of external
financing. These facilities consist of a $110 million term loan maturing in
February 2014 and a $30 million revolving credit facility maturing in February
2013.

The 2007
Secured Credit Facilities contain significant financial and other covenants.
Based on its operating plan, the Company projected that it would not be able to
comply with the financial covenants in fiscal 2009. Subsequent to the end of
fiscal 2008, the Company executed amendments to the 2007 Secured Credit
Facilities which, among other things, relaxed the financial covenants contained
therein for fiscal 2009 and 2010. The financial covenants as of February 3,
2008, and the amended financial covenants for future years, are described in
Note 10 to the consolidated financial statements appearing elsewhere herein.
While the Company was in compliance with the financial covenants as of February
3, 2008, and the Company expects to be able to comply with the amended financial
covenants based on its operating plan, there can be no assurance that the
Company will be able to do so. As a result of amendments and waivers in fiscal
2008 and 2009, the Company paid fees of approximately $835,000 and the interest
rate on the loans has increased from LIBOR plus 2.75% to LIBOR plus 5.50% (with
a LIBOR floor of 3.25%). The increase in rates will result in approximately $1.9
million of additional annual interest expense based on the current
level of borrowings. Any future amendments or waivers could result in additional
fees or rate increases.

The Company
has prepaid approximately $32.8 million of the $110 million term loan; such
prepayments included prepayments of approximately $17.8 million from sales of
property and equipment and discretionary prepayments of $5 million in each of
the first, second and third quarters of fiscal 2008 made in order to reduce the
likelihood of violating the leverage ratio covenant contained in the facilities.
In addition to scheduled amortization of principal, the term loan is required to
be prepaid with some or all of the net proceeds of certain equity issuances,
debt incurrences, asset sales and casualty events and with a percentage of
excess cash flow (as defined in the agreement) on an annual basis.

As of
February 3, 2008, the maximum additional borrowing available to the Company was
approximately $9.7 million, computed on a pro forma basis after giving effect to
the reduction in lender commitments under the Companys revolving credit
facility described in Note 10 to the consolidated financial statements appearing
elsewhere herein.

Failure to
comply with the financial covenants contained in the 2007 Credit Facilities, or
the occurrence or failure to occur of certain events, would cause the Company to
default under the facilities. In the absence of a waiver of, or forbearance with
respect to, any such default from the Companys lenders, the Company could be
obligated to repay outstanding indebtedness under the facilities in advance of
its scheduled maturity, and the Companys ability to access additional
borrowings under the facilities would be restricted. In the event the Company
were to fail to comply

49

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with one or more such covenants, the
Company would attempt to negotiate waivers of any such noncompliance. There can
be no assurance that the Company would be able to negotiate any such waivers,
and the costs or conditions associated with any such waivers could be
significant. In the event that credit under the 2007 Secured Credit Facilities
were not available to the Company, there can be no assurance that alternative
sources of credit would be available to the Company or, if they are available,
under what terms or at what cost.

Many factors
could adversely affect the Companys business. In particular, the Company is
vulnerable to further increases in the cost of raw materials, which could
adversely affect the Companys operating results and cash flows. In addition,
several franchisees have been experiencing financial pressures which, in certain
instances, became more exacerbated during fiscal 2008. The Company has
guaranteed certain obligations of franchisees in which it has an equity
interest, as described in Other Commitments and Contingencies in Note 12 to
the consolidated financial statements appearing elsewhere herein. In the fourth
quarter of fiscal 2008, the Company recorded a provision of $3.0 million for
estimated payments under these guarantees. The Company may be required to make
payments under any of these guarantees in the next 12 months. During the year
ended February 3, 2008, two of the Companys other franchisees filed for
reorganization under Chapter 11 of the United States Bankruptcy Code. One of
these bankruptcy cases was substantially concluded in February 2008 upon the
sale of the franchisees assets to, and assumption of most of its franchise
agreements by, a successor franchisee; the other franchise operation is
continuing to operate under court supervision. Franchisees opened 88 stores and
closed 26 stores in fiscal 2008. Franchisees have contractual commitments to
open over 170 additional stores after fiscal 2008; however, the Company believes
franchisees also will close additional stores in the future, and the number of
such closures may be significant. Royalty revenues and most of KK Supply Chain
revenues are directly correlated to sales by franchise stores and, accordingly,
franchise store closures have an adverse effect on the Companys revenues,
results of operations and cash flows.

Capital Resources, Contractual
Obligations and Off-Balance Sheet Arrangements

In addition
to cash flow generated from operations, the Company utilizes other capital
resources and financing arrangements to fund its business. These other resources
and arrangements have assumed increased importance in light of the reduced cash
flows provided by operations. A discussion of these capital resources and
financing techniques is included below.

Debt

The Company
continuously monitors its funding requirements for general working capital
purposes and other financing and investing activities. In the last three fiscal
years, management focused on reducing or eliminating the Companys investments
in franchisees and the related guarantees of franchisees obligations, and on
restructuring the Companys borrowing arrangements to maintain credit
availability to facilitate accomplishing the Companys business restructuring
initiatives.

On February
16, 2007, the Company closed new secured credit facilities totaling $160 million
(the 2007 Secured Credit Facilities). The facilities then consisted of a $50
million revolving credit facility maturing in February 2013 (the 2007
Revolver) and a $110 million term loan maturing in February 2014 (the 2007
Term Loan). The 2007 Secured Credit Facilities are secured by a first lien on
substantially all of the assets of the Company and its domestic subsidiaries. At
closing, the Company borrowed the full $110 million available under the 2007
Term Loan, and used the proceeds to retire approximately $107 million of
indebtedness outstanding under the 2005 Secured Credit Facilities described
below (which were then terminated), to pay prepayment premiums under the 2005
Secured Credit Facilities and to pay fees and expenses associated with the 2007
Secured Credit Facilities. The Company recorded a pretax charge related to the
refinancing of approximately $9.6 million in the first quarter of fiscal 2008,
representing the approximately $4.1 million prepayment fee related to the 2005
Secured Credit Facilities and the write-off of approximately $5.5 million of
unamortized deferred financing costs related to that facility.

The 2007
Revolver contains provisions which permit the Company to obtain letters of
credit. Issuance of letters of credit under these provisions constitutes usage
of the lending commitments, and reduces the amount available for cash borrowings
under the 2007 Revolver. The commitments under the 2007 Revolver were reduced to
$30 million from $50 million in connection with the amendments to the 2007
Secured Credit Facilities executed in April 2008 (the April
Amendments).

50

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Interest on
borrowings under the 2007 Revolver and Term Loan is payable either at LIBOR or
at the Alternate Base Rate (which is the greater of Fed funds rate plus 0.50% or
the prime rate), in each case plus the Applicable Margin. As of February 3,
2008, the Applicable Margin for LIBOR-based loans was 3.50% and for Alternate
Base Rate-based loans was 2.50%. The April Amendments to the 2007 Secured Credit
Facilities more fully described below increased the Applicable Margin for
LIBOR-based loans to 5.50% and for Alternate Base Rate-based loans to 4.50%. In
addition, those amendments provide that LIBOR-based loans shall be computed
based upon the greater of the relevant LIBOR rate or 3.25%.

The Company
is required to pay a fee equal to the Applicable Margin for LIBOR-based loans on
the outstanding amount of letters of credit issued under the 2007 Revolver, as
well as a fronting fee of 0.25% of the amount of such letter of credit payable
to the letter of credit issuer. There also is a fee of 0.50% on the unused
portion of the 2007 Revolver lending commitment, which increased to 0.75%
simultaneously with the reduction in the revolver lending commitments pursuant
to the April Amendments.

Borrowings
under the 2007 Revolver (and issuances of letters of credit) are subject to the
satisfaction of usual and customary conditions, including accuracy of
representations and warranties and the absence of defaults.

The 2007
Term Loan is payable in quarterly installments of approximately $240,000 (after
adjustment for the effects of certain principal prepayments) and a final
installment equal to the remaining principal balance in February 2014. The 2007
Term Loan is required to be prepaid with some or all of the net proceeds of
certain equity issuances, debt incurrences, asset sales and casualty events and
with a percentage of excess cash flow (as defined in the agreement) on an annual
basis.

The 2007
Secured Credit Facilities require the Company to meet certain financial tests,
including a maximum consolidated leverage ratio (expressed as a ratio of total
debt to Consolidated EBITDA) and a minimum consolidated interest coverage ratio
(expressed as a ratio of Consolidated EBITDA to net interest expense), computed
based upon Consolidated EBITDA and net interest expense for the most recent four
fiscal quarters and total debt as of the end of such four-quarter period. As of
February 3, 2008, the consolidated leverage ratio was required to be not greater
than 4.0 to 1.0 and the consolidated interest coverage ratio was required to be
not less than 3.25 to 1.0. As of February 3, 2008, the Companys consolidated
leverage ratio was approximately 3.03 to 1.0 and the Companys consolidated
interest coverage ratio was approximately 4.23 to 1.0. The April Amendments
provide that the consolidated leverage ratio shall not exceed 4.75 to 1.0 and
the consolidated interest coverage ratio shall not be less than 2.5 to 1.0 in
fiscal 2009. The maximum consolidated leverage ratio for periods after fiscal
2009 declines over time until it reaches 2.75 to 1.0 in fiscal 2013, and the
minimum consolidated interest coverage ratio increases over time until it
reaches 4.5 to 1.0 in fiscal 2011. Consolidated EBITDA is a non-GAAP measure
and is defined in the 2007 Secured Credit Facilities to mean, generally,
consolidated net income or loss, exclusive of unrealized gains and losses on
hedging instruments, gains or losses on the early extinguishment of debt and
provisions for payments on guarantees of franchisee obligations, plus the sum of
net interest expense, income taxes, depreciation and amortization, non-cash
charges, store closure costs, costs associated with certain litigation and
investigations, and extraordinary professional fees; and minus payments, if any,
on guarantees of franchisee obligations in excess of $3 million in any rolling
12-month period and the sum of non-cash credits. In addition, the 2007 Secured
Credit Facilities contain other covenants which, among other things, limit the
incurrence of additional indebtedness (including guarantees), liens, investments
(including investments in and advances to franchisees which own and operate
Krispy Kreme stores), dividends, transactions with affiliates, asset sales,
acquisitions, capital expenditures, mergers and consolidations, prepayments of
other indebtedness and other activities customarily restricted in such
agreements. The 2007 Secured Credit Facilities also prohibit the transfer of
cash or other assets to KKDI from its subsidiaries, whether by dividend, loan or
otherwise, but provide for exceptions to enable KKDI to pay taxes and operating
expenses and certain judgment and settlement costs.

The
operation of the restrictive financial covenants described above may limit the
amount the Company may borrow under the 2007 Revolver. In addition, the maximum
amount which may be borrowed under the 2007 Revolver is reduced by the amount of
outstanding letters of credit, of which approximately $20.3 million were
outstanding as of February 3, 2008. The maximum additional borrowing available
to the Company as of February 3, 2008 was approximately $9.7 million (computed
on a pro forma basis after giving effect to the April Amendments).

51

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The 2007
Secured Credit Facilities also contain customary events of default, including
without limitation, payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to other indebtedness in excess of
$5 million, certain events of bankruptcy and insolvency, judgment defaults in
excess of $5 million and the occurrence of a change of control.

In May 2007,
the Company entered into interest rate derivative contracts having an aggregate
notional principal amount of $60 million. The derivative contracts eliminate the
Companys exposure, with respect to such notional amount, to increases in three
month LIBOR beyond 5.40% through April 2010, and eliminate the Companys ability
to benefit from a reduction in three month LIBOR below 4.48% for the same
period.

*Leases*

The Company
conducts some of its operations from leased facilities and leases certain
equipment. Generally, these leases have initial terms of three to twenty years
and contain provisions for renewal options of five to ten years. In determining
whether to enter into a lease for an asset, the Company evaluates the nature of
the asset and the associated lease terms to determine if leasing is an effective
financing tool.

*Off-Balance Sheet Arrangements*

The
Companys only off-balance sheet arrangements, as defined by Item 303(a)(4) of
SEC Regulation S-K, consist of the Companys guarantees of indebtedness and
lease obligations of certain franchisees, as discussed in Notes 12 and 18 to the
consolidated financial statements appearing elsewhere herein, and certain
potential indemnification obligations also discussed in Note 12.

Contractual Cash Obligations at
February 3, 2008

The Companys contractual cash
obligations as of February 3, 2008 are as follows:

|                                                              |                |         |      | Payments Due In
|------------------------------------------------------------- | -------------- | ------- | ---- | ---------------
|                                                              |                |         |      | Less           
|                                                              |                |         |      | Than           
|                                                              | Total          |         | 1    |                
|                                                              | Amount         |         | Year |                
|                                                              | (In thousands)
|Long-term debt
      (excluding capital lease obligations),   |                |         |      |                
|including current maturities                                  | $              | 76,119  |      | $              
|Interest payment
      obligations (1)(2)                     |                | 47,565  |      |                
|Payment
      obligations on interest rate hedge (3)          |                | 3,052   |      |                
|Capital lease
      obligations                               |                | 594     |      |                
|Operating lease
      obligations                             |                | 159,658 |      |                
|Purchase
      obligations                                    |                | 48,885  |      |                
|Guarantee obligations                                         |                | 3,419   |      |                
|Other long-term
      obligations, including current portion, |                |         |      |                
|reflected on the Companys balance sheet:                     |                |         |      |                
|Self-insurance claims                                         |                | 18,127  |      |                
|401(k) mirror plan liability                                  |                | 368     |      |                
|Total                                                         | $              | 357,787 |      | $              

|(1) |  | Interest rates
      utilized to estimate interest payments for variable rate debt are based
      upon the forward LIBOR interest rate curve as of February 1, 2008 and have
      been computed on a pro forma basis to give effect to the amendments to the
      Companys secured credit facilities executed in April 2008.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Represents estimated
      amounts payable without reduction for any amount due to the Company or
      payable by the Company pursuant to an interest rate hedge agreement. See
      Note 10 to the consolidated financial statements appearing elsewhere
      herein.                                                       

52

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|(3) |  | Interest rates
      utilized to estimate payments on the interest rate hedge are based upon
      the forward LIBOR interest rate curve as of February 1,
  2008
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

The
preceding table of contractual cash obligations excludes income tax liabilities
of approximately $2.2 million as of February 3, 2008 for unrecognized tax
benefits due to uncertainty in predicting the timing of any such related
payments.

Capital Requirements

In the next five years, the Company
plans to use cash primarily for the following activities:

- Working capital and other corporate
  purposes
- Opening new Company stores in selected markets,
  principally satellite shops
- Remodeling and relocation of selected older
  Company shops
- Investments in systems and
  personnel
- Restructuring initiatives

The
Companys capital requirements for these activities may be significant. These
capital requirements will depend on many factors including the Companys overall
performance, the pace of store expansion and Company store remodels and
infrastructure needs for both personnel and facilities. These capital outlays
are subject to limitations contained in the 2007 Secured Credit
Facilities.

Inflation

The Company does not believe that
inflation has had a material effect on its results of operations in recent
years.

Critical Accounting
Policies

The
Companys discussion and analysis of its financial condition and results of
operations is based upon its financial statements that have been prepared in
accordance with GAAP. The preparation of financial statements in accordance with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosures, including disclosures of contingencies and uncertainties. GAAP
provides the framework from which to make these estimates, assumptions and
disclosures. The Company chooses accounting policies within GAAP that management
believes are appropriate to accurately and fairly report the Companys operating
results and financial position in a consistent manner. Management regularly
assesses these policies in light of changes in facts and circumstances and
discusses the selection of accounting policies and significant accounting
judgments with the audit committee of the Board of Directors. The Company
believes that application of the following accounting policies involves
judgments and estimates that are among the more significant used in the
preparation of the financial statements, and that an understanding of these
policies is important to understanding the Companys financial condition and
results of operations.

*Allowance for Doubtful
Accounts*

Accounts
receivable arise primarily from royalties earned on sales by the Companys
franchisees, sales by KK Supply Chain to our franchisees of equipment, mix and
other supplies necessary to operate a Krispy Kreme store, as well as from
off-premises sales by company stores to convenience and grocery stores and other
customers. During the three years in the period ended February 3, 2008, some of
the Companys franchisees experienced financial difficulties or for other
reasons did not comply with the normal payment terms for settlement of amounts
due to the Company. The Company has recorded provisions for doubtful accounts
related to its accounts receivable, including receivables from franchisees, in
amounts which management believes are sufficient to provide for losses estimated
to be sustained on realization of these receivables. Such estimates inherently
involve uncertainties and assessments of the outcome of future events, and
changes in facts and circumstances may result in adjustments to the provision
for doubtful accounts.

53

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*Goodwill and Identifiable Intangible
Assets*

FAS 142,
Goodwill and Other Intangible Assets (FAS 142), addresses the accounting and
reporting of goodwill and other intangible assets subsequent to their
acquisition. FAS 142 requires intangible assets with definite lives to be
amortized over their estimated useful lives, while those with indefinite lives
and goodwill are not subject to amortization but must be tested annually for
impairment, or more frequently if events and circumstances indicate potential
impairment.

For
intangible assets with indefinite lives, the Company performs the annual test
for impairment as of December 31. The impairment test involves determining the
fair values of the reporting units to which goodwill is assigned and comparing
those fair values to the reporting units carrying values, including goodwill.
To determine fair value for each reporting unit, the Company uses the fair value
of the cash flows that the reporting unit can be expected to generate in the
future. This valuation method requires management to project revenues, operating
expenses, working capital investment, capital spending and cash flows for the
reporting units over a multiyear period, as well as determine the weighted
average cost of capital to be used as a discount rate. Significant management
judgment is involved in preparing these estimates. Changes in projections or
estimates could significantly change the estimated fair value of reporting units
and affect the recorded balances of goodwill. In addition, if management uses
different assumptions or estimates in the future or if conditions exist in
future periods that are different than those anticipated, future operating
results and the balances of goodwill in the future could be affected by
impairment charges. Impairment analyses of goodwill in fiscal 2008, 2007 and
2006 resulted in impairment charges of approximately $4.6 million, $1.1 million
and $3.5 million, respectively. As of February 3, 2008, the remaining goodwill
had a carrying value of $23.5 million, all of which was associated with the
Franchise segment.

*Asset Impairment*

When an
asset group (typically a store) is identified as underperforming or when a
decision is made to abandon an asset group or to close a store, the Company
makes an assessment of the potential impairment of the related assets. The
assessment is based upon a comparison of the carrying amount of the assets,
primarily property and equipment, to the estimated undiscounted cash flows
expected to be generated from those assets. To estimate cash flows, management
projects the net cash flows anticipated from continuing operation of the asset
group or store until its closing or abandonment, as well as cash flows, if any,
anticipated from disposal of the related assets. If the carrying amount of the
assets exceeds the sum of the undiscounted cash flows, the Company records an
impairment charge in an amount equal to the excess of the carrying value of the
assets over their estimated fair value.

Determining
undiscounted cash flows and the fair value of an asset group involves estimating
future cash flows, revenues, operating expenses and disposal values. The
projections of these amounts represent managements best estimates at the time
of the review. If different cash flows had been estimated, property and
equipment balances and related impairment charges could have been affected.
Further, if management uses different assumptions or estimates in the future or
if conditions exist in future periods that are different than those anticipated,
future operating results could be affected. In fiscal 2008, 2007 and 2006, the
Company recorded impairment charges related to long-lived assets totaling
approximately $56.0 million, $9.4 million and $49.7, respectively. Additional
impairment charges may be necessary in future years.

*Insurance*

The Company
is subject to workers compensation, vehicle and general liability claims. The
Company is self-insured for the cost of all workers compensation, vehicle and
general liability claims up to the amount of stop-loss insurance coverage
purchased by the Company from commercial insurance carriers. The Company
maintains accruals for the estimated cost of claims, without regard to the
effects of stop-loss coverage, using actuarial methods which evaluate known open
and incurred but not reported claims and consider historical loss development
experience. In addition, the Company records receivables from the insurance
carriers for claims amounts estimated to be recovered under the stop-loss
insurance policies when these amounts are estimable and probable of collection.
The Company estimates such stop-loss receivables using the same actuarial
methods used to establish the related

54

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claims accruals, and taking into account
the amount of risk transferred to the carriers under the stop-loss policies.
Many estimates and assumptions are involved in estimating future claims, and
differences between future events and prior estimates and assumptions could
affect future operating results and result in adjustments to these loss accruals
and related insurance receivables.

*Income Taxes*

The Company
recognizes deferred tax assets and liabilities based upon managements
expectation of the future tax consequences of temporary differences between the
income tax and financial reporting bases of assets and liabilities. Deferred tax
liabilities generally represent tax expense recognized for which payment has
been deferred, or expenses which already have been deducted in the Companys tax
return but which have not yet been recognized as an expense in the consolidated
financial statements. Deferred tax assets generally represent tax deductions or
credits that will be reflected in future tax returns for which the Company has
already recorded a tax benefit in its consolidated financial statements. The
Company establishes valuation allowances for deferred income tax assets as
required under FAS 109, Accounting for Income Taxes. At February 3, 2008, the
Company has recorded a valuation allowance against deferred income tax assets of
$177.0 million, representing the total amount of such assets in excess of the
Companys deferred income tax liabilities. The valuation allowance was recorded
because management was unable to conclude, in light of the cumulative losses
realized by the Company, that realization of the net deferred income tax asset
was more likely than not. The determination of income tax expense and the
related balance sheet accounts, including valuation allowances for deferred
income tax assets, requires management to make estimates and assumptions
regarding future events, including future operating results and the outcome of
tax-related contingencies. If future events are different from those assumed or
anticipated, the amount of income tax assets and liabilities, including
valuation allowances for deferred income tax assets, could be materially
affected.

*Guarantee Liabilities*

The Company
has guaranteed a portion of loan and lease obligations of certain franchisees in
which the Company owns an interest. The Company assesses the likelihood of
making any payments under the guarantees and records liabilities for the present
value of anticipated payments when the Company believes that an obligation to
perform under the guarantees is probable. No liabilities for the guarantees were
recorded at the time they were issued because the Company believed the value of
the guarantees was immaterial. As of February 3, 2008, the Company has recorded
liabilities of approximately $3.4 million related to such guarantees, which
totaled approximately $17.5 million at that date. Assessing the probability of
future guarantee payments involves estimates and assumptions regarding future
events, including the future operating results of the franchisees. If future
events are different from those assumed or anticipated, the amounts estimated to
be paid pursuant to such guarantees could change, and additional provisions to
record such liabilities could be required.

*Investments in Franchisees*

The Company
has investments in certain Equity Method Franchisees. While the Company believes
that the recorded amounts of such investments are realizable, these franchisees
typically do not have an extensive operating history, and the value of the
Companys investments in the franchisees cannot be verified by reference to
quoted market prices. The Companys assessment of the realizability of these
investments involves assumptions concerning future events, including the future
operating results of the franchisees. If future events are different from those
assumed or anticipated by the Company, the assessment of realizability of the
recorded investments in these entities could change, and impairment provisions
related to these investments could be required. As of February 3, 2008, the
Companys investment in Equity Method Franchisees was approximately $2.0
million.

*Stock-Based Compensation*

In fiscal
2007 the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, which requires that stock awards,
including stock options, granted to employees and which ultimately vest be
recognized as compensation expense based on their fair value at the grant date.
Because

55

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options granted to employees differ from
options on the Companys common shares traded in the financial markets, the
Company cannot determine the fair value of options granted to employees based on
observed market prices. Accordingly, the Company estimates the fair value of
stock options subject only to service conditions using the Black-Scholes option
valuation model, which requires inputs including interest rates, expected
dividends, volatility measures and employee exercise behavior patterns. Some of
the inputs the Company uses are not market-observable and must be estimated. The
fair value of stock options which contain market conditions as well as service
conditions is estimated using Monte Carlo simulation techniques. In addition,
the Company must estimate the number of awards which ultimately will vest, and
periodically adjust such estimates to reflect actual vesting events. Use of
different estimates and assumptions would produce different option values, which
in turn would affect the amount of compensation expense recognized.

The
Black-Scholes model is capable of considering the specific features included in
the options granted to the Companys employees that are subject only to service
conditions. However, there are other models which could be used to estimate
their fair value, and techniques other than Monte Carlo simulation could be used
to estimate the value of stock options which are subject to both service and
market conditions. If the Company were to use different models, the option
values would differ despite using the same inputs. Accordingly, using different
assumptions coupled with using different valuation models could have a
significant impact on the fair value of employee stock options.

*Recent Accounting
Pronouncements*

The Company
adopted Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109 during first quarter of fiscal 2008 as described in Note 1 to the
consolidated financial statements appearing elsewhere herein.

In March
2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (FAS 161). The new standard is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entitys financial position, financial performance, and cash
flows. FAS 161 is effective for the Company in fiscal 2010.

In February
2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115 (FAS 159). FAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. FAS 159
does not affect any existing accounting literature that requires certain assets
and liabilities to be carried at fair value. Management does not intend to adopt
any fair value measurement options permitted by FAS 159 and, accordingly, does
not expect FAS 159 to have any effect on the Companys financial position or
results of operations.

In September
2006, the FASB issued Statement No. 157, Fair Value Measurements (FAS 157),
which addresses how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure purposes under GAAP.
As a result of FAS 157, there is now a common definition of fair value to be
used throughout GAAP, which is expected to make the measurement of fair value
more consistent and comparable. The Company must adopt FAS 157 in fiscal 2009.
Management does not expect adoption of FAS 157 to have a material effect on the
Companys financial position or results of operations.

56

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Item 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.

The Company
is exposed to market risk from increases in interest rates on its outstanding
debt. All of the borrowings under the Companys secured credit facilities bear
interest at variable rates based upon either the prime rate, Fed funds rate or
LIBOR. The interest cost of the Companys debt is affected by changes in
short-term interest rates and increases in those rates adversely affect the
Companys results of operations. The Company has entered into interest rate
derivative contracts having an aggregate notional principal amount of $60
million. The derivative contracts eliminate the Companys exposure, with respect
to such notional amount, to increases in three month LIBOR beyond 5.40% through
April 2010, and eliminate the Companys ability to benefit from a reduction in
three month LIBOR below 4.48% for the same period.

As of
February 3, 2008, the Company had approximately $76.7 million in borrowings
outstanding. A hypothetical increase of 100 basis points in short-term interest
rates would result in an increase in the Companys annual interest expense of
approximately $167,000, after giving effect to the change in payments due to or
from the Company from the interest rate hedge described above.

Because the
substantial majority of the Companys revenue, expense and capital purchasing
activities are transacted in United States dollars, the exposure to foreign
currency exchange risk is limited. The Companys investment in its franchisee
operating in Mexico and the Companys operations in Canada expose the Company to
exchange rate risk. In addition, although royalties from international
franchisees are payable to the Company in United States dollars, changes in the
rate of exchange between the United States dollar and the foreign currencies
used in the countries in which the international franchisees operate will affect
the Companys royalty revenues. The Company historically has not attempted to
hedge these exchange rate risks.

The Company
is exposed to the effects of commodity price fluctuations in the cost of
ingredients of its products, of which flour, sugar and shortening are the most
significant. In order to secure adequate supplies of materials and bring greater
stability to the cost of ingredients, the Company routinely enters into forward
purchase contracts and other purchase arrangements with suppliers. Under the
forward purchase contracts, the Company commits to purchasing agreed-upon
quantities of ingredients at agreed-upon prices at specified future dates. The
outstanding purchase commitment for these commodities at any point in time
typically ranges from one months to two years anticipated requirements,
depending on the ingredient. Other purchase arrangements typically are
contractual arrangements with vendors (for example, with respect to certain
beverages and ingredients) under which the Company is not required to purchase
any minimum quantity of goods, but must purchase minimum percentages of its
requirements for such goods from these vendors with whom it has executed these
contracts.

In addition
to entering into forward purchase contracts, from time to time the Company
purchases exchange-traded commodity futures contracts, and options on such
contracts, for raw materials which are ingredients of its products or which are
components of such ingredients, including wheat and soybean oil. The Company
typically assigns the futures contract to a supplier in connection with entering
into a forward purchase contract for the related ingredient. Quantitative
information about the Companys unassigned commodity futures contracts as of
February 3, 2008, all of which mature in fiscal 2009, is set forth in the table
below.

|                        |  |                                               |  |                        |  | Aggregate       |  |          
|----------------------- |  | --------------------------------------------- |  | ---------------------- |  | --------------- |  | ---------
|                        |  |                                               |  | Weighted               |  | Contract        |  | Aggregate
|                        |  |                                               |  | Average
      Contract |  | Amount          |  | Fair     
|                        |  | Contract Volume                               |  | or Strike Price        |  | or Strike Price |  | Value    
|                        |  | (Dollars in thousands, except average prices)
|Wheat futures contracts |  | 300,000 bu.                                   |  | $10.04/bu.             |  | $3,012          |  | $267     

Although the
Company utilizes forward purchase contracts and futures contracts and options on
such contracts to mitigate the risks related to commodity price fluctuations,
such contracts do not fully mitigate commodity price risk. In addition, the
portion of the Companys anticipated future commodity requirements that is
subject to such contracts varies from time to time. Recently, prices for wheat
and soy bean oil have been at or near all-time highs and dairy prices have
risen. Continued high prices or further adverse changes in commodity prices
could adversely affect the Companys profitability and liquidity.

57

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The
following table illustrates the potential effect on the Companys costs
resulting from hypothetical changes in the cost of the Companys three most
significant ingredients.

|           |  | Approximate                   |  | Approximate
      Range   |  |                          |  | Approximate
      Annual    
|---------- |  | ----------------------------- |  | ------------------------- |  | ------------------------ |  | ----------------------------
|           |  | Anticipated
      Fiscal 2009 |  | of Prices
      Paid In   |  | Hypothetical
      Price |  | Effect Of
      Hypothetical
|Ingredient |  | Purchases                     |  | Fiscal 2008               |  | Increase                 |  | Price Increase              
|           |  | (In
      thousands)          |  |                           |  |                          |  | (In
      thousands)        
|Flour      |  | 79,000lbs.                    |  | $0.141  $0.239/lb.       |  | $0.01                    |  | $790                        
|Shortening |  | 41,000lbs.                    |  | $0.367 
      $0.586/lb. |  | $0.01                    |  | 410                         
|Sugar      |  | 61,600lbs.                    |  | $0.295  $0.306/lb.       |  | $0.01                    |  | 616                         

The range of
prices paid for fiscal 2008 set forth in the table above reflect the effects of
any forward purchase contracts entered into at various times prior to delivery
of the goods and, accordingly, do not necessarily reflect the range of prices of
these ingredients prevailing in the market during the fiscal year.

58

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Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.

|                                                                                                                | Page
|--------------------------------------------------------------------------------------------------------------- | ----
|Index to Financial Statements                                                                                   |     
|Report of
      Independent Registered Public Accounting Firm                                                   | 60  
|Consolidated balance sheet as of February 3, 2008 and January 28,
      2007                                    | 61  
|Consolidated
      statement of operations for each of the three years in the period                            |     
|ended February 3, 2008                                                                                          | 62  
|Consolidated statement of cash flows for each of the three years in
      the period                            |     
|ended February 3,
      2008                                                                                    | 63  
|Consolidated
      statement of changes in shareholders equity for each of the three years
      in the period |     
|ended February 3, 2008                                                                                          | 64  
|Notes to financial statements                                                                                   | 65  
|Financial
      statement schedules:                                                                            |     
|For each of the three years in the period ended February 3,
      2008:                                         |     
|Schedule I 
      Condensed Financial Information of Registrant                                                | 110 
|Schedule II  Valuation and Qualifying Accounts and Reserves                                                    | 113 

59

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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
of Krispy Kreme Doughnuts, Inc.

In our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Krispy Kreme
Doughnuts, Inc. and its subsidiaries (the Company) at February 3, 2008 and
January 28, 2007, and the results of their operations and their cash flows for
each of the three years in the period ended February 3, 2008 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedules listed in the
accompanying index present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of February 3,
2008, based on criteria established inInternal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible for these financial
statements and financial statement schedules, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Managements Report on
Internal Control over Financial Reporting under Item 9A. Our responsibility is
to express opinions on these financial statements, on the financial statement
schedules, and on the Companys internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements
included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.

As discussed
in Note 1 to the consolidated financial statements, the Company changed the
manner in which it accounts for share-based compensation effective January 30,
2006 and uncertain tax positions effective January 29, 2007.

A companys
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial
statements.

Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP Greensboro,
North CarolinaApril 17, 2008

60

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KRISPY KREME DOUGHNUTS,
INC.

CONSOLIDATED BALANCE
SHEET

|                                                                                      |  | Feb. 3,        |          | Jan. 28,
|------------------------------------------------------------------------------------- |  | -------------- | -------- | --------
|                                                                                      |  | 2008           |          | 2007    
|                                                                                      |  | (In thousands)
|ASSETS                                                                               
|CURRENT
      ASSETS:                                                                 |  |                |          |         
|Cash and cash equivalents                                                             |  | $              | 24,735   |         
|Receivables                                                                           |  |                | 22,991   |         
|Accounts and notes receivable  equity method franchisees                             |  |                | 2,637    |         
|Inventories                                                                           |  |                | 19,987   |         
|Insurance recovery receivable                                                         |  |                |         |         
|Deferred income
      taxes                                                           |  |                | 83       |         
|Other current assets                                                                  |  |                | 5,647    |         
|Total current assets                                                                  |  |                | 76,080   |         
|Property and equipment                                                                |  |                | 90,996   |         
|Investments in
      equity method franchisees                                        |  |                | 1,950    |         
|Goodwill and other intangible assets                                                  |  |                | 23,856   |         
|Deferred income
      taxes                                                           |  |                |         |         
|Other assets                                                                          |  |                | 9,469    |         
|Total
      assets                                                                    |  | $              | 202,351  |         
|                                                                                     
|LIABILITIES AND SHAREHOLDERS EQUITY                                                 
|CURRENT
      LIABILITIES:                                                            |  |                |          |         
|Current maturities of long-term debt                                                  |  | $              | 1,557    |         
|Accounts
      payable                                                                |  |                | 5,712    |         
|Accrued litigation settlement                                                         |  |                |         |         
|Deferred income
      taxes                                                           |  |                |         |         
|Other accrued liabilities                                                             |  |                | 35,949   |         
|Total current liabilities                                                             |  |                | 43,218   |         
|Long-term debt, less current maturities                                               |  |                | 75,156   |         
|Deferred income
      taxes                                                           |  |                | 83       |         
|Other long-term obligations                                                           |  |                | 27,270   |         
|Commitments and
      contingencies                                                   |  |                |          |         
|SHAREHOLDERS EQUITY:                                                                 |  |                |          |         
|Preferred stock,
      no par value; 10,000 shares authorized; none issued and        |  |                |          |         
|outstanding                                                                           |  |                |         |         
|Common stock, no par value; 300,000 shares authorized; 65,370 and
      62,670 shares |  |                |          |         
|issued and outstanding                                                                |  |                | 355,615  |         
|Accumulated
      other comprehensive income                                          |  |                | 81       |         
|Accumulated deficit                                                                   |  |                | (299,072 | )       
|Total shareholders equity                                                            |  |                | 56,624   |         
|Total liabilities and shareholders equity                                            |  | $              | 202,351  |         

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

61

---

KRISPY KREME DOUGHNUTS,
INC.

CONSOLIDATED STATEMENT OF
OPERATIONS

|                                                                            |  | Year Ended                              
|--------------------------------------------------------------------------- |  | ----------------------------------------
|                                                                            |  | Feb. 3,                                 
|                                                                            |  | 2008                                    
|                                                                            |  | (In thousands, except per share amounts)
|Revenues                                                                    |  | $                                       
|Operating
      expenses:                                                   |  |                                         
|Direct operating expenses (exclusive of depreciation and
      amortization |  |                                         
|shown
      below)                                                          |  |                                         
|General and administrative expenses                                         |  |                                         
|Depreciation and amortization expense                                       |  |                                         
|Impairment charges and lease termination
      costs                        |  |                                         
|Settlement of litigation                                                    |  |                                         
|Other operating (income) and expense, net                                   |  |                                         
|Operating (loss)                                                            |  |                                         
|Interest
      income                                                       |  |                                         
|Interest expense                                                            |  |                                         
|Loss on
      extinguishment of debt                                        |  |                                         
|Equity in (losses) of equity method franchisees                             |  |                                         
|Minority
      interests in results of consolidated franchisees             |  |                                         
|Other non-operating income and (expense), net                               |  |                                         
|(Loss) before
      income taxes                                            |  |                                         
|Provision for income taxes (benefit)                                        |  |                                         
|Net
      (loss)                                                            |  | $                                       
|(Loss) per common share:                                                    |  |                                         
|Basic                                                                       |  | $                                       
|Diluted                                                                     |  | $                                       

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

62

---

KRISPY KREME DOUGHNUTS,
INC.

CONSOLIDATED STATEMENT OF CASH
FLOWS

|                                                                                      |  | Year Ended    
|------------------------------------------------------------------------------------- |  | --------------
|                                                                                      |  | Feb. 3,       
|                                                                                      |  | 2008          
|                                                                                      |  | (In thousands)
|CASH FLOW FROM OPERATING ACTIVITIES:                                                  |  |               
|Net
      (loss)                                                                      |  | $             
|Adjustments to reconcile net loss to net cash provided by operating
      activities: |  |               
|Depreciation and amortization                                                         |  |               
|Deferred income taxes                                                                 |  |               
|Impairment charges                                                                    |  |               
|Settlement of litigation                                                              |  |               
|Accrued rent expense                                                                  |  |               
|(Gain) loss on disposal of property and equipment                                     |  |               
|Gain on sale of interests in equity method
      franchisees                          |  |               
|Share-based compensation                                                              |  |               
|Provision for doubtful accounts                                                       |  |               
|Amortization of deferred financing costs                                              |  |               
|Minority interests in results of consolidated
      franchisees                       |  |               
|Equity in losses of equity method franchisees                                         |  |               
|Cash distributions from equity method franchisees                                     |  |               
|Other                                                                                 |  |               
|Change in assets
      and liabilities:                                               |  |               
|Receivables                                                                           |  |               
|Inventories                                                                           |  |               
|Other current and non-current assets                                                  |  |               
|Accounts payable and accrued liabilities                                              |  |               
|Other long-term obligations                                                           |  |               
|Net
      cash provided by operating activities                                       |  |               
|CASH FLOW FROM INVESTING ACTIVITIES:                                                  |  |               
|Purchase of
      property and equipment                                              |  |               
|Proceeds from disposals of property and equipment                                     |  |               
|Acquisition of
      franchisees and interests therein, net of cash acquired          |  |               
|Investments in and advances to franchise investees                                    |  |               
|Recovery of
      investments in and advances to franchise investee                   |  |               
|Sale of interests in equity method franchisee                                         |  |               
|Acquisition of
      stores from franchisee                                           |  |               
|Decrease in other assets                                                              |  |               
|Net cash provided by (used for) investing
      activities                            |  |               
|CASH FLOW FROM FINANCING ACTIVITIES:                                                  |  |               
|Issuance of
      short-term debt                                                     |  |               
|Repayment of short-term debt                                                          |  |               
|Proceeds from
      issuance of long-term debt                                        |  |               
|Repayment of long-term debt                                                           |  |               
|Net repayments
      under revolving credit lines                                     |  |               
|Deferred financing costs                                                              |  |               
|Proceeds from
      exercise of stock options                                         |  |               
|Net change in book overdraft                                                          |  |               
|Collection of
      notes receivable secured by common stock                          |  |               
|Cash received from minority interests                                                 |  |               
|Other                                                                                 |  |               
|Net cash provided by (used for) financing
      activities                            |  |               
|Effect of
      exchange rate changes on cash                                         |  |               
|Cash balances of subsidiaries at date of deconsolidation                              |  |               
|Net increase
      (decrease) in cash and cash equivalents                            |  |               
|Cash and cash equivalents at beginning of year                                        |  |               
|Cash and cash
      equivalents at end of year                                        |  | $             
|Supplemental schedule of non-cash investing and financing
      activities:           |  |               
|Assets acquired under capital leases                                                  |  | $             

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

63

---

KRISPY KREME DOUGHNUTS,
INC.

CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS EQUITY

|                                            |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               | Accumulated |                 |          |  |   |          |   |  |  
|------------------------------------------- |  | -------------- | - | ------ | - | ------------ | - | ---------- |  | ------ | - | ------------ |  | ------- | - | ------------- | ----------- | --------------- | -------- |  | - | -------- | - |  | -
|                                            |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               | Other       |                 | Retained |  |   |          |  
|                                            |  | Common         |   |        |   |              |   |            |  |        |   |              |  |         |   | Comprehensive |             | Earnings        |          |  |   |         
|                                            |  | Shares         |   | Common |   | Unearned     |   | Notes      |  | Income |   | (Accumulated |  |         |   |              
|                                            |  | Outstanding    |   | Stock  |   | Compensation |   | Receivable |  | (Loss) |   | (Deficit)    |  | Total  
|                                            |  | (In thousands)
|BALANCE AT JANUARY 30, 2005                 |  | 61,756         |   |        | $ | 295,611      |   |            |  | $(17   | ) |              |  | $(197   | ) |               |             | $    796        |          |  | $ | (55,250  | ) |  | $
|Comprehensive
      income (loss):          |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|Net
      (loss) for the year ended         |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|January 29, 2006                            |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   | (135,760 | ) |  |  
|Foreign currency translation                |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|adjustment, net of income tax               |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|benefit of $168                             |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             | (183            | )        |  |   |          |   |  |  
|Unrealized gain from cash flow hedge,       |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|net of income taxes of $531                 |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             | 813             |          |  |   |          |   |  |  
|Total comprehensive (loss)                  |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|Correction of errors in accounting for      |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|stock-based compensation (Note 1)           |  |                |   |        |   | 2,508        |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|Exercise of
      stock options             |  | 86             |   |        |   | 154          |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|Amortization of restricted shares           |  |                |   |        |   |              |   |            |  | 5      |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|Cancellation of
      restricted shares     |  | (1             | ) |        |   | (18          | ) |            |  | 12     |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|Collection of notes receivable secured by   |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|common stock                                |  |                |   |        |   |              |   |            |  |        |   |              |  | 197     |   |               |             |                 |          |  |   |          |   |  |  
|BALANCE AT
      JANUARY 29, 2006           |  | 61,841         |   |        |   | 298,255      |   |            |  |       |   |              |  |        |   |               |             | 1,426           |          |  |   | (191,010 | ) |  |  
|Comprehensive income (loss):                |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|Net (loss) for the year ended               |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|January 28, 2007                            |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   | (42,236  | ) |  |  
|Foreign currency translation                |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|adjustment, net of income tax               |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|benefit of $58                              |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             | (267            | )        |  |   |          |   |  |  
|Unrealized gain from cash flow hedge,       |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|net of income taxes of $70                  |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             | 107             |          |  |   |          |   |  |  
|Total comprehensive (loss)                  |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|Issuance of
      common stock warrant      |  |                |   |        |   | 6,700        |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|Share-based compensation                    |  | 831            |   |        |   | 5,987        |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|Cancellation of
      restricted shares     |  | (2             | ) |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|BALANCE AT JANUARY 28, 2007                 |  | 62,670         |   |        |   | 310,942      |   |            |  |       |   |              |  |        |   |               |             | 1,266           |          |  |   | (233,246 | ) |  |  
|Effect of
      adoption of FIN 48 (Note 1) |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   | 1,225    |   |  |  
|Comprehensive income (loss):                |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|Net (loss) for the year ended               |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|February 3, 2008                            |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   | (67,051  | ) |  |  
|Foreign currency translation                |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|adjustment, net of income taxes             |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|of $117                                     |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             | 357             |          |  |   |          |   |  |  
|Unrealized loss from cash flow              |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|hedge, net of income tax                    |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|benefit of $1,006                           |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             | (1,542          | )        |  |   |          |   |  |  
|Total comprehensive (loss)                  |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|Exercise of
      stock options             |  | 111            |   |        |   | 292          |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|Issuance of common shares and warrants      |  |                |   |        |   |              |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|(Notes 12 and 16)                           |  | 1,834          |   |        |   | 36,875       |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|Share-based
      compensation              |  | 785            |   |        |   | 7,599        |   |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|Cancellation of restricted shares           |  | (30            | ) |        |   | (93          | ) |            |  |        |   |              |  |         |   |               |             |                 |          |  |   |          |   |  |  
|BALANCE AT
      FEBRUARY 3, 2008           |  | 65,370         |   |        | $ | 355,615      |   |            |  | $     |   |              |  | $      |   |               |             | $     
      81 |          |  | $ | (299,072 | ) |  | $

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

64

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL
STATEMENTS

Note 1  Overview

Significant Accounting
Policies

NATURE OF
BUSINESS. Krispy Kreme Doughnuts, Inc.
(KKDI) and its subsidiaries (collectively, the Company) are engaged in the
sale of doughnuts and related items through Company-owned stores. The Company
also derives revenue from franchise and development fees and the collection of
royalties from franchisees. Additionally, the Company sells doughnut-making
equipment, doughnut mix and other ingredients and supplies to
franchisees.

The
significant accounting policies followed by the Company in preparing the
accompanying consolidated financial statements are as follows:

*BASIS OF
CONSOLIDATION*. The financial statements
include the accounts of KKDI and its wholly-owned subsidiaries, the most
significant of which is KKDIs principal operating subsidiary, Krispy Kreme
Doughnut Corporation (KKDC).

The Company
also consolidated the financial statements of certain less than wholly-owned
franchisees in which the Company had a controlling financial interest and of
certain variable interest entities of which the Company was the primary
beneficiary under Financial Accounting Standards Board (FASB) Interpretation
No. 46 (Revised), Consolidation of Variable Interest Entities. The Company
referred to these investees as Consolidated Franchisees, each of which has
either ceased operations or its minority interest has been acquired by the
Company.

Investments
in entities over which the Company has the ability to exercise significant
influence, and whose financial statements are not required to be consolidated,
are accounted for using the equity method. These entities typically are 20% to
35% owned and are hereinafter sometimes referred to as Equity Method
Franchisees.

REVENUE
RECOGNITION. A summary of the revenue
recognition policies for each of the Companys business segments is as
follows:

- Company Stores revenue is derived from the sale of
  doughnuts and related items to on-premises and off-premises customers. Revenue
  is recognized at the time of sale for on-premises sales. For off-premises
  sales, revenue is recognized at the time of delivery, net of provisions for
  estimated product returns.
- Franchise revenue is derived from development and
  initial franchise fees relating to new store openings and ongoing royalties
  charged to franchisees based on their sales. Development and franchise fees
  for new stores are deferred until the store is opened, which is the time at
  which the Company has performed substantially all of the initial services it
  is required to provide. Royalties are recognized in income as underlying
  franchisee sales occur unless there is significant uncertainty concerning the
  collectability of such revenues, in which case royalty revenues are recognized
  when received.
- KK Supply Chain revenue is derived from the sale
  of doughnut mix, other ingredients, supplies and doughnut-making equipment
  needed to operate a Krispy Kreme doughnut store. Revenues for the sale of
  doughnut mix and supplies are recognized upon delivery to the customer or, in
  the case of franchisees located outside North America, when the goods are
  loaded on the transport vessel at the U.S. port. Revenue for equipment sales
  and installation associated with new store openings is recognized at the store
  opening date. Revenue for equipment sales not associated with new store
  openings is recognized when the equipment is installed if the Company is
  responsible for the installation, and otherwise upon shipment of the
  equipment.

FISCAL
YEAR. The Companys fiscal year ends on the
Sunday closest to January 31, which periodically results in a 53-week year.
Fiscal 2008 contained 53 weeks while fiscal 2007 and 2006 each contained 52
weeks.

65

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

CASH AND
CASH EQUIVALENTS. The Company considers cash
on hand, demand deposits in banks and all highly liquid debt instruments with an
original maturity of three months or less to be cash and cash
equivalents.

INVENTORIES. Inventories are recorded
at the lower of cost or market, with cost determined using the first-in,
first-out method.

PROPERTY
AND EQUIPMENT. Property and equipment are
stated at cost less accumulated depreciation. Major renewals and betterments are
capitalized, while replacements, maintenance and repairs which do not improve or
extend the lives of the respective assets are expensed as incurred.

Depreciation
of property and equipment is provided using the straight-line method over the
assets estimated useful lives, which are as follows: buildings  15 to 35
years; machinery and equipment  3 to 15 years; and leasehold improvements 
lesser of the useful life of the improvements or the lease term.

GOODWILL
AND OTHER INTANGIBLE ASSETS. Goodwill
represents the excess of the purchase price over the value of identifiable net
assets acquired in business combinations. Goodwill has an indefinite life and is
not amortized, but is tested for impairment annually or more frequently if
events or circumstances indicate the carrying amount of the asset may be
impaired. Such impairment testing is performed for each reporting unit (as that
term is defined in Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets) to which goodwill has been
assigned.

Other
intangible assets consist principally of franchise rights reacquired in
acquisitions of franchisees, which the Company determined have indefinite lives
and are not subject to amortization. Intangible assets with indefinite lives are
reviewed for impairment annually or more frequently if events or circumstances
indicate the carrying amount of the assets may be impaired.

ADVERTISING COSTS. All costs
associated with advertising and promoting products are expensed as
incurred.

STORE
OPENING COSTS. Store opening costs are
expensed as incurred. The Company incurred no store opening costs in fiscal
2007. Store opening costs were $449,000 in fiscal 2006 and $17,000 in fiscal
2008.

LEGAL
COSTS. Legal costs associated with litigation
and other loss contingencies are charged to expense as services are
rendered.

ASSET
IMPAIRMENT. When an asset group (typically a
store) is identified as underperforming or a decision is made to abandon an
asset group or to close a store, the Company makes an assessment of the
potential impairment of the related assets. The assessment is based upon a
comparison of the carrying amount of the asset group, consisting primarily of
property and equipment, to the estimated undiscounted cash flows expected to be
generated from the asset group. To estimate cash flows, management projects the
net cash flows anticipated from continuing operation of the asset group or store
until its closing or abandonment as well as cash flows, if any, anticipated from
disposal of the related assets. If the carrying amount of the assets exceeds the
sum of the undiscounted cash flows, the Company records an impairment charge in
an amount equal to the excess of the carrying value of the assets over their
estimated fair value.

EARNINGS
PER SHARE. The computation of basic earnings
per share is based on the weighted average number of common shares outstanding
during the period. The computation of diluted earnings per share reflects the
potential dilution that would occur if stock options and warrants were exercised
and the dilution from the issuance of restricted shares, computed using the
treasury stock method.

66

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

The
following table sets forth amounts used in the computation of basic and diluted
earnings per share:

Year EndedFeb. 3,
    
    Jan. 28,
    
    Jan. 29,2008
    
    2007
    
    2006(In thousands)Numerator: net (loss)
    
    $
    (67,051
    )
    
    $
    (42,236
    )
    
    $
    (135,760
    )Denominator:Basic earnings per share  weighted average sharesoutstanding
    
    
    63,805
    
    
    
    61,871
    
    
    
    61,807Diluted earnings per share  weighted average
      sharesoutstanding
    
    
    63,805
    
    
    
    61,871
    
    
    
    61,807


All
potentially dilutive securities have been excluded from the number of shares
used in the computation of diluted earnings per share in fiscal 2008, 2007 and
2006 because the Company incurred a net loss in each year and their inclusion
would be antidilutive.

SHARE-BASED COMPENSATION. Effective
January 30, 2006 (the first day of fiscal 2007), the Company adopted Statement
of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment,
which requires the measurement and recognition of compensation expense for
share-based payment (SBP) awards, including stock options, based on their fair
values. Prior to fiscal 2007, the Company accounted for SBP awards using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25).

CONCENTRATION OF CREDIT RISK.
Financial instruments that subject the Company to credit risk consist
principally of receivables from wholesale customers and franchisees and
guarantees of leases and indebtedness of franchisees. Wholesale receivables are
primarily from grocery and convenience stores. The Company performs ongoing
credit evaluations of its customers financial condition and maintains
allowances for doubtful accounts which management believes are sufficient to
provide for losses which may be sustained on realization of these receivables.
In fiscal 2008, 2007 and 2006, no customer accounted for more than 10% of
Company-owned stores revenues. The Companys two largest wholesale customers
collectively accounted for approximately 10.2%, 10.2% and 10.3% of Company-owned
stores revenues in fiscal 2008, 2007 and 2006, respectively. The Companys two
wholesale customers with the largest trade receivables balances collectively
accounted for approximately 23.5% and 20.9% of wholesale doughnut customer trade
receivables at February 3, 2008 and January 28, 2007, respectively. The
foregoing percentages of revenues for fiscal 2007 and 2006 are computed based
upon Company Stores segment revenues exclusive of sales of Consolidated
Franchisees; revenues of Consolidated Franchisees accounted for 1.0% and 19.3%
of total Company Stores revenues in fiscal 2007 and 2006, respectively. The
Company had no Consolidated Franchisees in fiscal 2008.

The Company
also evaluates the recoverability of receivables from its franchisees and
maintains allowances for doubtful accounts which management believes are
sufficient to provide for losses which may be sustained on realization of these
receivables. In addition, the Company evaluates the likelihood of potential
payments by the Company under loan and lease guarantees and records estimated
liabilities for the present value of any payments the Company considers
probable.

SELF-INSURANCE RISKS AND RECEIVABLES FROM INSURERS. The Company is subject to workers compensation, vehicle and
general liability claims. The Company is self-insured for the cost of all
workers compensation, vehicle and general liability claims up to the amount of
stop-loss insurance coverage purchased by the Company from commercial insurance
carriers. The Company maintains accruals for the estimated cost of claims,
without regard to the effects of stop-loss coverage, using actuarial methods
which evaluate known open and incurred but not reported claims and consider
historical loss development experience. In addition, the

67

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KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Company records receivables from the
insurance carriers for claims amounts estimated to be recovered under the
stop-loss insurance policies when these amounts are estimable and probable of
collection. The Company estimates such stop-loss receivables using the same
actuarial methods used to establish the related claims accruals, and taking into
account the amount of risk transferred to the carriers under the stop-loss
policies. The stop-loss policies provide coverage for claims in excess of
retained self-insurance risks, which are determined on a claim-by-claim
basis.

The Company
provides health and medical benefits to eligible employees, and purchases
stop-loss insurance from commercial insurance carriers which pays covered
medical costs in excess of a specified annual amount incurred by each
claimant.

DERIVATIVE FINANCIAL INSTRUMENTS AND DERIVATIVE COMMODITY
INSTRUMENTS. The Company reflects derivative
financial instruments, which consist primarily of interest rate derivatives and
commodity futures contracts and options on such contracts, in the consolidated
balance sheet at their fair value. The difference between the cost, if any, and
the fair value of the interest rate derivatives is reflected in income unless
the derivative instrument qualifies as a cash flow hedge and is effective in
offsetting future cash flows of the underlying hedged item, in which case such
amount is reflected in other comprehensive income. The difference between the
cost, if any, and the fair value of commodity derivatives is reflected in
earnings because the Company has not designated these instruments as cash flow
hedges.

FOREIGN
CURRENCY TRANSLATION. The Company has
ownership interests in franchisees in Mexico and Canada and has store operations
in Canada. The functional currency of each of these operations is the local
currency. Assets and liabilities of these operations are translated into U.S.
dollars using exchange rates as of the balance sheet date, and revenues,
expenses and the Companys equity in the earnings or losses of the franchisee
are translated using the average exchange rate for the reporting period. The
resulting cumulative translation adjustments are reported, net of income taxes,
as a component of accumulated other comprehensive income. Transaction gains and
losses resulting from remeasuring transactions denominated in currencies other
than an entitys functional currency are reflected in earnings.

COMPREHENSIVE INCOME. Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (FAS
130), requires that certain items, including foreign currency translation
adjustments and mark-to-market adjustments on derivative contracts accounted for
as cash flow hedges (which are not reflected in net income) be presented as
components of comprehensive income. The cumulative amounts recognized by the
Company under FAS 130 are reflected in the consolidated balance sheet as
accumulated other comprehensive income, a component of shareholders equity, and
are summarized in the following table:

Feb. 3,
    
    Jan. 28,2008
    
    2007(In thousands)Accumulated other comprehensive income:Unrealized gains (losses) on cash flow hedges, including
      amounts related toEquity Method Franchisees
    
    $
    (2,236
    )
    
    $
    312Cumulative foreign currency translation adjustments
    
    
    2,371
    
    
    
    1,897135
    
    
    
    2,209Less: deferred income taxes
    
    
    (54
    )
    
    
    (943
    )$
    81
    
    
    $
    1,266


USE OF
ESTIMATES. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.

68

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KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

UNCERTAIN
TAX POSITIONS. Effective January 29, 2007,
the first day of fiscal 2008, the Company adopted the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48).
FIN 48 prescribes recognition thresholds that must be met before a tax position
is recognized in the financial statements and provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. Under FIN 48, an entity may only recognize
or continue to recognize tax positions that meet a more likely than not
threshold. The Company recorded the cumulative effect of applying FIN 48 as a
$1.2 million credit to the opening balance of accumulated deficit as of January
29, 2007, the date of adoption.

REVISIONS. At the beginning of fiscal
2008, the Company revised its presentation of gains and losses on disposals of
property and equipment and foreign currency transaction gains and losses related
to inventory purchases to report such amounts as components of income or loss
from operations. Such amounts previously had been reported as components of
non-operating income and expense. Gains and losses on disposals of property and
equipment are now reported consistently with depreciation and amortization
expense and impairment charges, and foreign currency gains and losses associated
with purchases of materials are now reported with other components of materials
purchases, as part of direct operating expenses. Amounts previously reported for
fiscal 2007 and 2006 have been revised to reflect the presentation adopted in
fiscal 2008; the effect of such revisions was not material.

CORRECTION OF ACCOUNTING ERRORS RELATED TO STOCK-BASED
COMPENSATION. In connection with the
preparation of its fiscal 2006 consolidated financial statements, the Company
performed certain procedures with respect to grants of stock options in prior
fiscal years.

In
performing such procedures, the Company identified certain grants of stock
options with respect to which the Company was unable to substantiate that the
grant date specified in the options was the appropriate date on which
compensation cost should have been measured under APB 25. Each of the stock
options was dated August 2, 2000 and had an exercise price equal to the closing
price of the Companys common stock on that date. The closing price on August 2,
2000 was the lowest closing price of the Companys common stock during the
fiscal quarter. Because the Company was unable to substantiate August 2, 2000 as
the measurement date, the Company considered all available relevant information
and concluded that it should use September 12, 2000, the date on which the
optionees were informed of the principal terms of the grants, as the measurement
date.

The market
price of the Companys common stock on this revised measurement date was greater
than the exercise price specified in the options and, accordingly, the Company
should have recognized compensation expense related to the options in an
aggregate amount equal to such excess multiplied by the number of options
awarded, in accordance with APB 25. Such aggregate charges total approximately
$4.0 million, and should have been recorded in the Companys fiscal 2001 through
fiscal 2004 consolidated financial statements.

These grants
were made principally to three new non-employee members of the board of
directors. The Company is aware of no evidence which suggests the optionees
influenced the selection of the grant date, were aware of how August 2, 2000 was
selected by the Company as the grant date, or believed the Companys accounting
for such options to be improper.

The Company
concluded that the stock-based compensation amounts were not material either
quantitatively or qualitatively to the Companys consolidated financial
statements in the affected periods and were not material to the fiscal 2006
consolidated financial statements. Accordingly, the Company corrected the error
by recording the approximately $4.0 million aggregate charge to earnings in the
first quarter of fiscal 2006 rather than restating prior periods consolidated
financial statements.

The
Companys income tax returns for certain years currently are under examination
by the Internal Revenue Service as described in Note 15. In connection with that
examination, the Company determined that certain income tax deductions related
to exercises of stock options reflected in its fiscal 2004 tax return were
overstated. The Company accounted for the tax benefit of such deductions as a
deferred income tax asset, with

69

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KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

a corresponding credit to common stock, in
fiscal 2004. These accounting entries constituted errors because the Company was
not entitled to the related income tax deductions. In fiscal 2005, the Company
established a valuation allowance against its deferred income tax assets via a
charge to earnings, and such charge was overstated as a consequence of the
fiscal 2004 error related to the tax benefit of stock option exercises. Because
the Company concluded that these amounts were not material to the Companys
consolidated financial statements in the affected periods, and were not material
to the fiscal 2006 consolidated financial statements, the Company corrected the
errors by recording an approximately $1.5 million charge to common stock and a
corresponding credit to the provision for income taxes in the first quarter of
fiscal 2006 rather than restating prior periods financial
statements.

RECENT ACCOUNTING
PRONOUNCEMENTS

In March
2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (FAS 161). The new standard is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entitys financial position, financial performance, and cash
flows. FAS 161 is effective for the Company in fiscal 2010.

In February
2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115 (FAS 159). FAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. FAS 159
does not affect any existing accounting literature that requires certain assets
and liabilities to be carried at fair value. Management does not intend to adopt
any fair value measurement options permitted by FAS 159 and, accordingly, does
not expect FAS 159 to have any effect on the Companys financial position or
results of operations.

In September
2006, the FASB issued Statement No. 157, Fair Value Measurements (FAS 157),
which addresses how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure purposes under
generally accepted accounting principles (GAAP). As a result of FAS 157, there
is now a common definition of fair value to be used throughout GAAP, which is
expected to make the measurement of fair value more consistent and comparable.
The Company must adopt FAS 157 in fiscal 2009. Management does not expect
adoption of FAS 157 to have a material effect on the Companys financial
position or results of operations.

Note 2  Business Conditions,
Uncertainties and Liquidity

The Company
incurred net losses of $135.8 million, $42.2 million and $67.1 million in fiscal
2006, 2007 and 2008, respectively, which include non-cash impairment charges of
$53.7 million, $10.8 million and $61.0 million, respectively.

In addition,
fiscal 2006 and 2007 results include non-cash charges of $35.8 million and $16.0
million, respectively, related to the settlement of certain litigation, and
fiscal 2008 results reflect a non-cash credit of $14.9 million related to the
same settlement, as described in Note 12.

The Company
experienced a decline in revenues and incurred net losses in each of the last
three fiscal years. The revenue decline reflects fewer Company stores in
operation, a decline in domestic royalty revenues and lower sales of mixes and
other ingredients resulting from lower sales by the Companys domestic
franchisees. Lower revenues have adversely affected operating margins because of
the fixed or semi-fixed nature of many of the Companys direct operating
expenses. In addition, the Company has recorded significant asset impairment

70

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KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

charges, principally related to
underperforming Company stores and, in fiscal 2008, a manufacturing and
distribution facility the Company divested. Total impairment charges and lease
termination costs for fiscal 2008 were $62.1 million.

The Company had net cash flow from
operations of $1.9 million, $22.1 million and $9.7 million in fiscal 2006, 2007,
and 2008, respectively. Asset dispositions generated investing cash flows of
$9.7 million in fiscal 2007 and $18.3 million in fiscal 2008, with the majority
of such proceeds used to reduce the outstanding borrowings under the Companys
credit facilities.

The
Companys fiscal 2009 operating plan reflects a decline in revenues and an
increase in certain costs, including the impact of commodity prices on its
raw materials costs, compared to fiscal 2008. The Company is taking measures to
reduce controllable costs and has implemented, and, to the extent feasible,
plans to implement in the future, price increases to offset increases in raw
material costs. Based on the Companys current working capital and the fiscal
2009 operating plan, management believes the Company can meet its projected
operating, investing and financing cash requirements.

In February
2007, the Company completed a refinancing using the proceeds of the 2007 Secured
Credit Facilities described in Note 10, which are the Companys principal source
of external financing. These facilities consist of a $110 million term loan
maturing in February 2014 and a $30 million revolving credit facility maturing
in February 2013.

The 2007
Secured Credit Facilities contain significant financial and other covenants.
Based on its operating plan, the Company projected that it would not be able to
comply with the financial covenants in fiscal 2009. Subsequent to the end of
fiscal 2008, the Company executed amendments to the 2007 Secured Credit
Facilities which, among other things, relaxed the financial covenants contained
therein for fiscal 2009 and 2010. The financial covenants as of February 3,
2008, and the amended financial covenants for future years, are described in
Note 10. While the Company was in compliance with the financial covenants as of
February 3, 2008, and the Company expects to be able to comply with the amended
financial covenants based on its operating plan, there can be no assurance that
the Company will be able to do so. As a result of amendments and waivers in
fiscal 2008 and 2009, the Company paid fees of approximately $835,000 and the
interest rate on the loans has increased from LIBOR plus 2.75% to LIBOR plus
5.50% (with a LIBOR floor of 3.25%). The increase in rates will result in
approximately $1.9 million of additional annual interest expense based on
the current level of borrowings. Any future amendments or waivers could result
in additional fees or rate increases.

The Company
has prepaid approximately $32.8 million of the $110 million term loan; such
prepayments included prepayments of approximately $17.8 million from sales of
property and equipment and discretionary prepayments of $5 million in each of
the first, second and third quarters of fiscal 2008 made in order to reduce the
likelihood of violating the leverage ratio covenant contained in the facilities.
In addition to scheduled amortization of principal, the term loan is required to
be prepaid with some or all of the net proceeds of certain equity issuances,
debt incurrences, asset sales and casualty events and with a percentage of
excess cash flow (as defined in the agreement) on an annual basis.

As of
February 3, 2008, the maximum additional borrowing available to the Company was
approximately $9.7 million, computed on a pro forma basis after giving effect to
the reduction in lender commitments under the Companys revolving credit
facility described in Note 10.

Failure to
comply with the financial covenants contained in the 2007 Credit Facilities, or
the occurrence or failure to occur of certain events, would cause the Company to
default under the facilities. In the absence of a waiver of, or forbearance with
respect to, any such default from the Companys lenders, the Company could be
obligated to repay outstanding indebtedness under the facilities in advance of
its scheduled maturity, and the Companys ability to access additional
borrowings under the facilities would be restricted. In the event the Company
were to fail to comply with one or more such covenants, the Company would
attempt to negotiate waivers of any such noncompliance. There can be no
assurance that the Company would be able to negotiate any

71

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KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

such waivers, and the costs or conditions
associated with any such waivers could be significant. In the event that credit
under the 2007 Secured Credit Facilities were not available to the Company,
there can be no assurance that alternative sources of credit would be available
to the Company or, if they are available, under what terms or at what
cost.

Many factors
could adversely affect the Companys business. In particular, the Company is
vulnerable to further increases in the cost of raw materials, which could
adversely affect the Companys operating results and cash flows. In addition,
several franchisees have been experiencing financial pressures which, in certain
instances, became more exacerbated during fiscal 2008. The Company has
guaranteed certain obligations of franchisees in which it has an equity
interest, as described in Other Commitments and Contingencies in Note 12. In
the fourth quarter of fiscal 2008, the Company recorded a provision of $3.0
million for estimated payments under these guarantees. The Company may be
required to make payments under any of these guarantees in the next 12 months.
During the year ended February 3, 2008, two of the Companys other franchisees
filed for reorganization under Chapter 11 of the United States Bankruptcy Code.
One of these bankruptcy cases was substantially concluded in February 2008 upon
the sale of the franchisees assets to, and assumption of most of its franchise
agreements by, a successor franchisee; the other franchise operation is
continuing to operate under court supervision. Franchisees opened 88 stores and
closed 26 stores in fiscal 2008. Franchisees have contractual commitments to
open over 170 additional stores after fiscal 2008; however, the Company believes
franchisees also will close additional stores in the future, and the number of
such closures may be significant. Royalty revenues and most of KK Supply Chain
revenues are directly correlated to sales by franchise stores and, accordingly,
franchise store closures have an adverse effect on the Companys revenues,
results of operations and cash flows.

Note 3  Receivables

The components of receivables are as
follows:

Feb. 3,
    
    Jan. 28,2008
    
    2007(In thousands)Receivables:Wholesale doughnut customers
    
    $
    12,769
    
    
    $
    15,091Unaffiliated franchisees
    
    
    14,607
    
    
    
    13,927Current portion of notes receivable
    
    
    365
    
    
    
    49627,741
    
    
    
    29,514Less  allowance for doubtful accounts:Wholesale doughnut customers
    
    
    (570
    )
    
    
    (682
    )Unaffiliated franchisees
    
    
    (4,180
    )
    
    
    (2,063
    )(4,750
    )
    
    
    (2,745
    )$
    22,991
    
    
    $
    26,769Receivables from Equity Method Franchisees (Notes 1 and
      18):Trade
    
    $
    4,016
    
    
    $
    3,719Current portion
      of notes receivable
    
    
    
    
    
    
    18Less  allowance for doubtful accounts
    
    
    (1,379
    )
    
    
    (2,903
    )$
    2,637
    
    
    $
    834


72

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

The changes in the allowances for
doubtful accounts are summarized as follows:

**Year Ended**Feb. 3,
    
    Jan. 28,
    
    Jan. 29,2008
    
    2007
    
    2006(In thousands)Allowance for doubtful accounts related to trade
      receivables:Balance at beginning of year
    
    $
    2,745
    
    
    $
    13,656
    
    
    $
    11,379Provision for doubtful accounts
    
    
    2,150
    
    
    
    1,836
    
    
    
    3,978Reserves associated with
      acquired businesses
    
    
    
    
    
    
    
    
    
    
    41Effects of deconsolidation of subsidiaries
    
    
    
    
    
    
    (115
    )
    
    
    (132
    )Chargeoffs
    
    
    (145
    )
    
    
    (12,632
    )
    
    
    (1,610
    )Balance at end of year
    
    $
    4,750
    
    
    $
    2,745
    
    
    $
    13,656Allowance for
      doubtful accounts related to Equity MethodFranchisees:Balance at beginning of year
    
    $
    2,903
    
    
    $
    3,160
    
    
    $
    1,105Provision for doubtful accounts
    
    
    (364
    )
    
    
    1,554
    
    
    
    2,055Chargeoffs
    
    
    (1,160
    )
    
    
    (1,811
    )
    
    
    Balance at end of year
    
    $
    1,379
    
    
    $
    2,903
    
    
    $
    3,160


Note 4  Inventories

The components of inventories are as
follows:

Feb. 3,
    
    Jan. 28,2008
    
    2007(In thousands)Raw materials
    $
    6,055
    
    $
    6,998Work in
      progress
    
    96
    
    
    33Finished goods
    
    5,794
    
    
    4,996Purchased
      merchandise
    
    7,969
    
    
    8,872Manufacturing supplies
    
    73
    
    
    107$
    19,987
    
    $
    21,006


Note 5  Other Current
Assets

Other current assets are composed of
the following:

Feb. 3,
    
    Jan. 28,2008
    
    2007(In thousands)Miscellaneous receivables
    
    $
    1,053
    
    $
    700Current portion
      of claims against insurance carriers related to
      self-insuranceprograms (Notes 1, 8, 9 and 11)
    
    
    609
    
    
    665Assets held for sale
    
    
    
    
    
    5,156Receivables from
      directors and officers insurance carriers
    
    
    
    
    
    762Prepaid expenses and other
    
    
    3,985
    
    
    4,717$
    5,647
    
    $
    12,000


73

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KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Note 6  Property and
Equipment

Property and equipment consists of
the following:

Feb. 3,
    
    Jan. 28,2008
    
    2007(In thousands)Land
    
    $
    19,058
    
    
    $
    19,161Buildings
    
    
    64,513
    
    
    
    100,784Leasehold improvements
    
    
    9,918
    
    
    
    18,848Machinery and
      equipment
    
    
    62,327
    
    
    
    123,285Construction in progress
    
    
    25
    
    
    
    360155,841
    
    
    
    262,438Less: accumulated depreciation
    
    
    (64,845
    )
    
    
    (93,784
    )$
    90,996
    
    
    $
    168,654


Machinery
and equipment includes assets leased under capital leases having a net book
value of approximately $594,000 and $630,000 at February 3, 2008 and January 28,
2007, respectively. Depreciation expense was $17.8 million, $20.3 million and
$27.9 million in fiscal 2008, 2007 and 2006, respectively.

The Company
recorded significant impairment charges related to property and equipment in
fiscal 2008 as described in Note 13.

Note 7  Goodwill and Other Intangible
Assets

Goodwill and other intangible assets
consist of the following:

Feb. 3,
    
    Jan. 28,2008
    
    2007(In thousands)Indefinite-lived intangible assets:Goodwill (by segment):Franchise
    
    $
    23,496
    
    $
    23,496Company Stores
    
    
    
    
    
    4,59823,496
    
    
    28,094Reacquired franchise rights associated with Company
      Stores
    
    
    360
    
    
    840$
    23,856
    
    $
    28,934


During
fiscal 2008, the Company recorded impairment charges of $4.6 million and
$480,000 to reduce the carrying value of goodwill and reacquired franchise
rights, respectively, to their estimated fair values. The goodwill impairment
charge reflects reductions in the Companys forecasted sales and earnings in
certain of the reporting units comprising the Company Stores segment. Such
reductions reflect current operating results, including the effects of higher
materials and labor costs, as well as recent trends in operating results. The
fair values of those reporting units are estimated using the present value of
expected future cash flows. The Company records impairment charges for
reacquired franchise rights when such intangible assets are determined to be
impaired as a result of store closing decisions or other
developments.

74

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KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Note 8  Other Assets

The components of other assets are
as follows:

Feb. 3,
    
    Jan. 28,2008
    
    2007(In thousands)Non-current portion of claims against insurance carriers related
      toself-insurance
      programs (Notes 1, 5, 9 and 11)
    
    $
    3,838
    
    $
    4,276Deferred
      financing costs, net of accumulated amortization
    
    
    2,369
    
    
    5,519Deposits
    
    
    1,275
    
    
    1,408Computer
      software, net of accumulated amortization
    
    
    1,171
    
    
    1,060401(k) mirror plan assets (Notes 11 and 20)
    
    
    368
    
    
    255Non-current
      portion of notes receivable from unaffiliated franchisees
    
    
    74
    
    
    308Fair value of interest rate hedge
    
    
    
    
    
    729Other
    
    
    374
    
    
    3,287$
    9,469
    
    $
    16,842


Note 9  Other Accrued
Liabilities

The components of other accrued
liabilities are as follows:

Feb. 3,
    
    Jan. 28,2008
    
    2007(In thousands)Current portion of self-insurance claims, principally workers
      compensation(Notes 1, 5, 8 and 11)
    
    $
    4,996
    
    $
    5,885Accrued
      compensation
    
    
    4,846
    
    
    3,891Accrued vacation pay
    
    
    3,981
    
    
    4,192Accrued
      guarantee obligations (Notes 12, 14 and 18)
    
    
    3,419
    
    
    450Accrued taxes, other than income
    
    
    3,036
    
    
    3,336Customer
      deposits
    
    
    2,881
    
    
    2,742Fair value of interest rate hedge
    
    
    2,231
    
    
    Accrued health care claims
    
    
    1,377
    
    
    1,290Accrued professional fees
    
    
    1,114
    
    
    3,880Accrued utilities
    
    
    862
    
    
    1,031Current portion of deferred franchise fee revenue
    
    
    601
    
    
    944Current portion of lease termination costs (Notes 11 and 13)
    
    
    322
    
    
    189Accrued interest
    
    
    67
    
    
    4,222Other
    
    
    6,216
    
    
    6,422$
    35,949
    
    $
    38,474


75

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Note 10  Long Term Debt and Lease
Commitments

Long-term debt and capital lease
obligations consist of the following:

Feb. 3,
    
    Jan. 28,2008
    
    2007(In thousands)2007 Secured Credit Facilities
    
    $
    76,119
    
    
    $
    2005 Secured
      Credit Facilities
    
    
    
    
    
    
    107,066Capital lease obligations
    
    
    594
    
    
    
    63076,713
    
    
    
    107,696Less: current maturities
    
    
    (1,557
    )
    
    
    (1,730
    )$
    75,156
    
    
    $
    105,966


The
following table presents maturities of long-term debt and capital lease
obligations:

Fiscal Year
    
    
    **(In
      thousands)**2009
    
    $
    1,5572010
    
    
    9632011
    
    
    9632012
    
    
    9632013
    
    
    963Thereafter
    
    
    71,304$
    76,713


2007 Secured
Credit Facilities

On February
16, 2007, the Company closed new secured credit facilities totaling $160 million
(the 2007 Secured Credit Facilities). The facilities then consisted of a $50
million revolving credit facility maturing in February 2013 (the 2007
Revolver) and a $110 million term loan maturing in February 2014 (the 2007
Term Loan). The 2007 Secured Credit Facilities are secured by a first lien on
substantially all of the assets of the Company and its domestic subsidiaries. At
closing, the Company borrowed the full $110 million available under the 2007
Term Loan, and used the proceeds to retire approximately $107 million of
indebtedness outstanding under the 2005 Secured Credit Facilities described
below (which were then terminated), to pay prepayment premiums under the 2005
Secured Credit Facilities and to pay fees and expenses associated with the 2007
Secured Credit Facilities. The Company recorded a pretax charge related to the
refinancing of approximately $9.6 million in the first quarter of fiscal 2008,
representing the approximately $4.1 million prepayment fee related to the 2005
Secured Credit Facilities and the write-off of approximately $5.5 million of
unamortized deferred financing costs related to that facility.

The 2007
Revolver contains provisions which permit the Company to obtain letters of
credit. Issuance of letters of credit under these provisions constitutes usage
of the lending commitments, and reduces the amount available for cash borrowings
under the 2007 Revolver. The commitments under the 2007 Revolver were reduced to
$30 million from $50 million in connection with the amendments to the 2007
Secured Credit Facilities executed in April 2008 (the April
Amendments).

Interest on
borrowings under the 2007 Revolver and Term Loan is payable either at LIBOR or
at the Alternate Base Rate (which is the greater of Fed funds rate plus 0.50% or
the prime rate), in each case plus the Applicable Margin. As of February 3,
2008, the Applicable Margin for LIBOR-based loans was 3.50% and for Alternate
Base Rate-based loans was 2.50%. The April Amendments to the 2007 Secured Credit
Facilities more fully described

76

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

below increased the Applicable Margin for
LIBOR-based loans to 5.50% and for Alternate Base Rate-based loans to 4.50%. In
addition, those amendments provide that LIBOR-based loans shall be computed
based upon the greater of the relevant LIBOR rate or 3.25%.

The Company
is required to pay a fee equal to the Applicable Margin for LIBOR-based loans on
the outstanding amount of letters of credit issued under the 2007 Revolver, as
well as a fronting fee of 0.25% of the amount of such letter of credit payable
to the letter of credit issuer. There also is a fee of 0.50% on the unused
portion of the 2007 Revolver lending commitment, which increased to 0.75%
simultaneously with the reduction in the revolver lending commitments pursuant
to the April Amendments.

Borrowings
under the 2007 Revolver (and issuances of letters of credit) are subject to the
satisfaction of usual and customary conditions, including accuracy of
representations and warranties and the absence of defaults.

The 2007
Term Loan is payable in quarterly installments of approximately $240,000 (after
adjustment for the effects of certain principal prepayments) and a final
installment equal to the remaining principal balance in February 2014. The 2007
Term Loan is required to be prepaid with some or all of the net proceeds of
certain equity issuances, debt incurrences, asset sales and casualty events and
with a percentage of excess cash flow (as defined in the agreement) on an annual
basis.

The 2007
Secured Credit Facilities require the Company to meet certain financial tests,
including a maximum consolidated leverage ratio (expressed as a ratio of total
debt to Consolidated EBITDA) and a minimum consolidated interest coverage ratio
(expressed as a ratio of Consolidated EBITDA to net interest expense), computed
based upon Consolidated EBITDA and net interest expense for the most recent four
fiscal quarters and total debt as of the end of such four-quarter period. As of
February 3, 2008, the consolidated leverage ratio was required to be not greater
than 4.0 to 1.0 and the consolidated interest coverage ratio was required to be
not less than 3.25 to 1.0. As of February 3, 2008, the Companys consolidated
leverage ratio was approximately 3.03 to 1.0 and the Companys consolidated
interest coverage ratio was approximately 4.23 to 1.0. The April Amendments
provide that the consolidated leverage ratio shall not exceed 4.75 to 1.0 and
the consolidated interest coverage ratio shall not be less than 2.5 to 1.0 in
fiscal 2009. The maximum consolidated leverage ratio for periods after fiscal
2009 declines over time until it reaches 2.75 to 1.0 in fiscal 2013, and the
minimum consolidated interest coverage ratio increases over time until it
reaches 4.5 to 1.0 in fiscal 2011. Consolidated EBITDA is a non-GAAP measure
and is defined in the 2007 Secured Credit Facilities to mean, generally,
consolidated net income or loss, exclusive of unrealized gains and losses on
hedging instruments, gains or losses on the early extinguishment of debt and
provisions for payments on guarantees of franchisee obligations plus the sum of
net interest expense, income taxes, depreciation and amortization, non-cash
charges, store closure costs, costs associated with certain litigation and
investigations, and extraordinary professional fees; and minus payments, if any,
on guarantees of franchisee obligations in excess of $3 million in any rolling
12-month period and the sum of non-cash credits. In addition, the 2007 Secured
Credit Facilities contain other covenants which, among other things, limit the
incurrence of additional indebtedness (including guarantees), liens, investments
(including investments in and advances to franchisees which own and operate
Krispy Kreme stores), dividends, transactions with affiliates, asset sales,
acquisitions, capital expenditures, mergers and consolidations, prepayments of
other indebtedness and other activities customarily restricted in such
agreements. The 2007 Secured Credit Facilities also prohibit the transfer of
cash or other assets to KKDI from its subsidiaries, whether by dividend, loan or
otherwise, but provide for exceptions to enable KKDI to pay taxes and operating
expenses and certain judgment and settlement costs.

The
operation of the restrictive financial covenants described above may limit the
amount the Company may borrow under the 2007 Revolver. In addition, the maximum
amount which may be borrowed under the 2007 Revolver is reduced by the amount of
outstanding letters of credit, of which approximately $20.3 million were
outstanding as of February 3, 2008. The maximum additional borrowing available
to the Company as of February 3, 2008 was approximately $9.7 million (computed
on a pro forma basis after giving effect to the April Amendments).

77

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

The 2007
Secured Credit Facilities also contain customary events of default, including
without limitation, payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to other indebtedness in excess of
$5 million, certain events of bankruptcy and insolvency, judgment defaults in
excess of $5 million and the occurrence of a change of control.

In May 2007,
the Company entered into interest rate derivative contracts having an aggregate
notional principal amount of $60 million. The derivative contracts eliminate the
Companys exposure, with respect to such notional amount, to increases in three
month LIBOR beyond 5.40% through April 2010, and eliminate the Companys ability
to benefit from a reduction in three month LIBOR below 4.48% for the same
period. The Company is accounting for these derivatives as cash flow
hedges.

2005 Secured
Credit Facilities

On April 1,
2005, the Company closed secured credit facilities totaling $225 million
(collectively, the 2005 Secured Credit Facilities). The facilities consisted
of a $75 million revolving credit facility (reduced by the Company to $25
million in November 2006) secured by a first lien on substantially all of the
assets of the Company and its domestic subsidiaries (the First Lien Revolver),
and a $150 million credit facility secured by a second lien on those assets (the
Second Lien Facility). The Second Lien Facility consisted of a $120 million
term loan (the Term Loan) and a $30 million revolving credit facility (the
Second Lien Revolver). At closing, the Company borrowed the full $120 million
available under the Term Loan, and used the proceeds to retire approximately $88
million of indebtedness outstanding under a bank credit facility (which was then
terminated) and to pay fees and expenses associated with the 2005 Secured Credit
Facilities. The 2005 Secured Credit Facilities were refinanced with the proceeds
of the 2007 Secured Credit Facilities described above.

Interest on
borrowings under the First Lien Revolver was payable either at LIBOR or at the
Alternate Base Rate (which is the greater of Fed funds rate plus 0.50% or the
prime rate), in each case plus the Applicable Margin. The Applicable Margin for
LIBOR-based loans was 2.75% and for Alternate Base Rate- based loans was 1.75%
(3.25% and 2.25%, respectively, from December 12, 2005 through January 28,
2007). In addition, the Company was required to pay a fee equal to the
Applicable Margin for LIBOR-based loans on the outstanding amount of letters of
credit issued under the First Lien Revolver, as well as a 0.25% fronting fee.
There also was a fee of 0.50% (0.75% from December 12, 2005 through January 28,
2007) on the unused portion of the First Lien Revolver lending
commitment.

The Company
paid fees aggregating 5.975% (7.35% from December 12, 2005 through January 28,
2007) on the entire $30 million Second Lien Revolver commitment. In addition,
interest accrued on outstanding borrowings at either the Fed funds rate or
LIBOR, and the outstanding amount of letters of credit issued under the Second
Lien Revolver incurred a fronting fee of 0.25%.

Interest on
the outstanding balance of the Term Loan accrued either at LIBOR or at the Fed
funds rate plus, in each case, the Applicable Margin. The Applicable Margin for
LIBOR-based loans was 5.875% and for Fed funds-based loans was 4.875% (7.25% and
6.25%, respectively, from December 12, 2005 through January 28,
2007).

As required
by the 2005 Secured Credit Facilities, the Company entered into an interest rate
derivative contract having a notional principal amount of $75 million. The
derivative contract eliminated the Companys exposure, with respect to such
notional amount, to increases in three month LIBOR beyond 4.0% through April
2006, 4.50% from May 2006 through April 2007 and 5.0% from May 2007 through
March 2008. This derivative was accounted for as a cash flow hedge from its
inception in June 2005 through February 16, 2007. After that date, the
derivative contract could no longer be shown to be effective (as defined in
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities) in hedging interest rate risk due to a
change in the computation of interest payment periods on the derivative contract
relative to interest expense on the related indebtedness, and hedge accounting
was discontinued. As a consequence,

78

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

subsequent changes in the fair value of
the derivative contract after February 16, 2007 were reflected in earnings.
Simultaneously with entering into the new derivative contracts described above
related to the 2007 Secured Credit Facilities, the Company terminated the $75
million notional amount derivative contract.

Lease
Obligations

The Company
leases equipment and facilities under both capital and operating leases. The
approximate future minimum lease payments under non-cancelable leases as of
February 3, 2008 are set forth in the following table:

Operating
    
    CapitalFiscal Year
    
    
    Leases
    
    Leases(In thousands)2009
    
    $
    10,651
    
    $
    6542010
    
    
    10,154
    
    
    2011
    
    
    9,929
    
    
    2012
    
    
    9,720
    
    
    2013
    
    
    8,686
    
    
    Thereafter
    
    
    110,518
    
    
    $
    159,658
    
    
    654Less:
      portion representing interest and executory costs
    
    
    
    
    
    (60
    )$
    594


Rent
expense, net of rental income, totaled $14.8 million in fiscal 2008, $17.7
million in fiscal 2007 and $23.5 million in fiscal 2006.

Cash Payments of
Interest

Interest
paid, exclusive of deferred financing costs, totaled $13.6 million in fiscal
2008, $17.6 million in fiscal 2007 and $13.4 million in fiscal 2006.

Note 11  Other Long-Term
Obligations

The components of other long-term
obligations are as follows:

Feb. 3,
    
    Jan. 28,2008
    
    2007(In thousands)Non-current portion of self-insurance claims, principally
      workerscompensation (Notes 1, 5, 8 and 9)
    
    $
    11,754
    
    $
    11,389Accrued rent
      expense
    
    
    6,935
    
    
    7,534Non-current portion of deferred franchise fee revenue
    
    
    3,405
    
    
    4,038Non-current
      portion of lease termination costs (Notes 9 and 13)
    
    
    2,515
    
    
    1,461401(k) mirror plan liabilities (Notes 8 and 20)
    
    
    368
    
    
    255Other
    
    
    2,293
    
    
    5,017$
    27,270
    
    $
    29,694


79

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Note 12  Commitments and
Contingencies

Legal Proceedings

Except as disclosed below, the
Company is not a party to any material legal proceedings.

Litigation
Settled

*Federal
Securities Class Actions and Settlement Thereof and Federal Court Shareholder
Derivative Actions and Partial Settlement Thereof*

On May 12,
2004, a purported securities class action was filed on behalf of persons who
purchased the Companys publicly traded securities between August 21, 2003 and
May 7, 2004 against the Company and certain of its former officers in the United
States District Court for the Middle District of North Carolina, alleging
violations of federal securities law in connection with various public
statements made by the Company and seeking damages in an unspecified amount.
Thereafter, 14 substantially identical purported class actions were filed in the
same court. All the actions ultimately were consolidated. The court appointed
lead plaintiffs in the consolidated action, who filed a second amended complaint
on May 23, 2005, alleging claims under federal securities law on behalf of
persons who purchased the Companys publicly-traded securities between March 8,
2001 and April 18, 2005.

In addition
to the purported securities class action, three shareholder derivative actions
were filed in the United States District Court for the Middle District of North
Carolina against certain current and former directors of the Company, certain
former officers of the Company, including Scott Livengood (the Companys former
Chairman and Chief Executive Officer), as well as certain persons or entities
that sold franchises to the Company. The complaints in these actions alleged
that the defendants breached their fiduciary duties in connection with their
management of the Company and the Companys acquisitions of certain franchises.
The complaints sought damages, rescission of the franchise acquisitions,
disgorgement of the proceeds from these acquisitions and other unspecified
relief.

In October
2004, the Companys Board of Directors elected Michael Sutton and Lizanne Thomas
to the Board and appointed them members and co-chairpersons of a Special
Committee to investigate the matters raised in connection with a formal
investigation of the Company by the Securities and Exchange Commission (the
SEC) described below, the allegations in the purported derivative lawsuits,
issues raised by the Companys independent auditors and other matters relevant
to the foregoing.

On October
31, 2006, the Company and the Special Committee entered into a Stipulation and
Settlement Agreement (the Stipulation) with the lead plaintiffs in the
securities class action, the derivative plaintiffs and all defendants named in
the class action and derivative litigation, except for Mr. Livengood, providing
for the settlement of the securities class action and a partial settlement of
the derivative action. On February 14, 2007, the Court granted final approval of
the proposed partial settlement in the derivative action and entered final
judgment dismissing all claims with respect to all defendants, except for claims
that the Company may assert against Mr. Livengood. On February 15, 2007, the
court granted final approval of the proposed settlement in the securities class
action and entered final judgment dismissing all claims with respect to all
defendants. The final judgments were entered as contemplated by the terms of the
Stipulation.

With respect
to the securities class action, the Stipulation provided for the certification
of a class consisting of all persons who purchased the Companys publicly-traded
securities between March 8, 2001 and April 18, 2005, inclusive. The settlement
class received total consideration of approximately $76.0 million, consisting of
a cash payment of approximately $35.0 million made by the Companys directors
and officers insurers, cash payments of $100,000 each made by John Tate (the
Companys former Chief Operating Officer) and Randy Casstevens (a former Chief
Financial Officer), a cash payment of $4 million made by the Companys
independent registered

80

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)



public accounting firm and common stock and warrants
to purchase common stock issued by the Company having an estimated aggregate
value of approximately $36.9 million as of their issuance on March 2, 2007.
Claims against all defendants were dismissed with prejudice; however, claims
that the Company may have against Mr. Livengood that may be asserted by the
Company in the derivative action for contribution to the securities class action
settlement or otherwise under applicable law are expressly preserved. The
Stipulation contained no admission of fault or wrongdoing by the Company or the
other defendants.

With respect to the derivative
litigation, the Stipulation provided for the settlement and dismissal with
prejudice of claims against all defendants except for claims against Mr.
Livengood. The Company, acting through its Special Committee, settled claims
against Mr. Tate and Mr. Casstevens for the following consideration: Messrs.
Tate and Casstevens each agreed to contribute $100,000 in cash to the settlement
of the securities class action; Mr. Tate agreed to cancel his interest in 6,000
shares of the Companys common stock; and Messrs. Tate and Casstevens agreed to
limit their claims for indemnity from the Company in connection with future
proceedings before the SEC or by the United States Attorney for the Southern
District of New York to specified amounts. The Company, acting through its
Special Committee, has been in negotiations with Mr. Livengood but has not
reached agreement to resolve the derivative claims against him. All other claims
against defendants named in the derivative actions were dismissed with prejudice
without paying any consideration. However, counsel for the derivative plaintiffs
have deferred their application for fees until conclusion of the derivative
actions against Mr. Livengood. See Other Contingencies and Commitments
below.

On March 2,
2007, the Company issued 1,833,828 shares of its common stock and warrants to
purchase 4,296,523 shares of its common stock at a price of $12.21 per share in
connection with the Stipulation. The warrants expire on March 2,
2012.

The Company
recorded a non-cash charge to earnings in fiscal 2006 of approximately $35.8
million, representing the estimated fair value, as of late October 2006, of the
common stock and warrants to be issued by the Company. In addition, the Company
recorded a related receivable from its insurers in the amount of approximately
$35.0 million, because the Company considered receipt of this amount to be
probable based on the insurance companies agreements to contribute this amount
to the settlement and the Companys assessment of the insurance companies
financial condition. Simultaneously, the Company recorded a liability in the
amount of $70.8 million representing the then estimated aggregate fair value of
the securities to be issued by the Company and the cash to be paid by the
insurers. In the fourth quarter of fiscal 2007, the Company recorded an
additional non-cash charge to earnings and an increase in the related liability
of approximately $16.0 million, representing the increase from October 2006 to
January 28, 2007 in the estimated fair value of the securities issued by the
Company in connection with the Stipulation. The provision for settlement costs
was adjusted downward by approximately $14.9 million in the first quarter of
fiscal 2008 to reflect the decrease in the fair value of the securities from
January 28, 2007 until their issuance on March 2, 2007. The fair value of the
common shares was determined based upon the market price of the Companys common
stock on March 2, 2007, and the fair value of the warrants to acquire common
shares was estimated as of that date as described in Note 16.

81

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

*State Court Books and Records Action*

On February
21, 2005, a lawsuit was filed against the Company in a North Carolina court
seeking an order requiring the Company to permit the plaintiff to inspect and
copy the books and records of the Company. On February 14, 2007, the federal
district court approved the partial settlement of the consolidated derivative
actions described above and entered an order dismissing those actions. On
February 14, 2007, the North Carolina court filed a copy of that order and, on
March 23, 2007, administratively dismissed the plaintiffs books and records
action.

***Pending Litigation and
Investigations***

The Company
is subject to other litigation and investigations, the outcome of which cannot
presently be determined. The Company cannot predict the likelihood of an
unfavorable outcome with respect to these other matters, or the amount or range
of potential loss with respect to, or the amount that might be paid in
connection with any settlement of, any of these other matters, and, accordingly,
no provision for loss with respect to any of the following matters has been
reflected in the consolidated financial statements.

*SEC Investigation*

On October
7, 2004, the staff of the SEC advised the Company that the SEC had entered a
formal order of investigation concerning the Company. The Company is cooperating
with the investigation.

*United States Attorney
Investigation*

On February
24, 2005, the United States Attorneys Office for the Southern District of New
York advised the Company that it would seek to conduct interviews of certain
current and former officers and employees of the Company. The Company is
cooperating with the investigation.

*FACTA litigation*

On October
3, 2007, a purported nationwide class action (Peter Jackson v. Krispy Kreme
Doughnut Corporation (Case No. CV07-06449 ABC (VBC)), United States District
Court, Central District of California) was filed against the Company and ten
fictitiously named defendants. Plaintiff asserts a single cause of action for
alleged willful violation of the federal Fair and Accurate Credit Transactions
Act (FACTA). Specifically, plaintiff alleges a violation concerning electronic
printing of certain credit card and debit card receipts that were not in
compliance with the applicable information truncation provisions of FACTA.
Plaintiff seeks statutory and punitive damages for these alleged violations, as
well as injunctive relief on behalf of a putative nationwide class. The Company
intends to defend vigorously against the claims asserted.

*TAG Litigation*

In February
2008, the Company filed suit in the U.S. District Court for the Middle District
of North Carolina against The Advantage Group Enterprise, Inc. (TAG), alleging
that TAG failed to properly account for and pay the Company on sales of
equipment that the Company consigned to TAG. Based on these allegations, the
Company asserted various claims including breach of fiduciary duty and
conversion, and it seeks an accounting and constructive trust. In addition, the
Company seeks a declaration that it does not owe TAG approximately $1 million
for storage fees and alleged lost profits. In March 2008, TAG answered the
complaint, denying liability and asserting counterclaims against the Company.
TAG alleges that the Company acted improperly by failing to execute a written
contract between the companies and claims damages for breach of contract,
services rendered, unjust enrichment, violation of the North Carolina Unfair
Trade Practices Act and fraud in the inducement. TAG seeks approximately $1
million in actual damages as well as punitive and treble damages. The Company
intends to vigorously prosecute its claims against TAG and to vigorously defend
against the counterclaims, which the Company believes are without
merit.

82

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

*Other matters*

The Company
also is engaged in various legal proceedings arising in the normal course of
business. The Company maintains customary insurance policies (which are subject
to deductibles) against certain kinds of such claims and suits, including
insurance policies for workers compensation and personal injury.

Other Commitments and Contingencies

The Company
has guaranteed certain leases and loans from third-party financial institutions
on behalf of Equity Method Franchisees primarily to assist the franchisees in
obtaining third party financing. The loans are collateralized by certain assets
of the franchisee, generally the Krispy Kreme store and related equipment. The
Companys contingent liabilities related to these guarantees totaled
approximately $17.5 million and $22.6 million at February 3, 2008 and January
28, 2007, respectively, and are summarized in Note 18. The guaranteed amount for
debt was determined based upon the principal amount outstanding under the
related agreement and the guaranteed amount for leases was determined based upon
the gross amount of remaining lease payments. The percentage of the aggregate
franchisee obligation guaranteed by the Company generally approximates the
Companys percentage ownership in the franchisee. These guarantees require
payment from the Company in the event of default on payment by the respective
debtor and, if the debtor defaults, the Company may be required to pay amounts
outstanding under the related agreements in addition to the principal amount
guaranteed, including accrued interest and related fees. At the time the
guarantees were issued, the Company determined the fair value of the guarantees
was immaterial and, accordingly, no amount was reflected for the liabilities in
the consolidated balance sheet.In the fourth
quarter of fiscal 2008, the Company recorded a provision of $3.0 million for
estimated payments under the Companys guarantees of certain debt and leases
related to a franchisee. During the quarter, the franchisee defaulted on certain
of the obligations guaranteed by the Company and, while there is no current
demand on the Company to perform under the guarantees, the Company believes it
is probable that demand will be made on the Company to perform under them. The
charge is comprised of $2.1 million representing 100% of the portion of
principal balance of the franchisees loans guaranteed by the Company, and
$900,000 representing the guaranteed portion of approximately one years total
payments on the guaranteed leases. The estimated aggregate maximum remaining
potential obligation on guaranteed leases over their remaining lives (which
range from 11 to 16 years) and for which no provision has been recorded is
approximately $8.8 million, assuming no sublease rentals or other loss
mitigation benefits and no reduction for rights of setoff or other defenses the
Company may have to the guarantees.During fiscal
2007, the Company recorded a provision of approximately $450,000 for estimated
payments under a Company guarantee of indebtedness of another franchisee. These
provisions are included in other non-operating income and expense in the
accompanying consolidated statement of operations. There is no liability
reflected for other guarantees as of February 3, 2008 because the Company did
not believe it was probable that the Company would be required to perform under
any other guarantees. However, there can be no assurance that the Company will
not be required to perform under those guarantees and, if circumstances change
from those prevailing at February 3, 2008, additional provisions for guarantee
payments could be required with respect to any of the guarantees, and such
provisions could be significant.

The Company
is subject to indemnification obligations to its directors and officers pursuant
to indemnification provisions of North Carolina law, the Companys bylaws and
certain indemnification agreements. Several of the Companys former directors,
officers and employees are the subject of criminal, administrative and civil
investigations and the unresolved components of the shareholder derivative
litigation. The Company may have an obligation to indemnify these persons in
relation to these matters. Some of these indemnification obligations would be
covered by certain insurers under applicable directors and officers liability
policies. In connection with the settlement of the securities class action and
the partial settlement of the derivative litigation described above, however,
the Company agreed with these insurers to limit its claims for reimbursement for
legal fees and costs incurred in connection with those proceedings, and the
related criminal and administrative investigations, to a specified reserve fund
in the amount of $3.4 million (of which approximately $1.4 million remains as of

83

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

February 3, 2008). Two of the Companys
former officers have agreed to limit their claims for indemnity from the Company
in connection with future proceedings before the SEC or the United States
District Court for the Southern District of New York to a portion of the amount
deposited into the reserve fund. This portion is not available to the Company
for its claims for reimbursement of the legal fees and costs described above. If
the sums in this fund are not sufficient to provide for reimbursement to the
Company or if the Company incurs significant uninsured indemnity obligations,
such indemnity obligations could have a material adverse effect on the Companys
financial condition, results of operations and cash flows. In addition, counsel
for the plaintiffs in several settled shareholder derivative actions have
deferred their application for fees until conclusion of the derivative actions,
and there can be no assurance as to the amount the Company will be required to
pay to such counsel or that the remaining reserve fund at such time will be
sufficient to reimburse the Company for such amount.

One of the
Companys lenders had issued letters of credit on behalf of the Company totaling
$20.3 million at February 3, 2008, the substantial majority of which secure the
Companys reimbursement obligations to insurers under the Companys
self-insurance arrangements.

The Company
is exposed to the effects of commodity price fluctuations on the cost of
ingredients of its products, of which flour, sugar and shortening are the most
significant. In order to secure adequate supplies of product and bring greater
stability to the cost of ingredients, the Company routinely enters into forward
purchase contracts with suppliers under which the Company commits to purchasing
agreed-upon quantities of ingredients at agreed-upon prices at specified future
dates. Typically, the aggregate outstanding purchase commitment at any point in
time will range from one months to two years anticipated ingredients
purchases, depending on the ingredient. In addition, from time to time the
Company enters into contracts for the future delivery of equipment purchased for
resale and components of doughnut-making equipment manufactured by the Company.
As of February 3, 2008, the Company had approximately $48.9 million of
commitments under ingredient and other forward purchase contracts. While the
Company has multiple suppliers for most of its ingredients, the termination of
the Companys relationships with vendors with whom the Company has forward
purchase agreements, or those vendors inability to honor the purchase
commitments, could adversely affect the Companys results of operations and cash
flows.

In addition
to entering into forward purchase contracts, the Company from time to time
purchases exchange-traded commodity futures contracts or options on such
contracts for raw materials which are ingredients of the Companys products or
which are components of such ingredients, including wheat and soybean oil. The
Company typically assigns the futures contract to a supplier in connection with
entering into a forward purchase contract for the related ingredient. The
aggregate fair value of unassigned futures contracts as of February 3, 2008 was
an asset of approximately $267,000.

84

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KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Note 13  Impairment Charges and Lease
Termination Costs

The components of impairment charges
and lease termination costs are as follows:

Year EndedFeb. 3,
    
    Jan. 28,
    
    Jan. 29,2008
    
    2007
    
    2006(In thousands)Impairment charges:Impairment of goodwill  Company Stores
      segment
    
    $
    4,598
    
    
    $
    874
    
    
    $
    3,511Impairment of goodwill  KK Supply Chain segment
    
    
    
    
    
    
    213
    
    
    
    Total goodwill impairment charges
    
    
    4,598
    
    
    
    1,087
    
    
    
    3,511Impairment of long-lived assets
    
    
    55,963
    
    
    
    9,418
    
    
    
    49,663Impairment of reacquired franchise rights
    
    
    480
    
    
    
    120
    
    
    
    560Other
    
    
    
    
    
    
    137
    
    
    
    Total impairment charges
    
    
    61,041
    
    
    
    10,762
    
    
    
    53,734Lease termination costs:Provision for termination costs
    
    
    2,683
    
    
    
    2,113
    
    
    
    2,860Less
       reversal of previously recorded deferred rent expense
    
    
    (1,651
    )
    
    
    (356
    )
    
    
    (1,532
    )Net provision
    
    
    1,032
    
    
    
    1,757
    
    
    
    1,328$
    62,073
    
    
    $
    12,519
    
    
    $
    55,062


The goodwill
impairment charges were recorded to reduce the carrying value of goodwill to its
estimated fair value, which the Company estimates using the present value of
expected future cash flows. Such charges reflect reductions in the Companys
forecasted sales and earnings in certain of the reporting units comprising the
Company Stores and KK Supply Chain segments, which caused a reduction in the
estimated fair value of those reporting units. Such reductions reflect current
operating results, including the effects of higher materials and labor costs, as
well as recent trends in operating results. The Company conducts its annual
goodwill impairment testing as of December 31.

The Company
tests other long-lived assets for impairment when events or changes in
circumstances indicate that their carrying value may not be recoverable. These
events and changes in circumstances include store closing decisions, the effects
of changing costs (including the impact of rising commodity costs) on current
results of operations, observed trends in operating results, and evidence of a
change in circumstances observed as a part of periodic reforecasts of future
operating results and as part of the Companys annual budgeting process. When
the Company concludes that the carrying value of other long-lived assets is not
recoverable (based on future projected undiscounted cash flows), the Company
records impairment charges to reduce the carrying value of those assets to their
estimated fair values. Impairment charges related to Company Stores long-lived
assets were approximately $44.1 million, $9.4 million and $49.7 million in
fiscal 2008, 2007 and 2006, respectively. Such charges relate to underperforming
stores, including both stores closed or likely to be closed and stores
management believes will not generate sufficient future cash flows to enable the
Company to recover the carrying value of the stores assets, but which
management has not yet decided to close. The impaired store assets include
leasehold improvements, which are typically abandoned when the leased properties
revert to the lessor (although the Company may recover a portion of the cost of
the improvements if the Company is successful in assigning its leasehold
interests to another tenant), and doughnut-making and other equipment. The fair
value of equipment is based upon its estimated selling price to franchisees
opening new stores, after considering refurbishment and transportation costs.

For the
fiscal year ended February 3, 2008, the Company also recorded an impairment
charge of approximately $10.4 million (substantially all of which was recorded
in the second quarter) with respect to its KK Supply Chain manufacturing and
distribution facility in Illinois, based on managements revised expectations

85

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

about the use and ultimate disposition of
that facility. During the second quarter, the Company decided to divest the
facility and determined that the projected cash flows from operation and
ultimate sale of the facility were less than its carrying value; accordingly,
the Company recorded an impairment charge to reduce the carrying value of the
facility and related equipment to their estimated fair value. The Company sold
these assets for approximately $10.9 million cash (net of expenses) in the
fourth quarter of fiscal 2008, and recorded a credit to impairment charges of
approximately $600,000, representing the excess of the ultimate selling price
over the previously estimated disposition value of the facility.

The Company
also recorded an impairment charge of approximately $1.5 million during fiscal
year ended February 3, 2008 to reduce the carrying value of its KK Supply Chain
coffee roasting assets to their estimated fair value upon disposition. The
Company sold these assets for approximately $1.9 million cash during the third
quarter of fiscal 2008.

The Company
records impairment charges for reacquired franchise rights when such intangible
assets are determined to be impaired as a result of store closing decisions or
other developments.

Lease
termination costs represent the net present value of remaining contractual lease
payments related to closed stores, after reduction by estimated sublease
rentals.

The transactions reflected in the
accrual for lease termination costs are as follows:

Year EndedFeb. 3,
    
    Jan. 28,
    
    Jan. 29,2008
    
    2007
    
    2006(In thousands)Balance at beginning of year
    
    $
    1,650
    
    
    $
    1,981
    
    
    $
    2,281Provision for lease termination costs:Provisions associated with store closings, net of estimated
      subleaserentals
    
    
    1,961
    
    
    
    122
    
    
    
    2,682Adjustments to previously recorded provisions resulting
      fromsettlements with lessors and adjustments of previous
      estimates
    
    
    526
    
    
    
    1,824
    
    
    
    77Accretion of discount
    
    
    196
    
    
    
    167
    
    
    
    101Total provision
    
    
    2,683
    
    
    
    2,113
    
    
    
    2,860Proceeds from assignment of leases
    
    
    966
    
    
    
    
    
    
    
    Accruals related to deconsolidated
      franchisees
    
    
    
    
    
    
    
    
    
    
    (1,012
    )Payments on unexpired leases, including settlements with
      lessors
    
    
    (2,462
    )
    
    
    (2,444
    )
    
    
    (2,148
    )Total reductions
    
    
    (1,496
    )
    
    
    (2,444
    )
    
    
    (3,160
    )Balance at end of
      year
    
    $
    2,837
    
    
    $
    1,650
    
    
    $
    1,981Accrued lease
      termination costs are included in the consolidatedbalance sheet as follows:Other accrued liabilities
    
    $
    322
    
    
    $
    189
    
    
    $
    282Other long-term obligations
    
    
    2,515
    
    
    
    1,461
    
    
    
    1,699$
    2,837
    
    
    $
    1,650
    
    
    $
    1,981


86

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Note 14  Other Non-Operating Income
and Expense

The components of other
non-operating income and expense are as follows:

Year EndedFeb. 3,
    
    Jan. 28,
    
    Jan. 29,2008
    
    2007
    
    2006(In thousands)Foreign currency transaction gain (loss)
    
    $
    70
    
    
    $
    163
    
    
    $
    (248
    )Gain on disposal
      of interests in Equity Method Franchisees(Note 18)
    
    
    260
    
    
    
    7,308
    
    
    
    Impairment charge related to investment in Equity
      MethodFranchisee (Note 18)
    
    
    (572
    )
    
    
    
    
    
    
    Provision for
      guarantee payments
    
    
    (2,969
    )
    
    
    (450
    )
    
    
    $
    (3,211
    )
    
    $
    7,021
    
    
    $
    (248
    )


In the
fourth quarter of fiscal 2008, the Company recorded a provision of $3.0 million
for estimated payments under the Companys guarantees of certain debt and leases
related to a franchisee. During the quarter, the franchisee defaulted on certain
of the obligations guaranteed by the Company and, while there is no current
demand on the Company to perform under the guarantees, the Company believes it
is probable that the Company will be required to perform under some, and
potentially all, of them. The charge is comprised of $2.1 million representing
100% of the portion of principal balance of the franchisees loans guaranteed by
the Company, and $900,000 representing the guaranteed portion of approximately
one years total payments on the guaranteed leases. The estimated aggregate
maximum remaining potential obligation on guaranteed leases over their remaining
lives (which range from 11 to 16 years) and for which no provision has been
recorded is approximately $8.8 million, assuming no sublease rentals or other
loss mitigation benefits and no reduction for rights of setoff or other defenses
the Company may have to the guarantees. During fiscal 2007, the Company recorded
a provision of approximately $450,000 for estimated payments under a Company
guarantee of indebtedness of another franchisee.

Note 15  Income Taxes

The components of the provision for
income taxes (benefit) are as follows:

Year EndedFeb. 3,
    
    Jan. 28,
    
    Jan. 29,2008
    
    2007
    
    2006(In thousands)Current
    
    $
    1,435
    
    $
    1,223
    
    
    $
    1,112Deferred
    
    
    889
    
    
    (12
    )
    
    
    (1,888
    )$
    2,324
    
    $
    1,211
    
    
    $
    (776
    )


87

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

The components of the loss before
income taxes are as follows:

Year EndedFeb. 3,
    
    Jan. 28,
    
    Jan. 29,2008
    
    2007
    
    2006(In thousands)Domestic
    
    $
    (58,491
    )
    
    $
    (45,705
    )
    
    $
    (130,411
    )Foreign
    
    
    (6,236
    )
    
    
    4,680
    
    
    
    (6,125
    )Total (loss) before income taxes
    
    $
    (64,727
    )
    
    $
    (41,025
    )
    
    $
    (136,536
    )


A
reconciliation of a tax provision computed at the statutory federal income tax
rate and the Companys provision for income taxes follows:

Year EndedFeb. 3,
    
    Jan. 28,
    
    Jan. 29,2008
    
    2007
    
    2006(In thousands)Income taxes at statutory federal rate
    
    $
    (22,654
    )
    
    $
    (14,359
    )
    
    $
    (47,788
    )State income
      taxes
    
    
    (3,718
    )
    
    
    (1,984
    )
    
    
    (3,988
    )Foreign (income) losses with no tax (cost) benefit
    
    
    114
    
    
    
    (2,216
    )
    
    
    291Valuation
      allowance provided on deferred income tax assets
    
    
    27,642
    
    
    
    19,420
    
    
    
    50,284Foreign withholding taxes
    
    
    773
    
    
    
    1,033
    
    
    
    102Other
    
    
    167
    
    
    
    (683
    )
    
    
    323$
    2,324
    
    
    $
    1,211
    
    
    $
    (776
    )


Income tax
payments, net of refunds, were $682,000, $505,000 and $690,000 in fiscal 2008,
2007 and 2006, respectively.

The components of deferred income
taxes are as follows:

Feb. 3,
    
    Jan. 28,2008
    
    2007(In thousands)Net current assets (liabilities)
    $
    83
    
    
    $
    (20
    )Net noncurrent
      assets (liabilities)
    
    (83
    )
    
    
    20Net
      asset
    $
    
    
    
    $
    


88

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

The tax effects of temporary
differences are as follows:

Feb. 3,
    
    Jan. 28,2008
    
    2007(In thousands)Deferred income tax assets:Goodwill and other intangible assets
    $
    29,830
    
    
    $
    33,056Accrued litigation settlement
    
    7,315
    
    
    
    20,463Allowance for doubtful accounts
    
    2,668
    
    
    
    2,298Other current assets
    
    2,180
    
    
    
    1,900Property and equipment
    
    11,907
    
    
    
    1,731Other non-current assets
    
    1,084
    
    
    
    959Insurance accruals
    
    5,404
    
    
    
    5,406Deferred revenue
    
    3,306
    
    
    
    5,310Other current liabilities
    
    5,478
    
    
    
    6,219Other non-current liabilities
    
    3,733
    
    
    
    3,553Share-based compensation
    
    4,262
    
    
    
    2,129Federal net operating loss carryforwards
    
    79,339
    
    
    
    52,371Federal tax credit carryforwards
    
    3,678
    
    
    
    2,883Charitable contributions carryforward
    
    3,889
    
    
    
    3,717State net operating loss and credit
      carryforwards
    
    12,176
    
    
    
    7,526Other
    
    1,532
    
    
    
    625Gross deferred income tax assets
    
    177,781
    
    
    
    150,146Valuation allowance on deferred income tax
      assets
    
    (176,964
    )
    
    
    (149,322
    )Deferred income tax assets, net of valuation
      allowance
    
    817
    
    
    
    824Deferred income tax liabilities:Other
    
    (817
    )
    
    
    (824
    )Gross deferred income tax liabilities
    
    (817
    )
    
    
    (824
    )Net deferred income tax asset
    $
    
    
    
    $
    


Certain
amounts set forth in the preceding table as of January 28, 2007 differ from
amounts previously reported; however, the aggregate net deferred income tax
asset at that date is unchanged.

The Company
has recorded a valuation allowance against deferred income tax assets of $177.0
million and $149.3 million at February 3, 2008 and January 28, 2007,
respectively, representing the amount of its deferred income tax assets in
excess of its deferred income tax liabilities. The valuation allowances were
recorded because management was unable to conclude, in light of the cumulative
loss realized by the Company for the three year period ended February 3, 2008,
that realization of the net deferred income tax asset was more likely than not.

The Company
has approximately $237 million of federal income tax loss carryforwards expiring
in fiscal 2024 through 2028. Of this amount, approximately $11 million is the
result of tax deductions related to the exercise of stock options by employees,
the tax benefits of which, if subsequently realized, will be recorded as an
addition to common stock. The Company also has state income tax loss
carryforwards expiring in fiscal 2010 through 2028.

The Company
is subject to U.S. federal income tax, as well as income tax in multiple U.S.
state and local jurisdictions and a limited number of foreign jurisdictions. All
significant state, local and foreign income tax matters have been concluded
through fiscal 2004. The Company has concluded all U.S. federal income tax
matters for all years prior to fiscal 2002.

89

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

The Company
currently is subject to examinations of its fiscal 2002 through 2004 income tax
returns by the Internal Revenue Service (IRS), and other tax examinations by
other tax authorities in various jurisdictions. The IRS has informed the Company
that it will seek to disallow permanently approximately $7.2 million of
deductions claimed in the income tax returns currently under examination. The
Company currently expects to agree with a portion of the adjustment proposed by
the IRS, but disagrees with the balance of the proposed adjustment. Because the
Company has net operating loss carryovers for federal income tax purposes, the
proposed adjustment is not expected to result in significant payment of
additional taxes with respect to the tax years under audit, but would, to the
extent sustained by the IRS, result in an increase in taxes payable by the
Company at such time, if any, as those net operating loss carryovers are
exhausted. The Company assesses the likelihood of adverse outcomes resulting
from these examinations in determining the provision for income
taxes.

The Company
had $5.1 million of unrecognized tax benefits as of February 3, 2008. If
recognized, $2.2 million of the unrecognized tax benefits would be recorded as a
part of income tax expense and affect the Companys effective income tax
rate.

The
following table presents a reconciliation of the beginning and ending amounts of
unrecognized tax benefits:

(In thousands)Unrecognized tax benefits recorded at adoption of FIN 48 effective
      January 29, 2007
    
    $
    4,540Increases for
      positions related to the current year
    
    
    238Increases for positions taken in prior years
    
    
    794Settlements with
      taxing authorities
    
    
    (41
    )Lapsing of statutes of limitations
    
    
    (401
    )Unrecognized tax
      benefits at February 3, 2008
    
    $
    5,130


It is
reasonably possible that the total amount of unrecognized tax benefits will
decrease in fiscal 2009 by up to approximately $3.9 million, of which
approximately $1.4 million would be recorded as part of income tax expense if
recognized. Decreases in the unrecognized tax benefits may result from the
completion of the IRS income tax audit, the pending liquidation of foreign
subsidiaries and the lapsing of statutes of limitations.

The
Companys policy is to recognize interest and penalties related to income tax
issues as components of income tax expense. The Company had approximately
$670,000 of accrued interest and penalties as of February 3, 2008, and accrued
approximately $220,000 for such items for the year then ended.

Note 16  Shareholders
Equity

***Common Shares and Warrants Issued in
Connection With Settlement of Litigation***

On March 2,
2007, the Company issued 1,833,828 shares of common stock and warrants to
acquire 4,296,523 shares of common stock at a price of $12.21 per share in
connection with the settlement of certain litigation as described in Note 12. As
of that date, the aggregate fair value of the common shares was approximately
$18.4 million and the aggregate fair value of the warrants was approximately
$18.5 million. The estimated fair value of the warrants was computed using the
Black-Scholes option pricing model with the following assumptions: an exercise
price of $12.21 per share; a market price of common stock of $10.01 per share;
an expected term of 5.0 years; a risk-free rate of 4.46%; a dividend yield of
zero; and expected volatility of 50%.

The common
stock and warrants had a fair value as of January 28, 2007 of approximately
$51.8 million which, together with the approximately $35.0 million cash paid to
the settlement class by the Companys insurers, was reflected in the
consolidated balance sheet under the caption accrued litigation settlement.
The decrease in the estimated fair value of the common stock and warrants from
January 28, 2007 to their issuance on March 2,

90

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

2007 of approximately $14.9 million was
credited to earnings in the first quarter of fiscal 2008, at which time the
aggregate fair value of the securities of approximately $36.9 million was
reclassified from liabilities to common stock.

***Warrant Issued in Exchange for
Services***

General and
administrative expenses for fiscal 2007 and 2006 include $3.9 million and $2.8
million, respectively, representing, in the aggregate, the estimated fair value
of a warrant to purchase 1.2 million shares of the Companys common stock issued
during fiscal 2006 to a corporate recovery and advisory firm engaged by the
Company to provide interim management services to the Company from late January
2005 through March 2006. The warrants exercise price is $7.75 per share, and it
expires on January 31, 2013. The warrants fair value was charged to earnings
during the period from January 18, 2005, the date on which the advisory firm was
engaged, to April 6, 2006, the date on which the warrant became exercisable and
non-forfeitable, in accordance with EITF Issue 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services. The substantial charge to earnings
related to the warrant in fiscal 2007 reflects an increase in its estimated fair
value as of April 6, 2006, the date on which the value of the warrant was fixed
for accounting purposes, compared to its estimated fair value at January 29,
2006. The estimated fair value of the warrant as of April 6, 2006 was computed
using the Black-Scholes option pricing model with the following assumptions: an
exercise price of $7.75 per share; a market price of common stock of $8.84 per
share; a term to maturity of 6.82 years; a risk-free rate of 4.91%; a dividend
yield of zero; and expected volatility of 55%. The aggregate $6.7 million
estimated fair value of the warrant as of April 6, 2006 was reclassified from
accrued liabilities to common stock as of that date.

***Share-Based Compensation for
Employees***

The
Companys shareholders approved the 2000 Stock Incentive Plan (the 2000 Plan),
under which incentive stock options, nonqualified stock options, stock
appreciation rights, performance units, restricted stock (or units) and common
shares may be awarded. In fiscal 2008, the Companys shareholders amended the
2000 plan to extend the term of the 2000 Plan by two years to June 30, 2012 and
to remove the 2000 Plans sublimit on the number of shares that may be issued in
connection with awards of stock appreciation rights, restricted stock, common
stock and performance unit awards. The maximum number of shares of common stock
with respect to which awards may be granted under the 2000 Plan is 9,996,000, of
which 3,566,500 remain available for grant after fiscal 2008. The 2000 Plan
provides that options may be granted with exercise prices not less than the
closing sale price of the Companys common stock on the date of
grant.

Effective
January 30, 2006 (the first day of fiscal 2007), the Company adopted Statement
of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment
(FAS 123(R)), which requires the measurement and recognition of compensation
expense for share-based payment (SBP) awards, including stock options. Such
adoption included consideration of the provisions of Staff Accounting Bulletin
No. 107, which contains the views of the staff of the Commission relating to
adoption of FAS 123(R). Prior to fiscal 2007, the Company accounted for SBP
awards using the intrinsic value method prescribed by APB 25.

The Company
adopted FAS 123(R) using the modified prospective method of adoption;
accordingly, financial statements for years prior to fiscal 2007 have not been
restated to reflect the fair value method of recognizing compensation cost
relating to stock options. Under the modified prospective method of adoption,
the aggregate fair value of stock options which were unvested at the end of
fiscal 2006 that is attributable to employee service after fiscal 2006 will be
charged to earnings over the remaining service period associated with the
options. In addition, the Company is recognizing compensation expense for stock
option awards made in fiscal 2007 and thereafter. The Company previously
recognized compensation expense for grants of restricted stock based upon the
fair value of the shares awarded, and this practice has continued after adoption
of FAS 123(R). Under FAS 123(R), the fair value of SBP awards with respect to
which employees render the requisite service necessary for the

91

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

award to vest is recognized over the
related vesting period. The fair value of SBP awards which vest in increments
and for which vesting is subject solely to service conditions is charged to
expense on a straight-line basis over the aggregate vesting period of each
award, which generally ranges from three to four years. The fair value of SBP
awards which vest in increments and for which vesting is subject to both market
conditions and service conditions is charged to expense over the estimated
vesting period of each increment of the award, each of which is treated as a
separate award for accounting purposes.

Adoption of
FAS 123(R) had the effect of increasing compensation expense for fiscal 2007 by
approximately $5.0 million. Because the Company recorded no income tax benefit
with respect to its operating loss for fiscal 2007, the after tax effect of the
accounting change also was approximately $5.0 million, or $.08 per share. This
additional expense includes not only a portion of the fair value of stock
options granted during fiscal 2007, but also a portion of the fair value of
stock options granted in prior years.

The
aggregate cost of SBP awards charged to earnings in fiscal 2008 and fiscal 2007
is set forth in the following table. The Company did not realize any excess tax
benefits from the exercise of stock options during either year.

Year Ended**Feb. 3**,
    
    **Jan. 29**,2008
    
    2007(In thousands)Costs charged to earnings related to:Stock options
    
    $
    2,561
    
    $
    4,978Restricted stock and restricted stock units
    
    
    5,038
    
    
    1,009Total costs
    
    $
    7,599
    
    $
    5,987Costs included in:Direct operating expenses
    
    $
    2,384
    
    $
    2,628General and administrative expenses
    
    
    5,215
    
    
    3,359Total costs
    
    $
    7,599
    
    $
    5,987


Had
compensation cost for the Companys stock option plans for fiscal 2006 been
determined based on the estimated fair value of the awards at the grant dates in
accordance with the provisions of Statement of Financial Accounting Standards
No. 123, Stock-Based Compensation (FAS 123), rather than using the intrinsic
value method of APB 25, the Companys earnings would have been affected as set
forth in the table below:

|                                                            |  | Year Ended                  
|----------------------------------------------------------- |  | ----------------------------
|                                                            |  | **Jan. 29**,**2006**        
|                                                            |  | **(In thousands**,**except**
|                                                            |  | per share amounts)          
|Net (loss) as reported                                      |  |                             
|Deduct: SBP
      awards determined under fair value method |  |                             
|Pro forma net (loss)                                        |  |                             
|(Loss) per
      share:                                     |  |                             
|Reported (loss) per share  Basic                           |  |                             
|Pro forma (loss) per share  Basic                          |  |                             
|Reported (loss) per share  Diluted                         |  |                             
|Pro forma (loss) per share  Diluted                        |  |                             

92

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

The fair
value of stock options subject only to service conditions was estimated using
the Black-Scholes option pricing model. In addition to service conditions,
certain stock options granted in fiscal 2008 and 2007 also provide that the
price of the Companys common stock must increase by 20% and 40% after the grant
date, and remain at or above the appreciated price for at least ten consecutive
trading days, in order for the options to become vested and exercisable. The
fair value of those stock options was estimated using Monte Carlo simulation
techniques. Options granted generally have contractual terms of 10 years, the
maximum term permitted under the 2000 Plan. The weighted average assumptions
used in valuing stock options are set forth in the following table:

Year ended**Feb. 3**,
    
    **Jan. 28**,
    
    **Jan. 29**,2008
    
    2007
    
    2006Expected life of option
    
    6.9 years
    
    
    6.6 years
    
    
    (1
    )Risk-free
      interest rate
    
    4.42
    %
    
    4.63
    %
    
    (1
    )Expected volatility of stock
    
    50.0
    %
    
    51.8
    %
    
    (1
    )Expected
      dividend yield
    
    
    
    
    
    
    
    (1
    )


|(1) |  | Not applicable; no stock options
      were granted in fiscal 2006.
|--- |  | -------------------------------------------------------------------

The expected
life of stock options valued using the Black-Scholes option pricing model is
estimated by reference to historical experience, published data and any relevant
characteristics of the option. The expected life of stock options valued using
Monte Carlo simulation techniques is based upon the vesting dates forecasted by
the simulation and then assuming that options which vest are exercised at the
midpoint between the forecasted vesting date and their expiration. The risk-free
rate of interest is based on the yield of a zero-coupon U.S. Treasury bond on
the date the award is granted having a maturity approximately equal to the
expected term of the award. Expected volatility is based on a combination of the
historical and implied volatility of the Companys common shares and the shares
of peer companies. The Company uses historical data to estimate forfeitures of
awards prior to vesting.

The number
of options granted during fiscal 2008, 2007 and 2006 and the aggregate and
weighed average fair value of such options were as follows:

Year ended**Feb. 3**,
    
    **Jan. 28**,
    
    **Jan. 29**,2008
    
    2007
    
    2006Weighted average fair value per share of options granted
    
    $
    2.95
    
    $
    4.88
    
    (1
    )Total number of
      options granted
    
    
    784,200
    
    
    1,400,000
    
    Total fair value of all options granted
    
    $
    2,309,700
    
    $
    6,831,500
    
    (1
    )


|(1) |  | Not applicable; no stock options
      were granted in fiscal 2006.
|--- |  | -------------------------------------------------------------------

93

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

The
following table summarizes stock option transactions for fiscal 2008, 2007 and
2006. Option transactions include options granted under the 2000 Plan as well as
options granted under the Companys 1998 Stock Option Plan (the 1998 Plan)
pursuant to which grants may no longer be awarded.

Weighted
    
    
    
    
    WeightedShares
    
    Average
    
    
    
    
    AverageSubject
    
    Exercise
    
    Aggregate
    
    Remaining**to**
    
    Price
    
    Intrinsic
    
    ContractualOption
    
    Per Share
    
    Value
    
    Term**(Dollars in thousands**,**except per share amounts)**Outstanding at January 30, 2005
    
    7,448,500
    
    
    $
    18.89Granted
    
    
    
    
    
    Exercised
    
    (85,700
    )
    
    $
    1.79
    
    $
    459Forfeited
    
    (1,284,400
    )
    
    $
    30.97Outstanding at January 29, 2006
    
    6,078,400
    
    
    $
    16.58Granted
    
    1,400,000
    
    
    $
    8.52Exercised
    
    
    
    
    
    
    
    
    Forfeited
    
    (403,200
    )
    
    $
    26.78Outstanding at January 28, 2007
    
    7,075,200
    
    
    $
    14.40
    
    $
    35,366
    
    4.8 yearsGranted
    
    784,200
    
    
    $
    5.21Exercised
    
    (110,800
    )
    
    $
    2.63
    
    $
    526Forfeited
    
    (1,352,800
    )
    
    $
    13.76Outstanding at February 3, 2008
    
    6,395,800
    
    
    $
    13.61
    
    $
    3,796
    
    3.6 yearsExercisable at
      February 3, 2008
    
    5,253,300
    
    
    $
    14.80
    
    $
    3,796
    
    2.4
      years


Additional information regarding
stock options outstanding as of February 3, 2008, is as follows:

Options OutstandingWeightedAverage
    
    
    
    
    **Options Exercisable**Remaining
    
    Weighted
    
    
    
    WeightedContractual
    
    Average
    
    
    
    AverageRange
      of
    
    
    
    
    Life
    
    Exercise
    
    
    
    ExerciseExercise Prices
    
    
    Shares
    
    (Years)
    
    Price
    
    Shares
    
    Price$  1.30- $  3.41
    
    2,991,400
    
    1.9
    
    $
    1.73
    
    2,588,600
    
    $
    1.46$  5.25- $  9.71
    
    544,000
    
    8.0
    
    $
    9.19
    
    64,000
    
    $
    5.25$10.20- $16.94
    
    1,042,100
    
    5.1
    
    $
    13.95
    
    788,600
    
    $
    14.55$28.11- $28.58
    
    624,000
    
    4.3
    
    $
    28.34
    
    624,000
    
    $
    28.34$30.98- $44.22
    
    1,194,300
    
    4.0
    
    $
    37.41
    
    1,188,100
    
    $
    37.43


94

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

In addition
to stock options, the Company periodically has awarded restricted stock and
restricted stock units (which are settled in common stock) under the 2000 Plan.
The following table summarizes changes in unvested restricted stock awards for
fiscal 2008, 2007 and 2006:

WeightedAverageUnvested
    
    Grant DateShares
    
    Fair ValueUnvested at January 30, 2005
    
    500
    
    
    $
    38.66Granted
    
    
    
    
    
    Vested
    
    (100
    )
    
    $
    34.11Forfeited
    
    (400
    )
    
    $
    39.43Unvested at January 29, 2006
    
    
    
    
    
    Granted
    
    834,000
    
    
    $
    8.52Vested
    
    (87,000
    )
    
    $
    6.86Forfeited
    
    (3,000
    )
    
    $
    9.71Unvested at January 28, 2007
    
    744,000
    
    
    $
    8.71Granted
    
    1,552,000
    
    
    $
    4.68Vested
    
    (795,500
    )
    
    $
    4.96Forfeited
    
    (315,000
    )
    
    $
    7.24Unvested at February 3, 2008
    
    1,185,500
    
    
    $
    6.33


The total
fair value as of the grant date of shares vesting during fiscal 2008, 2007 and
2006 was $3,946,000, $597,000 and $3,000, respectively.

As of
February 3, 2008, the total unrecognized compensation cost related to SBP awards
was approximately $9.0 million. The remaining service periods over which
compensation cost will be recognized for these awards range from approximately
three months to four years, with a weighted average remaining service period of
approximately 1.6 years.

At February
3, 2008, there were approximately 11,147,800 shares of common stock reserved for
issuance pursuant to awards granted under the 2000 Plan and the 1998
Plan.

Shareholder Rights
Plan

Each share
of the Companys common stock has one preferred share purchase right. Each share
purchase right entitles the registered shareholder to purchase one one-hundredth
(1/100) of a share of Krispy Kreme Series A Participating Cumulative Preferred
Stock at a price of $96.00 per one one-hundredth of a Series A preferred share.
The share purchase rights are not exercisable until the earlier to occur of (1)
10 days following a public announcement that a person or group of affiliated or
associated persons  referred to as an acquiring person  has acquired
beneficial ownership of 15% or more of the Companys outstanding common stock or
(2) 10 business days following the commencement of, or announcement of an
intention to make a tender offer or exchange offer which would result in an
acquiring person beneficially owning 15% or more of the outstanding shares of
common stock.

If the
Company is acquired in a merger or other business combination, or if 50% or more
of the Companys consolidated assets or earning power is sold after a person or
group has become an acquiring person, proper provision will be made so that each
holder of a share purchase right  other than share purchase rights beneficially
owned by the acquiring person, which will thereafter be void  will have the
right to receive, upon exercise of the share purchase right at the then current
exercise price, the number of shares of common stock of the acquiring company
which at the time of the transaction have a market value of two times the share
purchase right exercise

95

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

price. If any person or group becomes an
acquiring person, proper provision shall be made so that each holder of a share
purchase right  other than share purchase rights beneficially owned by the
acquiring person, which will thereafter be void  will have the right to receive
upon exercise, and without paying the exercise price, the number of shares of
Krispy Kreme common stock with a market value equal to the share purchase right
exercise price.

Series A
preferred shares purchasable upon exercise of the share purchase rights will not
be redeemable. Each Series A preferred share will be entitled to a minimum
preferential dividend payment of $1 per share and will be entitled to an
aggregate dividend of 100 times the dividend declared per share of common stock.
In the event the Company liquidates, the holders of the Series A preferred
shares will be entitled to a minimum preferential liquidation payment of $1 per
share but will be entitled to an aggregate payment of 100 times the payment made
per share of common stock. Each Series A preferred share will have 100 votes,
voting together with the shares of common stock. Finally, in the event of any
merger, consolidation or other transaction in which shares of common stock are
exchanged, each Series A preferred share will be entitled to receive 100 times
the amount received per share of common stock. These rights are protected by
customary antidilution provisions.

Before the
date the share purchase rights are exercisable, the share purchase rights may
not be detached or transferred separately from the common stock. The share
purchase rights will expire on January 18, 2010, unless that expiration date is
extended or unless the share purchase rights are redeemed or exchanged by the
Company. At any time an acquiring person acquires beneficial ownership of 15% or
more of the Companys outstanding common stock, the Board of Directors may
redeem the share purchase rights in whole, but not in part, at a price of $0.001
per share purchase right. Immediately upon any share purchase rights redemption,
the exercise rights terminate and the holders will only be entitled to receive
the redemption price.

Note 17  Segment
Information

The
Companys reportable segments are Company Stores, Franchise and KK Supply Chain.
The Company Stores segment is comprised of the operating activities of the
stores operated by the Company. These stores sell doughnuts and complementary
products through both on-premises and off-premises sales channels, although some
stores serve only one of these distribution channels. The majority of the
ingredients and materials used by Company stores are purchased from the KK
Supply Chain segment, which supplies mix, equipment and other items to both
Company and franchisee-owned stores. The Franchise segment consists of the
Companys store franchise operations. Under the terms of the franchise
agreements, the franchisees pay royalties and fees to the Company in return for
the use of the Krispy Kreme name and ongoing brand and operational support.
Expenses for this segment include costs incurred to recruit new franchisees and
to open, monitor and aid in the performance of these stores and direct general
and administrative expenses.

All
intercompany sales by the KK Supply Chain segment to the Company Stores segment
are at prices intended to reflect an arms-length transfer price and are
eliminated in consolidation. Operating income for the Company Stores segment
does not include any profit earned by the KK Supply Chain segment on sales of
doughnut mix, ingredients and supplies to the Company Stores segment; such
profit is included in KK Supply Chain operating income. The gross profit earned
by the KK Supply Chain segment on sales of equipment to the Company Stores
segment and eliminated in consolidation is not included in the KK Supply Chain
segment operating income shown below, and depreciation expense charged to
Company Stores operating income reflects the elimination of that intercompany
profit.

The
following table presents the results of operations of the Companys operating
segments for fiscal 2008, 2007 and 2006. As described under Revisions in Note
1, in fiscal 2008 the Company revised its presentation of gains and losses on
disposals of property and equipment and foreign currency transaction gains and
losses related to inventory purchases to report such amounts as components of
income or loss from operations rather than as components of non-operating income
and expense. Certain amounts set forth in the table below for fiscal 2007 and
2006 differ from amounts previously reported as a result of such
revision.

96

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Segment
operating income is consolidated operating income before unallocated general and
administrative expenses, impairment charges and lease termination costs and
settlement of litigation.

Year EndedFeb. 3,
    
    Jan. 28,
    
    Jan. 29,**2008**
    
    2007
    
    2006(In thousands)Revenues:Company Stores
    
    $
    304,444
    
    
    $
    326,199
    
    
    $
    398,450Franchise
    
    
    22,958
    
    
    
    21,075
    
    
    
    18,394KK Supply Chain:Total revenues
    
    
    203,283
    
    
    
    219,991
    
    
    
    253,367Less  intersegment sales elimination
    
    
    (101,366
    )
    
    
    (106,070
    )
    
    
    (126,850
    )External KK Supply Chain revenues
    
    
    101,917
    
    
    
    113,921
    
    
    
    126,517Total revenues
    
    $
    429,319
    
    
    $
    461,195
    
    
    $
    543,361Operating income (loss):Company Stores
    
    $
    (6,292
    )
    
    $
    1,721
    
    
    $
    (2,425
    )Franchise
    
    
    14,317
    
    
    
    16,354
    
    
    
    13,805KK Supply Chain
    
    
    24,083
    
    
    
    32,311
    
    
    
    32,089Unallocated general and administrative expenses
    
    
    (27,552
    )
    
    
    (50,392
    )
    
    
    (69,605
    )Impairment charges and lease termination
      costs
    
    
    (62,073
    )
    
    
    (12,519
    )
    
    
    (55,062
    )Settlement of litigation
    
    
    14,930
    
    
    
    (15,972
    )
    
    
    (35,833
    )Total operating (loss)
    
    $
    (42,587
    )
    
    $
    (28,497
    )
    
    $
    (117,031
    )Depreciation and amortization expense:Company Stores
    
    $
    11,558
    
    
    $
    15,979
    
    
    $
    23,416Franchise
    
    
    92
    
    
    
    119
    
    
    
    145KK Supply Chain
    
    
    5,586
    
    
    
    3,469
    
    
    
    3,504Corporate administration
    
    
    1,197
    
    
    
    1,479
    
    
    
    1,855Total depreciation and amortization expense
    
    $
    18,433
    
    
    $
    21,046
    
    
    $
    28,920


Segment
information for total assets and capital expenditures is not presented as such
information is not used in measuring segment performance or allocating resources
among segments.

Revenues for
fiscal 2008, 2007 and 2006 include approximately $48 million, $43 million and
$24 million, respectively, from customers outside the United States.
Approximately $4 million of the carrying value of property and equipment at
January 28, 2007 relates to the Companys operations in Canada.

Note 18  Investments in
Franchisees

As of
February 3, 2008, the Company has investments in seven franchisees. These
investments have been made in the form of capital contributions and, in certain
instances, loans evidenced by promissory notes. Notes receivable bear interest,
payable semi-annually, at rates ranging from 6.5% to 10.0% per annum, and have
maturity dates ranging from September 30, 2008 to the dissolution of the
franchisee. These investments and notes receivable are included in Investments
in Equity Method Franchisees in the consolidated balance sheet.

Information
about the Companys ownership in the Equity Method Franchisees and the markets
served by those franchisees is set forth below:

97

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

|                                              |  |                                 |  | Number of       |  |            |      |               |  |     
|--------------------------------------------- |  | ------------------------------- |  | --------------- |  | ---------- | ---- | ------------- |  | ----
|                                              |  |                                 |  | Stores as       |  |            |      |               |  |     
|                                              |  |                                 |  | of
      Feb. 3 |  | Ownership%
|                                              |  | Geographic Market               |  | **2008(1)**     |  | Company    |      | Third Parties
|A-OK, LLC                                     |  | Arkansas, Oklahoma              |  | 5               |  |            | 30.3 | %             |  | 69.7
|KK-TX I,
      L.P.                           |  | Texas (Amarillo,
      Lubbock) |  | 1               |  |            | 33.3 | %             |  | 66.7
|KremeWorks, LLC                               |  | Alaska, Hawaii, Oregon,         |  | 11              |  |            | 25.0 | %             |  | 75.0
|                                              |  | Washington                      |  |                 |  |            |      |               |  |     
|Kremeworks
      Canada, LP                   |  | Western
      Canada            |  | 1               |  |            | 24.5 | %             |  | 75.5
|Krispy Kreme of South Florida, LLC            |  | Southern Florida                |  | 3               |  |            | 35.3 | %             |  | 64.7
|Krispy Kreme
      Mexico, S. de R.L. de C.V. |  | Mexico                          |  | 36              |  |            | 30.0 | %             |  | 70.0
|Priz Doughnuts, LP                            |  | Texas (El Paso), Mexico         |  | 2               |  |            | 66.7 | %             |  | 33.3
|                                              |  | (Ciudad Juarez)                 |  |                 |  |            |      |               |  |     

|(1) |  | Includes satellite
    stores.
|--- |  | ------------------------------

Information
about the financial position and results of operations of the Companys Equity
Method Franchisees is set forth below:

|                                              |  | Summary Financial
      Information(1)
|--------------------------------------------- |  | --------------------------------------
|                                              |  |                                       
|                                              |  |                                       
|                                              |  | Revenues                              
|                                              |  | (In thousands)                        
|A-OK, LLC                                     |  | $                                     
|KK-TX I,
      L.P.                           |  |                                       
|KremeWorks, LLC                               |  |                                       
|Kremeworks
      Canada, LP                   |  |                                       
|Krispy Kreme of South Florida, LLC            |  |                                       
|Krispy Kreme
      Mexico, S. de R.L. de C.V. |  |                                       
|Priz Doughnuts, LP(2)                         |  |                                       

|(1) |  | The revenues and net income
      (loss) shown for each of these franchisees represents the amounts reported
      by the franchisee for calendar 2007, and the amounts shown as total assets
      and total liabilities represent the corresponding amounts reported by each
      of the franchisees on or about December 31, 2007.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Information other than revenues
      was not available for Priz Doughnuts, LP.                                                                                                                                                                                                                                                       

98

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

The
Companys financial exposures related to franchisees in which the Company has an
investment are summarized in the tables below. The consolidated balance sheet at
February 3, 2008 includes accruals for estimated payments under loan and lease
guarantees of approximately $3.4 million related to Krispy Kreme of South
Florida, LLC (KKSF) and Priz Doughnuts, LP (Priz). There is no liability
reflected for other guarantees of franchisee obligations because the Company did
not believe it was probable that the Company would be required to perform under
such other guarantees.

|                                              |  | February 3, 2008
|--------------------------------------------- |  | ----------------
|                                              |  | Investment      
|                                              |  | and             
|                                              |  | Advances        
|                                              |  | (In thousands)  
|A-OK, LLC                                     |  | $               
|KK-TX I,
      L.P.                           |  |                 
|Kremeworks, LLC                               |  |                 
|Kremeworks
      Canada, LP                   |  |                 
|Krispy Kreme of South Florida, LLC            |  |                 
|Krispy Kreme
      Mexico, S. de R.L. de C.V. |  |                 
|Priz Doughnuts, LP                            |  |                 
|                                              |  | $               
|                                             
|                                              |  | January 28, 2007
|                                              |  | Investment      
|                                              |  | and             
|                                              |  | Advances        
|                                              |  | (In thousands)  
|A-OK, LLC                                     |  | $               
|KK-TX I,
      L.P.                           |  |                 
|Kremeworks, LLC                               |  |                 
|Kremeworks
      Canada, LP                   |  |                 
|Krispy Kreme of South Florida, LLC(1)         |  |                 
|Krispy Kreme
      Mexico, S. de R.L. de C.V. |  |                 
|Priz Doughnuts, LP                            |  |                 
|                                              |  | $               

|(1) |  | Reflects a correction of the
      previously reported guarantee amount of $10,231 reflected in the 2007 Form
      10-K.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

Amounts
shown in the preceding tables for accounts and notes receivable are before
reduction for related allowances for doubtful accounts, which totaled
approximately $1.4 million and $2.9 million at February 3, 2008 and January 28,
2007, respectively (see Note 3). The aggregate loan and lease guarantees at
February 3, 2008 and January 28, 2007 shown in the preceding tables include
$11.5 million and $15.0 million, respectively, representing guarantees of lease
obligations; the balance of the guarantee amounts represents guarantees of
outstanding loans. The guaranteed amount for debt was determined based upon the
principal amount outstanding under the related agreement and the guaranteed
amount for leases was determined based upon the gross amount of remaining lease
payments.

99

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

In April
2008, the Company completed an agreement with A-OK, LLC and KK-TX-I, L.P. (which
have common ownership and are collectively referred to as the A-OK Parties)
pursuant to which, among other things, the Company conveyed to the owner of the
A-OK Parties the Companys equity interests in the A-OK Parties and compromised
and settled certain disputed and past due amounts owed by the A-OK Parties to
the Company. In connection with this agreement, the Company was released from
its obligations under all of its partial guarantees of certain of the A-OK
Parties indebtedness and lease obligations.

During
fiscal 2008, the Company reevaluated its investment in Kremeworks Canada, LP
(Kremeworks Canada) and concluded that such investment was not recoverable;
accordingly, the Company recorded an impairment charge of $572,000 to reduce the
carrying value of the Companys investment in Kremeworks Canada to zero. This
charge is included in other non-operating income and expense, net in the
consolidated statement of operations.

In August
2007, the Company acquired an additional 33.4% interest in Priz as part of a
plan to restructure its operations, which currently consist of two franchise
stores.

In December
2006, the Company entered into an agreement with KKSF pursuant to which, among
other things, the Company agreed to permit KKSF to close certain of its stores
and granted KKSF forbearance with respect to certain of KKSFs financial
obligations to the Company, and KKSF agreed to use its best efforts to cause the
Company to be released from its obligations under its partial guarantees of
certain KKSF indebtedness and lease obligations. If KKSF obtained the Companys
release from the guarantees and otherwise complied with the terms of the
agreement, the Company agreed to convey to the majority owner of KKSF the
Companys equity interest in KKSF without further consideration. While KKSF
obtained the Companys release from approximately $2.9 million of potential
guarantee obligations since December 2006, as of February 3, 2008, KKSF was not
in compliance with all of the terms of the agreement and which, in any event,
has expired and not been extended. KKSF is seeking additional forbearance and/or
financial support from the Company, and is in default with respect to certain
credit agreements with its lenders, including agreements related to KKSF
indebtedness guaranteed, in part, by the Company. During the fourth quarter of
fiscal 2008, the Company recorded a provision of $3.0 million for estimated
payments related to guarantees of KKSF loans and leases, as more fully described
under Other Commitment and Contingencies in Note 12.

The
following table summarizes the Companys obligations under the loan and lease
guarantees as of February 3, 2008 and the scheduled expiration of these
obligations in each of the next five fiscal years and thereafter. The amounts
shown as the scheduled expiration of the guarantees are based upon the scheduled
maturity of the underlying guaranteed obligation.

|                            |  |                |  | Total      |   |                                       |  |      |       |      |   |       |  |      |       |            |   |       |  |   |       |  | 
|--------------------------- |  | -------------- |  | ---------- | - | ------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | ---- | ----- | ---------- | - | ----- |  | - | ----- |  | 
|                            |  |                |  | Loan/      |   |                                       |  |      |       |      |   |       |  |      |       |            |   |       |  |   |       |  | 
|                            |  | Guarantee      |  | Lease      |   | Amounts Expiring in Fiscal
      Year
|                            |  | Percentages    |  | Guarantees |   | 2009                                  |  | 2010 |       | 2011 |   | 2012  |  | 2013 |       | Thereafter
|                            |  | (In thousands)
|A-OK, LLC                   |  | 22.3%-33.3%    |  |            | $ | 2,319                                 |  | $    | 366   |      |   | 198   |  |      | 143   |            |   | 147   |  |   | 150   |  | 
|KK-TX I,
      L.P.         |  | 30.0%-33.3%    |  |            |   | 810                                   |  |      | 147   |      |   | 128   |  |      | 92    |            |   | 69    |  |   | 52    |  | 
|Kremeworks, LLC             |  | 20.0%          |  |            |   | 2,122                                 |  |      | 1,506 |      |   | 616   |  |      |      |            |   |      |  |   |      |  | 
|Krispy Kreme of
      South |  |                |  |            |   |                                       |  |      |       |      |   |       |  |      |       |            |   |       |  |   |       |  | 
|Florida, LLC                |  | 35.0%-100.0%   |  |            |   | 11,801                                |  |      | 2,969 |      |   | 822   |  |      | 822   |            |   | 822   |  |   | 822   |  | 
|Priz Doughnuts, LP          |  | 66.7%          |  |            |   | 450                                   |  |      | 450   |      |   |      |  |      |      |            |   |      |  |   |      |  | 
|                            |  |                |  |            | $ | 17,502                                |  | $    | 5,438 |      | $ | 1,764 |  | $    | 1,057 |            | $ | 1,038 |  | $ | 1,024 |  | 

100

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Note 19  Related Party
Transactions

All
franchisees are required to purchase doughnut mix and production equipment from
the Company. Revenues include $14.7 million, $22.9 million and $47.6 million in
fiscal 2008, 2007 and 2006, respectively, of sales to franchise stores owned, in
whole or in part, by emeritus directors and franchisees in which the Company has
an ownership interest. In August 2005, the Company eliminated the position of
emeritus director. Revenues also include royalties from these franchisees of
$2.9 million, $4.4 million and $8.6 million in fiscal 2008, 2007 and 2006,
respectively. Trade receivables from these franchisees are included in
receivables from related parties in Note 3. These transactions were conducted
pursuant to development and/or franchise agreements, the terms of which are
substantially the same as those with similar franchisees.

The
Companys franchisee for the Middle East is an affiliate of a shareholder which
is the beneficial owner of approximately 14% of the companys common stock. The
Company had transactions in the normal course of business with this franchisee
(including sales of doughnut mix and equipment to the franchisee and royalties
payable to the Company by the franchisee based on its sales at Krispy Kreme
franchise stores) totaling approximately $8.1 million in fiscal 2008 and $1.5
million in fiscal 2007. Such transactions were conducted pursuant to development
and franchise agreements, the terms of which are substantially the same as those
currently offered to our other international franchisees.

Note 20  Employee Benefit
Plans

The Company
has a 401(k) savings plan (the 401(k) Plan) to which employees may contribute
up to 100% of their salary and bonus to the plan on a tax deferred basis,
subject to statutory limitations.

The Company
also has a Nonqualified Deferred Compensation Plan (the 401(k) Mirror Plan)
designed to enable officers of the Company whose contributions to the 401(k)
Plan are limited by certain statutory limitations to have the same opportunity
to defer compensation as is available to other employees of the Company under
the qualified 401(k) savings plan. Participants may defer from 1% to 15% of
their base salary and from 1% to 100% of their bonus (reduced by their
contributions to the 401(k) Plan), subject to statutory limitations, into the
401(k) Mirror Plan and may direct the investment of the amounts they have
deferred. The investments, however, are not a legally separate fund of assets
and are included in other assets in the consolidated balance sheet. The
corresponding liability to participants is included in other long-term
obligations. The balance in the asset and corresponding liability account was
$368,000 and $255,000 at February 3, 2008 and January 28, 2007,
respectively.

The Company
currently matches 50% of the first 6% of compensation contributed by each
employee to both the 401(k) Plan and the 401(k) Mirror Plan. Contributions
expense for these plans totaled $847,000 in fiscal 2008, $838,000 in fiscal 2007
and $851,000 in fiscal 2006.

In February
1999, the Company established the Krispy Kreme Profit Sharing Stock Ownership
Plan (KSOP) pursuant to which the Company could contribute a discretionary
percentage of each employees compensation, subject to Internal Revenue Code
limits, to each eligible employees account under the plan. The Company made no
contribution to this plan in fiscal 2008, 2007 or 2006. In connection with the
settlement in fiscal 2007 of certain litigation involving the 401(k) Plan and
the KSOP, the Company agreed to merge the KSOP with and into the Companys
401(k) Plan, which occurred on June 1, 2007.

KKDC
established a nonqualified mirror plan, comparable to the KSOP, in February
1999. Contributions to this nonqualified plan could be made by the Company with
respect to compensation earned by participants in excess of the maximum amount
of compensation that may be taken into account under the qualified plan. No
amounts were credited to employees under the nonqualified plan in fiscal 2008,
2007 or 2006.

101

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

In February
2002, the Company established the Krispy Kreme Doughnuts, Inc. Employee Stock
Purchase Plan (ESPP) to provide eligible employees of the Company an
opportunity to purchase Company common stock by deferring a portion of their
compensation. Deferred amounts are accumulated and, at the end of each quarter,
are used to purchase shares of common stock of the Company. The ESPP provides
that the shares can be acquired either from the Company or in the open market.
The Company recorded compensation expense related to the plan of $14,000 in
fiscal 2006 prior to halting purchases under the ESPP. As of February 3, 2008,
there were 2,000,000 common shares reserved for issuance under the
ESPP.

Note 21  Selected Quarterly Financial
Data (Unaudited)

The tables below present selected
quarterly financial data for fiscal 2008 and 2007.

|                                                    |  | Three Months
    Ended               
|--------------------------------------------------- |  | -------------------------------------
|                                                    |  | Apr. 29,                             
|                                                    |  | 2007                                 
|                                                    |  | (In thousands, except per share data)
|Revenues                                            |  | $                                    
|Operating
      expenses:                           |  |                                      
|Direct operating expenses                           |  |                                      
|General and administrative expenses                 |  |                                      
|Depreciation and amortization expense               |  |                                      
|Impairment charges and lease termination
    costs  |  |                                      
|Settlement of litigation                            |  |                                      
|Other operating (income) and expense,
net           |  |                                      
|Operating income (loss)                             |  |                                      
|Interest
      income                               |  |                                      
|Interest expense                                    |  |                                      
|Loss on
      extinguishment of debt.               |  |                                      
|Equity in (losses) of equity method franchisees     |  |                                      
|Other
      non-operating income and (expense), net |  |                                      
|(Loss) before income taxes                          |  |                                      
|Provision for
      income taxes                    |  |                                      
|Net (loss)                                          |  | $                                    
|                                                   
|(Loss) per common share:                            |  |                                      
|Basic                                               |  | $                                    
|Diluted                                             |  | $                                    

102

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

|                                                             |  | Three Months Ended                   
|------------------------------------------------------------ |  | -------------------------------------
|                                                             |  | Apr. 30,                             
|                                                             |  | 2006                                 
|                                                             |  | (In thousands, except per share data)
|Revenues                                                     |  | $                                    
|Operating
      expenses:                                    |  |                                      
|Direct operating expenses                                    |  |                                      
|General and administrative expenses                          |  |                                      
|Depreciation and amortization expense                        |  |                                      
|Impairment charges and lease termination
      costs         |  |                                      
|Settlement of litigation                                     |  |                                      
|Other operating (income) and expenses, net                   |  |                                      
|Operating (loss)                                             |  |                                      
|Interest
      income                                        |  |                                      
|Interest expense                                             |  |                                      
|Equity in income
      (losses) of equity method franchisees |  |                                      
|Other non-operating income and (expense), net                |  |                                      
|(Loss) before
      income taxes                             |  |                                      
|Provision for income taxes                                   |  |                                      
|Net
      (loss)                                             |  | $                                    
|                                                            
|(Loss) per common share:                                     |  |                                      
|Basic                                                        |  | $                                    
|Diluted                                                      |  | $                                    

Quarterly loss
per share amounts may not add to the total loss per share for the year due to
rounding.

Note 22  Fair Value of Financial
Instruments

The carrying values and approximate fair values of certain financial
instruments were as follows:

|                                                    |  | Feb. 3, 2008   |        | Jan. 28, 2007
|--------------------------------------------------- |  | -------------- | ------ | -------------
|                                                    |  | Carrying       |        | Fair         
|                                                    |  | value          |        | value        
|                                                    |  | (In thousands)
|Assets                                              |  |                |        |              
|Cash and cash equivalents                           |  | $              | 24,735 |              
|Trade receivables                                   |  |                | 22,991 |              
|Commodity futures contracts                         |  |                | 267    |              
|Interest rate derivative instruments                |  |                |       |              
|                                                   
|Liabilities:                                        |  |                |        |              
|Accounts payable                                    |  |                | 5,712  |              
|Interest rate derivative instruments                |  |                | 2,231  |              
|Long-term debt (including current
      maturities) |  |                | 76,713 |              

103

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|Item
      9. |  | CHANGES IN AND
      DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.
|------------- |  | -------------------------------------------------------------------------------------------------

None.

Item 9A. CONTROLS AND
PROCEDURES.

Evaluation of Disclosure Controls
and Procedures

As of
February 3, 2008, the end of the period covered by this Annual Report on Form
10-K, management performed, under the supervision and with the participation of
our chief executive officer and chief financial officer, an evaluation of the
effectiveness of our disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed in
the reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and
forms, and that such information is accumulated and communicated to management,
including our chief executive officer and chief financial officer, to allow
timely decisions regarding required disclosures. Based on this evaluation, our
chief executive officer and chief financial officer have concluded that, as of
February 3, 2008, our disclosure controls and procedures were
effective.

Managements Report on Internal
Control over Financial Reporting

Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act. Internal control over financial reporting is a process,
effected by an entitys board of directors, management and other personnel,
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements for external
purposes in accordance with GAAP. Internal control over financial reporting
includes those policies and procedures which pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of assets; provide reasonable assurance that
transactions are recorded as necessary to permit preparation of consolidated
financial statements in accordance with GAAP; provide reasonable assurance that
receipts and expenditures are being made only in accordance with managements
and/or the Board of Directors authorization; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our consolidated
financial statements.

Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect material errors in our financial statements. Also, projection
of any evaluation of the effectiveness of our internal control over financial
reporting to future periods is subject to the risk that controls may become
inadequate because of changes in conditions, because the degree of compliance
with our policies and procedures may deteriorate.

Management
assessed the effectiveness of our internal control over financial reporting as
of February 3, 2008, using the criteria established inInternal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on our assessment, management has concluded
that we maintained effective internal control over financial reporting as of
February 3, 2008, based on the COSO criteria.

The report
of PricewaterhouseCoopers LLP, an independent registered public accounting firm,
on our internal control over financial reporting appears on page 60 in this
Annual Report.

Remediation of Material Weaknesses
in Internal Control over Financial Reporting

Our
management report on internal control over financial reporting for the fiscal
year ended January 28, 2007 described material weaknesses in our internal
control over financial reporting. These material weaknesses continued to exist
as of the end of the first three quarters of fiscal 2008, during which time we
were engaged in the implementation and testing of remedial measures designed to
address these material weaknesses. In the

104

---

fourth quarter of fiscal 2008, we
completed testing of the design and operating effectiveness of enhanced controls
to demonstrate their operating effectiveness over a period of time sufficient to
support our conclusion that, as of February 3, 2008, we had remediated the
previously reported material weakness in our internal control over financial
reporting.

During
fiscal 2008, we implemented the following changes in our internal control over
financial reporting to address previously reported material
weaknesses:

| | 1. |  | We designed and
      implemented several key initiatives to strengthen our control environment.
      These included:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |  | Establishing a formal risk assessment
        process and performing a formal enterprise risk assessment to gain
        insight as to areas of high risk throughout the
        Company.Establishing and implementing procedures to promote the
        sharing of financial information within and across our corporate and
        divisional offices and other operating facilities such that significant
        issues are brought to the attention of appropriate level of accounting
        and financial reporting personnel.Establishing and updating written accounting policies
        and procedures for our critical accounting policies.Establishing formal procedures for monitoring the
        appropriateness of, and maintaining user access and segregation of
        duties related to, our key financial applications.
| |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 2. |  | We designed and/or
      implemented several key initiatives to strengthen our internal control
      over financial closing and reporting including the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |  | Designing and implementing controls over the
        review and approval of journal entries to ensure the completeness,
        accuracy and validity of the entries recorded.Designing and implementing controls to ensure the
        completeness and accuracy of our accounting for equity method
        franchisees in accordance with GAAP.Designing and implementing controls to ensure that
        accrued expenses, including accruals for legal and professional fees,
        were complete and accurate in accordance with GAAP.                                                                                                                                                                                                                                                                                                  
| |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 3. |  | We designed and
      implemented effective controls to ensure that revenue was recognized in
      the proper period for sales of equipment to franchisees in connection with
      new store openings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   
| | 4. |  | We designed and
      implemented effective controls over the application and monitoring of
      accounting policies related to lease renewal options, rent escalations,
      amortization periods for leasehold improvements and lease classification
      principally affecting property and equipment, accrued rent, capital lease
      obligations, rent expense and depreciation to ensure that such
      transactions were completely and accurately accounted for in accordance
      with GAAP.                                                                                                                                                                                                                                                                                                                                    
| |   
| | 5. |  | We designed and
      implemented effective controls to ensure that retired assets were written
      off in the appropriate period, that appropriate depreciable lives were
      assigned to capital additions and assets were capitalized in accordance
      with GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Changes in Internal Control over
Financial Reporting

Our
remediation of the material weaknesses described above during the quarter ended
February 3, 2008 has materially affected our internal control over financial
reporting.

Item 9B. OTHER INFORMATION.

None.

105

---

PART III

|Item 10. |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
    GOVERNANCE.
|-------- |  | -----------------------------------------------------------

Except as
set forth below, the information required by this item is contained in our proxy
statement for our 2008 Annual Meeting of Shareholders to be held on June 17,
2008, to be filed pursuant to Section 14 of the Exchange Act, and is
incorporated herein by reference.

NYSE and SEC
Certifications

In
accordance with Section 303A.12(a) of the NYSE Listed Company Manual, the Chief
Executive Officer of the Company submits annual certifications to the NYSE
stating that he is not aware of any violations by the Company of the NYSE
corporate governance listing standards, qualifying the certification to the
extent necessary. The last such annual certification was submitted on June 22,
2007 and contained no qualifications.

We have
filed certifications executed by our Chief Executive Officer and Chief Financial
Officer with the SEC pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act
as exhibits to this Annual Report on Form 10-K.

Item 11. EXECUTIVE
COMPENSATION.

The
information required by this item is contained in our proxy statement for our
2008 Annual Meeting of Shareholders to be held on June 17, 2008, to be filed
pursuant to Section 14 of the Exchange Act, and is incorporated herein by
reference.

|Item 12. |  | SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.
|-------- |  | -----------------------------------------------------------------------------------------------------------

The
information required by this item is contained in our proxy statement for our
2008 Annual Meeting of Shareholders to be held on June 17, 2008, to be filed
pursuant to Section 14 of the Exchange Act, and is incorporated herein by
reference.

|Item 13. |  | CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.
|-------- |  | --------------------------------------------------------------------------------------

The
information required by this item is contained in our proxy statement for our
2008 Annual Meeting of Shareholders to be held on June 17, 2008, to be filed
pursuant to Section 14 of the Exchange Act, and is incorporated herein by
reference.

Item 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES

The
information required by this item is contained in our proxy statement for our
2008 Annual Meeting of Shareholders to be held on June 17, 2008, to be filed
pursuant to Section 14 of the Exchange Act, and is incorporated herein by
reference.

106

---

PART IV

Item 15. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES

|(a) |  | Financial Statements and Schedules                                     |    
|--- |  | ---------------------------------------------------------------------- | ---
|    |  |                                                                        |    
|    |  | 1.                                                                     |    
|    |  |                                                                        |    
|    |  | 2.                                                                     |    
|    |  |                                                                        |    
|    |  | For each of the three years in the period ended February 3,
      2008 |    
|    |  |                                                                        |    
|    |  | Schedule I  Condensed Financial
      Information of Registrant       | 110
|    |  |                                                                        |    
|    |  | Schedule II  Valuation and Qualifying
      Accounts and Reserves     | 113
|    |  |                                                                        |    
|    |  | 3.                                                                     |    

|Exhibit |   |  |   |  | Description of                                                                                                                                                                                                                                                                                                                                            | 
|------- | - |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Number  |   |  |   |  | Exhibits                                                                                                                                                                                                                                                                                                                                                  | 
|3.1     |   |  |  |  | Amended Articles of Incorporation of the Registrant
      (incorporated by reference to Exhibit 3.1 of the Registrants Registration
      Statement on Form S-8 (Commission File No. 333-97787), filed with the
      Commission on August 7, 2002)                                                                                                     
|3.2     |   |  |  |  | Amended and Restated Bylaws of the Registrant, as amended
      (incorporated by reference to Exhibit 3.1 to the Registrants Current
      Report on Form 8-K filed September 5, 2007)                                                                                                                                                                  
|4.1     |   |  |  |  | Form of Certificate for Common Stock (incorporated by
      reference to Exhibit 4.1 to the Registrants Amendment No. 4 to
      Registration Statement on Form S-1 (Commission File No. 333-92909), filed
      with the Commission on April 3, 2000)                                                                                                  
|4.2     |   |  |  |  | Rights Agreement between the Company and Branch Banking and Trust
      Company, as Rights Agent, dated as of January 18, 2000 (incorporated by
      reference to Exhibit 4.2 to the Registrants Amendment No. 4 to
      Registration Statement on Form S-1 (Commission File No. 333-92909), filed
      with the Commission on April 3, 2000)        
|4.3     |   |  |  |  | Warrant to Purchase Common Stock issued by Krispy Kreme
      Doughnuts, Inc. in favor of Kroll Zolfo Cooper LLC, dated July 31, 2005
      (incorporated by reference to Exhibit 4.1 to the Registrants Current
      Report on Form 8-K filed October 26, 2005)                                                                                       
|4.4     |   |  |  |  | Warrant Agreement, dated as of March 2, 2007, between Krispy Kreme
      Doughnuts, Inc. and American Stock Transfer & Trust Company
      (incorporated by reference to Exhibit 4.1 to the Registrants Current
      Report on Form 8-K filed March 8, 2007)                                                                                           
|10.1    |   |  |  |  | Form of Associates License Agreement (incorporated by
      reference to Exhibit 10.2 to the Registrants Registration Statement on
      Form S-1 (Commission File No. 333-92909), filed with the Commission on
      December 16, 1999)                                                                                                                
|10.2    | * |  |  |  | Form of Development Agreement                                                                                                                                                                                                                                                                                                                            
|10.3    | * |  |  |  | Form of Franchise Agreement                                                                                                                                                                                                                                                                                                                              
|10.4    |   |  |  |  | Form of International Franchise Agreement (incorporated by
      reference to Exhibit 10.4 to the Registrants Annual Report on Form 10-K
      for fiscal 2005)                                                                                                                                                                                         
|10.5    |   |  |  |  | Form of International Development Agreement
      (incorporated by reference to Exhibit 10.5 to the Registrants Annual
      Report on Form 10-K for fiscal 2005)                                                                                                                                                                                       
|10.6    |   |  |  |  | Trademark License Agreement, dated May 27, 1996, between HDN
      Development Corporation and Krispy Kreme Doughnut Corporation
      (incorporated by reference to Exhibit 10.22 to the Registrants Amendment
      No. 1 to Registration Statement on Form S-1 (Commission File No.
      333-92909), filed with the Commission on February 22, 2000)
|10.7    |   |  |  |  | 1998 Stock Option Plan dated August 6, 1998 (incorporated by
      reference to Exhibit 10.23 to the Registrants Amendment No. 1 to
      Registration Statement on Form S-1(Commission File No. 333-92909), filed
      with the Commission on February 22, 2000)**                                                                                    

107

---

|Exhibit |   |  |   |  | Description of                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|------- | - |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Number  |   |  |   |  | Exhibits                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|10.8    |   |  |  |  | Employment Agreement, dated January 6, 2004, between the
      Registrant and Michael C. Phalen (incorporated by reference to Exhibit
      10.15 to the Registrants Annual Report on Form 10-K for fiscal
      2004)**                                                                                                                                                                                                                      
|10.9    |   |  |  |  | Employment Agreement, dated as of April 23, 2007, among Krispy
      Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Douglas R.
      Muir (incorporated by reference to Exhibit 10.2 to the Registrants
      Current Report on Form 8-K filed April 27, 2007)**                                                                                                                                                                
|10.10   |   |  |  |  | Amendment, dated November 8, 2007, to Employment
      Agreement, dated as of April 23, 2007, among Krispy Kreme Doughnuts, Inc.,
      Krispy Kreme Doughnut Corporation and Douglas R. Muir (incorporated by
      reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K
      filed November 13, 2007)**                                                                                                                 
|10.11   |   |  |  |  | Employment Agreement, dated as of March 6, 2006, among Krispy Kreme
      Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Daryl G. Brewster
      (incorporated by reference to Exhibit 10.1 to the Registrants Current
      Report on Form 8-K filed March 8, 2006)**                                                                                                                                                                
|10.12   |   |  |  |  | Amendment, dated March 30, 2007, to Employment
      Agreement, dated as of March 6, 2006, among Krispy Kreme Doughnuts, Inc.,
      Krispy Kreme Doughnut Corporation and Daryl G. Brewster (incorporated by
      reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K
      filed April 2, 2007)**                                                                                                                      
|10.13   |   |  |  |  | Agreement and Release, dated as of January 6, 2008, among Krispy
      Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Daryl G.
      Brewster (incorporated by reference to Exhibit 10.1 to the Registrants
      Current Report on Form 8-K filed January 7, 2008)**                                                                                                                                                           
|10.14   |   |  |  |  | Employment Agreement, dated as of February 27, 2008,
      among Krispy Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and
      James H. Morgan (incorporated by reference to Exhibit 10.1 to the
      Registrants Current Report on Form 8-K filed March 5,
2008)**                                                                                                                                                              
|10.15   |   |  |  |  | Employment Agreement, dated as of April 23, 2007, among Krispy
      Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Sandra K.
      Michel (incorporated by reference to Exhibit 10.1 to the Registrants
      Current Report on Form 8-K filed April 27, 2007)**                                                                                                                                                               
|10.16   |   |  |  |  | Amendment, dated October 3, 2007, to Employment
      Agreement, dated as of April 23, 2007, among Krispy Kreme Doughnuts, Inc.,
      Krispy Kreme Doughnut Corporation and Sandra K. Michel (incorporated by
      reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K
      filed October 4, 2007)**                                                                                                                   
|10.17   |   |  |  |  | Second Amendment, dated as of November 8, 2007, to Employment
      Agreement, dated as of April 23, 2007, among Krispy Kreme Doughnuts, Inc.,
      Krispy Kreme Doughnut Corporation and Sandra K. Michel (incorporated by
      reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K
      filed November 13, 2007)**                                                                                                   
|10.18   | * |  |  |  | Employment Agreement, dated as of November 7, 2007,
      among Krispy Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and
      Kenneth J. Hudson**                                                                                                                                                                                                                                                                                  
|10.19   | * |  |  |  | Employment Agreement, dated as of November 7, 2007, among Krispy
      Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Jeffrey B.
      Welch **                                                                                                                                                                                                                                                                                  
|10.20   |   |  |  |  | 2000 Stock Incentive Plan (incorporated by reference to Exhibit
      10.1 to the Registrants Current Report on Form 8-K filed June 8,
      2007)**                                                                                                                                                                                                                                                                                          
|10.21   |   |  |  |  | Krispy Kreme Doughnut Corporation Nonqualified Deferred
      Compensation Plan, effective October 1, 2000 (incorporated by reference to
      Exhibit 10.20 to the Registrants Annual Report on Form 10-K for fiscal
      2005)**                                                                                                                                                                                                           
|10.22   |   |  |  |  | Credit Agreement, dated as of February 16, 2007, by and among KKDC,
      KKDI, the Subsidiary Guarantors party thereto, the Lenders party thereto
      and Credit Suisse, Cayman Islands Branch, as administrative agent,
      collateral agent, issuing lender and swingline lender (the Credit
      Agreement) (incorporated by reference to Exhibit 10.1 to the Registrants
      Current Report on Form 8-K filed February 23,
2007)

108

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|Exhibit |   |  |   |  | Description of                                                                                                                                                                                                                                                                                                               | 
|------- | - |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Number  |   |  |   |  | Exhibits                                                                                                                                                                                                                                                                                                                     | 
|10.23   |   |  |  |  | Security Agreement, dated as of February 16, 2007, by
      and among KKDC, KKDI, the Subsidiary Guarantors party thereto and Credit
      Suisse, Cayman Islands Branch, as collateral agent (incorporated by
      reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K
      filed February 23, 2007)
|10.24   |   |  |  |  | Amendment No. 1, dated as of June 21, 2007, to the Credit Agreement
      (incorporated by reference to Exhibit 10.1 to the Registrants Current
      Report on Form 8-K filed June 27, 2007)                                                                                                                              
|10.25   |   |  |  |  | Amendment No. 2, dated as of January 23, 2008, to the
      Credit Agreement (incorporated by reference to Exhibit 10.1 to the
      Registrants Current Report on Form 8-K filed January 25,
  2008)                                                                                                                      
|10.26   |   |  |  |  | Amendment No. 3, dated as of April 9, 2008, to the Credit Agreement
      (incorporated by reference to Exhibit 10.1 to the Registrants Current
      Report on Form 8-K filed April 15, 2008)                                                                                                                             
|10.27   |   |  |  |  | Form of Indemnification Agreement entered into between
      Krispy Kreme Doughnuts, Inc. and Lizanne Thomas and Michael Sutton
      (incorporated by reference to Exhibit 99.3 to the Registrants Current
      Report on Form 8-K filed October 8, 2004)**                                                              
|10.28   |   |  |  |  | Form of Indemnification Agreement entered into between Krispy Kreme
      Doughnuts, Inc. and members of the Registrants Board of Directors (other
      than Lizanne Thomas and Michael Sutton) (incorporated by reference to
      Exhibit 10.42 to the Registrants Annual Report on Form 10-K for fiscal
      2005)** 
|10.29   |   |  |  |  | Form of Indemnification Agreement entered into between
      Krispy Kreme Doughnuts, Inc. and Officers of the Registrant (incorporated
      by reference to Exhibit 10.1 to the Registrants Current Report on Form
      8-K filed September 18, 2007)                                                                    
|10.30   | * |  |  |  | Form of Nonqualified Stock Option Agreement**                                                                                                                                                                                                                                                                               
|10.31   |   |  |  |  | Stipulation and Agreement of Class and Derivative
      Settlement, dated as of October 30, 2006 (incorporated by reference to
      Exhibit 10.1 to the Registrants Current Report on Form 8-K filed November
      6, 2006)                                                                                              
|10.32   | * |  |  |  | Annual Incentive Plan**                                                                                                                                                                                                                                                                                                     
|10.33   | * |  |  |  | Form of Restricted Stock Agreement**                                                                                                                                                                                                                                                                                        
|10.34   | * |  |  |  | Purchase
      Agreement, dated December 21, 2007, entered into between Krispy Kreme
      Doughnut Corporation and Harlan Bakeries, Inc.                                                                                                                                                                                   
|21      | * |  |  |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                        
|23      | * |  |  |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                                                                                       
|24      | * |  |  |  | Powers of Attorney of certain officers and directors of the Company
      (included on the signature page of this Annual Report on Form
    10-K)                                                                                                                                                                           
|31.1    | * |  |  |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
      and Rule 15d-14(a) of the Securities Exchange Act of 1934, as
      amended                                                                                                                                                                       
|31.2    | * |  |  |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
      and Rule 15d-14(a) of the Securities Exchange Act of 1934, as
      amended                                                                                                                                                                       
|32.1    | * |  |  |  | Certification by Chief Executive Officer pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002                                                                                                                                                               
|32.2    | * |  |  |  | Certification by Chief Financial Officer pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002                                                                                                                                                               

|*  |  | Filed
      herewith.                                                                                                                                                                                                                                         
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                               
|** |  | Identifies
      management contracts and executive compensation plans or arrangements
      required to be filed as exhibits pursuant to Item 15(b), Exhibits and
      Financial Statement Schedules  Exhibits, of this Annual Report on Form
      10-K.



109

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SCHEDULE I  CONDENSED FINANCIAL
INFORMATION OF REGISTRANT

KRISPY KREME DOUGHNUTS,
INC.(PARENT COMPANY ONLY)

BALANCE SHEET

|                                           | Feb. 3,        |          | Jan. 28,
|------------------------------------------ | -------------- | -------- | --------
|                                           | 2008           |          | 2007    
|                                           | (In thousands)
|ASSETS                                    
|                                          
|Investment in and advances to subsidiaries | $              | 56,624   |         
|                                          
|SHAREHOLDERS EQUITY                      
|                                          
|Preferred stock                            | $              |         |         
|Common
      stock                         |                | 355,615  |         
|Accumulated other comprehensive income     |                | 81       |         
|Accumulated
      deficit                  |                | (299,072 | )       
|Total shareholders equity                 | $              | 56,624   |         

110

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SCHEDULE I  CONDENSED FINANCIAL
INFORMATION OF REGISTRANT

KRISPY KREME DOUGHNUTS,
INC.(PARENT COMPANY ONLY)

STATEMENT OF
OPERATIONS

|                                           | Year Ended    
|------------------------------------------ | --------------
|                                           | Feb. 3,       
|                                           | 2008          
|                                           | (In thousands)
|Equity in (losses) of subsidiaries         | $             
|Miscellaneous
      expenses               |               
|(Loss) before income taxes                 |               
|Provision for
      income taxes (benefit) |               
|Net (loss)                                 | $             

111

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SCHEDULE I  CONDENSED FINANCIAL
INFORMATION OF REGISTRANT

KRISPY KREME DOUGHNUTS,
INC.(PARENT COMPANY ONLY)

STATEMENT OF CASH
FLOWS

|                                                             | Year Ended    
|------------------------------------------------------------ | --------------
|                                                             | Feb. 3,       
|                                                             | 2008          
|                                                             | (In thousands)
|CASH FLOW FROM OPERATING ACTIVITIES:                         |               
|Net
      (loss)                                             | $             
|Equity in earnings of subsidiaries                           |               
|Net cash used by
      operating activities                  |               
|CASH FLOW FROM INVESTING ACTIVITIES:                         |               
|Investments in
      subsidiaries                            |               
|Net cash used for investing activities                       |               
|CASH FLOW FROM
      FINANCING ACTIVITIES:                   |               
|Proceeds from exercise of stock options                      |               
|Collection of
      notes receivable secured by common stock |               
|Net cash provided by financing activities                    |               
|Net increase in
      cash and cash equivalents              |               
|Cash and cash equivalents at beginning of year               |               
|Cash and cash
      equivalents at end of year               | $             

112

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SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS AND RESERVES

KRISPY KREME DOUGHNUTS,
INC.

|                                                     |                 |        |            | Additions |                |     |          |   |          |   |            
|---------------------------------------------------- | --------------- | ------ | ---------- | --------- | -------------- | --- | -------- | - | -------- | - | -----------
|                                                     | Balance at      |        | Charged to |           | Charged        |     |          |   |          |   |            
|                                                     | beginning       |        | costs and  |           | to
      other |     |          |   |          |   | Balance at 
|                                                     | **Description** |        | of year    |           | expenses       |     | accounts |   | Payments |   | end of year
|                                                     | (In thousands) 
|Accrual for self-insurance claims,
      principally |                 |        |            |           |                |     |          |   |          |   |            
|workers compensation (current and                   |                 |        |            |           |                |     |          |   |          |   |            
|non-current portions)                                |                 |        |            |           |                |     |          |   |          |   |            
|                                                    
|Year ended January 28, 2007                          | $               | 13,250 |            | $         | 8,223          | (1) |          |  |          | $ | (4,199     
|                                                    
|Accrual included in:                                 |                 |        |            |           |                |     |          |   |          |   |            
|Other
      accrued liabilities (Note 9)             | $               | 4,378  |            |           |                |     |          |   |          |   |            
|Other
      long-term obligations (Note 11)          |                 | 8,872  |            |           |                |     |          |   |          |   |            
|                                                     | $               | 13,250 |            |           |                |     |          |   |          |   |            
|                                                    
|Year ended February 3, 2008                          | $               | 17,274 |            | $         | 3,381          |     |          |  |          | $ | (3,905     
|                                                    
|Accrual included in:                                 |                 |        |            |           |                |     |          |   |          |   |            
|Other
      accrued liabilities (Note 9)             | $               | 5,885  |            |           |                |     |          |   |          |   |            
|Other
      long-term obligations (Note 11)          |                 | 11,389 |            |           |                |     |          |   |          |   |            
|                                                     | $               | 17,274 |            |           |                |     |          |   |          |   |            

|(1) |  | Includes an increase
      in the estimated total cost of open claims of $2,040. All of the increase
      represents claim amounts covered by the Companys stop-loss coverages;
      accordingly, there was a corresponding increase in amounts estimated to be
      recoverable from the Companys insurance carriers related to such claims,
      and the increase in total estimated claims was offset by a credit from
      stop-loss insurance coverage, resulting in no net impact to
      earnings.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

113

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SIGNATURES

Pursuant to
the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Krispy Kreme Doughnuts,
      Inc.By:
    
    /s/ Douglas R. MuirName:
    
    Douglas R.
      MuirTitle:
    
    Executive Vice
      President andChief Financial
      Officer


Date: April 17, 2008

POWER OF ATTORNEY

Each person
whose signature appears below hereby constitutes and appoints James H. Morgan
and Douglas R. Muir, or either of them, his or her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any or all amendments or supplements to this Annual Report
on Form 10-K and to file the same with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing necessary or appropriate to be done with this
Annual Report on Form 10-K and any amendments or supplements hereto, as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to
the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on April 17, 2008.



|                           | **Signature** |                                                             |  |  | **Title** | 
|-------------------------- | ------------- | ----------------------------------------------------------- |  |  | --------- | 
|                          
|/s/ James
      H. Morgan  |               | Chairman of the Board of Directors, President and          
|James
      H. Morgan      |               | Chief
      Executive Officer (Principal Executive Officer)
|                          
|/s/ Douglas R. Muir        |               | Executive Vice President and Chief Financial Officer       
|Douglas R. Muir            |               | (Principal Financial and Accounting Officer)               
|                          
|/s/ Charles A. Blixt       |               | Director                                                   
|Charles A. Blixt           |               |                                                            
|                          
|/s/ Lynn
      Crump-Caine |               | Director                                                   
|Lynn
      Crump-Caine     |               |                                                            
|                          
|/s/ C.
      Stephen Lynn  |               | Director                                                   
|C.
      Stephen Lynn      |               |                                                            
|                          
|/s/ Robert S. McCoy, Jr.   |               | Director                                                   
|Robert
      S. McCoy, Jr. |               |                                                            

114

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|                          | **Signature** |          |  |  | **Title** | 
|------------------------- | ------------- | -------- |  |  | --------- | 
|                         
|/s/Andrew J. Schindler    |               | Director
|Andrew
      J. Schindler |               |         
|                         
|/s/Michael H. Sutton      |               | Director
|Michael H. Sutton         |               |         
|                         
|/s/Lizanne Thomas         |               | Director
|Lizanne Thomas            |               |         
|                         
|/s/Togo D. West, Jr.      |               | Director
|Togo
      D. West, Jr.   |               |         

115

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