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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark one) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended January 30, 2005                                                  
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number 001-16485


KRISPY KREME DOUGHNUTS, INC.


(Exact name of registrant as specified in its charter)


|                                                                                                |  |                                     
|----------------------------------------------------------------------------------------------- |  | ------------------------------------
|North Carolina                                                                                  |  | 56-2169715                          
|(State or other jurisdiction of incorporation or
    organization)                              |  | (I.R.S. Employer Identification No.)
|370 Knollwood Street,
    Winston-Salem, North Carolina(Address of principal executive offices) |  | 27103(Zip Code)                     

Registrants telephone number, including area code:


(336) 725-2981


Securities registered pursuant to Section 12(b) of the
Act:


|                                  |  |                                          
|--------------------------------- |  | -----------------------------------------
|Title of Each Class               |  | Name of Each Exchange on Which Registered
|                                  |  |                                          
|Common Stock, No Par Value        |  | New York Stock Exchange                  
|Preferred Share Purchase Rights   |  | New York Stock Exchange                  
|Warrants to Purchase Common Stock |  | American Stock Exchange                  

Securities registered pursuant to Section 12(g) of the
Act:


None


o þ


o þ


o þ


S-K 10-K 10-K. o


12b-2


o þ o


12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE:












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TABLE OF CONTENTS


|                                                     |  |                                                                                                    |     |      |     | 
|---------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- | --- | ---- | --- | 
|                                                     |  |                                                                                                    |     | Page
|                                                     |  |                                                                                                    |     |     
|EXPLANATORY NOTE                                     |  |                                                                                                    | 1   |     
|FORWARD-LOOKING STATEMENTS                           |  |                                                                                                    | 2   |     
|                                                    
|PART I                                              
|Item 1                                               |  | Business                                                                                           |     |      | 4   | 
|Item 1A                                              |  | Risk Factors                                                                                       |     |      | 26  | 
|Item 1B                                              |  | Unresolved Staff Comments                                                                          |     |      | 35  | 
|Item 2                                               |  | Properties                                                                                         |     |      | 35  | 
|Item 3                                               |  | Legal Proceedings                                                                                  |     |      | 38  | 
|Item 4                                               |  | Submission of Matters to a Vote of Security
    Holders                                            |     |      | 41  | 
|                                                    
|PART II                                             
|Item 5                                               |  | Market for Registrants Common Equity
    and Related Stockholder Matters                          |     |      | 42  | 
|Item 6                                               |  | Selected Financial Data                                                                            |     |      | 44  | 
|Item 7                                               |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations          |     |      | 47  | 
|Item 7A                                              |  | Quantitative and Qualitative Disclosures
    About Market Risks                                    |     |      | 72  | 
|Item 8                                               |  | Financial Statements and Supplementary
    Data                                                    |     |      | 73  | 
|Item 9                                               |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure           |     |      | 153 | 
|Item 9A                                              |  | Controls and Procedures                                                                            |     |      | 153 | 
|Item 9B                                              |  | Other Information                                                                                  |     |      | 159 | 
|                                                    
|PART III                                            
|Item 10                                              |  | Directors and Executive Officers of the
    Registrant                                             |     |      | 160 | 
|Item 11                                              |  | Executive Compensation                                                                             |     |      | 165 | 
|Item 12                                              |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters |     |      | 178 | 
|Item 13                                              |  | Certain Relationships and Related
    Transactions                                                 |     |      | 183 | 
|Item 14                                              |  | Principal Accountant Fees and Services                                                             |     |      | 184 | 
|PART IV                                             
|Item 15                                              |  | Exhibits and Financial Statement
    Schedules                                                     |     |      | 185 | 
|SIGNATURES                                           |  |                                                                                                    | 189 |     
|EX-10.4: FORM OF INTERNATIONAL FRANCHISE AGREEMENT  
|EX-10.5: FORM OF INTERNATIONAL DEVELOPMENT AGREEMENT
|EX-10.20: NONQUALIFIED DEFERRED COMPENSATION PLAN   
|EX-10.21: NONQUALIFIED STOCK OWNERSHIP PLAN         
|EX-10.42: FORM OF INDEMNIFICATION AGREEMENT         
|EX-21: LIST OF SUBSIDIARIES                         
|EX-31.1: CERTIFICATION                              
|EX-31.2: CERTIFICATION                              
|EX-32.1: CERTIFICATION                              
|EX-32.2: CERTIFICATION                              





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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 2001, fiscal 2002, fiscal 2003,
fiscal 2004, fiscal 2005 and fiscal 2006 mean the fiscal years
ended January 28, 2001, February 3, 2002,
February 2, 2003, February 1, 2004, January 30,
2005 and January 29, 2006, respectively. Please note that
fiscal 2002 contained 53 weeks. All references to share
amounts and per share amounts in this Annual Report on
Form 10-K, unless
otherwise noted, have been adjusted to reflect stock splits.





EXPLANATORY NOTE




10-Q 8-K 10-Q 10-K.




10-K 10-Q


10-K






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FORWARD-LOOKING STATEMENTS






| |   |                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the outcome of pending governmental investigations, including by
    the Securities and Exchange Commission and the United States
    Attorneys Office for the Southern District of New York,
    and a review by the Department of Labor;
|
| |  | the outcome of shareholder derivative and class action
    litigation;                                                                                                                                                                     
|
| |  | potential indemnification obligations and limitations of our
    director and officer liability insurance;                                                                                                                                 
|
| |  | material weaknesses in our internal control over financial
    reporting;                                                                                                                                                                  
|
| |  | our ability to implement remedial measures necessary to improve
    our processes and procedures;                                                                                                                                          
|
| |  | continuing negative publicity;                                                                                                                                                                                                             
|
| |  | significant changes in our management;                                                                                                                                                                                                     
|
| |  | the quality of franchise store operations;                                                                                                                                                                                                 
|
| |  | our ability, and our dependence on the ability of our
    franchisees, to execute on our and their business plans;                                                                                                                         
|
| |  | disputes with our franchisees, including pending litigation with
    some of them;                                                                                                                                                         
|
| |  | our ability to implement our international growth 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 contained in our senior secured
    credit facilities;                                                                                                                                                      
|
| |  | our ability to meet our ongoing liquidity needs;                                                                                                                                                                                           
|
| |  | changes in customer preferences and perceptions;                                                                                                                                                                                           
|
| |  | 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 Securities and Exchange
    Commission.                                                       



2



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3



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PART I







|        |          
|------- | ---------
|Item 1. | BUSINESS.

Overview


®








Significant Events Since Our Last Regular Periodic Report






| |                            
| | ---------------------------
| | Governmental Investigations



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 this 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 this investigation.                                                                                                                                                                                    
|
| |  | On March 9 and March 21, 2005, the United States Department
    of Labor (DOL) informed the Company that it was
    commencing a review of the Krispy Kreme Doughnut
    Corporation Retirement Savings Plan and the Krispy Kreme Profit
    Sharing Stock Ownership Plan, respectively, to determine whether
    any violations of Title I of the Employee Retirement Income
    Security Act of 1974 (ERISA) have occurred. The
    Company is cooperating with the DOL.



4



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| |                                                                    
| | -------------------------------------------------------------------
| | Federal Securities, Shareholder Derivative and ERISA
    Litigation



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On May 12, 2004, Eastside Investors, on behalf of itself
    and purportedly on behalf of a class of the Companys
    investors who purchased the Companys publicly traded
    securities between August 21, 2003 and May 7, 2004,
    filed an action in the United States District Court for the
    Middle District of North Carolina against the Company and
    certain of its current and former officers. This action alleges
    violations of the Securities Exchange Act of 1934 (the
    Exchange Act),
    Rule 10b-5
    promulgated thereunder and Section 20(a) of the Exchange
    Act in connection with various public statements made by the
    Company and seeks an order that the action may proceed as a
    class action and an award of compensatory damages in favor of
    the plaintiff and the other class members in an unspecified
    amount, together with interest and reimbursement of costs and
    expenses of the litigation. To date, 14 follow-on actions have
    been filed in the same court alleging substantially similar
    claims. On November 8, 2004, all of these claims were
    consolidated into one action. Subsequent to the consolidation,
    plaintiffs filed two amended complaints, the latest of which was
    filed on May 23, 2005. The complaint now covers investors
    who purchased the Companys publicly traded securities
    between March 8, 2001 and April 18, 2005. On
    October 14, 2005, the Company filed a motion, which is
    currently pending, to dismiss this action.                                                                                                                                                                                                                                                        
|
| |  | Shareholder derivative actions have been filed by persons
    identifying themselves as Krispy Kreme shareholders and
    purporting to act on behalf of the Company: three actions were
    filed in the United States District Court for the Middle
    District of North Carolina and two actions were filed in the
    Superior Court of North Carolina, Forsyth County. The state
    court actions have been dismissed in favor of the federal court
    actions. The still pending derivative actions are
    Wright v. Krispy Kreme Doughnuts, Inc., et al.,
    filed September 14, 2004; Blackwell v. Krispy Kreme
    Doughnuts, Inc., et al., filed May 23, 2005; and
    Andrews v. Krispy Kreme Doughnuts, Inc.,
    et al., filed May 24, 2005. The defendants in one
    or more of these actions include certain current or former
    directors and/or officers of the Company and certain persons or
    entities that have sold franchises to the Company. The
    complaints in these actions allege that the current and former
    directors and officers of the Company named as defendants
    breached their fiduciary duties in connection with their
    management of the Company and the Companys acquisitions of
    certain franchises. These complaints seek (i) damages;
    (ii) rescission of the Companys acquisitions of
    certain franchises; (iii) disgorgement of the proceeds from
    these acquisitions; (iv) other appropriate equitable
    relief; (v) costs and expenses; and (vi) other relief
    as may be just and proper. On July 12, 2005, the Court
    consolidated the Wright, Blackwelland Andrewsshareholder derivative actions under the heading
    Wright v. Krispy Kreme Doughnuts, Inc., et al.
    A consolidated complaint has not yet been filed.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On August 10, 2005, the Company announced that the Special
    Committee (referred to below under  Special
    Committee Investigation) had completed its investigation.
    The Special Committee concluded that it was in the best interest
    of the Company to reject the demands by shareholders that the
    Company commence litigation against certain present and former
    outside directors and officers of the Company, and to seek
    dismissal of the shareholder litigation against the outside
    directors, the sellers of certain franchises and current and
    former officers other than Scott A. Livengood, John W. Tate and
    Randy S. Casstevens. The Special Committee concluded that it
    would not seek dismissal of shareholder derivative litigation
    against Messrs. Livengood, Tate and Casstevens.
|
| | On October 21, 2005, the Court granted a motion by Trudy
    Nomm, who, like the plaintiffs in the Wright, Blackwelland Andrewsactions, identifies herself as a Krispy
    Kreme shareholder, to intervene in these derivative actions. On
    October 28, 2005, the Court appointed the plaintiffs in the
    Wrightaction, Judy Woodall and William Douglas Wright,
    as co-lead plaintiffs in the consolidated action.                                                                                                                                                                                                                                                                                                                                                                                                                     



| |   |                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On March 16, 2005, our wholly-owned subsidiary Krispy Kreme
    Doughnut Corporation (KKDC) was served with a
    purported class action lawsuit filed in the United States
    District Court for the

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Middle District of North Carolina that asserts claims for breach
    of fiduciary duty under ERISA against KKDC and certain of its
    current and former officers and employees. Plaintiffs purport to
    represent a class of persons who were participants in or
    beneficiaries of KKDCs retirement savings plan or profit
    sharing stock ownership plan between January 1, 2003 and
    the date of filing and whose accounts included investments in
    our common stock. Plaintiffs contend that defendants failed to
    manage prudently and loyally the assets of the plans by
    continuing to offer our common stock as an investment option and
    to hold large percentages of the plans assets in our
    common stock; failed to provide complete and accurate
    information about the risks of our common stock; failed to
    monitor the performance of fiduciary appointees; and breached
    duties and responsibilities as co-fiduciaries. The plaintiffs
    filed an amended complaint on July 1, 2005 asserting the
    same claims they asserted in their original complaint. The
    defendants received an extension of time to respond to the
    amended complaint, and on December 15, 2005, filed a motion
    to dismiss the amended complaint for failure to state a claim on
    which relief may be granted. Plaintiffs seek unspecified
    monetary damages and other relief.





| |                                
| | -------------------------------
| | Special Committee Investigation



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On October 4, 2004, the Company formed a special committee
    (the Special Committee) of newly-appointed
    independent directors, consisting of and co-chaired by Michael
    H. Sutton (former Chief Accountant of the SEC) and Lizanne
    Thomas (a senior corporate partner of the law firm of Jones
    Day), to conduct an independent review and investigation of any
    and all issues raised by: (1) regulatory investigations
    such as those commenced by the SEC and the United States
    Attorneys Office, (2) the Companys independent
    auditors, PricewaterhouseCoopers LLP, (3) shareholder
    demands and shareholder derivative actions and
    (4) whistleblowers. The Special Committees mandate
    also encompassed any other issues it deemed necessary or
    appropriate in furtherance of its investigation. With respect to
    each of these matters, the Special Committee received full and
    complete authority and power to determine the appropriate action
    to be taken by the Company and to initiate, supervise and
    conduct to conclusion any lawful action that the Special
    Committee, in the exercise of its independent judgment, deemed
    to be in the best interests of the Company.
|
| |  | The Special Committee conducted its investigation from early
    October 2004 through early August 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | To assist in the investigation, the Special Committee retained
    independent legal counsel Weil, Gotshal & Manges LLP
    (Weil Gotshal) and Smith Moore LLP. Weil Gotshal, in
    turn, retained independent forensic accountants, Navigant
    Consulting, Inc., and an independent restaurant industry
    valuation expert, Restaurant Capital Advisory, LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The Special Committee issued its report to our Board of
    Directors on August 9, 2005. For a summary of the
    conclusions and directives for remedial action set forth in its
    report, see Exhibit 99.1 to our Current Report on
    Form 8-K filed
    with the SEC on August 10, 2005. These directives
    addressed, among other things, restatement of the Companys
    financial statements; the employment status of certain
    personnel, including their stock options and entitlement to
    advancement of legal expenses; shareholder demands and
    derivative litigation; the composition and functioning of the
    Board of Directors; internal resources, controls and compliance;
    public disclosure; and compensation of management and directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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| |                                    
| | -----------------------------------
| | Restatement of Financial Statements



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On December 28, 2004, our Board of Directors, in
    consultation with, and upon the recommendation of, its Audit
    Committee and management of the Company, and with the
    concurrence of the Special Committee, concluded that our
    previously issued financial statements for fiscal 2004 and the
    last three quarters of such fiscal year should be restated to
    correct certain errors contained therein and, accordingly, that
    such financial statements should no longer be relied upon.                             
|
| |  | On April 18, 2005, the Audit Committee of our Board of
    Directors and management of the Company concluded that our
    financial statements for fiscal 2001, 2002 and 2003 and for the
    first three quarters of fiscal 2005 should be restated to
    correct certain errors contained therein, and, accordingly, that
    such financial statements should no longer be relied upon.                                                                                                                                                  
|
| |  | As part of this Annual Report on
    Form 10-K, we are
    restating our fiscal 2003 and 2004 financial statements and our
    opening equity at February 4, 2002 (the first day of fiscal
    2003). For a discussion of the significant restatement
    adjustments, see Notes 2 and 25 to the consolidated
    financial statements under Item 8, Financial
    Statements and Supplementary Data. For information on the
    effects of the restatement adjustments on fiscal 2001 and 2002,
    see Item 6, Selected Financial Data.



| |                                       
| | --------------------------------------
| | Management/ Board of Directors Changes



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Effective August 23, 2004, John W. Tate resigned his
    position of Chief Operating Officer of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | On October 4, 2004, as described above, the Special
    Committee was formed and Mr. Sutton and Ms. Thomas
    joined the Board of Directors of the Company as independent
    directors and as co-chairs of the Special Committee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | On January 13, 2005, the Special Committee discussed with
    the Companys independent directors its preliminary
    conclusions concerning Scott A. Livengoods stewardship of
    the Company. With the Special Committees strong
    encouragement, the independent directors determined that new
    leadership was required. The decision was communicated to
    Mr. Livengood and, on January 17, 2005, he retired as
    Chairman of the Board, President and Chief Executive Officer of
    the Company and resigned as a director of the Company. The
    Company and Mr. Livengood entered into a consulting
    agreement effective January 17, 2005. On June 3, 2005,
    the Company informed Mr. Livengood that his failure to
    cooperate with the Special Committees investigation
    constituted a breach of the consulting agreement, that the
    payment of consulting fees and continued medical coverage would
    therefore cease and that the term of the agreement would not be
    extended past its initial six-month term. See Item 11,
    Executive Compensation  Employment Contracts
    and Termination of Employment and Change-In-Control
    Arrangements for a description of this consulting
    agreement.
|
| |  | On January 18, 2005, the following changes were made with
    respect to our management:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We retained Kroll Zolfo Cooper LLC (KZC), a
    corporate recovery and advisory firm, as our financial advisor
    and interim management consultant and, on February 8, 2005,
    entered into a Services Agreement dated as of January 18,
    2005 with KZC, Stephen F. Cooper and Steven G. Panagos. See
    Item 11, Execution Compensation 
    Employment Contracts and Termination of Employment and
    Change-In-Control Arrangements for a description of the
    Services Agreement.
|
| |  | Stephen F. Cooper, Chairman of KZC, was named the Companys
    Chief Executive Officer, replacing Mr. Livengood.                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Steven G. Panagos, a Managing Director of KZC, was named the
    Companys President and Chief Operating Officer.                                                                                                                                                                                                                                                                                                                                                                                    

7



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| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | James H. Morgan, who had served as a director of the Company
    since July 2002 and Vice Chairman since March 2004, was
    appointed Chairman of the Board of the Company.
|
| |  | Robert L. Strickland, who had served as a director of the
    Company since 1998, was appointed Vice Chairman of the Board of
    the Company.                              



| |   |                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On June 15, 2005, the Special Committee informed our senior
    management that the Special Committee had concluded that six of
    our officers should be discharged. These six officers included
    four senior vice presidents and were in the areas of operations,
    finance, business development and manufacturing and
    distribution. Five of these individuals resigned and one retired.
|
| |  | Effective June 27, 2005, Douglas R. Muir, who had been a
    consultant to the Company since December 2004 and who has over
    20 years of accounting experience, was appointed as the
    Companys Chief Accounting Officer. Michael C. Phalen, the
    Companys Chief Financial Officer, formerly acted as the
    Companys principal accounting officer.                                      
|
| |  | The Special Committees report directed that the Board of
    Directors eliminate the position of non-voting emeritus
    director. Effective August 9, 2005, Frank E. Guthrie,
    Robert L. McCoy and Steven D. Smith retired as non-voting
    emeritus directors.                                                                                                                                
|
| |  | Effective September 30, 2005, John N. (Jack) McAleer
    retired as Executive Vice President, Concept Development and
    resigned as a director of the Company.                                                                                                                                                                                                                                     
|
| |  | Effective October 26, 2005, Jeffrey L. Jervik joined the
    Company as its Executive Vice President of Operations.
    Mr. Jervik has over 20 years experience in the food
    service industry.                                                                                                                                                                                                    
|
| |  | Effective December 1, 2005, Frank Murphy resigned as
    Executive Vice President, General Counsel, Secretary and Chief
    Governance Officer of the Company.                                                                                                                                                                                                                                       
|
| |  | Effective December 31, 2005, Dr. Su Hua Newton
    resigned as a director of the Company.                                                                                                                                                                                                                                                                                                            
|
| |  | Effective March 6, 2006, the following changes were made
    with respect to our management:                                                                                                                                                                                                                                                                                                         



| |   |                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mr. Cooper resigned as the Companys Chief Executive
    Officer and was appointed as the Companys Chief
    Restructuring Officer.                                                                                                                                        
|
| |  | Mr. Panagos resigned as the Companys President and
    Chief Operating Officer and was appointed as the Companys
    Director of Restructuring.                                                                                                                           
|
| |  | Daryl G. Brewster joined the Company as its President and Chief
    Executive Officer and a member of the Companys Board of
    Directors. Mr. Brewster had been Group Vice President of
    Kraft Foods and has over 20 years experience in the food
    service industry.



| |                         
| | ------------------------
| | Operations and Financing



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On February 8, 2005, we announced that we were reducing the
    number of employees in our corporate, mix plant, equipment
    manufacturing and distribution facilities by approximately 25%
    and that we had also divested a corporate airplane that was
    subject to an operating lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | On April 1, 2005, KKDC entered into new senior secured
    credit facilities aggregating $225 million, comprised of a
    $75 million first lien senior secured revolving credit
    facility, a $120 million second lien senior secured term
    loan and a $30 million second lien prefunded revolving loan
    and letter of credit facility. Proceeds of the term loan were
    used to repay the approximately $88 million outstanding
    under KKDCs previous credit facility, pay fees and
    expenses related to the financing and provide cash on the
    balance sheet. Since entering into the credit facilities, the
    Company has had to obtain a number of waivers thereunder and
    amendments thereof, including waivers of covenant defaults.
|
| |  | During fiscal 2006 and the second half of fiscal 2005,
    approximately 67 company stores were closed, including 36
    owned by consolidated franchisees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

8



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| |                                                                   
| | ------------------------------------------------------------------
| | Litigation and Restructuring of Relationships with
    Franchisees

in-depth




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On April 15, 2005, an application was filed under the
    Companies Creditors Arrangement Act with the Ontario
    Superior Court of Justice for a restructuring of a consolidated
    franchisee, KremeKo, Inc. (KremeKo), at that time
    our area developer for Central and Eastern Canada, in which KKDC
    had a 40.6% interest. In connection with this application, KKDC,
    the franchisor, agreed to provide
    debtor-in-possession
    financing to provide funds for KremeKos operations during
    the restructuring process. KKDC subsequently reached an
    agreement with KremeKos two secured creditors to settle
    KKDCs obligations with respect to its guarantees of
    certain indebtedness to such lenders and related equipment
    repurchase agreements. Pursuant to the agreement, KKDC paid
    approximately $9.3 million to the lenders in settlement of
    all of KKDCs obligations to them, and the lenders assigned
    to KKDC notes payable by KremeKo to the lenders (the
    KremeKo Notes). On December 19, 2005, a newly
    formed subsidiary of KKDC acquired from KremeKo all of its
    operating assets in exchange for the KremeKo Notes pursuant to a
    sale authorized by the Ontario Court, and thereafter the
    business has operated as a wholly-owned subsidiary of KKDC.
|
| |  | In June 2005, the Company agreed to suspend its right to receive
    a fixed annual cash distribution of approximately
    $1 million per year from Krispy Kreme South
    Florida, LLC (KKSF), a franchisee in which the
    Company has a 35.3% ownership interest. There is no
    assurance as to when or if this distribution will be resumed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | On July 19, 2005, KKDC was sued by one of our area
    developers, Sweet Traditions, LLC (Sweet
    Traditions), and its Illinois corporate entity Sweet
    Traditions of Illinois, LLC, in the Circuit Court for St. Clair
    County, Illinois seeking specific performance, declaratory
    judgment and injunctive relief, as well as moving for a
    temporary restraining order and preliminary injunction. Sweet
    Traditions sought to compel KKDC to continue to supply product
    to its franchisee stores without payment. On July 22, 2005,
    KKDC removed the case to the United States District Court for
    the Southern District of Illinois, and on July 27, 2005,
    the District Court entered an order denying plaintiffs
    motion for a preliminary injunction on the basis that their
    claims had no reasonable likelihood of success on the merits. On
    November 7, 2005, KKDC filed its answer denying the
    allegations in the complaint, and on November 11, 2005, at
    the joint request of the parties, the District Court entered a
    stay of proceedings pending arbitration.                                                                                                                                                                                                            
|
| |  | On September 29, 2005, Krispy Kreme Doughnuts, Inc.
    (KKDI), KKDC, certain former officers and directors
    of KKDI and KKDC and various other defendants were sued in
    California Superior Court for Los Angeles County by Richard
    Reinis and Roger E. Glickman. Messrs. Reinis and Glickman
    are the principals and managing members of the Companys
    Southern California developer and franchisee, Great Circle
    Family Foods, LLC and its affiliates (Great Circle),
    and the guarantors of Great Circles monetary obligations
    to KKDC. The complaint, which seeks unspecified damages and
    injunctive relief, purports to assert various claims on behalf
    of Great Circle, as well as certain individual claims by the
    plaintiffs, that arise out of and relate to Great Circles
    franchise relationship with the Company. On November 8,
    2005, KKDI, KKDC and certain co-defendants filed a petition in
    the California court for an order compelling arbitration of                                                                                                                                                                                                                                                                                                                

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | all of the alleged claims pursuant to mandatory arbitration
    clauses in Great Circles development agreement and
    franchise agreements. On December 23, 2005, the court
    entered an order denying the petition to compel arbitration. On
    January 4, 2006, KKDI and KKDC filed a notice of appeal
    from the courts denial of the petition to compel
    arbitration. Our
    co-defendants have also
    filed notices of appeal. The court has not yet ruled on the
    motions. The filing of the appeals stays all litigation in the
    trial court.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On April 14, 2006, Great Circle filed a demand for
    arbitration with the American Arbitration Association. Great
    Circles arbitration demand asserts 51 causes of action
    against KKDI, KKDC and various current and former officers and
    directors and others, arising out of and relating to Great
    Circles franchise relationship with KKDC. The demand,
    which asserts many of the same claims brought by Great
    Circles principals on Great Circles behalf in the
    litigation described above, seeks at least $20 million in
    damages, declaratory relief, accounting and rescission. The case
    is still in its very early stages and the respondents have not
    yet responded to the arbitration demand. At this early stage,
    KKDI and KKDC cannot predict how long the arbitration will take
    or evaluate the merits or weaknesses of the case. However, KKDI
    and KKDC intend to defend vigorously against the alleged claims.
|
| | On January 5, 2006, as a result of continuing defaults by
    Great Circle under its franchise agreements with us, KKDC
    terminated Great Circles franchise licenses and commenced
    an action in North Carolina state court based on Great
    Circles unauthorized use of the Krispy Kreme trademarks.
    KKDC sought and obtained a temporary restraining order
    prohibiting Great Circle and its affiliates from using the
    Krispy Kreme marks and holding themselves out as a Krispy Kreme
    franchisee. On January 6, 2006, following Great
    Circles agreement to remit certain past due royalties and
    brand fund fees, we reinstated Great Circles franchise
    licenses and resumed product shipments. Great Circle remains
    indebted to the Company for other amounts due under its
    franchise agreements, and the Company has reserved its rights to
    pursue payment of those amounts.                                                 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On October 17, 2005, we announced that a consolidated
    franchisee, Freedom Rings, LLC (Freedom Rings), at
    that time our area developer in the Philadelphia region, had
    filed a voluntary petition for Chapter 11 bankruptcy with
    the Delaware Bankruptcy Court. Prior to the filing, KKDC, which
    previously owned 70% of Freedom Rings, acquired the 30% minority
    interest for nominal consideration. In connection with this
    petition, KKDC agreed to provide funding to Freedom Rings during
    the restructuring process. On December 27, 2005, we
    announced that Freedom Rings had closed its four remaining
    stores. The Bankruptcy Court confirmed Freedom Rings plan
    of liquidation on April 20, 2006.                                                                                                                                                                                                                                         
|
| |  | On November 30, 2005, Krispy Kreme International, Ltd., a
    wholly-owned subsidiary of KKDC, sold its 35% equity interest in
    Krispy Kreme Australia Pty Limited (Krispy Kreme
    Australia), our area developer in Australia and New
    Zealand, to KKA Holdings Pty Ltd (KKA Holdings), the
    majority owner, for approximately $2.5 million. Pursuant to
    the purchase agreement, we also agreed to sell our existing
    shareholder loans in Krispy Kreme Australia to KKA Holdings on
    or before May 30, 2006 for approximately $3.7 million.
    Our approximately $4.4 million guarantee of Krispy Kreme
    Australias debt is expected to be released on or before
    May 30, 2006.                                                                                                                                                                                                                                                                              
|
| |  | On December 20, 2005, Amazing Glazed, LLC (Amazing
    Glazed), our area developer for western Pennsylvania,
    entered into an agreement with KKDC and the other Amazing Glazed
    shareholders pursuant to which Amazing Glazed redeemed
    KKDCs 30.3% equity interest in Amazing Glazed and the
    other minority shareholders 3% equity interest. As a
    result of this redemption, Amazing Glazeds majority owner,
    Rocking Ks, a Pennsylvania general partnership
    (Rocking Ks), became the owner of 100% of the
    equity interest of Amazing Glazed. In connection with this
    transaction, KKDC loaned Amazing Glazed $300,000 pursuant to a
    subordinated promissory note (which was issued in satisfaction
    of an outstanding capital call), consented to the closure of
    certain Amazing Glazed stores and waived its default rights
    under the development agreement with Amazing Glazed. In
    exchange, Amazing Glazed and certain partners

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | of Rocking Ks released Krispy Kreme from all claims
    existing on or before the date of the redemption agreement, and
    those partners agreed to indemnify Krispy Kreme from all claims
    asserted by the partners of Rocking Ks that did not
    execute the release. In addition, KKDC was released from its
    guarantee of approximately $2.5 million of debt of Amazing
    Glazed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | On December 23, 2005, KKDC entered into an agreement with
    Jan Dough, LLC, KKDCs franchisee partner in New England
    Dough, LLC (New England Dough), a consolidated
    franchisee and at that time our area developer in the New
    England region, regarding the distribution of New England
    Doughs assets. Prior to this transaction, KKDC owned a 60%
    interest in New England Dough. Pursuant to the agreement, New
    England Dough distributed approximately $1.5 million to
    KKDC, as well as the development rights for the New England
    territory, which includes Massachusetts, Connecticut and Rhode
    Island. New England Dough transferred its stores located in
    Milford, Connecticut; Cranston, Rhode Island; and Dedham,
    Massachusetts to Northeast Doughnuts, LLC, a wholly-owned
    subsidiary of KKDC. Jan Dough received from New England Dough
    all of its interest in the operations located at Mohegan Sun in
    Uncasville, Connecticut. New England Doughs three
    remaining stores were closed, and the affairs of New England
    Dough are being wound down. In addition, as part of the New
    England Dough transaction, all of New England Doughs
    approximately $9.5 million of bank debt was repaid. KKDC
    and Jan Dough had guaranteed that debt approximately in
    proportion to their equity interests. Of the $9.5 million,
    approximately $5.6 million was repaid by KKDC,
    approximately $3.8 million was repaid by Jan Dough, and the
    balance was repaid by New England Dough itself.                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | On February 2, 2006, a consolidated franchisee, Glazed
    Investments, LLC (Glazed Investments), entered into
    an agreement with Westward Dough Operating Company, LLC
    (Westward Dough), the Krispy Kreme area developer
    for Nevada, Utah, Idaho, Wyoming and Montana, for Westward Dough
    to purchase substantially all of the assets of Glazed
    Investments. Glazed Investments at that time was our area
    developer for Colorado, Minnesota and Wisconsin. The agreement
    called for Westward Dough to purchase 12 Krispy Kreme
    stores, as well as the franchise development rights for
    Colorado, Minnesota and Wisconsin, for approximately
    $10 million. As a condition of the purchase agreement, and
    at the request of Westward Dough, Glazed Investments agreed to
    conduct the sale under Chapter 11 Section 363 of the
    U.S. Bankruptcy Code. The Chapter 11 filing, which was
    made on February 3, 2006, facilitated the sale by
    permitting the assets to be sold free and clear of all liens,
    claims and encumbrances. On March 30, 2006, Westward Dough
    consummated its acquisition of Glazed Investments assets.
    Krispy Kreme previously owned 97% of Glazed Investments.
    Pursuant to the plan of liquidation filed by Glazed Investments
    in connection with the sale under Chapter 11, Glazed
    Investments will be dissolved after distributing the sale
    proceeds to its creditors, and Krispy Kreme will not receive any
    consideration on account of its ownership interest in Glazed
    Investments. The proceeds from this transaction are expected to
    be used to repay a substantial portion of $11.6 million of
    debt of Glazed Investments, approximately $8.7 million of
    which is guaranteed by KKDC. The Company estimates that the
    funding requirement to satisfy its obligation under the debt
    guarantee could be as much as approximately $1.5 million.
|
| |  | On February 9, 2006, KKDC reached an agreement with Lone
    Star Doughnuts, Ltd. (Lone Star), our Houston area
    franchisee, to terminate our franchisor-franchisee relationship
    and to settle all outstanding disputes and claims, including the
    dismissal of a lawsuit filed by Lone Star against KKDC. Neither
    KKDC nor Lone Star paid consideration to the other in connection
    with such termination. KKDC did not collect all of its
    receivables from Lone Star at the date of termination, but
    previously had established reserves for doubtful accounts
    related to these receivables.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | On April 27, 2006, KKNY, LLC (KKNY), our New
    York area developer, assigned to KKDC, for a cash payment of
    $500,000, the leases and KKNYs personal property
    previously used by KKNY in the operations of its locations in
    Penn Station and on Third Avenue in New York City.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In December 2005, the Company entered into a term sheet with the
    majority owner of Krispy Kreme U.K. Limited (KK UK)
    setting forth the basis of a proposed sale by the Company, for
    $5.6 million in cash, of the Companys 35% equity
    investment in and notes receivable from KK UK. A condition
    to the completion of the proposed transaction is a release by
    KK UKs lenders of all guarantees by the Company of
    obligations of KK UK and a termination of an equipment
    repurchase agreement relating to KK UK. There is no assurance
    that the transaction will be completed.

Business Operations




Company Store Operations.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On-premises sales. On-premises sales consist of
    sales to customers visiting our stores, including the
    drive-through windows, along with discounted sales to community
    organizations that in turn sell our products 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. We also sell beverages, including drip coffees,
    espresso-based coffees and both coffee-based and non
    coffee-based frozen drinks, as well as collectible memorabilia
    such as tee shirts, sweatshirts and hats. The majority of the
    sales by our international stores 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 supermarkets, convenience
    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. In addition, we have recently begun
    selling branded packaged coffee and other products to select
    supermarkets and mass merchants.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 fresh doughnuts, both packaged and unpackaged,
    to our retail customers. Our off-premises customers include
    Albertsons, Food Lion, Kroger, Speedway SuperAmerica and
    Wal-Mart. 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 Operations.


KKM&D.


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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mix manufacturing. We produce all of our
    proprietary doughnut mixes, which our franchisees are required
    to purchase, for use in stores located in the United States,
    Canada and Mexico at our manufacturing facilities in
    Winston-Salem, North Carolina and Effingham, Illinois. For other
    international jurisdictions, we produce a concentrate which is
    shipped internationally where it is then finished pursuant to
    the terms of agreements with contract manufacturers. We control
    production of this critical input in order to ensure that our
    products meet quality expectations. Manufacturing and selling
    our own mixes also allow us to capture the profit that otherwise
    would accrue to an outside supplier. Our mixes are produced
    according to our high-quality standards, which include:



| |   |                                                    
| | - | ---------------------------------------------------
| |  | Receiving truckloads of our main ingredients daily;
|
| |  | Testing each incoming key ingredient; and          
|
| |  | Testing each batch of mix.                         



| |   |                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 unusual store configurations;
|
| |  | Cost-effectiveness. We believe, based on our internal
    studies, that our costs are lower than if we purchased our
    equipment from third parties; and             
|
| |  | Efficiency. We refine our equipment design to ensure
    maximum automation in order to manage labor costs and/or improve
    consistency.                             



| |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We currently manufacture five models of doughnut-making 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.
|
| | We also sell smaller machines, which we refer to as tunnel
    ovens, 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 have the capability
    to 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, most of which (other than coffee) are
    purchased from third parties. One of our focus areas, however,
    has been on improving our beverage program. Through an
    acquisition in fiscal 2002, we acquired significant coffee
    roasting expertise. We have since formulated and have
    implemented in the majority of our

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | stores a complete beverage program, including drip coffees, a
    complete line of espresso-based coffees including flavors, and
    both coffee-based and noncoffee-based frozen drinks. See
    Products  Beverages.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Distribution centers.We operate three
    distribution centers (Winston-Salem, North Carolina, Effingham,
    Illinois and greater Los Angeles, California), which are capable
    of supplying our domestic stores and certain of our
    international stores with key supplies, including mixes, other
    food ingredients, coffee, juices, signage, display cases,
    uniforms and various other items. Stores must use our doughnut
    mixes exclusively. In addition, most of our 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 KKM&D. 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 typically 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 controlled
    on a systemwide basis rather than at the store level; and
|
| |  | 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






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 from
    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 theaters. Our factory stores
    typically showcase our doughnut-making theaters, which are
    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.                                                                                                          
|
| |  | Hot Doughnuts Now. The Hot Doughnuts
    Nowtm
    sign, when illuminated, is a signal that our Hot Original Glazed
    are being made. The Hot Doughnuts Now sign is an impulse
    purchase generator and an integral contributor to our brand. Our
    Hot Original Glazed 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.


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Domestic Store Development.


International Store Development.


Store Operations


General store operations.


15



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##### Table of Contents







on-site




Quality standards and customer service.


Management and staffing. e-mail






Store Ownership




Company stores.


16



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Franchisee stores. multi-unit


Associates.


15-year


Area developers.




17



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##### Table of Contents



multi-unit




15-year






Restructuring Initiatives.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | KremeKo, Inc. (Eastern and Central Canada): On
    April 15, 2005, an application was filed under the
    Companies Creditors Arrangement Act with the Ontario
    Superior Court of Justice for a restructuring of a consolidated
    franchisee, KremeKo, Inc., in which KKDC had a 40.6% interest.
    In connection with this application, KKDC, the franchisor,
    agreed to provide
    debtor-in-possession
    financing to provide funds for KremeKos operations during
    the restructuring process. KKDC subsequently reached an
    agreement with KremeKos two secured creditors to settle
    KKDCs obligations with respect to its guarantees of
    certain indebtedness to such lenders and related equipment
    repurchase agreements. Pursuant to the agreement, KKDC paid
    approximately $9.3 million to the lenders in settlement of
    all of KKDCs obligations to them, and the lenders assigned
    to KKDC notes payable by KremeKo to the lenders. On
    December 19, 2005, a newly formed subsidiary of KKDC
    acquired from KremeKo all of its operating assets in exchange
    for the KremeKo Notes pursuant to a sale authorized by the
    Ontario Court, and thereafter the business has operated as a
    wholly-owned subsidiary of KKDC.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Krispy Kreme South Florida, LLC (Broward County,
    Florida): In June 2005, the Company agreed to suspend its
    right to receive a fixed annual cash distribution of
    approximately $1 million per year from Krispy Kreme South
    Florida, LLC, a franchisee in which the Company has a
    35.3% ownership interest. There is no assurance as to when
    or if this distribution will be resumed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Freedom Rings, LLC (Eastern Pennsylvania, Delaware and
    Southern New Jersey): On October 17, 2005, we announced
    that a consolidated franchisee, Freedom Rings, LLC, at that time
    our franchisee partner in the Philadelphia region, had filed a
    voluntary petition for Chapter 11 bankruptcy with the
    Delaware Bankruptcy Court. Prior to the filing, KKDC, which
    previously owned 70% of Freedom Rings, acquired the 30% minority
    interest for nominal consideration. In connection with this
    petition, KKDC agreed to provide funding to Freedom Rings during
    the restructuring process. On December 27, 2005, we
    announced that Freedom Rings had closed its four remaining
    stores. The Bankruptcy Court confirmed Freedom Rings plan
    of liquidation on April 20, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Krispy Kreme Australia Pty Limited (Australia and New
    Zealand): On November 30, 2005, Krispy Kreme
    International, Ltd., a wholly-owned subsidiary of KKDC, sold its
    35% equity interest in Krispy Kreme Australia Pty Limited to KKA
    Holdings Pty Ltd, the majority owner, for approximately
    $2.5 million. Pursuant to the purchase agreement, we also
    agreed to sell our existing shareholder loans in Krispy Kreme
    Australia to KKA Holdings on or before May 30, 2006 for
    approximately $3.7 million. Our approximately
    $4.4 million guarantee of Krispy Kreme Australias
    debt is expected to be released on or before May 30, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Amazing Glazed LLC (Western Pennsylvania): On
    December 20, 2005, Amazing Glazed, our area developer for
    western Pennsylvania, entered into an agreement with KKDC and
    the other Amazing Glazed shareholders pursuant to which Amazing
    Glazed redeemed KKDCs 30.3% equity interest in Amazing
    Glazed and the other minority shareholders 3% equity
    interest. As a result of this redemption, Amazing Glazeds
    majority owner, Rocking Ks, became the owner of 100% of
    the equity interest of Amazing Glazed. In connection with this
    transaction, KKDC loaned Amazing Glazed $300,000 pursuant to a
    subordinated promissory note (which was issued in satisfaction
    of an outstanding capital call), consented to the closure of
    certain Amazing Glazed stores and waived its default rights
    under the development agreement with Amazing Glazed. In
    exchange, Amazing Glazed and certain partners of Rocking
    Ks released Krispy Kreme from all claims existing on or
    before the date of the redemption agreement and those partners
    agreed to indemnify Krispy Kreme from all claims asserted by the
    partners of Rocking Ks that did not execute the release.
    In addition, KKDC was released from its guarantee of
    approximately $2.5 million of debt of Amazing Glazed.                                                                                                                                                                                                                                              
|
| |  | New England Dough, LLC (New England): On
    December 23, 2005, KKDC entered into an agreement with Jan
    Dough, LLC, KKDCs franchisee partner in New England Dough,
    LLC, a consolidated franchisee and at that time our area
    developer in the New England region, regarding the distribution
    of New England Doughs assets. Prior to this transaction,
    KKDC owned a 60% interest in New England Dough. Pursuant to the
    agreement, New England Dough distributed approximately
    $1.5 million to KKDC, as well as the development rights for
    the New England territory, which includes Massachusetts,
    Connecticut and Rhode Island. New England Dough transferred its
    stores located in Milford, Connecticut; Cranston, Rhode Island;
    and Dedham, Massachusetts to Northeast Doughnuts, LLC, a
    wholly-owned subsidiary of KKDC. Jan Dough received from New
    England Dough all of its interest in the operations located at
    Mohegan Sun in Uncasville, Connecticut. New England Doughs
    three remaining stores were closed, and the affairs of New
    England Dough are being wound down. In addition, as part of the
    New England Dough transaction, all of New England Doughs
    approximately $9.5 million of bank debt was repaid. KKDC
    and Jan Dough had guaranteed that debt approximately in
    proportion to their equity interests. Of the $9.5 million,
    approximately $5.6 million was repaid by KKDC,
    approximately $3.8 million was repaid by Jan Dough and the
    balance was repaid by New England Dough itself.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Great Circle Family Foods, LLC (Southern California): On
    January 5, 2006, as a result of continuing defaults by
    Great Circle under its franchise agreements, KKDC terminated
    Great Circles franchise licenses. On January 6, 2006,
    following Great Circles agreement to remit certain past
    due royalties and Brand Fund fees, KKDC reinstated the franchise
    licenses and resumed product shipments. For a discussion of
    pending litigation involving Great Circle, see Item 3,
    Legal Proceedings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Glazed Investments, LLC (Colorado, Minnesota and
    Wisconsin): On February 2, 2006, a consolidated
    franchisee, Glazed Investments, entered into an agreement with
    Westward Dough, the Krispy Kreme area developer for Nevada,
    Utah, Idaho, Wyoming and Montana, for Westward Dough to purchase
    substantially all of the assets of Glazed Investments. Glazed
    Investments at that time was our area developer for Colorado,
    Minnesota and Wisconsin. The agreement called for Westward Dough
    to purchase 12 Krispy Kreme stores, as well as the
    franchise development rights for Colorado, Minnesota and
    Wisconsin, for approximately $10 million. As a condition of
    the purchase agreement, and at the request of Westward Dough,
    Glazed Investments agreed to conduct the sale under
    Chapter 11 Section 363 of the U.S. Bankruptcy
    Code. The Chapter 11 filing, which was made on
    February 3, 2006, facilitated the sale by permitting the
    assets to be sold free and clear of all liens, claims and
    encumbrances. On March 30, 2006, Westward Dough consummated
    its acquisition of Glazed Investments assets. Krispy Kreme
    previously owned 97% of Glazed Investments. Pursuant to the plan
    of liquidation filed by Glazed Investments in connection with
    the sale under Chapter 11, Glazed Investments will be
    dissolved after distributing the sale proceeds to its creditors,
    and Krispy Kreme will not receive any consideration on account
    of its ownership interest in Glazed Investments. The proceeds
    from this transaction are expected to be used to repay a
    substantial portion of $11.6 million of debt of Glazed
    Investments, approximately $8.7 million of which is
    guaranteed by KKDC.
|
| |  | Lone Star Doughnuts, Ltd. (Houston): On February 9,
    2006, we reached an agreement with Lone Star, our Houston area
    franchisee, to terminate our franchisor-franchisee relationship
    and to settle all outstanding disputes and claims, including the
    dismissal of a lawsuit filed by Lone Star against KKDC. See
    Item 3, Legal Proceedings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | KKNY, LLC (New York): On April 27, 2006, KKNY, our
    New York area developer, assigned to KKDC, for a cash payment of
    $500,000, the leases and KKNYs personal property
    previously used by KKNY in the operations of its locations in
    Penn Station and on Third Avenue in New York City.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Krispy Kreme U.K. Limited (United Kingdom): In December
    2005, the Company entered into a term sheet with the majority
    owner of KK UK setting forth the basis of a proposed sale
    by the Company, for $5.6 million in cash, of the
    Companys 35% equity investment in and notes receivable
    from KK UK. A condition to the completion of the proposed
    transaction is a release by KK UKs lenders of all
    guarantees by the Company of obligations of KK UK and a
    termination of an equipment repurchase agreement relating to
    KK UK. There is no assurance that the transaction will be
    completed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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Products


Doughnuts and Related Products.


Beverages.


Marketing




Store experience.


Relationship marketing.




| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
    raise money for their non-profit causes.                                                               

Public Relations.


Advertising and Sales Promotions.


Brand Fund.


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Management Information Systems


e-mail










Competition








Trademarks and Trade Names




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Government Regulation


Local regulation.


Food product regulation.






Franchise regulation.


up-to


23



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Employment regulations.


Other regulations.


Employees










Available Information


10-K, 10-K 10-Q 1-800-SEC-0330. http://www.sec.gov.


http://www.krispykreme.com 10-K, 10-Q, 8-K


http://www.krispykreme.com/gov charter.pdf http://www.krispykreme.com/comp charter.pdf http://www.krispykreme.com/audit charter.pdf


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http://www.krispykreme.com/corpgovernance.pdf http://www.krispykreme.com/code of ethics.pdf http://www.krispykreme.com/board directors ethics.pdf http://www.krispykreme.com/officers ethics.pdf.




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|         |              
|-------- | -------------
|Item 1A. | RISK FACTORS.



RISKS RELATING TO MATTERS UNDER INVESTIGATION




| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Pending civil litigation could have a material adverse effect
    on the Company.





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



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| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have identified numerous material weaknesses in our
    internal control over financial reporting, which could continue
    to impact our ability to report our results of operations and
    financial condition accurately and in a timely manner.



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | We have numerous material weaknesses in our internal control
    over financial reporting.





| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | We have extensive work remaining to remedy the material
    weaknesses in our internal control over financial reporting.





| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | The implementation of certain remedial measures set forth in
    the Special Committees report may take time and be costly
    to implement.





| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The delays in filing our periodic reports could cause the New
    York Stock Exchange (the NYSE) to commence
    suspension or delisting procedures in respect of our common
    stock.



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| |                                                                     
| | --------------------------------------------------------------------
| | Continuing negative publicity may adversely affect our
    business.





| |                                                                               
| | ------------------------------------------------------------------------------
| | Ongoing SEC review may require us to amend our public
    disclosures further.

10-K 10-K




| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are not in compliance with our periodic reporting
    obligations under the Exchange Act; and until current financial
    statements are available our securities are not able to be
    registered with the SEC.



RISKS RELATING TO OUR BUSINESS




| |                                                      
| | -----------------------------------------------------
| | Our management team has undergone significant change.



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| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Sales at company and franchised stores have been declining
    and may continue to decline.







| |   |                                                          
| | - | ---------------------------------------------------------
| |  | Consumer trends;                                         
|
| |  | Our ability to execute our business strategy effectively;
|
| |  | Competition;                                             
|
| |  | General regional and national economic conditions;       
|
| |  | Adverse weather conditions; and                          
|
| |  | Strong initial sales performance by new stores.          





| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





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| |                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





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





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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
    stores ability to make doughnuts will be negatively
    affected. In addition, changes in vendor credit terms or the
    failure to manage risks associated with ingredient purchases
    could adversely affect our profitability and liquidity.





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





| |                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

up-to




| |                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.







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



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| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have substantial indebtedness under our senior 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 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 senior
    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 increased vulnerability to general economic downturns and
    adverse developments in our industry.                                                                                                                                                                            





| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our senior 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.



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We currently have substantial ongoing liquidity needs arising
    from expenditures to professional advisors, and we will require
    a significant amount of cash to meet these liquidity needs. If
    these expenditures continue and we cannot generate the required
    cash, we may not be able to continue to obtain necessary
    services from our professional advisors and our ability to fund
    our operations may be significantly impaired.



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.





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



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

start-up


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 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.



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|         |                           
|-------- | --------------------------
|Item 1B. | UNRESOLVED STAFF COMMENTS.

10-K 10-Q 10-K 10-K







|        |            
|------- | -----------
|Item 2. | PROPERTIES.

Stores.




| |   |                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As of January 29, 2006, the majority of our factory stores
    had on-premises sales, and approximately 306 stores also
    engaged in off-premises sales.                                                                                         
|
| |  | Of the 113 factory stores we operated ourselves as of
    January 29, 2006, we owned the land and building for
    51 stores. We owned the building and leased the land for
    52 stores, and leased both the land and building for
    10 stores.
|
| |  | Of the 15 factory stores operated by consolidated franchisees as
    of January 29, 2006, we leased both the land and building
    for seven stores and leased the land and owned the building for
    eight stores.                               







| |   |                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As of January 30, 2005, the majority of our factory stores
    had on-premises sales, and approximately 312 stores also
    engaged in off-premises sales.                                                                                                      
|
| |  | Of the 124 factory stores we operated ourselves as of
    January 30, 2005, we owned the land and building for
    56 stores. We owned the building and leased the land for 45
    stores and leased both the land and building for 23 stores.                  
|
| |  | Of the 51 factory stores operated by consolidated
    franchisees as of January 30, 2005, we owned the land and
    building for one store. We owned the building and leased the
    land for 39 stores and leased both the land and building
    for 11 stores.



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|             |                            |                          |  |     |                |  |  |                |     |  |  |     |     | 
|------------ | -------------------------- | ------------------------ |  | --- | -------------- |  |  | -------------- | --- |  |  | --- | --- | 
|             |                            | At February 1,           |  |     | At January 30, |  |  | At January 29, |    
|             |                            | 2004                     |  |     | 2005           |  |  | 2006           |    
|             |                            |                          |  |     |                |  |  |                |    
|By Owner:    |                            |                          |  |     |                |  |  |                |     |  |  |    
|             | Company Stores             |                          |  |     |                |  |  |                |     |  |  |     |    
|             |                            | Company                  |  |     | 129            |  |  |                | 131 |  |  |     | 118 | 
|             |                            | Consolidated Franchisees |  |     | 24             |  |  |                | 54  |  |  |     | 15  | 
|             |                            |                          |  |     |                |  |  |                |    
|             | Total Company Stores       |                          |  | 153 |                |  |  | 185            |     |  |  | 133 |    
|             | Franchise Stores           |                          |  |     |                |  |  |                |     |  |  |     |    
|             |                            | Associates               |  |     | 62             |  |  |                | 59  |  |  |     | 57  | 
|             |                            | Area Developers          |  |     | 171            |  |  |                | 189 |  |  |     | 212 | 
|             |                            |                          |  |     |                |  |  |                |    
|             | Total Franchise Stores     |                          |  | 233 |                |  |  | 248            |     |  |  | 269 |    
|             |                            |                          |  |     |                |  |  |                |    
|             | Total Systemwide           |                          |  | 386 |                |  |  | 433            |     |  |  | 402 |    
|             |                            |                          |  |     |                |  |  |                |    
|By Type:     |                            |                          |  |     |                |  |  |                |     |  |  |    
|             | Factory Stores             |                          |  |     |                |  |  |                |     |  |  |     |    
|             |                            | Company                  |  |     | 117            |  |  |                | 124 |  |  |     | 113 | 
|             |                            | Consolidated Franchisees |  |     | 24             |  |  |                | 51  |  |  |     | 15  | 
|             |                            | Associates               |  |     | 57             |  |  |                | 54  |  |  |     | 47  | 
|             |                            | Area Developers          |  |     | 159            |  |  |                | 167 |  |  |     | 148 | 
|             |                            |                          |  |     |                |  |  |                |    
|             | Total Factory Stores       |                          |  | 357 |                |  |  | 396            |     |  |  | 323 |    
|             | Satellites                 |                          |  |     |                |  |  |                |     |  |  |     |    
|             |                            | Company                  |  |     | 12             |  |  |                | 7   |  |  |     | 5   | 
|             |                            | Consolidated Franchisees |  |     | 0              |  |  |                | 3   |  |  |     | 0   | 
|             |                            | Associates               |  |     | 5              |  |  |                | 5   |  |  |     | 10  | 
|             |                            | Area Developers          |  |     | 12             |  |  |                | 22  |  |  |     | 64  | 
|             |                            |                          |  |     |                |  |  |                |    
|             | Total Satellites           |                          |  | 29  |                |  |  | 37             |     |  |  | 79  |    
|             |                            |                          |  |     |                |  |  |                |    
|             | Total Systemwide           |                          |  | 386 |                |  |  | 433            |     |  |  | 402 |    
|             |                            |                          |  |     |                |  |  |                |    
|By Location: |                            |                          |  |     |                |  |  |                |     |  |  |    
|             | Domestic Stores            |                          |  |     |                |  |  |                |     |  |  |     |    
|             |                            | Company                  |  |     | 129            |  |  |                | 131 |  |  |     | 112 | 
|             |                            | Consolidated Franchisees |  |     | 24             |  |  |                | 41  |  |  |     | 15  | 
|             |                            | Associates               |  |     | 62             |  |  |                | 59  |  |  |     | 57  | 
|             |                            | Area Developers          |  |     | 150            |  |  |                | 165 |  |  |     | 150 | 
|             |                            |                          |  |     |                |  |  |                |    
|             | Total Domestic Stores      |                          |  | 365 |                |  |  | 396            |     |  |  | 334 |    
|             | International Stores       |                          |  |     |                |  |  |                |     |  |  |     |    
|             |                            | Company                  |  |     | 0              |  |  |                | 0   |  |  |     | 6   | 
|             |                            | Consolidated Franchisees |  |     | 0              |  |  |                | 13  |  |  |     | 0   | 
|             |                            | Associates               |  |     | 0              |  |  |                | 0   |  |  |     | 0   | 
|             |                            | Area Developers          |  |     | 21             |  |  |                | 24  |  |  |     | 62  | 
|             |                            |                          |  |     |                |  |  |                |    
|             | Total International Stores |                          |  | 21  |                |  |  | 37             |     |  |  | 68  |    
|             |                            |                          |  |     |                |  |  |                |    
|             | Total Systemwide           |                          |  | 386 |                |  |  | 433            |     |  |  | 402 |    
|             |                            |                          |  |     |                |  |  |                |    

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KKM&D facilities.


Other properties.


37



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##### Table of Contents








|        |                   
|------- | ------------------
|Item 3. | LEGAL PROCEEDINGS.





Governmental Investigations


SEC Investigation.


United States Attorney Investigation.


Department of Labor Review.


State Franchise/ FTC Inquiry.


Litigation


Federal Securities Class Actions. 10b-5


38



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##### Table of Contents





Shareholder Derivative Actions.


Federal Court Shareholder Derivative Actions. Wright v. Krispy Kreme Doughnuts, Inc.,
et al. Blackwell v. Krispy Kreme Doughnuts, Inc.,
et al Andrews v.
Krispy Kreme Doughnuts, Inc., et al.




Wright


Wright, Blackwell Andrews Wright, Blackwell Andrews Wright, Blackwell Andrews Wright v. Krispy Kreme Doughnuts, Inc., et al.




Wright


State Court Shareholder Derivative Actions. Andrews v.
Krispy Kreme Doughnuts, Inc., et al. Lockwood v. Krispy Kreme
Doughnuts, Inc., et al. Andrews


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##### Table of Contents



State Court Books and Records Action. Nomm v. Krispy Kreme, Inc.


ERISA Class Action.




| |                       
| | ----------------------
| | Franchisee Litigation.

Lone Star.


Sweet Traditions.


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Great Circle.






KremeKo.







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



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PART II







|        |                                                                           
|------- | --------------------------------------------------------------------------
|Item 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
    STOCKHOLDER MATTERS.

Market Information




|                             |  |      |       |  |     |   |       | 
|---------------------------- |  | ---- | ----- |  | --- | - | ----- | 
|                             |  | High |       |  | Low |  
|                             |  |      |       |  |     |  
|Year Ended February 1, 2004: |  |      |       |  |     |   |       | 
|First Quarter                |  | $    | 35.36 |  |     | $ | 26.42 | 
|Second Quarter               |  |      | 45.77 |  |     |   | 30.20 | 
|Third Quarter                |  |      | 49.74 |  |     |   | 37.50 | 
|Fourth Quarter               |  |      | 44.54 |  |     |   | 35.00 | 
|Year Ended January 30, 2005: |  |      |       |  |     |   |       | 
|First Quarter                |  | $    | 39.99 |  |     | $ | 32.38 | 
|Second Quarter               |  |      | 32.70 |  |     |   | 15.08 | 
|Third Quarter                |  |      | 15.95 |  |     |   | 10.36 | 
|Fourth Quarter               |  |      | 12.95 |  |     |   | 8.51  | 
|Year Ended January 29, 2006: |  |      |       |  |     |   |       | 
|First Quarter                |  | $    | 9.40  |  |     | $ | 5.05  | 
|Second Quarter               |  |      | 8.79  |  |     |   | 5.77  | 
|Third Quarter                |  |      | 7.89  |  |     |   | 3.91  | 
|Fourth Quarter               |  |      | 6.20  |  |     |   | 3.35  | 

Holders




Dividends




Securities Authorized for Issuance Under Equity Compensation
Plans


S-K


Recent Sales of Unregistered Securities






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Purchases of Equity Securities




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|        |                         
|------- | ------------------------
|Item 6. | SELECTED FINANCIAL DATA.







|                                                             |                                                |                                                            |         |         |            |   |         |            |  |   |            |         |  |          |         |         |   |   |          |         | 
|------------------------------------------------------------ | ---------------------------------------------- | ---------------------------------------------------------- | ------- | ------- | ---------- | - | ------- | ---------- |  | - | ---------- | ------- |  | -------- | ------- | ------- | - | - | -------- | ------- | 
|                                                             |                                                | Year Ended                                                 |        
|                                                             |                                                |                                                            |        
|                                                             |                                                | Jan. 28,                                                   |         |         | Feb. 3,    |   |         | Feb. 2,    |  |   | Feb. 1,    |         |  | Jan. 30, |        
|                                                             |                                                | 2001                                                       |         |         | 2002       |   |         | 2003       |  |   | 2004       |         |  | 2005     |        
|                                                             |                                                |                                                            |         |         |            |   |         |            |  |   |            |         |  |          |        
|                                                             |                                                | (restated)                                                 |         |         | (restated) |   |         | (restated) |  |   | (restated) |         |  |         
|                                                             |                                                | (In thousands, except per share and number of stores data) |        
|STATEMENT OF OPERATIONS DATA:                                |                                                |                                                            |         |         |            |   |         |            |  |   |            |         |  |          |         |         |   |   |          |        
|Revenues                                                     |                                                | $                                                          | 300,729 |         |            | $ | 394,241 |            |  | $ | 490,728    |         |  | $        | 649,345 |         |   | $ | 707,766  |        
|Operating expenses:                                          |                                                |                                                            |         |         |            |   |         |            |  |   |            |         |  |          |         |         |   |   |          |        
|                                                             | Direct operating expenses                      |                                                            |         | 249,475 |            |   |         | 317,571    |  |   |            | 380,644 |  |          |         | 493,650 |   |   |          | 597,110 | 
|                                                             | General and administrative expenses            |                                                            |         | 20,981  |            |   |         | 28,330     |  |   |            | 30,073  |  |          |         | 45,230  |   |   |          | 56,472  | 
|                                                             | Depreciation and amortization expense          |                                                            |         | 7,856   |            |   |         | 9,646      |  |   |            | 14,675  |  |          |         | 22,309  |   |   |          | 31,934  | 
|                                                             | Impairment charges and lease termination costs |                                                            |         |        |            |   |         |           |  |   |            |        |  |          |         |        |   |   |          | 161,847 | 
|                                                             | Arbitration award                              |                                                            |         |        |            |   |         |           |  |   |            | 9,075   |  |          |         | (525    | ) |   |          |        | 
|                                                             |                                                |                                                            |         |         |            |   |         |            |  |   |            |         |  |          |        
|Operating income (loss)                                      |                                                |                                                            | 22,417  |         |            |   | 38,694  |            |  |   | 56,261     |         |  |          | 88,681  |         |   |   | (139,597 | )      
|Net interest income (expense)                                |                                                |                                                            | 1,459   |         |            |   | 2,480   |            |  |   | 75         |         |  |          | (3,603  | )       |   |   | (6,100   | )      
|Equity in losses of equity method franchisees                |                                                |                                                            | (706    | )       |            |   | (617    | )          |  |   | (2,088     | )       |  |          | (2,242  | )       |   |   | (1,622   | )      
|Minority interests in results of consolidated franchisees    |                                                |                                                            | (627    | )       |            |   | (1,004  | )          |  |   | (2,187     | )       |  |          | (1,898  | )       |   |   | 6,249    |        
|Other income (expense), net                                  |                                                |                                                            | (320    | )       |            |   | (585    | )          |  |   | (1,284     | )       |  |          | 2,053   |         |   |   | (6,310   | )      
|                                                             |                                                |                                                            |         |         |            |   |         |            |  |   |            |         |  |          |        
|Income (loss) from continuing operations before income taxes |                                                |                                                            | 22,223  |         |            |   | 38,968  |            |  |   | 50,777     |         |  |          | 82,991  |         |   |   | (147,380 | )      
|Provision for income taxes                                   |                                                |                                                            | 8,441   |         |            |   | 14,755  |            |  |   | 19,719     |         |  |          | 33,146  |         |   |   | 9,674    |        
|                                                             |                                                |                                                            |         |         |            |   |         |            |  |   |            |         |  |          |        
|Income (loss) from continuing operations                     |                                                | $                                                          | 13,782  |         |            | $ | 24,213  |            |  | $ | 31,058     |         |  | $        | 49,845  |         |   | $ | (157,054 | )      
|                                                             |                                                |                                                            |         |         |            |   |         |            |  |   |            |         |  |          |        

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|                                                           |            |                                                            |         |     |            |   |         |            |     |   |            |     |     |          |         |     |     |   |         |     |       |  
|---------------------------------------------------------- | ---------- | ---------------------------------------------------------- | ------- | --- | ---------- | - | ------- | ---------- | --- | - | ---------- | --- | --- | -------- | ------- | --- | --- | - | ------- | --- | ----- | -
|                                                           |            | Year Ended                                                 |        
|                                                           |            |                                                            |        
|                                                           |            | Jan. 28,                                                   |         |     | Feb. 3,    |   |         | Feb. 2,    |     |   | Feb. 1,    |     |     | Jan. 30, |        
|                                                           |            | 2001                                                       |         |     | 2002       |   |         | 2003       |     |   | 2004       |     |     | 2005     |        
|                                                           |            |                                                            |         |     |            |   |         |            |     |   |            |     |     |          |        
|                                                           |            | (restated)                                                 |         |     | (restated) |   |         | (restated) |     |   | (restated) |     |     |         
|                                                           |            | (In thousands, except per share and number of stores data) |        
|Income (loss) from continuing operations per common share: |            |                                                            |         |     |            |   |         |            |     |   |            |     |     |          |         |     |     |   |         |    
|                                                           |            | Basic                                                      |         | $   | .28        |   |         | $          | .45 |   |            | $   | .56 |          |         | $   | .84 |   |         | $   | (2.55 | )
|                                                           |            | Diluted                                                    |         |     | .26        |   |         |            | .41 |   |            |     | .52 |          |         |     | .80 |   |         |     | (2.55 | )
|OPERATING DATA (UNAUDITED):                                |            |                                                            |         |     |            |   |         |            |     |   |            |     |     |          |         |     |     |   |         |    
|Number of factory stores at end of year:                   |            |                                                            |         |     |            |   |         |            |     |   |            |     |     |          |         |     |     |   |         |    
|                                                           | Company    |                                                            |         | 63  |            |   |         | 75         |     |   |            | 99  |     |          |         | 141 |     |   |         | 175 |      
|                                                           | Franchise  |                                                            |         | 111 |            |   |         | 143        |     |   |            | 177 |     |          |         | 216 |     |   |         | 221 |      
|                                                           |            |                                                            |         |     |            |   |         |            |     |   |            |     |     |          |        
|                                                           | Systemwide |                                                            |         | 174 |            |   |         | 218        |     |   |            | 276 |     |          |         | 357 |     |   |         | 396 |      
|                                                           |            |                                                            |         |     |            |   |         |            |     |   |            |     |     |          |        
|BALANCE SHEET DATA (AT END OF YEAR):                       |            |                                                            |         |     |            |   |         |            |     |   |            |     |     |          |         |     |     |   |         |    
|Working capital                                            |            | $                                                          | 27,806  |     |            | $ | 46,847  |            |     | $ | 78,318     |     |     | $        | 78,821  |     |     | $ | 1,728   |    
|Total assets                                               |            |                                                            | 175,050 |     |            |   | 258,341 |            |     |   | 413,619    |     |     |          | 656,603 |     |     |   | 480,278 |    
|Long-term debt, less current maturities                    |            |                                                            | 3,505   |     |            |   | 4,643   |            |     |   | 55,564     |     |     |          | 137,114 |     |     |   | 90,950  |    
|Total shareholders equity                                 |            |                                                            | 122,387 |     |            |   | 182,210 |            |     |   | 265,439    |     |     |          | 436,409 |     |     |   | 240,943 |    



|                                                          |         |                                       |         |      |              |   |         |            |  |   |          |      |  |   |         |      | 
|--------------------------------------------------------- | ------- | ------------------------------------- | ------- | ---- | ------------ | - | ------- | ---------- |  | - | -------- | ---- |  | - | ------- | ---- | 
|                                                          |         | Year Ended                            |         |      | Year Ended   |  
|                                                          |         | Jan. 28, 2001                         |         |      | Feb. 3, 2002 |  
|                                                          |         |                                       |         |      |              |  
|                                                          |         | As                                    |         |      |              |   | As      |            |  |  
|                                                          |         | Originally                            |         |      | As           |   |         | Originally |  |   | As       |     
|                                                          |         | Reported                              |         |      | Restated     |   |         | Reported   |  |   | Restated |     
|                                                          |         |                                       |         |      |              |   |         |            |  |   |          |     
|                                                          |         | (In thousands, except per share data) |        
|Revenues                                                  |         | $                                     | 300,715 |      |              | $ | 300,729 |            |  | $ | 394,354  |      |  | $ | 394,241 |     
|Direct operating expenses                                 |         |                                       | 250,690 |      |              |   | 249,475 |            |  |   | 316,946  |      |  |   | 317,571 |     
|General and administrative expenses                       |         |                                       | 20,061  |      |              |   | 20,981  |            |  |   | 27,562   |      |  |   | 28,330  |     
|Depreciation and amortization expense                     |         |                                       | 6,457   |      |              |   | 7,856   |            |  |   | 7,959    |      |  |   | 9,646   |     
|                                                          |         |                                       |         |      |              |   |         |            |  |   |          |     
|Operating income                                          |         |                                       | 23,507  |      |              |   | 22,417  |            |  |   | 41,887   |      |  |   | 38,694  |     
|Net interest income                                       |         |                                       | 1,718   |      |              |   | 1,459   |            |  |   | 2,643    |      |  |   | 2,480   |     
|Equity in losses of equity method franchisees             |         |                                       | (706    | )    |              |   | (706    | )          |  |   | (602     | )    |  |   | (617    | )   
|Minority interests in results of consolidated franchisees |         |                                       | (716    | )    |              |   | (627    | )          |  |   | (1,147   | )    |  |   | (1,004  | )   
|Other (expense), net                                      |         |                                       | (20     | )    |              |   | (320    | )          |  |   | (235     | )    |  |   | (585    | )   
|                                                          |         |                                       |         |      |              |   |         |            |  |   |          |     
|Income from continuing operations before income taxes     |         |                                       | 23,783  |      |              |   | 22,223  |            |  |   | 42,546   |      |  |   | 38,968  |     
|Provision for income taxes                                |         |                                       | 9,058   |      |              |   | 8,441   |            |  |   | 16,168   |      |  |   | 14,755  |     
|                                                          |         |                                       |         |      |              |   |         |            |  |   |          |     
|Income from continuing operations                         |         | $                                     | 14,725  |      |              | $ | 13,782  |            |  | $ | 26,378   |      |  | $ | 24,213  |     
|                                                          |         |                                       |         |      |              |   |         |            |  |   |          |     
|Income from continuing operations per common share:       |         |                                       |         |      |              |   |         |            |  |   |          |      |  |   |         |     
|                                                          | Basic   |                                       | $       | 0.30 |              |   | $       | 0.28       |  |   | $        | 0.49 |  |   | $       | 0.45 | 
|                                                          | Diluted |                                       | $       | 0.27 |              |   | $       | 0.26       |  |   | $        | 0.45 |  |   | $       | 0.41 | 

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|                         |                                                                                |                |         |      |                  |             |         |                       |   |   |         |        |   |          |        |        |         |   |        |      |   |   |        |        |  
|------------------------ | ------------------------------------------------------------------------------ | -------------- | ------- | ---- | ---------------- | ----------- | ------- | --------------------- | - | - | ------- | ------ | - | -------- | ------ | ------ | ------- | - | ------ | ---- | - | - | ------ | ------ | -
|                         |                                                                                |                |         |      |                  | Income from |        
|                         |                                                                                | Revenues       |         |      | Operating Income |             |         | Continuing Operations |  
|                         |                                                                                | Year Ended     |         |      | Year Ended       |             |         | Year Ended            |  
|                         |                                                                                |                |         |      |                  |             |         |                       |  
|                         |                                                                                | Jan. 28,       |         |      | Feb. 3,          |             |         | Jan. 28,              |   |   | Feb. 3, |        |   | Jan. 28, |        |        | Feb. 3, |  
|                         |                                                                                | 2001           |         |      | 2002             |             |         | 2001                  |   |   | 2002    |        |   | 2001     |        |        | 2002    |  
|                         |                                                                                |                |         |      |                  |             |         |                       |   |   |         |        |   |          |        |        |         |  
|                         |                                                                                | (In thousands) |        
|As originally reported   |                                                                                | $              | 300,715 |      |                  | $           | 394,354 |                       |   | $ | 23,507  |        |   | $        | 41,887 |        |         | $ | 14,725 |      |   | $ | 26,378 |       
|                         |                                                                                |                |         |      |                  |             |         |                       |   |   |         |        |   |          |        |        |         |  
|Restatement adjustments: |                                                                                |                |         |      |                  |             |         |                       |   |   |         |        |   |          |        |        |         |   |        |      |   |   |        |       
|                         | Revenue recognition on equipment sales                                         |                |         | 136  |                  |             |         | 98                    |   |   |         | 51     |   |          |        | 17     |         |   |        | 31   |   |   |        | 10     |  
|                         | Lease and depreciation accounting                                              |                |         |     |                  |             |         |                      |   |   |         | (680   | ) |          |        | (981   | )       |   |        | (411 | ) |   |        | (594   | )
|                         | Commodity futures contracts                                                    |                |         |     |                  |             |         |                      |   |   |         | (20    | ) |          |        | (21    | )       |   |        | (12  | ) |   |        | (13    | )
|                         | Intercompany profit on sales of equipment                                      |                |         |     |                  |             |         |                      |   |   |         | (54    | ) |          |        | (809   | )       |   |        | (33  | ) |   |        | (490   | )
|                         | Vacation pay                                                                   |                |         |     |                  |             |         |                      |   |   |         | (425   | ) |          |        | (480   | )       |   |        | (257 | ) |   |        | (291   | )
|                         | Elimination of initial franchise fees charged to equity method
    franchisees |                |         |     |                  |             |         | (98                   | ) |   |         |       |   |          |        | (98    | )       |   |        |     |   |   |        | (59    | )
|                         | Capitalized trademark costs                                                    |                |         |     |                  |             |         |                      |   |   |         |       |   |          |        | (205   | )       |   |        |     |   |   |        | (124   | )
|                         | Charitable contributions                                                       |                |         |     |                  |             |         |                      |   |   |         | (530   | ) |          |        | 6      |         |   |        | (321 | ) |   |        | 4      |  
|                         | Contingent proceeds related to sale of franchise                               |                |         |     |                  |             |         |                      |   |   |         |       |   |          |        |       |         |   |        | (182 | ) |   |        | (212   | )
|                         | Other adjustments                                                              |                |         | (122 | )                |             |         | (113                  | ) |   |         | 568    |   |          |        | (622   | )       |   |        | 242  |   |   |        | (396   | )
|                         |                                                                                |                |         |      |                  |             |         |                       |   |   |         |        |   |          |        |        |         |  
|                         | Total adjustments                                                              |                |         | 14   |                  |             |         | (113                  | ) |   |         | (1,090 | ) |          |        | (3,193 | )       |   |        | (943 | ) |   |        | (2,165 | )
|                         |                                                                                |                |         |      |                  |             |         |                       |   |   |         |        |   |          |        |        |         |  
|As restated              |                                                                                | $              | 300,729 |      |                  | $           | 394,241 |                       |   | $ | 22,417  |        |   | $        | 38,694 |        |         | $ | 13,782 |      |   | $ | 24,213 |       
|                         |                                                                                |                |         |      |                  |             |         |                       |   |   |         |        |   |          |        |        |         |  

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





Company Overview and Industry Outlook






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On-premises sales. Sales to customers visiting our
    stores, including the drive-through windows, along with
    discounted sales to community organizations that in turn sell
    our products for fundraising purposes.                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Off-premises sales. Daily sales of fresh doughnuts
    primarily on a branded basis to a variety of retail customers,
    such as supermarkets, convenience 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. In addition, we have recently begun selling branded
    packaged coffee and other products to select supermarkets and
    mass merchants.



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Results of Operations




Overview.


Segment results.




| |   |                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Company Stores. Represents the results of stores owned by
    the Company and by consolidated franchisees. These stores make
    and sell doughnuts and complementary products through the sales
    channels described above under  Company
    Overview and Industry Outlook. Expenses for this

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | business segment include store level expenses along with direct
    general and administrative expenses. For additional information
    about the consolidated franchisees, see Note 19 to our
    consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Franchise. Represents the results of our franchise
    programs. We have two franchise programs: the associate program,
    which is our original franchising program developed in the
    1940s, and the area developer program, which was developed in
    the mid-1990s. Associates pay royalties of 3.0% of on- premises
    sales and 1.0% of all other sales. Area developers 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.
    Domestic area developers are required to contribute 1.0% of
    their sales to the Brand Fund. International area developers are
    required to contribute varying percentages of their sales to the
    Brand Fund. Some associates contribute 1.0% of their sales to
    the Brand Fund. Expenses for this business segment include costs
    incurred to recruit new franchisees, costs to open, monitor and
    aid in the performance of these stores and direct general and
    administrative expenses.
|
| |  | KKM&D. Represents the results of our KKM&D
    business unit. This business unit buys and processes ingredients
    used to produce doughnut mixes and manufactures doughnut-making
    equipment that all of our factory stores are required to
    purchase. This business unit also includes our coffee roasting
    operation, which supplies our drip coffee product to our stores.
    The KKM&D business unit also purchases and sells key
    supplies, including mixes, other food ingredients, juices,
    signage, display cases, uniforms and other items. All
    intersegment transactions between KKM&D and Company Stores
    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.                                                                                                                                                                                





|                                                             |                                                |            |       |      |            |  |       |          |   |  |       |      | 
|------------------------------------------------------------ | ---------------------------------------------- | ---------- | ----- | ---- | ---------- |  | ----- | -------- | - |  | ----- | ---- | 
|                                                             |                                                | Year Ended |      
|                                                             |                                                |            |      
|                                                             |                                                | FEB. 2,    |       |      | FEB. 1,    |  |       | JAN. 30, |  
|                                                             |                                                | 2003       |       |      | 2004       |  |       | 2005     |  
|                                                             |                                                |            |       |      |            |  |       |          |  
|                                                             |                                                | (restated) |       |      | (restated) |  |       |         
|STATEMENT OF OPERATIONS DATA:                                |                                                |            |       |      |            |  |       |          |   |  |       |     
|Revenues                                                     |                                                |            | 100.0 | %    |            |  | 100.0 | %        |   |  | 100.0 | %   
|Operating expenses:                                          |                                                |            |       |      |            |  |       |          |   |  |       |     
|                                                             | Direct operating expenses                      |            |       | 77.6 |            |  |       | 76.0     |   |  |       | 84.4 | 
|                                                             | General and administrative expenses            |            |       | 6.1  |            |  |       | 7.0      |   |  |       | 8.0  | 
|                                                             | Depreciation and amortization expenses         |            |       | 3.0  |            |  |       | 3.4      |   |  |       | 4.5  | 
|                                                             | Impairment charges and lease termination costs |            |       |     |            |  |       |         |   |  |       | 22.8 | 
|                                                             | Arbitration award                              |            |       | 1.9  |            |  |       | (0.1     | ) |  |       |     | 
|                                                             |                                                |            |       |      |            |  |       |          |  
|Operating income (loss)                                      |                                                |            | 11.4  |      |            |  | 13.7  |          |   |  | (19.7 | )   
|Interest and other expense, net                              |                                                |            | 1.1   |      |            |  | 0.9   |          |   |  | 1.1   |     
|                                                             |                                                |            |       |      |            |  |       |          |  
|Income (loss) from continuing operations before income taxes |                                                |            | 10.3  |      |            |  | 12.8  |          |   |  | (20.8 | )   
|Provision for income taxes                                   |                                                |            | 4.0   |      |            |  | 5.1   |          |   |  | 1.4   |     
|                                                             |                                                |            |       |      |            |  |       |          |  
|Income (loss) from continuing operations                     |                                                |            | 6.3   | %    |            |  | 7.7   | %        |   |  | (22.2 | )%  
|                                                             |                                                |            |       |      |            |  |       |          |  

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|                                               |                                 |                |         |         |            |   |         |          |  |   |         |         | 
|---------------------------------------------- | ------------------------------- | -------------- | ------- | ------- | ---------- | - | ------- | -------- |  | - | ------- | ------- | 
|                                               |                                 | Year Ended     |        
|                                               |                                 |                |        
|                                               |                                 | FEB. 2,        |         |         | FEB. 1,    |   |         | JAN. 30, | 
|                                               |                                 | 2003           |         |         | 2004       |   |         | 2005     | 
|                                               |                                 |                |         |         |            |   |         |          | 
|                                               |                                 | (restated)     |         |         | (restated) |   |         |         
|                                               |                                 | (In thousands) |        
|REVENUES BY BUSINESS SEGMENT:                  |                                 |                |         |         |            |   |         |          |  |   |         |        
|Company Stores                                 |                                 | $              | 319,886 |         |            | $ | 441,707 |          |  | $ | 508,100 |        
|Franchise                                      |                                 |                | 19,156  |         |            |   | 23,506  |          |  |   | 24,720  |        
|KKM&D                                          |                                 |                | 151,686 |         |            |   | 184,132 |          |  |   | 174,946 |        
|                                               |                                 |                |         |         |            |   |         |          | 
|                                               | Total revenues                  |                | $       | 490,728 |            |   | $       | 649,345  |  |   | $       | 707,766 | 
|                                               |                                 |                |         |         |            |   |         |          | 
|DIRECT OPERATING EXPENSES BY BUSINESS SEGMENT: |                                 |                |         |         |            |   |         |          |  |   |         |        
|Company Stores                                 |                                 | $              | 276,823 |         |            | $ | 381,642 |          |  | $ | 469,868 |        
|Franchise                                      |                                 |                | 4,876   |         |            |   | 4,631   |          |  |   | 8,006   |        
|KKM&D                                          |                                 |                | 98,945  |         |            |   | 107,377 |          |  |   | 119,236 |        
|                                               |                                 |                |         |         |            |   |         |          | 
|                                               | Total direct operating expenses |                | $       | 380,644 |            |   | $       | 493,650  |  |   | $       | 597,110 | 
|                                               |                                 |                |         |         |            |   |         |          | 



|                                                               |                                 |            |      |       |            |  |      |          |   |  |      |       |  
|-------------------------------------------------------------- | ------------------------------- | ---------- | ---- | ----- | ---------- |  | ---- | -------- | - |  | ---- | ----- | -
|                                                               |                                 | Year Ended |     
|                                                               |                                 |            |     
|                                                               |                                 | FEB. 2,    |      |       | FEB. 1,    |  |      | JAN. 30, |  
|                                                               |                                 | 2003       |      |       | 2004       |  |      | 2005     |  
|                                                               |                                 |            |      |       |            |  |      |          |  
|                                                               |                                 | (restated) |      |       | (restated) |  |      |         
|REVENUES BY BUSINESS SEGMENT:                                  |                                 |            |      |       |            |  |      |          |   |  |      |      
|Company Stores                                                 |                                 |            | 65.2 | %     |            |  | 68.0 | %        |   |  | 71.8 | %    
|Franchise                                                      |                                 |            | 3.9  |       |            |  | 3.6  |          |   |  | 3.5  |      
|KKM&D                                                          |                                 |            | 30.9 |       |            |  | 28.4 |          |   |  | 24.7 |      
|                                                               |                                 |            |      |       |            |  |      |          |  
|                                                               | Total revenues                  |            |      | 100.0 | %          |  |      | 100.0    | % |  |      | 100.0 | %
|                                                               |                                 |            |      |       |            |  |      |          |  
|DIRECT OPERATING EXPENSES AS A PERCENTAGE OF SEGMENT REVENUES: |                                 |            |      |       |            |  |      |          |   |  |      |      
|Company Stores                                                 |                                 |            | 86.5 | %     |            |  | 86.4 | %        |   |  | 92.5 | %    
|Franchise                                                      |                                 |            | 25.5 | %     |            |  | 19.7 | %        |   |  | 32.4 | %    
|KKM&D                                                          |                                 |            | 65.2 | %     |            |  | 58.3 | %        |   |  | 68.2 | %    
|                                                               | Total direct operating expenses |            |      | 77.6  | %          |  |      | 76.0     | % |  |      | 84.4  | %

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|                 |  |         |     |   |           |  |     |       |  |  |     |  
|---------------- |  | ------- | --- | - | --------- |  | --- | ----- |  |  | --- | -
|                 |  | COMPANY |     |   | FRANCHISE |  |     | TOTAL | 
|                 |  |         |     |   |           |  |     |       | 
|FEBRUARY 3, 2002 |  |         | 75  |   |           |  | 143 |       |  |  | 218 |  
|Opened           |  |         | 14  |   |           |  | 49  |       |  |  | 63  |  
|Closed           |  |         | (3  | ) |           |  | (2  | )     |  |  | (5  | )
|Transferred      |  |         | 13  |   |           |  | (13 | )     |  |  |    |  
|                 |  |         |     |   |           |  |     |       | 
|FEBRUARY 2, 2003 |  |         | 99  |   |           |  | 177 |       |  |  | 276 |  
|Opened           |  |         | 28  |   |           |  | 58  |       |  |  | 86  |  
|Closed           |  |         | (2  | ) |           |  | (3  | )     |  |  | (5  | )
|Transferred      |  |         | 16  |   |           |  | (16 | )     |  |  |    |  
|                 |  |         |     |   |           |  |     |       | 
|FEBRUARY 1, 2004 |  |         | 141 |   |           |  | 216 |       |  |  | 357 |  
|Opened           |  |         | 24  |   |           |  | 36  |       |  |  | 60  |  
|Closed           |  |         | (14 | ) |           |  | (7  | )     |  |  | (21 | )
|Transferred      |  |         | 24  |   |           |  | (24 | )     |  |  |    |  
|                 |  |         |     |   |           |  |     |       | 
|JANUARY 30, 2005 |  |         | 175 |   |           |  | 221 |       |  |  | 396 |  
|Opened           |  |         | 3   |   |           |  | 13  |       |  |  | 16  |  
|Closed           |  |         | (49 | ) |           |  | (40 | )     |  |  | (89 | )
|Transferred      |  |         | (1  | ) |           |  | 1   |       |  |  |    |  
|                 |  |         |     |   |           |  |     |       | 
|JANUARY 29, 2006 |  |         | 128 |   |           |  | 195 |       |  |  | 323 |  
|                 |  |         |     |   |           |  |     |       | 



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|                                           |            |                                        |   |        |              |  |   |               |  |  |   |        | 
|------------------------------------------ | ---------- | -------------------------------------- | - | ------ | ------------ |  | - | ------------- |  |  | - | ------ | 
|                                           |            | Year Ended                             |  
|                                           |            |                                        |  
|                                           |            | FEB. 2, 2003                           |   |        | FEB. 1, 2004 |  |   | JAN. 30, 2005 | 
|                                           |            |                                        |   |        |              |  |   |               | 
|                                           |            | (In thousands, except operating weeks) |  
|Average weekly sales per factory store(1): |            |                                        |   |        |              |  |   |               |  |  |   |       
|                                           | Company    |                                        | $ | 75.4   |              |  | $ | 72.5          |  |  | $ | 58.2   | 
|                                           | Systemwide |                                        | $ | 65.5   |              |  | $ | 63.6          |  |  | $ | 54.7   | 
|Factory Store Operating Weeks:             |            |                                        |   |        |              |  |   |               |  |  |   |       
|                                           | Company    |                                        |   | 4,208  |              |  |   | 6,005         |  |  |   | 8,602  | 
|                                           | Systemwide |                                        |   | 11,904 |              |  |   | 15,400        |  |  |   | 19,415 | 
|Average weekly sales per store(1):         |            |                                        |   |        |              |  |   |               |  |  |   |       
|                                           | Company    |                                        | $ | 71.6   |              |  | $ | 68.7          |  |  | $ | 55.1   | 
|                                           | Systemwide |                                        | $ | 62.5   |              |  | $ | 59.9          |  |  | $ | 50.5   | 
|Store Operating Weeks:                     |            |                                        |   |        |              |  |   |               |  |  |   |       
|                                           | Company    |                                        |   | 4,430  |              |  |   | 6,337         |  |  |   | 9,099  | 
|                                           | Systemwide |                                        |   | 12,474 |              |  |   | 16,328        |  |  |   | 21,033 | 






|    |                                                                  
|--- | -----------------------------------------------------------------
|(1) | Excludes intersystem sales between company and franchised stores.

FISCAL 2005 COMPARED WITH FISCAL 2004




| |         
| | --------
| | Overview







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| |               
| | --------------
| | Company Stores

Company Stores Revenues.


Company Stores Direct Operating Expenses.




| |          
| | ---------
| | Franchise

Franchise Revenues.


Franchise Direct Operating Expenses.




| |      
| | -----
| | KKM&D

KKM&D Revenues.


KKM&D Direct Operating Expenses.


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| |      
| | -----
| | Other

General and Administrative Expenses.


Depreciation and Amortization Expense.


Impairment Charges and Lease Termination Costs.


Arbitration Award.


Interest Income.


Interest Expense.


Equity in Losses of Equity Method Franchisees.


Minority Interests in Results of Consolidated
Franchisees.


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Provision for Income Taxes.


Income (Loss) from Continuing Operations.


FISCAL 2004 COMPARED WITH FISCAL 2003




| |         
| | --------
| | Overview









| |               
| | --------------
| | Company Stores

Company Stores Revenues.


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Company Stores Direct Operating Expenses.




| |          
| | ---------
| | Franchise

Franchise Revenues.


Franchise Direct Operating Expenses.




| |      
| | -----
| | KKM&D

KKM&D Revenues.


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KKM&D Direct Operating Expenses. Start-up




| |      
| | -----
| | Other

General and Administrative Expenses.


Depreciation and Amortization Expense.


Arbitration Award.


Interest Income.


Interest Expense.


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Equity Losses of Equity Method Franchisees. start-up


Minority Interests in Results of Consolidated
Franchisees.


Provision for Income Taxes.


Income from Continuing Operations.


Liquidity and Capital Resources




|                                                               |                                                      |                |         |        |              |   |          |               |   |   |         |       | 
|-------------------------------------------------------------- | ---------------------------------------------------- | -------------- | ------- | ------ | ------------ | - | -------- | ------------- | - | - | ------- | ----- | 
|                                                               |                                                      | (IN THOUSANDS) |        
|                                                               |                                                      |                |        
|                                                               |                                                      | Year Ended     |        
|                                                               |                                                      |                |        
|                                                               |                                                      | FEB. 2, 2003   |         |        | FEB. 1, 2004 |   |          | JAN. 30, 2005 |  
|                                                               |                                                      |                |         |        |              |   |          |               |  
|                                                               |                                                      | (restated)     |         |        | (restated)   |   |          |              
|Net cash provided by operating activities                      |                                                      | $              | 51,905  |        |              | $ | 82,665   |               |   | $ | 84,921  |      
|Net cash used for investing activities                         |                                                      |                | (91,640 | )      |              |   | (169,949 | )             |   |   | (47,607 | )    
|Net cash provided by (used for) financing activities           |                                                      |                | 50,034  |        |              |   | 76,110   |               |   |   | (34,214 | )    
|Effect of exchange rate changes on cash                        |                                                      |                |        |        |              |   |         |               |   |   | 340     |      
|Cash balances of subsidiaries at date of initial consolidation |                                                      |                |        |        |              |   |         |               |   |   | 3,217   |      
|                                                               |                                                      |                |         |        |              |   |          |               |  
|                                                               | Net increase (decrease) in cash and cash equivalents |                | $       | 10,299 |              |   | $        | (11,174       | ) |   | $       | 6,657 | 
|                                                               |                                                      |                |         |        |              |   |          |               |  

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Cash Flows from Operating Activities










Cash Flows from Investing Activities












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Cash Flows from Financing Activities












Business Conditions, Uncertainties and Liquidity






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10-Q 10-K


Capital Resources, Contractual Obligations and Off-Balance
Sheet Arrangements






| |     
| | ----
| | Debt





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| |       
| | ------
| | Leases





| |                               
| | ------------------------------
| | Off-Balance Sheet Arrangements

S-K,


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Contractual Cash Obligations at January 30, 2005




|                                                                                                     |                              |                |         |                 |           |   |         |       |  |   |         |       |  |           |        |       |  |   |         |       | 
|---------------------------------------------------------------------------------------------------- | ---------------------------- | -------------- | ------- | --------------- | --------- | - | ------- | ----- |  | - | ------- | ----- |  | --------- | ------ | ----- |  | - | ------- | ----- | 
|                                                                                                     |                              |                |         | Payments Due In |          
|                                                                                                     |                              |                |         |                 |          
|                                                                                                     |                              | Total          |         |                 | Less Than |   |         | 1-3   |  |   | 3-5     |       |  | More Than |       
|                                                                                                     |                              | Amount         |         |                 | 1 Year    |   |         | Years |  |   | Years   |       |  | 5 Years   |       
|                                                                                                     |                              |                |         |                 |           |   |         |       |  |   |         |       |  |           |       
|                                                                                                     |                              | (In thousands) |        
|Long-term debt, including current maturities                                                         |                              | $              | 139,047 |                 |           | $ | 48,097  |       |  | $ | 90,804  |       |  | $         | 10     |       |  | $ | 136     |      
|Total interest payment obligations(1)(2)                                                             |                              |                | 15,605  |                 |           |   | 6,044   |       |  |   | 9,561   |       |  |           |       |       |  |   |        |      
|Total consolidated franchisees interest payment obligations(3)                                       |                              |                | 2,298   |                 |           |   | 2,224   |       |  |   | 33      |       |  |           | 33     |       |  |   | 8       |      
|Capital lease obligations                                                                            |                              |                | 10,314  |                 |           |   | 6,800   |       |  |   | 3,502   |       |  |           | 12     |       |  |   |        |      
|Operating leases                                                                                     |                              |                | 346,303 |                 |           |   | 17,852  |       |  |   | 32,640  |       |  |           | 30,385 |       |  |   | 265,426 |      
|Purchase obligations                                                                                 |                              |                | 112,904 |                 |           |   | 34,268  |       |  |   | 78,636  |       |  |           |       |       |  |   |        |      
|Other long-term obligations reflected on Krispy Kremes
    balance sheet including current portion: |                              |                |         |                 |           |   |         |       |  |   |         |       |  |           |        |       |  |   |         |      
|                                                                                                     | Self-insurance claims        |                |         | 13,060          |           |   |         | 7,161 |  |   |         | 3,147 |  |           |        | 1,854 |  |   |         | 898   | 
|                                                                                                     | Lease termination costs      |                |         | 2,281           |           |   |         | 921   |  |   |         | 427   |  |           |        | 408   |  |   |         | 525   | 
|                                                                                                     | Mirror 401(k) plan liability |                |         | 1,673           |           |   |         |      |  |   |         |      |  |           |        |      |  |   |         | 1,673 | 
|                                                                                                     |                              |                |         |                 |           |   |         |       |  |   |         |       |  |           |       
|Total                                                                                                |                              | $              | 643,485 |                 |           | $ | 123,367 |       |  | $ | 218,750 |       |  | $         | 32,702 |       |  | $ | 268,666 |      
|                                                                                                     |                              |                |         |                 |           |   |         |       |  |   |         |       |  |           |       






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents estimated interest payments to be made on our
    long-term debt, excluding debt of our consolidated franchisees.
    All interest payments assume that principal payments are made as
    originally scheduled. Interest rates utilized to determine
    interest payments for variable rate debt are based upon our
    estimate of future interest rates. Interest payment obligations
    for the periods shown above, after giving effect to the new
    credit facility entered into in April 2005, would be
    $10.2 million, $20.8 million, $20.9 million and
    $4.1 million, respectively, for a total of
    $56.0 million.
|   
|(2) | Represents estimated amounts payable without reduction for any
    amount due to the Company pursuant to interest rate hedge
    agreements. See Note 11 to our consolidated financial
    statements.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(3) | Represents estimated interest payments to be made on our
    consolidated franchisees debt. For the amounts in default
    and classified as current, all interest payments assume that the
    principal balance is paid within one year. Interest rates
    utilized to determine interest payments for variable rate debt
    are based upon our estimate of future interest rates.                                                                                                                                                                                                                                                            

Capital Requirements






| |   |                                                           
| | - | ----------------------------------------------------------
| |  | Working capital and other corporate purposes              
|
| |  | Investments in systems and personnel                      
|
| |  | Restructuring initiatives                                 
|
| |  | Remodeling and relocation of selected older Company stores
|
| |  | Opening new Company stores in selected markets            



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Inflation




Critical Accounting Policies






| |                       
| | ----------------------
| | Basis of Consolidation





| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts





| |                                            
| | -------------------------------------------
| | Goodwill and Identifiable Intangible Assets



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| |                 
| | ----------------
| | Asset Impairment







| |          
| | ---------
| | Insurance



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| |             
| | ------------
| | Income Taxes





| |                      
| | ---------------------
| | Guarantee Liabilities





| |                           
| | --------------------------
| | Investments in Franchisees



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| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements





03-13, 03-13). 03-13 03-13




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|         |                                                                 
|-------- | ----------------------------------------------------------------
|Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISKS.











|                   |  |                                               |                |          |               |   |             |        |  |      |       |  |  |   |      |  
|------------------ |  | --------------------------------------------- | -------------- | -------- | ------------- | - | ----------- | ------ |  | ---- | ----- |  |  | - | ---- | -
|                   |  |                                               |                | Weighted |               |   | Contract    |        |  | Fair |      
|                   |  | Contract Volume                               |                |          | Average Price |   |             | Amount |  |      | Value | 
|                   |  |                                               |                |          |               |   |             |        |  |      |       | 
|                   |  | (Dollars in thousands, except average prices) |               
|Futures contracts: |  |                                               |                |          |               |   |             |        |  |      |       |  |  |   |      |  
|Soybean oil        |  |                                               | 720,000 lbs.   |          |               | $ | 0.2022/lb.  |        |  | $    | 3,030 |  |  | $ | (53  | )
|Wheat              |  |                                               | 65,000 bushels |          |               | $ | 3.34/bushel |        |  | $    | 1,535 |  |  |   | (101 | )
|                   |  |                                               |                |          |               |   |             |        |  |      |       | 
|                   |  |                                               |                |          |               |   |             |        |  |      |       |  |  | $ | (154 | )
|                   |  |                                               |                |          |               |   |             |        |  |      |       | 



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|        |                                             
|------- | --------------------------------------------
|Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

|                                                                                                                                   |  |      |    | 
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                   |  | Page |   
|                                                                                                                                   |  |      |   
|Index to Financial Statements                                                                                                      |  |      |    | 
|Report of Independent Registered Public
    Accounting Firm                                                                        |  |      | 74 | 
|Consolidated balance sheets as of
    February 1, 2004 and January 30, 2005                                                        |  |      | 79 | 
|Consolidated statement of operations for
    each of the three years in the period ended January 30,
    2005                      |  |      | 80 | 
|Consolidated statement of cash flows for
    each of the three years in the period ended January 30,
    2005                      |  |      | 81 | 
|Consolidated statement of changes in
    shareholders equity for each of the three years in the
    period ended January 30, 2005 |  |      | 82 | 
|Notes to financial statements                                                                                                      |  |      | 83 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






Consolidated financial statements








Internal control over financial reporting


Internal Control 
Integrated Framework




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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Companys former chief executive officer, who retired
    from the Company in January 2005, and the Companys former
    chief operating officer, who resigned from the Company in August
    2004 (together former senior management), did not
    establish and maintain a proper tone and control consciousness.
    Specifically, former senior management through its actions did
    not emphasize the importance of internal control over financial
    reporting and adherence to the Companys code of business
    conduct and ethics.                                                                                                                                                                                                                                                                           
|
| |  | The Company failed to implement adequate assignment of authority
    and responsibility and the necessary lines of communication
    between operations and finance personnel. Specifically, there
    was inadequate sharing of financial information within and
    across its corporate and divisional offices and other operating
    facilities to adequately raise issues to the appropriate level
    of accounting and financial reporting personnel. Further, the
    Company did not maintain effective controls over the
    communication and maintenance of information regarding
    significant transactions and events with certain of its
    franchisees, such as the signing of letters of intent and
    definitive agreements and the guaranteeing of certain
    obligations of certain of its franchisees.
|
| |  | The Company did not maintain formalized and consistent finance
    and accounting policies and procedures nor did it maintain
    adequate controls with respect to the review, supervision and
    monitoring of the Companys accounting operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | The Company did not maintain a sufficient complement of
    personnel with an appropriate level of accounting knowledge,
    experience and training in the application of generally accepted
    accounting principles (GAAP) commensurate with its
    financial reporting requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company did not maintain effective controls over the
    preparation and review of recurring and nonrecurring journal
    entries. Specifically, effective controls were not designed and
    in place to ensure that journal entries were prepared with
    sufficient supporting documentation and that those entries were
    reviewed and approved to ensure the completeness, accuracy and
    appropriateness of the entries recorded.
|
| |  | The Company did not maintain effective controls to ensure that
    its financial statement accounts were complete and accurate and
    that they were analyzed and agreed to detailed supporting
    documentation. Specifically, the Company did not maintain
    effective controls to ensure that account reconciliations over
    certain balance sheet accounts were properly performed, reviewed
    and approved.                        

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company did not maintain effective controls over the
    accounting for acquisitions and divestitures. Specifically,
    effective controls were not designed and in place to ensure that
    such transactions were accounted for in accordance with GAAP.
    This control deficiency and the control environment deficiencies
    described under paragraph 1 above resulted in the failure to
    prevent or detect errors in the accounting for certain of the
    Companys acquisitions, including the improper recording of
    income or failure to properly record expense with respect to
    certain transactions with the acquired companies, where that
    accounting was not consistent with the economic substance of the
    transactions.
|
| |  | The Company did not maintain effective controls over its
    accounting for consolidated franchisees and equity method
    franchisees. Specifically, the Company did not maintain
    effective controls to ensure completeness and accuracy related
    to the consolidation of its franchisees accounted for on a
    consolidated basis. Also, the Company did not maintain effective
    controls to ensure completeness and accuracy of its financial
    statement accounts related to franchisees accounted for on the
    equity method in accordance with GAAP.                                                                                                                                                                                       
|
| |  | The Company did not maintain effective controls over the
    completeness and accuracy of intercompany eliminations with
    respect to the profit to be eliminated for intercompany
    equipment sales and for franchise fees earned from franchisees
    accounted for under the equity method of accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | The Company did not maintain effective controls to ensure that
    its financial statement accounts related to translation of
    financial statement accounts denominated in foreign currencies
    and translation of foreign currency transaction gains or losses
    were completely and accurately recorded in accordance with GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                       









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KRISPY KREME DOUGHNUTS, INC.





CONSOLIDATED BALANCE SHEET


|                                                                                                                        |                                            |                |         |         |               |   |         |         | 
|----------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------------- | ------- | ------- | ------------- | - | ------- | ------- | 
|                                                                                                                        |                                            | Feb. 1, 2004   |         |         | Jan. 30, 2005 |  
|                                                                                                                        |                                            |                |         |         |               |  
|                                                                                                                        |                                            | (restated)     |         |         |              
|                                                                                                                        |                                            | (In thousands) |        
|ASSETS                                                                                                                 
|CURRENT ASSETS:                                                                                                         |                                            |                |         |         |               |   |         |        
|Cash and cash equivalents                                                                                               |                                            | $              | 21,029  |         |               | $ | 27,686  |        
|Receivables                                                                                                             |                                            |                | 45,576  |         |               |   | 30,198  |        
|Accounts and notes receivable  related parties                                                                         |                                            |                | 18,270  |         |               |   | 15,510  |        
|Inventories                                                                                                             |                                            |                | 29,821  |         |               |   | 28,591  |        
|Income taxes refundable                                                                                                 |                                            |                | 7,973   |         |               |   |        |        
|Deferred income taxes                                                                                                   |                                            |                | 7,405   |         |               |   | 3,913   |        
|Other current assets                                                                                                    |                                            |                | 7,421   |         |               |   | 13,465  |        
|                                                                                                                        |                                            |                |         |         |               |  
|                                                                                                                        | Total current assets                       |                |         | 137,495 |               |   |         | 119,363 | 
|Property and equipment                                                                                                  |                                            |                | 287,492 |         |               |   | 309,214 |        
|Non-current portion of notes receivable  related
    parties                                                           |                                            |                | 6,561   |         |               |   | 2,120   |        
|Investments in equity method franchisees                                                                                |                                            |                | 14,584  |         |               |   | 5,973   |        
|Goodwill and other intangible assets                                                                                    |                                            |                | 197,162 |         |               |   | 34,380  |        
|Deferred income taxes                                                                                                   |                                            |                | 2,941   |         |               |   |        |        
|Other assets                                                                                                            |                                            |                | 10,368  |         |               |   | 9,228   |        
|                                                                                                                        |                                            |                |         |         |               |  
|                                                                                                                        | Total assets                               |                | $       | 656,603 |               |   | $       | 480,278 | 
|                                                                                                                        |                                            |                |         |         |               |  
|                                                                                                                       
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                   
|CURRENT LIABILITIES:                                                                                                    |                                            |                |         |         |               |   |         |        
|Current maturities of long-term debt                                                                                    |                                            | $              | 8,142   |         |               | $ | 48,097  |        
|Book overdraft                                                                                                          |                                            |                | 8,123   |         |               |   | 8,480   |        
|Accounts payable                                                                                                        |                                            |                | 19,107  |         |               |   | 17,436  |        
|Accrued expenses                                                                                                        |                                            |                | 23,302  |         |               |   | 43,622  |        
|                                                                                                                        |                                            |                |         |         |               |  
|                                                                                                                        | Total current liabilities                  |                |         | 58,674  |               |   |         | 117,635 | 
|                                                                                                                        |                                            |                |         |         |               |  
|Long-term debt, less current maturities                                                                                 |                                            |                | 137,114 |         |               |   | 90,950  |        
|Deferred income taxes                                                                                                   |                                            |                |        |         |               |   | 3,913   |        
|Other long-term obligations                                                                                             |                                            |                | 22,258  |         |               |   | 26,447  |        
|Minority interests in consolidated franchisees                                                                          |                                            |                | 2,148   |         |               |   | 390     |        
|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;
    issued and outstanding  61,286 (2004) and 61,756
    (2005) |                                            |                | 294,477 |         |               |   | 295,611 |        
|Unearned compensation                                                                                                   |                                            |                | (62     | )       |               |   | (17     | )      
|Notes receivable secured by common stock                                                                                |                                            |                | (383    | )       |               |   | (197    | )      
|Accumulated other comprehensive income (loss)                                                                           |                                            |                | (712    | )       |               |   | 796     |        
|Retained earnings (accumulated deficit)                                                                                 |                                            |                | 143,089 |         |               |   | (55,250 | )      
|                                                                                                                        |                                            |                |         |         |               |  
|                                                                                                                        | Total shareholders equity                 |                |         | 436,409 |               |   |         | 240,943 | 
|                                                                                                                        |                                            |                |         |         |               |  
|                                                                                                                        | Total liabilities and shareholders equity |                | $       | 656,603 |               |   | $       | 480,278 | 
|                                                                                                                        |                                            |                |         |         |               |  



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KRISPY KREME DOUGHNUTS, INC.





CONSOLIDATED STATEMENT OF OPERATIONS


|                                                                             |                                                     |                                          |         |         |            |   |         |          |   |   |          |         |  
|---------------------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------------- | ------- | ------- | ---------- | - | ------- | -------- | - | - | -------- | ------- | -
|                                                                             |                                                     | Year Ended                               |        
|                                                                             |                                                     |                                          |        
|                                                                             |                                                     | Feb. 2,                                  |         |         | Feb. 1,    |   |         | Jan. 30, |  
|                                                                             |                                                     | 2003                                     |         |         | 2004       |   |         | 2005     |  
|                                                                             |                                                     |                                          |         |         |            |   |         |          |  
|                                                                             |                                                     | (restated)                               |         |         | (restated) |   |         |         
|                                                                             |                                                     | (In thousands, except per share amounts) |        
|Revenues                                                                     |                                                     | $                                        | 490,728 |         |            | $ | 649,345 |          |   | $ | 707,766  |        
|Operating expenses:                                                          |                                                     |                                          |         |         |            |   |         |          |   |   |          |        
|                                                                             | Direct operating expenses                           |                                          |         | 380,644 |            |   |         | 493,650  |   |   |          | 597,110 |  
|                                                                             | General and administrative expenses                 |                                          |         | 30,073  |            |   |         | 45,230   |   |   |          | 56,472  |  
|                                                                             | Depreciation and amortization expense               |                                          |         | 14,675  |            |   |         | 22,309   |   |   |          | 31,934  |  
|                                                                             | Impairment charges and lease termination costs      |                                          |         |        |            |   |         |         |   |   |          | 161,847 |  
|                                                                             | Arbitration award                                   |                                          |         | 9,075   |            |   |         | (525     | ) |   |          |        |  
|                                                                             |                                                     |                                          |         |         |            |   |         |          |  
|Operating income (loss)                                                      |                                                     |                                          | 56,261  |         |            |   | 88,681  |          |   |   | (139,597 | )      
|Interest income                                                              |                                                     |                                          | 1,966   |         |            |   | 906     |          |   |   | 775      |        
|Interest expense                                                             |                                                     |                                          | (1,891  | )       |            |   | (4,509  | )        |   |   | (6,875   | )      
|Equity in losses of equity method franchisees                                |                                                     |                                          | (2,088  | )       |            |   | (2,242  | )        |   |   | (1,622   | )      
|Minority interests in results of consolidated franchisees                    |                                                     |                                          | (2,187  | )       |            |   | (1,898  | )        |   |   | 6,249    |        
|Other income and (expense), net                                              |                                                     |                                          | (1,284  | )       |            |   | 2,053   |          |   |   | (6,310   | )      
|                                                                             |                                                     |                                          |         |         |            |   |         |          |  
|Income (loss) from continuing operations before income taxes                 |                                                     |                                          | 50,777  |         |            |   | 82,991  |          |   |   | (147,380 | )      
|Provision for income taxes                                                   |                                                     |                                          | 19,719  |         |            |   | 33,146  |          |   |   | 9,674    |        
|                                                                             |                                                     |                                          |         |         |            |   |         |          |  
|Income (loss) from continuing operations                                     |                                                     |                                          | 31,058  |         |            |   | 49,845  |          |   |   | (157,054 | )      
|Discontinued operations, including income tax effects                        |                                                     |                                          |        |         |            |   | (1,282  | )        |   |   | (40,054  | )      
|                                                                             |                                                     |                                          |         |         |            |   |         |          |  
|Income (loss) before cumulative effect of change in accounting
    principle |                                                     |                                          | 31,058  |         |            |   | 48,563  |          |   |   | (197,108 | )      
|Cumulative effect of change in accounting principle, net of
    income taxes |                                                     |                                          |        |         |            |   |        |          |   |   | (1,231   | )      
|                                                                             |                                                     |                                          |         |         |            |   |         |          |  
|Net income (loss)                                                            |                                                     | $                                        | 31,058  |         |            | $ | 48,563  |          |   | $ | (198,339 | )      
|                                                                             |                                                     |                                          |         |         |            |   |         |          |  
|Earnings (loss) per common share  basic                                     |                                                     |                                          |         |         |            |   |         |          |   |   |          |        
|                                                                             | Income (loss) from continuing operations            |                                          | $       | .56     |            |   | $       | .84      |   |   | $        | (2.55   | )
|                                                                             | Discontinued operations                             |                                          |         |        |            |   |         | (.02     | ) |   |          | (.65    | )
|                                                                             | Cumulative effect of change in accounting principle |                                          |         |        |            |   |         |         |   |   |          | (.02    | )
|                                                                             |                                                     |                                          |         |         |            |   |         |          |  
|                                                                             | Net income (loss)                                   |                                          | $       | .56     |            |   | $       | .82      |   |   | $        | (3.22   | )
|                                                                             |                                                     |                                          |         |         |            |   |         |          |  
|Earnings (loss) per common share  diluted                                   |                                                     |                                          |         |         |            |   |         |          |   |   |          |        
|                                                                             | Income (loss) from continuing operations            |                                          | $       | .52     |            |   | $       | .80      |   |   | $        | (2.55   | )
|                                                                             | Discontinued operations                             |                                          |         |        |            |   |         | (.02     | ) |   |          | (.65    | )
|                                                                             | Cumulative effect of change in accounting principle |                                          |         |        |            |   |         |         |   |   |          | (.02    | )
|                                                                             |                                                     |                                          |         |         |            |   |         |          |  
|                                                                             | Net income (loss)                                   |                                          | $       | .52     |            |   | $       | .78      |   |   | $        | (3.22   | )
|                                                                             |                                                     |                                          |         |         |            |   |         |          |  



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KRISPY KREME DOUGHNUTS, INC.





CONSOLIDATED STATEMENT OF CASH FLOWS


|                                                                           |                                                                              |                                                      |         |        |              |   |          |               |          |   |          |         |         |  
|-------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ---------------------------------------------------- | ------- | ------ | ------------ | - | -------- | ------------- | -------- | - | -------- | ------- | ------- | -
|                                                                           |                                                                              | Year Ended                                           |        
|                                                                           |                                                                              |                                                      |        
|                                                                           |                                                                              | Feb. 2, 2003                                         |         |        | Feb. 1, 2004 |   |          | Jan. 30, 2005 |         
|                                                                           |                                                                              |                                                      |         |        |              |   |          |               |         
|                                                                           |                                                                              | (restated)                                           |         |        | (restated)   |   |          |              
|                                                                           |                                                                              | (In thousands)                                       |        
|CASH FLOW FROM OPERATING ACTIVITIES:                                       |                                                                              |                                                      |         |        |              |   |          |               |          |   |          |        
|Net income (loss)                                                          |                                                                              | $                                                    | 31,058  |        |              | $ | 48,563   |               |          | $ | (198,339 | )      
|Items not requiring cash:                                                  |                                                                              |                                                      |         |        |              |   |          |               |          |   |          |        
|                                                                           | Depreciation and amortization                                                |                                                      |         | 14,675 |              |   |          | 22,806        |          |   |          | 31,982  |        
|                                                                           | Deferred income taxes                                                        |                                                      |         | 56     |              |   |          | (3,491        | )        |   |          | 10,117  |        
|                                                                           | Impairment charges                                                           |                                                      |         |       |              |   |          |              |          |   |          | 194,100 |        
|                                                                           | Cumulative effect of change in accounting principle                          |                                                      |         |       |              |   |          |              |          |   |          | 1,231   |        
|                                                                           | Deferred rent expense                                                        |                                                      |         | 821    |              |   |          | 849           |          |   |          | 3,220   |        
|                                                                           | Loss on disposal of property and equipment                                   |                                                      |         | 934    |              |   |          | 939           |          |   |          | 4,439   |        
|                                                                           | Provision for doubtful accounts, net of chargeoffs                           |                                                      |         | 271    |              |   |          | (305          | )        |   |          | 11,219  |        
|                                                                           | Tax benefit from exercise of nonqualified stock options                      |                                                      |         | 13,795 |              |   |          | 35,771        |          |   |          |        |        
|                                                                           | Minority interest in results of consolidated franchisees                     |                                                      |         | 2,187  |              |   |          | 1,898         |          |   |          | (6,249  | )      
|                                                                           | Equity in losses of equity method franchisees                                |                                                      |         | 2,088  |              |   |          | 2,242         |          |   |          | 1,622   |        
|                                                                           | Cash distributions from equity method franchisees                            |                                                      |         | 520    |              |   |          | 1,582         |          |   |          | 2,003   |        
|                                                                           | Other                                                                        |                                                      |         | 417    |              |   |          | (2,658        | )        |   |          | 1,610   |        
|Change in assets and liabilities:                                          |                                                                              |                                                      |         |        |              |   |          |               |          |   |          |        
|                                                                           | Receivables                                                                  |                                                      |         | (6,978 | )            |   |          | (18,729       | )        |   |          | 10,982  |        
|                                                                           | Inventories                                                                  |                                                      |         | (8,516 | )            |   |          | (4,068        | )        |   |          | 2,141   |        
|                                                                           | Other current assets                                                         |                                                      |         | (331   | )            |   |          | (965          | )        |   |          | (4,056  | )      
|                                                                           | Income taxes                                                                 |                                                      |         | 571    |              |   |          | 1,025         |          |   |          | 7,973   |        
|                                                                           | Accounts payable and accrued expenses                                        |                                                      |         | 742    |              |   |          | (7,117        | )        |   |          | 8,278   |        
|                                                                           | Other long-term obligations                                                  |                                                      |         | (405   | )            |   |          | 4,323         |          |   |          | 2,648   |        
|                                                                           |                                                                              |                                                      |         |        |              |   |          |               |         
|                                                                           |                                                                              | Net cash provided by operating activities            |         |        | 51,905       |   |          |               | 82,665   |   |          |         | 84,921  |  
|                                                                           |                                                                              |                                                      |         |        |              |   |          |               |         
|CASH FLOW FROM INVESTING ACTIVITIES:                                       |                                                                              |                                                      |         |        |              |   |          |               |          |   |          |        
|Purchase of property and equipment                                         |                                                                              |                                                      | (81,696 | )      |              |   | (78,316  | )             |          |   | (74,308  | )      
|Proceeds from sales of assets leased back                                  |                                                                              |                                                      |        |        |              |   |         |               |          |   | 20,217   |        
|Proceeds from other disposals of property and equipment                    |                                                                              |                                                      | 701     |        |              |   | 456      |               |          |   | 7,805    |        
|Proceeds from disposal of assets held for sale                             |                                                                              |                                                      | 1,435   |        |              |   |         |               |          |   | 638      |        
|Acquisition of franchisees and interests therein, net of cash
    acquired |                                                                              |                                                      | (4,965  | )      |              |   | (112,450 | )             |          |   | (3,618   | )      
|Acquisition of Montana Mills, net of cash acquired                         |                                                                              |                                                      |        |        |              |   | 4,052    |               |          |   |         |        
|Investments in equity method franchisees                                   |                                                                              |                                                      | (8,399  | )      |              |   | (7,958   | )             |          |   | (3,471   | )      
|Purchases of investments                                                   |                                                                              |                                                      | (32,739 | )      |              |   | (6,000   | )             |          |   |         |        
|Proceeds from sales of investments                                         |                                                                              |                                                      | 33,097  |        |              |   | 33,136   |               |          |   |         |        
|Issuance of notes receivable                                               |                                                                              |                                                      |        |        |              |   | (5,974   | )             |          |   | (724     | )      
|Collection of notes receivable                                             |                                                                              |                                                      | 1,590   |        |              |   | 5,302    |               |          |   | 4,139    |        
|(Increase) decrease in other assets                                        |                                                                              |                                                      | (664    | )      |              |   | (2,197   | )             |          |   | 1,715    |        
|                                                                           |                                                                              |                                                      |         |        |              |   |          |               |         
|                                                                           |                                                                              | Net cash used for investing activities               |         |        | (91,640      | ) |          |               | (169,949 | ) |          |         | (47,607 | )
|                                                                           |                                                                              |                                                      |         |        |              |   |          |               |         
|CASH FLOW FROM FINANCING ACTIVITIES:                                       |                                                                              |                                                      |         |        |              |   |          |               |          |   |          |        
|Proceeds from exercise of stock options                                    |                                                                              |                                                      | 7,140   |        |              |   | 19,514   |               |          |   | 1,175    |        
|Proceeds from exercise of warrants                                         |                                                                              |                                                      |        |        |              |   | 4        |               |          |   |         |        
|Issuance of short-term debt                                                |                                                                              |                                                      |        |        |              |   | 55,000   |               |          |   |         |        
|Issuance of long-term debt                                                 |                                                                              |                                                      | 44,234  |        |              |   | 44,570   |               |          |   | 12,164   |        
|Repayment of short-term debt                                               |                                                                              |                                                      |        |        |              |   | (66,286  | )             |          |   |         |        
|Repayment of long-term debt                                                |                                                                              |                                                      | (4,383  | )      |              |   | (50,296  | )             |          |   | (49,332  | )      
|Net (repayments) borrowings from revolving lines of credit                 |                                                                              |                                                      | (121    | )      |              |   | 79,712   |               |          |   | 1,606    |        
|Issuance of short-term debt  related party                                |                                                                              |                                                      |        |        |              |   | 2,350    |               |          |   |         |        
|Repayment of short-term debt  related party                               |                                                                              |                                                      | (500    | )      |              |   | (3,250   | )             |          |   |         |        
|Debt issuance costs                                                        |                                                                              |                                                      | (194    | )      |              |   | (921     | )             |          |   | (386     | )      
|Net change in book overdraft                                               |                                                                              |                                                      | 2,268   |        |              |   | (3,252   | )             |          |   | 357      |        
|Collection of notes receivable secured by common stock                     |                                                                              |                                                      | 2,022   |        |              |   | 175      |               |          |   | 186      |        
|Cash received from (paid to) minority interests                            |                                                                              |                                                      | (432    | )      |              |   | (1,210   | )             |          |   | 16       |        
|                                                                           |                                                                              |                                                      |         |        |              |   |          |               |         
|                                                                           |                                                                              | Net cash provided by (used for) financing activities |         |        | 50,034       |   |          |               | 76,110   |   |          |         | (34,214 | )
|                                                                           |                                                                              |                                                      |         |        |              |   |          |               |         
|Effect of exchange rate changes on cash                                    |                                                                              |                                                      |        |        |              |   |         |               |          |   | 340      |        
|                                                                           |                                                                              |                                                      |         |        |              |   |          |               |         
|Cash balances of subsidiaries at date of initial consolidation             |                                                                              |                                                      |        |        |              |   |         |               |          |   | 3,217    |        
|                                                                           |                                                                              |                                                      |         |        |              |   |          |               |         
|Net increase (decrease) in cash and cash equivalents                       |                                                                              |                                                      | 10,299  |        |              |   | (11,174  | )             |          |   | 6,657    |        
|Cash and cash equivalents at beginning of year                             |                                                                              |                                                      | 21,904  |        |              |   | 32,203   |               |          |   | 21,029   |        
|                                                                           |                                                                              |                                                      |         |        |              |   |          |               |         
|Cash and cash equivalents at end of year                                   |                                                                              | $                                                    | 32,203  |        |              | $ | 21,029   |               |          | $ | 27,686   |        
|                                                                           |                                                                              |                                                      |         |        |              |   |          |               |         
|Supplemental schedule of non-cash investing and financing
    activities:  |                                                                              |                                                      |         |        |              |   |          |               |          |   |          |        
|                                                                           | Issuance of stock in conjunction with acquisitions                           |                                                      | $       | 30,975 |              |   | $        | 59,031        |          |   | $        |        |        
|                                                                           | Assets acquired under capital leases                                         |                                                      |         | 4,422  |              |   |          | 4,972         |          |   |          | 5,979   |        
|                                                                           | Receipt of promissory notes in connection with sale of assets                |                                                      |         |       |              |   |          | 3,551         |          |   |          |        |        
|                                                                           | Issuance of promissory note in connection with acquisition of
    franchisee |                                                      |         |       |              |   |          | 11,286        |          |   |          |        |        
|                                                                           | Issuance of stock options in exchange for services                           |                                                      |         | 150    |              |   |          |              |          |   |          |        |        
|                                                                           | Issuance of restricted common shares                                         |                                                      |         |       |              |   |          | 10            |          |   |          |        |        



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KRISPY KREME DOUGHNUTS, INC.





CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS
EQUITY


|                                                                            |                                                                                          |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   |         |          |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------- | ------ | - | ------ | - | ------- | ------------ |  | ------------- | ---------- | - | -------- | ------ | ------ | - | ------------ | - | ------ | ------ | - | - | ------- | -------- | - | - | ------- | -------- | -
|                                                                            |                                                                                          |                |        |   |        |   |         |              |  | Accumulated   |            |   |          |        |       
|                                                                            |                                                                                          |                |        |   |        |   |         |              |  | Other         |            |   | Retained |        |        |  
|                                                                            |                                                                                          |                |        |   |        |   |         |              |  | Comprehensive |            |   | Earnings |        |        |  
|                                                                            |                                                                                          | Common         |        |   | Common |   |         | Unearned     |  |               | Notes      |   |          | Income |        |   | (Accumulated |   |        |       
|                                                                            |                                                                                          | Shares         |        |   | Stock  |   |         | Compensation |  |               | Receivable |   |          | (Loss) |        |   | (Deficit)    |   |        | Total  |  
|                                                                            |                                                                                          |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |  
|                                                                            |                                                                                          | (In thousands) |       
|BALANCE AT FEBRUARY 3, 2002 (restated)                                      |                                                                                          |                | 54,271 |   |        | $ | 121,052 |              |  | $             | (186       | ) |          | $      | (2,580 | ) |              | $ | 456    |        |   | $ | 63,468  |          |   | $ | 182,210 |         
|Comprehensive income:                                                       |                                                                                          |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   |         |         
|                                                                            | Net income for the year ended February 2, 2003 (restated)                                |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         | 31,058   |   |   |         | 31,058   |  
|                                                                            | Unrealized holding loss, net of tax benefit of $241                                      |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        | (385   | ) |   |         |          |   |   |         | (385     | )
|                                                                            | Foreign currency translation adjustment, net of income taxes of
    $7                   |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        | 11     |   |   |         |          |   |   |         | 11       |  
|                                                                            | Unrealized loss from cash flow hedge, net of income tax benefit
    of $1,005 (restated) |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        | (1,604 | ) |   |         |          |   |   |         | (1,604   | )
|                                                                            |                                                                                          |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |  
|                                                                            | Total comprehensive income (restated)                                                    |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   |         | 29,080   |  
|Exercise of stock options, including tax benefit of $13,795                 |                                                                                          |                | 1,187  |   |        |   | 20,935  |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   | 20,935  |         
|Issuance of shares in conjunction with acquisition of franchise
    markets |                                                                                          |                | 837    |   |        |   | 30,975  |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   | 30,975  |         
|Amortization of restricted common shares                                    |                                                                                          |                |        |   |        |   |         |              |  |               | 67         |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   | 67      |         
|Issuance of stock options in exchange for services                          |                                                                                          |                |        |   |        |   | 150     |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   | 150     |         
|Collection of notes receivable                                              |                                                                                          |                |        |   |        |   |         |              |  |               |            |   |          |        | 2,022  |   |              |   |        |        |   |   |         |          |   |   | 2,022   |         
|                                                                            |                                                                                          |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |  
|BALANCE AT FEBRUARY 2, 2003 (restated)                                      |                                                                                          |                | 56,295 |   |        |   | 173,112 |              |  |               | (119       | ) |          |        | (558   | ) |              |   | (1,522 | )      |   |   | 94,526  |          |   |   | 265,439 |         
|Comprehensive income:                                                       |                                                                                          |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   |         |         
|                                                                            | Net income for the year ended February 1, 2004 (restated)                                |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         | 48,563   |   |   |         | 48,563   |  
|                                                                            | Unrealized holding loss, net of tax benefit of $71                                       |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        | (113   | ) |   |         |          |   |   |         | (113     | )
|                                                                            | Foreign currency translation adjustment, net of income taxes of
    $15                  |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        | 682    |   |   |         |          |   |   |         | 682      |  
|                                                                            | Unrealized gain from cash flow hedge, net of income taxes of
    $115 (restated)         |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        | 241    |   |   |         |          |   |   |         | 241      |  
|                                                                            |                                                                                          |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |  
|                                                                            | Total comprehensive income (restated)                                                    |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   |         | 49,373   |  
|Exercise of stock options, including tax benefit of $42,806                 |                                                                                          |                | 3,300  |   |        |   | 62,320  |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   | 62,320  |         
|Exercise of warrants                                                        |                                                                                          |                |        |   |        |   | 4       |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   | 4       |         
|Issuance of shares in conjunction with acquisition of business              |                                                                                          |                | 1,247  |   |        |   | 40,491  |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   | 40,491  |         
|Issuance of shares in conjunction with acquisition of franchise
    market  |                                                                                          |                | 444    |   |        |   | 18,540  |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   | 18,540  |         
|Issuance of restricted common shares                                        |                                                                                          |                |        |   |        |   | 10      |              |  |               | (10        | ) |          |        |        |   |              |   |        |        |   |   |         |          |   |   |        |         
|Amortization of restricted common shares                                    |                                                                                          |                |        |   |        |   |         |              |  |               | 67         |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   | 67      |         
|Collection of notes receivable                                              |                                                                                          |                |        |   |        |   |         |              |  |               |            |   |          |        | 175    |   |              |   |        |        |   |   |         |          |   |   | 175     |         
|                                                                            |                                                                                          |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |  
|BALANCE AT FEBRUARY 1, 2004 (restated)                                      |                                                                                          |                | 61,286 |   |        |   | 294,477 |              |  |               | (62        | ) |          |        | (383   | ) |              |   | (712   | )      |   |   | 143,089 |          |   |   | 436,409 |         
|Comprehensive income (loss):                                                |                                                                                          |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   |         |         
|                                                                            | Net loss for the year ended January 30, 2005                                             |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         | (198,339 | ) |   |         | (198,339 | )
|                                                                            | Foreign currency translation adjustment, net of income taxes of
    $620                 |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        | 876    |   |   |         |          |   |   |         | 876      |  
|                                                                            | Unrealized gain from cash flow hedge, net of income taxes of $412                        |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        | 632    |   |   |         |          |   |   |         | 632      |  
|                                                                            |                                                                                          |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |  
|                                                                            | Total comprehensive income (loss)                                                        |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   |         | (196,831 | )
|Exercise of stock options                                                   |                                                                                          |                | 472    |   |        |   | 1,175   |              |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   | 1,175   |         
|Amortization of restricted common shares                                    |                                                                                          |                |        |   |        |   |         |              |  |               | 45         |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   | 45      |         
|Cancellation of restricted common shares                                    |                                                                                          |                | (2     | ) |        |   | (41     | )            |  |               |            |   |          |        |        |   |              |   |        |        |   |   |         |          |   |   | (41     | )       
|Collection of notes receivable                                              |                                                                                          |                |        |   |        |   |         |              |  |               |            |   |          |        | 186    |   |              |   |        |        |   |   |         |          |   |   | 186     |         
|                                                                            |                                                                                          |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |  
|BALANCE AT JANUARY 30, 2005                                                 |                                                                                          |                | 61,756 |   |        | $ | 295,611 |              |  | $             | (17        | ) |          | $      | (197   | ) |              | $ | 796    |        |   | $ | (55,250 | )        |   | $ | 240,943 |         
|                                                                            |                                                                                          |                |        |   |        |   |         |              |  |               |            |   |          |        |        |   |              |   |        |        |  



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KRISPY KREME DOUGHNUTS, INC.





NOTES TO FINANCIAL STATEMENTS


Note 1  Nature of Business and Significant
Accounting Policies


NATURE OF BUSINESS.




BASIS OF CONSOLIDATION AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE.














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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)








REVENUE RECOGNITION.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Company Store Operations 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 Operations 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.                                                                                                                         
|
| |  | KKM&D revenue is derived from the sale of doughnut-making
    equipment, doughnut mix, coffee and supplies needed to operate a
    doughnut store. 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. Revenues for the sale
    of doughnut mix, coffee and supplies are recognized upon
    delivery to the customer.

FISCAL YEAR. 53-week


CASH AND CASH EQUIVALENTS.


INVENTORIES. first-in,


PROPERTY AND EQUIPMENT.




GOODWILL AND OTHER INTANGIBLE ASSETS.


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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)








FAIR VALUE OF FINANCIAL INSTRUMENTS.


ADVERTISING COSTS.


STORE OPENING COSTS.


ASSET IMPAIRMENT.


EARNINGS PER SHARE.


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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                             |                                                                |                  |        |        |            |   |        |          |       |   |          |        |   | 
|---------------------------- | -------------------------------------------------------------- | ---------------- | ------ | ------ | ---------- | - | ------ | -------- | ----- | - | -------- | ------ | - | 
|                             |                                                                | Year Ended       |       
|                             |                                                                |                  |       
|                             |                                                                | Feb. 2,          |        |        | Feb. 1,    |   |        | Jan. 30, |      
|                             |                                                                | 2003             |        |        | 2004       |   |        | 2005     |      
|                             |                                                                |                  |        |        |            |   |        |          |      
|                             |                                                                | (restated)       |        |        | (restated) |   |        |         
|                             |                                                                | (In thousands)   |       
|Numerator: net income (loss) |                                                                | $                | 31,058 |        |            | $ | 48,563 |          |       | $ | (198,339 | )     
|                             |                                                                |                  |        |        |            |   |        |          |      
|Denominator:                 |                                                                |                  |        |        |            |   |        |          |       |   |          |       
|                             | Basic earnings per share-weighted average shares outstanding   |                  |        | 55,093 |            |   |        | 59,188   |       |   |          | 61,626 |  
|                             | Effect of dilutive securities:                                 |                  |        |        |            |   |        |          |       |   |          |        |  
|                             |                                                                | Stock options    |        |        | 4,395      |   |        |          | 3,197 |   |          |        |  | 
|                             |                                                                | Restricted stock |        |        | 4          |   |        |          | 3     |   |          |        |  | 
|                             |                                                                |                  |        |        |            |   |        |          |      
|                             | Diluted earnings per share-weighted average shares outstanding |                  |        | 59,492 |            |   |        | 62,388   |       |   |          | 61,626 |  
|                             |                                                                |                  |        |        |            |   |        |          |      



STOCK-BASED COMPENSATION.


|                                                                                                                           |                                               |                                          |        |     |            |   |         |          |  |   |          |       |  
|-------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | ---------------------------------------- | ------ | --- | ---------- | - | ------- | -------- |  | - | -------- | ----- | -
|                                                                                                                           |                                               | Year Ended                               |       
|                                                                                                                           |                                               |                                          |       
|                                                                                                                           |                                               | Feb. 2,                                  |        |     | Feb. 1,    |   |         | Jan. 30, | 
|                                                                                                                           |                                               | 2003                                     |        |     | 2004       |   |         | 2005     | 
|                                                                                                                           |                                               |                                          |        |     |            |   |         |          | 
|                                                                                                                           |                                               | (restated)                               |        |     | (restated) |   |         |         
|                                                                                                                           |                                               | (In thousands, except per share amounts) |       
|Net income (loss), as reported                                                                                             |                                               | $                                        | 31,058 |     |            | $ | 48,563  |          |  | $ | (198,339 | )    
|Add: Stock-based expense charged to earnings, net of related tax
    effects                                               |                                               |                                          | 31     |     |            |   | 62      |          |  |   |         |      
|Deduct: Stock-based compensation expense determined under fair
    value method for all awards, net of related tax effects |                                               |                                          | (8,653 | )   |            |   | (11,481 | )        |  |   | (13,549  | )    
|                                                                                                                           |                                               |                                          |        |     |            |   |         |          | 
|Pro forma net income (loss)                                                                                                |                                               | $                                        | 22,436 |     |            | $ | 37,144  |          |  | $ | (211,888 | )    
|                                                                                                                           |                                               |                                          |        |     |            |   |         |          | 
|Earnings (loss) per share:                                                                                                 |                                               |                                          |        |     |            |   |         |          |  |   |          |      
|                                                                                                                           | Reported earnings (loss) per share  Basic    |                                          | $      | .56 |            |   | $       | .82      |  |   | $        | (3.22 | )
|                                                                                                                           | Pro forma earnings (loss) per share  Basic   |                                          | $      | .41 |            |   | $       | .63      |  |   | $        | (3.44 | )
|                                                                                                                           | Reported earnings (loss) per share  Diluted  |                                          | $      | .52 |            |   | $       | .78      |  |   | $        | (3.22 | )
|                                                                                                                           | Pro forma earnings (loss) per share  Diluted |                                          | $      | .38 |            |   | $       | .60      |  |   | $        | (3.44 | )

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                             |  |            |         |   |         |  |         |          |  |  |         |  
|---------------------------- |  | ---------- | ------- | - | ------- |  | ------- | -------- |  |  | ------- | -
|                             |  | Year Ended |        
|                             |  |            |        
|                             |  | Feb. 2,    |         |   | Feb. 1, |  |         | Jan. 30, | 
|                             |  | 2003       |         |   | 2004    |  |         | 2005     | 
|                             |  |            |         |   |         |  |         |          | 
|Expected life of option      |  |            | 7 years |   |         |  | 7 years |          |  |  | 7 years |  
|Risk-free interest rate      |  |            | 4.4     | % |         |  | 3.7     | %        |  |  | 3.9     | %
|Expected volatility of stock |  |            | 45.9    | % |         |  | 41.6    | %        |  |  | 45.0    | %
|Expected dividend yield      |  |            |        |   |         |  |        |          |  |  |        |  



|                                        |  |            |            |  |         |   |            |          |  |   |           | 
|--------------------------------------- |  | ---------- | ---------- |  | ------- | - | ---------- | -------- |  | - | --------- | 
|                                        |  | Year Ended |           
|                                        |  |            |           
|                                        |  | Feb. 2,    |            |  | Feb. 1, |   |            | Jan. 30, | 
|                                        |  | 2003       |            |  | 2004    |   |            | 2005     | 
|                                        |  |            |            |  |         |   |            |          | 
|Fair value of each option granted       |  | $          | 18.91      |  |         | $ | 19.84      |          |  | $ | 7.71      | 
|Total number of options granted         |  |            | 1,186,200  |  |         |   | 1,829,200  |          |  |   | 1,113,500 | 
|Total fair value of all options granted |  | $          | 22,431,000 |  |         | $ | 36,291,300 |          |  | $ | 8,585,100 | 

CONCENTRATION OF CREDIT RISK.




SELF-INSURANCE RISKS.


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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




DERIVATIVE FINANCIAL INSTRUMENTS AND DERIVATIVE COMMODITY
INSTRUMENTS.


FOREIGN CURRENCY TRANSLATION.


COMPREHENSIVE INCOME. mark-to


|                                               |                                                     |                |        |        |          |   |       |        |  
|---------------------------------------------- | --------------------------------------------------- | -------------- | ------ | ------ | -------- | - | ----- | ------ | -
|                                               |                                                     | Feb. 1,        |        |        | Jan. 30, |  
|                                               |                                                     | 2004           |        |        | 2005     |  
|                                               |                                                     |                |        |        |          |  
|                                               |                                                     | (restated)     |        |        |         
|                                               |                                                     | (In thousands) |       
|Accumulated other comprehensive income (loss): |                                                     |                |        |        |          |   |       |       
|                                               | Unrealized (loss) on cash flow hedges               |                | $      | (2,252 | )        |   | $     | (1,209 | )
|                                               | Cumulative foreign currency translation adjustments |                |        | 1,076  |          |   |       | 2,573  |  
|                                               |                                                     |                |        |        |          |  
|                                               |                                                     |                | (1,176 | )      |          |   | 1,364 |       
|                                               | Less: deferred income taxes                         |                |        | 464    |          |   |       | (568   | )
|                                               |                                                     |                |        |        |          |  
|                                               |                                                     | $              | (712   | )      |          | $ | 796   |       
|                                               |                                                     |                |        |        |          |  

USE OF ESTIMATES.


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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


RECENT ACCOUNTING PRONOUNCEMENTS






03-13, 03-13). 03-13 03-13




Note 2  Restatement of Financial
Statements




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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




10-K


8-K




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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)






| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Comparison of restated financial statements to financial
    statements as originally reported



|                                                           |                                   |                                       |         |      |                         |   |         |            |         |   |          |      |         |              |         |      |         |   |         |      |         |  
|---------------------------------------------------------- | --------------------------------- | ------------------------------------- | ------- | ---- | ----------------------- | - | ------- | ---------- | ------- | - | -------- | ---- | ------- | ------------ | ------- | ---- | ------- | - | ------- | ---- | ------- | -
|                                                           |                                   | Year Ended Feb. 2, 2003               |         |      | Year Ended Feb. 1, 2004 |  
|                                                           |                                   |                                       |         |      |                         |  
|                                                           |                                   | As                                    |         |      |                         |   | As      |            |         |  
|                                                           |                                   | Originally                            |         |      | As                      |   |         | Originally |         |   | As       |      |         | As           |        
|                                                           |                                   | Reported                              |         |      | Restated                |   |         | Reported   |         |   | Restated |      |         | Reclassified |        
|                                                           |                                   |                                       |         |      |                         |   |         |            |         |   |          |      |         |              |        
|                                                           |                                   | (In thousands)                        |        
|Revenues                                                   |                                   | $                                     | 491,549 |      |                         | $ | 490,728 |            |         | $ | 665,592  |      |         | $            | 656,092 |      |         | $ | 649,345 |     
|                                                           | Operating expenses:               |                                       |         |      |                         |   |         |            |         |   |          |      |         |              |         |      |         |   |         |      |        
|                                                           |                                   | Direct operating expenses             |         |      | 381,489                 |   |         |            | 380,644 |   |          |      | 507,396 |              |         |      | 501,885 |   |         |      | 493,650 |  
|                                                           |                                   | General and administrative expenses   |         |      | 28,897                  |   |         |            | 30,073  |   |          |      | 36,912  |              |         |      | 45,230  |   |         |      | 45,230  |  
|                                                           |                                   | Depreciation and amortization expense |         |      | 12,271                  |   |         |            | 14,675  |   |          |      | 19,723  |              |         |      | 22,808  |   |         |      | 22,309  |  
|                                                           |                                   | Arbitration award                     |         |      | 9,075                   |   |         |            | 9,075   |   |          |      | (525    | )            |         |      | (525    | ) |         |      | (525    | )
|                                                           |                                   |                                       |         |      |                         |   |         |            |         |   |          |      |         |              |        
|Operating income                                           |                                   |                                       | 59,817  |      |                         |   | 56,261  |            |         |   | 102,086  |      |         |              | 86,694  |      |         |   | 88,681  |     
|Interest income                                            |                                   |                                       | 1,966   |      |                         |   | 1,966   |            |         |   | 921      |      |         |              | 921     |      |         |   | 906     |     
|Interest expense                                           |                                   |                                       | (1,781  | )    |                         |   | (1,891  | )          |         |   | (4,409   | )    |         |              | (4,509  | )    |         |   | (4,509  | )   
|Equity in losses of equity method franchisees              |                                   |                                       | (2,008  | )    |                         |   | (2,088  | )          |         |   | (1,836   | )    |         |              | (2,242  | )    |         |   | (2,242  | )   
|Minority interests in results of consolidated subsidiaries |                                   |                                       | (2,287  | )    |                         |   | (2,187  | )          |         |   | (2,072   | )    |         |              | (1,898  | )    |         |   | (1,898  | )   
|Other income and (expense), net                            |                                   |                                       | (934    | )    |                         |   | (1,284  | )          |         |   | (13      | )    |         |              | 2,053   |      |         |   | 2,053   |     
|                                                           |                                   |                                       |         |      |                         |   |         |            |         |   |          |      |         |              |        
|Income from continuing operations before income taxes      |                                   |                                       | 54,773  |      |                         |   | 50,777  |            |         |   | 94,677   |      |         |              | 81,019  |      |         |   | 82,991  |     
|Provision for income taxes                                 |                                   |                                       | 21,295  |      |                         |   | 19,719  |            |         |   | 37,590   |      |         |              | 32,456  |      |         |   | 33,146  |     
|                                                           |                                   |                                       |         |      |                         |   |         |            |         |   |          |      |         |              |        
|Income from continuing operations                          |                                   |                                       | 33,478  |      |                         |   | 31,058  |            |         |   | 57,087   |      |         |              | 48,563  |      |         |   | 49,845  |     
|Discontinued operations                                    |                                   |                                       |        |      |                         |   |        |            |         |   |         |      |         |              |        |      |         |   | (1,282  | )   
|                                                           |                                   |                                       |         |      |                         |   |         |            |         |   |          |      |         |              |        
|Net income                                                 |                                   | $                                     | 33,478  |      |                         | $ | 31,058  |            |         | $ | 57,087   |      |         | $            | 48,563  |      |         | $ | 48,563  |     
|                                                           |                                   |                                       |         |      |                         |   |         |            |         |   |          |      |         |              |        
|Earnings per common share  basic:                         |                                   |                                       |         |      |                         |   |         |            |         |   |          |      |         |              |         |      |         |   |         |     
|                                                           | Income from continuing operations |                                       | $       | 0.61 |                         |   | $       | 0.56       |         |   | $        | 0.96 |         |              | $       | 0.82 |         |   | $       | 0.84 |        
|                                                           | Discontinued operations           |                                       |         |     |                         |   |         |           |         |   |          |     |         |              |         |     |         |   |         | (.02 | )      
|                                                           |                                   |                                       |         |      |                         |   |         |            |         |   |          |      |         |              |        
|                                                           | Net income                        |                                       | $       | 0.61 |                         |   | $       | 0.56       |         |   | $        | 0.96 |         |              | $       | 0.82 |         |   | $       | 0.82 |        
|                                                           |                                   |                                       |         |      |                         |   |         |            |         |   |          |      |         |              |        
|Earnings per common share  diluted:                       |                                   |                                       |         |      |                         |   |         |            |         |   |          |      |         |              |         |      |         |   |         |     
|                                                           | Income from continuing operations |                                       | $       | 0.56 |                         |   | $       | 0.52       |         |   | $        | 0.92 |         |              | $       | 0.78 |         |   | $       | 0.80 |        
|                                                           | Discontinued operations           |                                       |         |     |                         |   |         |           |         |   |          |     |         |              |         |     |         |   |         | (.02 | )      
|                                                           |                                   |                                       |         |      |                         |   |         |            |         |   |          |      |         |              |        
|                                                           | Net income                        |                                       | $       | 0.56 |                         |   | $       | 0.52       |         |   | $        | 0.92 |         |              | $       | 0.78 |         |   | $       | 0.78 |        
|                                                           |                                   |                                       |         |      |                         |   |         |            |         |   |          |      |         |              |        

91



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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                                              |                                            |                |         |         |          |   |         |         | 
|------------------------------------------------------------- | ------------------------------------------ | -------------- | ------- | ------- | -------- | - | ------- | ------- | 
|                                                              |                                            | Feb. 1, 2004   |        
|                                                              |                                            |                |        
|                                                              |                                            | As             |         |         |         
|                                                              |                                            | Originally     |         |         | As       |  
|                                                              |                                            | Reported       |         |         | Restated |  
|                                                              |                                            |                |         |         |          |  
|                                                              |                                            | (In thousands) |        
|ASSETS                                                       
|CURRENT ASSETS:                                               |                                            |                |         |         |          |   |         |        
|Cash and cash equivalents                                     |                                            | $              | 21,029  |         |          | $ | 21,029  |        
|Receivables                                                   |                                            |                | 46,213  |         |          |   | 45,576  |        
|Accounts and notes receivable  related parties               |                                            |                | 20,940  |         |          |   | 18,270  |        
|Inventories                                                   |                                            |                | 28,864  |         |          |   | 29,821  |        
|Income taxes refundable                                       |                                            |                | 7,973   |         |          |   | 7,973   |        
|Deferred income taxes                                         |                                            |                | 6,453   |         |          |   | 7,405   |        
|Other current assets                                          |                                            |                | 7,172   |         |          |   | 7,421   |        
|                                                              |                                            |                |         |         |          |  
|                                                              | Total current assets                       |                |         | 138,644 |          |   |         | 137,495 | 
|Property and equipment                                        |                                            |                | 284,716 |         |          |   | 287,492 |        
|Non-current portion of notes receivable  related
    parties |                                            |                | 7,609   |         |          |   | 6,561   |        
|Investments in equity method franchisees                      |                                            |                | 12,426  |         |          |   | 14,584  |        
|Goodwill and other intangible assets                          |                                            |                | 207,724 |         |          |   | 197,162 |        
|Deferred income taxes                                         |                                            |                |        |         |          |   | 2,941   |        
|Other assets                                                  |                                            |                | 9,545   |         |          |   | 10,368  |        
|                                                              |                                            |                |         |         |          |  
|                                                              | Total assets                               |                | $       | 660,664 |          |   | $       | 656,603 | 
|                                                              |                                            |                |         |         |          |  
|                                                             
|LIABILITIES AND SHAREHOLDERS EQUITY                         
|CURRENT LIABILITIES:                                          |                                            |                |         |         |          |   |         |        
|Current maturities of long-term debt                          |                                            | $              | 2,861   |         |          | $ | 8,142   |        
|Book overdraft                                                |                                            |                | 8,123   |         |          |   | 8,123   |        
|Accounts payable                                              |                                            |                | 19,107  |         |          |   | 19,107  |        
|Accrued expenses                                              |                                            |                | 23,402  |         |          |   | 23,302  |        
|                                                              |                                            |                |         |         |          |  
|                                                              | Total current liabilities                  |                |         | 53,493  |          |   |         | 58,674  | 
|                                                              |                                            |                |         |         |          |  
|Long-term debt, less current maturities                       |                                            |                | 135,056 |         |          |   | 137,114 |        
|Deferred income taxes                                         |                                            |                | 6,417   |         |          |   |        |        
|Other long-term obligations                                   |                                            |                | 11,168  |         |          |   | 22,258  |        
|Minority interest in consolidated franchisees                 |                                            |                | 2,323   |         |          |   | 2,148   |        
|SHAREHOLDERS EQUITY:                                         |                                            |                |         |         |          |   |         |        
|Preferred stock                                               |                                            |                |        |         |          |   |        |        
|Common stock                                                  |                                            |                | 294,477 |         |          |   | 294,477 |        
|Unearned compensation                                         |                                            |                | (62     | )       |          |   | (62     | )      
|Notes receivable secured by common stock                      |                                            |                | (383    | )       |          |   | (383    | )      
|Accumulated other comprehensive loss                          |                                            |                | (1,315  | )       |          |   | (712    | )      
|Retained earnings                                             |                                            |                | 159,490 |         |          |   | 143,089 |        
|                                                              |                                            |                |         |         |          |  
|                                                              | Total shareholders equity                 |                |         | 452,207 |          |   |         | 436,409 | 
|                                                              |                                            |                |         |         |          |  
|                                                              | Total liabilities and shareholders equity |                | $       | 660,664 |          |   | $       | 656,603 | 
|                                                              |                                            |                |         |         |          |  

92



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##### Table of Contents



KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                                                           |                                                          |                                           |         |        |                         |   |         |            |         |   |          |         |          |   |          |         |          |  
|-------------------------------------------------------------------------- | -------------------------------------------------------- | ----------------------------------------- | ------- | ------ | ----------------------- | - | ------- | ---------- | ------- | - | -------- | ------- | -------- | - | -------- | ------- | -------- | -
|                                                                           |                                                          | Year Ended Feb. 2, 2003                   |         |        | Year Ended Feb. 1, 2004 |  
|                                                                           |                                                          |                                           |         |        |                         |  
|                                                                           |                                                          | As                                        |         |        |                         |   | As      |            |         |  
|                                                                           |                                                          | Originally                                |         |        | As                      |   |         | Originally |         |   | As       |        
|                                                                           |                                                          | Reported                                  |         |        | Restated                |   |         | Reported   |         |   | Restated |        
|                                                                           |                                                          |                                           |         |        |                         |   |         |            |         |   |          |        
|                                                                           |                                                          | (In thousands)                            |        
|CASH FLOW FROM OPERATING ACTIVITIES:                                       |                                                          |                                           |         |        |                         |   |         |            |         |   |          |         |          |   |          |        
|Net income                                                                 |                                                          | $                                         | 33,478  |        |                         | $ | 31,058  |            |         | $ | 57,087   |         |          | $ | 48,563   |        
|Items not requiring cash:                                                  |                                                          |                                           |         |        |                         |   |         |            |         |   |          |         |          |   |          |        
|                                                                           | Depreciation and amortization                            |                                           |         | 12,271 |                         |   |         | 14,675     |         |   |          | 19,723  |          |   |          | 22,806  |         
|                                                                           | Deferred income taxes                                    |                                           |         | 1,632  |                         |   |         | 56         |         |   |          | 1,643   |          |   |          | (3,491  | )       
|                                                                           | Deferred rent expense                                    |                                           |         |       |                         |   |         | 821        |         |   |          |        |          |   |          | 849     |         
|                                                                           | Loss on disposal of property and equipment               |                                           |         | 934    |                         |   |         | 934        |         |   |          | 939     |          |   |          | 939     |         
|                                                                           | Provision for doubtful accounts, net of chargeoffs       |                                           |         | 271    |                         |   |         | 271        |         |   |          | (188    | )        |   |          | (305    | )       
|                                                                           | Tax benefit from exercise of nonqualified stock options  |                                           |         | 13,795 |                         |   |         | 13,795     |         |   |          | 42,806  |          |   |          | 35,771  |         
|                                                                           | Minority interest in results of consolidated franchisees |                                           |         | 2,287  |                         |   |         | 2,187      |         |   |          | 2,072   |          |   |          | 1,898   |         
|                                                                           | Equity in losses of equity method franchisees            |                                           |         | 2,008  |                         |   |         | 2,088      |         |   |          | 1,836   |          |   |          | 2,242   |         
|                                                                           | Cash distributions from equity method franchisees        |                                           |         |       |                         |   |         | 520        |         |   |          |        |          |   |          | 1,582   |         
|                                                                           | Other                                                    |                                           |         | 67     |                         |   |         | 417        |         |   |          | 67      |          |   |          | (2,658  | )       
|Change in assets and liabilities:                                          |                                                          |                                           |         |        |                         |   |         |            |         |   |          |         |          |   |          |        
|                                                                           | Receivables                                              |                                           |         | (7,661 | )                       |   |         | (6,978     | )       |   |          | (17,441 | )        |   |          | (18,729 | )       
|                                                                           | Inventories                                              |                                           |         | (7,866 | )                       |   |         | (8,516     | )       |   |          | (3,804  | )        |   |          | (4,068  | )       
|                                                                           | Other current assets                                     |                                           |         | (331   | )                       |   |         | (331       | )       |   |          | (1,047  | )        |   |          | (965    | )       
|                                                                           | Income taxes                                             |                                           |         | 571    |                         |   |         | 571        |         |   |          | (6,010  | )        |   |          | 1,025   |         
|                                                                           | Accounts payable and accrued expenses                    |                                           |         | (254   | )                       |   |         | 742        |         |   |          | (5,773  | )        |   |          | (7,117  | )       
|                                                                           | Other long-term obligations                              |                                           |         | (166   | )                       |   |         | (405       | )       |   |          | 3,643   |          |   |          | 4,323   |         
|                                                                           |                                                          |                                           |         |        |                         |   |         |            |         |   |          |        
|                                                                           |                                                          | Net cash provided by operating activities |         |        | 51,036                  |   |         |            | 51,905  |   |          |         | 95,553   |   |          |         | 82,665   |  
|                                                                           |                                                          |                                           |         |        |                         |   |         |            |         |   |          |        
|CASH FLOW FROM INVESTING ACTIVITIES:                                       |                                                          |                                           |         |        |                         |   |         |            |         |   |          |         |          |   |          |        
|Purchase of property and equipment                                         |                                                          |                                           | (83,196 | )      |                         |   | (81,696 | )          |         |   | (79,649  | )       |          |   | (78,316  | )      
|Proceeds from disposal of property and equipment                           |                                                          |                                           | 701     |        |                         |   | 701     |            |         |   |         |         |          |   | 456      |        
|Proceeds from disposal of assets held for sale                             |                                                          |                                           | 1,435   |        |                         |   | 1,435   |            |         |   |         |         |          |   |         |        
|Acquisition of franchisees and interests therein, net of cash
    acquired |                                                          |                                           | (4,965  | )      |                         |   | (4,965  | )          |         |   | (122,352 | )       |          |   | (112,450 | )      
|Acquisition of Montana Mills, net of cash acquired                         |                                                          |                                           |        |        |                         |   |        |            |         |   | 4,052    |         |          |   | 4,052    |        
|Investments in equity method franchisees                                   |                                                          |                                           | (7,869  | )      |                         |   | (8,399  | )          |         |   | (7,377   | )       |          |   | (7,958   | )      
|Purchases of investments                                                   |                                                          |                                           | (32,739 | )      |                         |   | (32,739 | )          |         |   | (6,000   | )       |          |   | (6,000   | )      
|Proceeds from sales of investments                                         |                                                          |                                           | 33,097  |        |                         |   | 33,097  |            |         |   | 33,136   |         |          |   | 33,136   |        
|Issuance of notes receivable                                               |                                                          |                                           |        |        |                         |   |        |            |         |   | (6,613   | )       |          |   | (5,974   | )      
|Collection of notes receivable                                             |                                                          |                                           | 1,590   |        |                         |   | 1,590   |            |         |   | 1,147    |         |          |   | 5,302    |        
|Increase in other assets                                                   |                                                          |                                           | (1,038  | )      |                         |   | (664    | )          |         |   | (2,585   | )       |          |   | (2,197   | )      
|                                                                           |                                                          |                                           |         |        |                         |   |         |            |         |   |          |        
|                                                                           |                                                          | Net cash used for investing activities    |         |        | (92,984                 | ) |         |            | (91,640 | ) |          |         | (186,241 | ) |          |         | (169,949 | )
|                                                                           |                                                          |                                           |         |        |                         |   |         |            |         |   |          |        
|CASH FLOW FROM FINANCING ACTIVITIES:                                       |                                                          |                                           |         |        |                         |   |         |            |         |   |          |         |          |   |          |        
|Proceeds from exercise of stock options                                    |                                                          |                                           | 7,140   |        |                         |   | 7,140   |            |         |   | 19,514   |         |          |   | 19,514   |        
|Proceeds from exercise of warrants                                         |                                                          |                                           |        |        |                         |   |        |            |         |   | 4        |         |          |   | 4        |        
|Issuance of short-term debt                                                |                                                          |                                           |        |        |                         |   |        |            |         |   | 55,000   |         |          |   | 55,000   |        
|Issuance of long-term debt                                                 |                                                          |                                           | 44,234  |        |                         |   | 44,234  |            |         |   | 44,570   |         |          |   | 44,570   |        
|Repayment of short-term debt                                               |                                                          |                                           |        |        |                         |   |        |            |         |   | (66,286  | )       |          |   | (66,286  | )      
|Repayment of long-term debt                                                |                                                          |                                           | (2,170  | )      |                         |   | (4,383  | )          |         |   | (46,892  | )       |          |   | (50,296  | )      
|Net (repayments) borrowings from revolving lines of credit                 |                                                          |                                           | (121    | )      |                         |   | (121    | )          |         |   | 79,712   |         |          |   | 79,712   |        
|Issuance of short-term debt  related party                                |                                                          |                                           |        |        |                         |   |        |            |         |   | 2,350    |         |          |   | 2,350    |        
|Repayment of short-term debt  related party                               |                                                          |                                           | (500    | )      |                         |   | (500    | )          |         |   | (3,250   | )       |          |   | (3,250   | )      
|Debt issuance costs                                                        |                                                          |                                           | (194    | )      |                         |   | (194    | )          |         |   | (921     | )       |          |   | (921     | )      
|Net change in book overdraft                                               |                                                          |                                           | 2,268   |        |                         |   | 2,268   |            |         |   | (3,252   | )       |          |   | (3,252   | )      
|Collection of notes receivable secured by common stock                     |                                                          |                                           | 2,022   |        |                         |   | 2,022   |            |         |   | 175      |         |          |   | 175      |        
|Cash paid to minority interests                                            |                                                          |                                           | (432    | )      |                         |   | (432    | )          |         |   | (1,210   | )       |          |   | (1,210   | )      
|                                                                           |                                                          |                                           |         |        |                         |   |         |            |         |   |          |        
|                                                                           |                                                          | Net cash provided by financing activities |         |        | 52,247                  |   |         |            | 50,034  |   |          |         | 79,514   |   |          |         | 76,110   |  
|                                                                           |                                                          |                                           |         |        |                         |   |         |            |         |   |          |        
|Net increase (decrease) in cash and cash equivalents                       |                                                          |                                           | 10,299  |        |                         |   | 10,299  |            |         |   | (11,174  | )       |          |   | (11,174  | )      
|Cash and cash equivalents at beginning of year                             |                                                          |                                           | 21,904  |        |                         |   | 21,904  |            |         |   | 32,203   |         |          |   | 32,203   |        
|                                                                           |                                                          |                                           |         |        |                         |   |         |            |         |   |          |        
|Cash and cash equivalents at end of year                                   |                                                          | $                                         | 32,203  |        |                         | $ | 32,203  |            |         | $ | 21,029   |         |          | $ | 21,029   |        
|                                                                           |                                                          |                                           |         |        |                         |   |         |            |         |   |          |        

93



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##### Table of Contents



KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


Effects of restatement
adjustments






|                                                             |                                                                                                                 |                |        |        |            |   |        |                  |   |   |            |        |   |         |        |        |         |   |         |         |   |   |         |      |   |   |         |        |  
|------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------- | -------------- | ------ | ------ | ---------- | - | ------ | ---------------- | - | - | ---------- | ------ | - | ------- | ------ | ------ | ------- | - | ------- | ------- | - | - | ------- | ---- | - | - | ------- | ------ | -
|                                                             |                                                                                                                 | Retained       |        |        | Net Income |   |        | Operating Income |   |   | Revenues   |       
|                                                             |                                                                                                                 | Earnings       |        |        | Year Ended |   |        | Year Ended       |   |   | Year Ended |       
|                                                             |                                                                                                                 | as of          |        |        |            |   |        |                  |   |   |            |       
|                                                             |                                                                                                                 | Feb. 4,        |        |        | Feb. 2,    |   |        | Feb. 1,          |   |   | Feb. 2,    |        |   | Feb. 1, |        |        | Feb. 2, |   |         | Feb. 1, |  
|                                                             |                                                                                                                 | 2002           |        |        | 2003       |   |        | 2004             |   |   | 2003       |        |   | 2004    |        |        | 2003    |   |         | 2004    |  
|                                                             |                                                                                                                 |                |        |        |            |   |        |                  |   |   |            |        |   |         |        |        |         |   |         |         |  
|                                                             |                                                                                                                 | (In thousands) |       
|As originally reported                                       |                                                                                                                 | $              | 68,925 |        |            | $ | 33,478 |                  |   | $ | 57,087     |        |   | $       | 59,817 |        |         | $ | 102,086 |         |   | $ | 491,549 |      |   | $ | 665,592 |       
|                                                             |                                                                                                                 |                |        |        |            |   |        |                  |   |   |            |        |   |         |        |        |         |   |         |         |  
|Restatement adjustments:                                     |                                                                                                                 |                |        |        |            |   |        |                  |   |   |            |        |   |         |        |        |         |   |         |         |   |   |         |      |   |   |         |       
|                                                             | Revenue recognition on pre-acquisition sales to acquired
    franchisee ($.02 per share)                        |                |        |       |            |   |        |                 |   |   |            | (1,113 | ) |         |        |       |         |   |         | (1,840  | ) |   |         |     |   |   |         | (6,134 | )
|                                                             | Revenue recognition on equipment sales ($.01 per share in
    fiscal 2004)                                      |                |        | (52    | )          |   |        | (192             | ) |   |            | (703   | ) |         |        | (317   | )       |   |         | (1,163  | ) |   |         | (967 | ) |   |         | (2,119 | )
|                                                             | Equipment sales associated with franchise acquisition
    ($.01 per share)                                      |                |        |       |            |   |        |                 |   |   |            | (365   | ) |         |        |       |         |   |         | (604    | ) |   |         |     |   |   |         | (744   | )
|                                                             | Compensation expense associated with acquired franchises
    ($.04 per share)                                   |                |        |       |            |   |        |                 |   |   |            | (2,663 | ) |         |        |       |         |   |         | (4,401  | ) |   |         |     |   |   |         |       |  
|                                                             | Acquisition premium paid to owner of acquired franchise
    ($.02 per share)                                    |                |        |       |            |   |        |                 |   |   |            | (1,130 | ) |         |        |       |         |   |         | (1,867  | ) |   |         |     |   |   |         |       |  
|                                                             | Management fee associated with acquired franchise ($.01 per
    share)                                          |                |        |       |            |   |        |                 |   |   |            | (361   | ) |         |        |       |         |   |         | (597    | ) |   |         |     |   |   |         |       |  
|                                                             | Other payments associated with acquired franchise ($.01 per
    share)                                          |                |        |       |            |   |        |                 |   |   |            | (694   | ) |         |        |       |         |   |         | (1,147  | ) |   |         |     |   |   |         |       |  
|                                                             | Lease and depreciation accounting ($.01 per share in fiscal
    2003 and $.01 per share in fiscal 2004)         |                |        | (1,970 | )          |   |        | (785             | ) |   |            | (924   | ) |         |        | (1,296 | )       |   |         | (1,526  | ) |   |         |     |   |   |         |       |  
|                                                             | Commodity futures contracts ($.01 per share in fiscal 2004)                                                     |                |        | (25    | )          |   |        | (78              | ) |   |            | 726    |   |         |        | (129   | )       |   |         | 1,200   |   |   |         |     |   |   |         |       |  
|                                                             | Intercompany profit on sales of equipment ($.01 per share
    in fiscal 2003 and $.01 per share in fiscal 2004) |                |        | (523   | )          |   |        | (499             | ) |   |            | (448   | ) |         |        | (825   | )       |   |         | (741    | ) |   |         |     |   |   |         |       |  
|                                                             | Vacation pay                                                                                                    |                |        | (1,749 | )          |   |        | (173             | ) |   |            | (175   | ) |         |        | (285   | )       |   |         | (290    | ) |   |         |     |   |   |         |       |  
|                                                             | Elimination of initial franchise fees charged to equity method
    franchisees                                  |                |        | (59    | )          |   |        | (89              | ) |   |            | (207   | ) |         |        | (147   | )       |   |         | (342    | ) |   |         |     |   |   |         |       |  
|                                                             | Capitalized trademark costs                                                                                     |                |        | (167   | )          |   |        | (226             | ) |   |            | (235   | ) |         |        | (374   | )       |   |         | (388    | ) |   |         |     |   |   |         |       |  
|                                                             | Charitable contributions ($.01 per share in 2003)                                                               |                |        | (343   | )          |   |        | (324             | ) |   |            | (16    | ) |         |        | (535   | )       |   |         | (27     | ) |   |         |     |   |   |         |       |  
|                                                             | Equipment loss provision ( $.01 per share)                                                                      |                |        |       |            |   |        |                 |   |   |            | (628   | ) |         |        |       |         |   |         | (1,039  | ) |   |         |     |   |   |         |       |  
|                                                             | Sale of stores to franchisee ($.03 per share)                                                                   |                |        |       |            |   |        |                 |   |   |            | 1,649  |   |         |        |       |         |   |         |        |   |   |         |     |   |   |         |       |  
|                                                             | Foreign currency translation and transactions ($.01 per
    share)                                              |                |        |       |            |   |        |                 |   |   |            | (659   | ) |         |        |       |         |   |         |        |   |   |         |     |   |   |         |       |  
|                                                             | Contingent proceeds related to sale of franchise                                                                |                |        | (394   | )          |   |        | (212             | ) |   |            |       |   |         |        |       |         |   |         |        |   |   |         |     |   |   |         |       |  
|                                                             | Other adjustments                                                                                               |                |        | (175   | )          |   |        | 158              |   |   |            | (578   | ) |         |        | 352    |         |   |         | (620    | ) |   |         | 146  |   |   |         | (503   | )
|                                                             |                                                                                                                 |                |        |        |            |   |        |                  |   |   |            |        |   |         |        |        |         |   |         |         |  
|                                                             | Total adjustments                                                                                               |                |        | (5,457 | )          |   |        | (2,420           | ) |   |            | (8,524 | ) |         |        | (3,556 | )       |   |         | (15,392 | ) |   |         | (821 | ) |   |         | (9,500 | )
|                                                             |                                                                                                                 |                |        |        |            |   |        |                  |   |   |            |        |   |         |        |        |         |   |         |         |  
|As restated                                                  |                                                                                                                 |                | 63,468 |        |            |   | 31,058 |                  |   |   | 48,563     |        |   |         | 56,261 |        |         |   | 86,694  |         |   |   | 490,728 |      |   |   | 656,092 |       
|Reclassification of Montana Mills to discontinued operations |                                                                                                                 |                |       |        |            |   |       |                  |   |   |           |        |   |         |       |        |         |   | 1,987   |         |   |   |        |      |   |   | (6,747  | )     
|                                                             |                                                                                                                 |                |        |        |            |   |        |                  |   |   |            |        |   |         |        |        |         |   |         |         |  
|As reclassified                                              |                                                                                                                 | $              | 63,468 |        |            | $ | 31,058 |                  |   | $ | 48,563     |        |   | $       | 56,261 |        |         | $ | 88,681  |         |   | $ | 490,728 |      |   | $ | 649,345 |       
|                                                             |                                                                                                                 |                |        |        |            |   |        |                  |   |   |            |        |   |         |        |        |         |   |         |         |  

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


Description of restatement
adjustments






| |                                                                        
| | -----------------------------------------------------------------------
| | Revenue Recognition on Pre-Acquisition Sales to Acquired
    Franchisee









| |                                       
| | --------------------------------------
| | Revenue Recognition on Equipment Sales





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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




00-21, 00-21)






| |                                                       
| | ------------------------------------------------------
| | Equipment Sales Associated With Franchise Acquisitions





| |                                                         
| | --------------------------------------------------------
| | Compensation Expense Associated With Acquired Franchises



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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


95-8,






| |                                                        
| | -------------------------------------------------------
| | Acquisition Premium Paid to Owner of Acquired Franchise

85-6, 85-6),




| |                                                  
| | -------------------------------------------------
| | Management Fee Associated With Acquired Franchise





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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)






| |                                                  
| | -------------------------------------------------
| | Other Payments Associated With Acquired Franchise







85-6,




| |                                  
| | ---------------------------------
| | Lease and Depreciation Accounting



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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)








| |                            
| | ---------------------------
| | Commodity Futures Contracts







| |                                          
| | -----------------------------------------
| | Intercompany Profit on Sales of Equipment





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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |             
| | ------------
| | Vacation pay





| |                                                                               
| | ------------------------------------------------------------------------------
| | Elimination of Initial Franchise Fees Charged to Equity
    Method Franchisees







| |                            
| | ---------------------------
| | Capitalized Trademark Costs







| |                         
| | ------------------------
| | Charitable Contributions





| |                         
| | ------------------------
| | Equipment Loss Provision





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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                             
| | ----------------------------
| | Sale of Stores to Franchisee







| |                                              
| | ---------------------------------------------
| | Foreign Currency Translation and Transactions





| |                                                 
| | ------------------------------------------------
| | Contingent Proceeds Related to Sale of Franchise





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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)






| |                              
| | -----------------------------
| | Other Restatement Adjustments





Note 3  Business Conditions, Uncertainties
and Liquidity








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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


















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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




10-Q 10-K


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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|         |            
|-------- | -----------
|Note 4  | Receivables



|                                                              |                                                    |                                        |        |        |          |   |        |         |        |  
|------------------------------------------------------------- | -------------------------------------------------- | -------------------------------------- | ------ | ------ | -------- | - | ------ | ------- | ------ | -
|                                                              |                                                    | Feb. 1,                                |        |        | Jan. 30, |  
|                                                              |                                                    | 2004                                   |        |        | 2005     |  
|                                                              |                                                    |                                        |        |        |          |  
|                                                              |                                                    | (restated)                             |        |        |         
|                                                              |                                                    | (In thousands)                         |       
|Trade receivables:                                            |                                                    |                                        |        |        |          |   |        |        
|                                                              | Wholesale doughnut customers                       |                                        | $      | 28,200 |          |   | $      | 21,743  |       
|                                                              | Unaffiliated franchisees                           |                                        |        | 17,889 |          |   |        | 18,897  |       
|                                                              | Current portion of notes receivable                |                                        |        | 752    |          |   |        | 937     |       
|                                                              | Less  allowance for doubtful accounts             |                                        |        | (1,265 | )        |   |        | (11,379 | )     
|                                                              |                                                    |                                        |        |        |          |  
|                                                              |                                                    | $                                      | 45,576 |        |          | $ | 30,198 |        
|                                                              |                                                    |                                        |        |        |          |  
|Receivables from related parties:                             |                                                    |                                        |        |        |          |   |        |        
|                                                              | Equity Method Franchisees (Notes 1, 5, 19 and 21): |                                        |        |        |          |   |        |         |       
|                                                              |                                                    | Trade                                  |        | $      | 15,900   |   |        | $       | 12,804 |  
|                                                              |                                                    | Current portion of notes receivable    |        |        | 312      |   |        |         | 2,000  |  
|                                                              |                                                    | Less  allowance for doubtful accounts |        |        |         |   |        |         | (1,105 | )
|                                                              |                                                    |                                        |        |        |          |  
|                                                              |                                                    |                                        | 16,212 |        |          |   | 13,699 |        
|                                                              |                                                    |                                        |        |        |          |  
|                                                              | Franchisees owned by Directors emeriti (Note 21):  |                                        |        |        |          |   |        |         |       
|                                                              |                                                    | Trade                                  |        |        | 1,935    |   |        |         | 1,669  |  
|                                                              |                                                    | Current portion of notes receivable    |        |        | 123      |   |        |         | 142    |  
|                                                              |                                                    |                                        |        |        |          |  
|                                                              |                                                    |                                        | 2,058  |        |          |   | 1,811  |        
|                                                              |                                                    |                                        |        |        |          |  
|                                                              |                                                    | $                                      | 18,270 |        |          | $ | 15,510 |        
|                                                              |                                                    |                                        |        |        |          |  
|Non-current portion of notes receivable from related parties: |                                                    |                                        |        |        |          |   |        |        
|                                                              | Equity Method Franchisees (Notes 19 and 21)        |                                        | $      | 6,335  |          |   | $      | 1,958   |       
|                                                              | Franchisees owned by Directors emeriti (Note 21)   |                                        |        | 226    |          |   |        | 162     |       
|                                                              |                                                    |                                        |        |        |          |  
|                                                              |                                                    | $                                      | 6,561  |        |          | $ | 2,120  |        
|                                                              |                                                    |                                        |        |        |          |  

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                                                          |                                              |                |   |       |            |  |   |          |   |  |   |        |  
|------------------------------------------------------------------------- | -------------------------------------------- | -------------- | - | ----- | ---------- |  | - | -------- | - |  | - | ------ | -
|                                                                          |                                              | Year Ended     |  
|                                                                          |                                              |                |  
|                                                                          |                                              | Feb. 2,        |   |       | Feb. 1,    |  |   | Jan, 30, |  
|                                                                          |                                              | 2003           |   |       | 2004       |  |   | 2005     |  
|                                                                          |                                              |                |   |       |            |  |   |          |  
|                                                                          |                                              | (restated)     |   |       | (restated) |  |   |         
|                                                                          |                                              | (In thousands) |  
|Allowance for doubtful accounts related to trade receivables:             |                                              |                |   |       |            |  |   |          |   |  |   |       
|                                                                          | Balance at beginning of year                 |                | $ | 1,182 |            |  | $ | 1,453    |   |  | $ | 1,265  |  
|                                                                          | Provision for doubtful accounts              |                |   | 272   |            |  |   | 657      |   |  |   | 12,696 |  
|                                                                          | Reserves associated with acquired businesses |                |   |      |            |  |   | 117      |   |  |   |       |  
|                                                                          | Chargeoffs                                   |                |   | (1    | )          |  |   | (962     | ) |  |   | (2,582 | )
|                                                                          |                                              |                |   |       |            |  |   |          |  
|                                                                          | Balance at end of year                       |                | $ | 1,453 |            |  | $ | 1,265    |   |  | $ | 11,379 |  
|                                                                          |                                              |                |   |       |            |  |   |          |  
|Allowance for doubtful accounts related to Equity Method
    Franchisees: |                                              |                |   |       |            |  |   |          |   |  |   |       
|                                                                          | Balance at beginning of year                 |                | $ |      |            |  | $ |         |   |  | $ |       |  
|                                                                          | Provision for doubtful accounts              |                |   |      |            |  |   |         |   |  |   | 1,105  |  
|                                                                          | Chargeoffs                                   |                |   |      |            |  |   |         |   |  |   |       |  
|                                                                          |                                              |                |   |       |            |  |   |          |  
|                                                                          | Balance at end of year                       |                | $ |      |            |  | $ |         |   |  | $ | 1,105  |  
|                                                                          |                                              |                |   |       |            |  |   |          |  



|         |            
|-------- | -----------
|Note 5  | Inventories



|                       |  |                |        |  |          |   |        | 
|---------------------- |  | -------------- | ------ |  | -------- | - | ------ | 
|                       |  | Feb. 1,        |        |  | Jan. 30, |  
|                       |  | 2004           |        |  | 2005     |  
|                       |  |                |        |  |          |  
|                       |  | (restated)     |        |  |         
|                       |  | (In thousands) |       
|Raw materials          |  | $              | 8,731  |  |          | $ | 8,210  | 
|Work in progress       |  |                | 84     |  |          |   | 56     | 
|Finished goods         |  |                | 7,699  |  |          |   | 7,225  | 
|Purchased merchandise  |  |                | 13,190 |  |          |   | 12,948 | 
|Manufacturing supplies |  |                | 117    |  |          |   | 152    | 
|                       |  |                |        |  |          |  
|                       |  | $              | 29,821 |  |          | $ | 28,591 | 
|                       |  |                |        |  |          |  

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|         |                     
|-------- | --------------------
|Note 6  | Other Current Assets



|                                                                                                                    |  |                |       |  |          |   |        | 
|------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----- |  | -------- | - | ------ | 
|                                                                                                                    |  | Feb. 1,        |       |  | Jan. 30, |  
|                                                                                                                    |  | 2004           |       |  | 2005     |  
|                                                                                                                    |  |                |       |  |          |  
|                                                                                                                    |  | (restated)     |       |  |         
|                                                                                                                    |  | (In thousands) |      
|Receivables from directors and officers insurance
    carriers                                                    |  | $              |      |  |          | $ | 3,390  | 
|Current portion of claims against insurance carriers related to
    self-insurance programs (Notes 1, 9, 10 and 12) |  |                | 476   |  |          |   | 772    | 
|Other receivables                                                                                                   |  |                | 1,286 |  |          |   | 2,572  | 
|Assets held for sale                                                                                                |  |                |      |  |          |   | 1,534  | 
|Prepaid expenses and other                                                                                          |  |                | 5,659 |  |          |   | 5,197  | 
|                                                                                                                    |  |                |       |  |          |  
|                                                                                                                    |  | $              | 7,421 |  |          | $ | 13,465 | 
|                                                                                                                    |  |                |       |  |          |  

Note 7  Property and Equipment




|                               |  |                |         |   |          |   |         |  
|------------------------------ |  | -------------- | ------- | - | -------- | - | ------- | -
|                               |  | Feb. 1,        |         |   | Jan. 30, |  
|                               |  | 2004           |         |   | 2005     |  
|                               |  |                |         |   |          |  
|                               |  | (restated)     |         |   |         
|                               |  | (In thousands) |        
|Land                           |  | $              | 33,801  |   |          | $ | 30,733  |  
|Buildings                      |  |                | 131,727 |   |          |   | 160,459 |  
|Machinery and equipment        |  |                | 157,069 |   |          |   | 175,126 |  
|Leasehold improvements         |  |                | 25,254  |   |          |   | 23,640  |  
|Construction in progress       |  |                | 6,550   |   |          |   | 3,853   |  
|                               |  |                |         |   |          |  
|                               |  |                | 354,401 |   |          |   | 393,811 |  
|Less: accumulated depreciation |  |                | (66,909 | ) |          |   | (84,597 | )
|                               |  |                |         |   |          |  
|                               |  | $              | 287,492 |   |          | $ | 309,214 |  
|                               |  |                |         |   |          |  



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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


Note 8  Goodwill and Other Intangible
Assets




|                                    |                                                            |                |         |        |          |   |        |       |        | 
|----------------------------------- | ---------------------------------------------------------- | -------------- | ------- | ------ | -------- | - | ------ | ----- | ------ | 
|                                    |                                                            | Feb. 1,        |         |        | Jan. 30, |  
|                                    |                                                            | 2004           |         |        | 2005     |  
|                                    |                                                            |                |         |        |          |  
|                                    |                                                            | (restated)     |         |        |         
|                                    |                                                            | (In thousands) |        
|Indefinite-lived intangible assets: |                                                            |                |         |        |          |   |        |      
|                                    | Goodwill (by segment):                                     |                |         |        |          |   |        |       |       
|                                    |                                                            | Company Stores |         | $      | 139,386  |   |        | $     | 8,983  | 
|                                    |                                                            | Franchise      |         |        | 23,496   |   |        |       | 23,496 | 
|                                    |                                                            | KKM&D          |         |        | 213      |   |        |       | 213    | 
|                                    |                                                            | Montana Mills  |         |        | 19,664   |   |        |       |       | 
|                                    |                                                            |                |         |        |          |  
|                                    |                                                            |                | 182,759 |        |          |   | 32,692 |      
|                                    | Reacquired franchise rights associated with Company Stores |                |         | 2,120  |          |   |        | 1,520 |       
|                                    | Trademarks and trade names associated with Montana Mills   |                |         | 11,300 |          |   |        |      |       
|                                    |                                                            |                |         |        |          |  
|                                    |                                                            |                | 196,179 |        |          |   | 34,212 |      
|Definite-lived intangible assets:   |                                                            |                |         |        |          |   |        |      
|                                    | Recipes                                                    |                |         | 983    |          |   |        | 168   |       
|                                    |                                                            |                |         |        |          |  
|                                    |                                                            | $              | 197,162 |        |          | $ | 34,380 |      
|                                    |                                                            |                |         |        |          |  





|         |             
|-------- | ------------
|Note 9  | Other Assets



|                                                                                                                        |  |                |        |  |          |   |       | 
|----------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ |  | -------- | - | ----- | 
|                                                                                                                        |  | Feb. 1,        |        |  | Jan. 30, |  
|                                                                                                                        |  | 2004           |        |  | 2005     |  
|                                                                                                                        |  |                |        |  |          |  
|                                                                                                                        |  | (restated)     |        |  |         
|                                                                                                                        |  | (In thousands) |       
|Computer software, net of accumulated amortization                                                                      |  | $              | 2,915  |  |          | $ | 2,523 | 
|Mirror 401(k) plan assets (Notes 12 and 22)                                                                             |  |                | 1,388  |  |          |   | 1,673 | 
|Non-current portion of notes receivable from unaffiliated
    franchisees                                               |  |                | 1,484  |  |          |   | 1,525 | 
|Deferred debt issuance costs, net of accumulated amortization                                                           |  |                | 1,207  |  |          |   | 1,146 | 
|Non-current portion of claims against insurance carriers related
    to self-insurance programs (Notes 1, 6, 10 and 12) |  |                | 1,011  |  |          |   | 1,067 | 
|Deposits                                                                                                                |  |                | 1,639  |  |          |   | 776   | 
|Other                                                                                                                   |  |                | 724    |  |          |   | 518   | 
|                                                                                                                        |  |                |        |  |          |  
|                                                                                                                        |  | $              | 10,368 |  |          | $ | 9,228 | 
|                                                                                                                        |  |                |        |  |          |  

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|          |                    
|--------- | -------------------
|Note 10  | Accrued Liabilities



|                                                                                                       |       |                |       |        |          |   |        |        | 
|------------------------------------------------------------------------------------------------------ | ----- | -------------- | ----- | ------ | -------- | - | ------ | ------ | 
|                                                                                                       |       | Feb. 1,        |       |        | Jan. 30, |  
|                                                                                                       |       | 2004           |       |        | 2005     |  
|                                                                                                       |       |                |       |        |          |  
|                                                                                                       |       | (restated)     |       |        |         
|                                                                                                       |       | (In thousands) |      
|Current portion of self-insurance claims, principally
    workers compensation (Notes 1, 6, 9 and 12) |       | $              | 4,369 |        |          | $ | 7,161  |       
|Accrued professional fees                                                                              |       |                | 849   |        |          |   | 9,790  |       
|Salaries, wages and incentive compensation                                                             |       |                | 4,041 |        |          |   | 4,607  |       
|Vacation pay                                                                                           |       |                | 3,963 |        |          |   | 4,505  |       
|Taxes, other than income                                                                               |       |                | 3,249 |        |          |   | 4,084  |       
|Accrued charitable contributions                                                                       |       |                | 1,194 |        |          |   | 1,872  |       
|Current portion of lease termination costs (Note 14)                                                   |       |                |      |        |          |   | 921    |       
|Current portion of deferred franchise fee revenue                                                      |       |                | 991   |        |          |   | 244    |       
|Other                                                                                                  |       |                | 4,646 |        |          |   | 10,438 |       
|                                                                                                       |       |                |       |        |          |  
|                                                                                                       | Total |                | $     | 23,302 |          |   | $      | 43,622 | 
|                                                                                                       |       |                |       |        |          |  

Note 11  Long Term Debt and Lease
Commitments




| |                          
| | -------------------------
| | Secured Credit Facilities







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NOTES TO FINANCIAL STATEMENTS  (Continued)


















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NOTES TO FINANCIAL STATEMENTS  (Continued)










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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                   |                                         |                |         |        |          |   |         |        | 
|---------------------------------- | --------------------------------------- | -------------- | ------- | ------ | -------- | - | ------- | ------ | 
|                                   |                                         | Feb. 1,        |         |        | Jan. 30, |  
|                                   |                                         | 2004           |         |        | 2005     |  
|                                   |                                         |                |         |        |          |  
|                                   |                                         | (restated)     |         |        |         
|                                   |                                         | (In thousands) |        
|Krispy Kreme Doughnut Corporation: |                                         |                |         |        |          |   |         |       
|                                   | $119.3 million revolving line of credit |                | $       | 87,000 |          |   | $       | 59,000 | 
|                                   | $30.7 million term loan                 |                |         | 30,113 |          |   |         | 28,600 | 
|                                   | Capital lease obligations               |                |         | 7,339  |          |   |         | 7,360  | 
|                                   |                                         |                |         |        |          |  
|                                   |                                         |                | 124,452 |        |          |   | 94,960  |       
|                                   |                                         |                |         |        |          |  
|Glazed Investments:                |                                         |                |         |        |          |   |         |       
|                                   | $12 million credit facility             |                |         | 6,330  |          |   |         | 7,003  | 
|                                   | Real estate and equipment loans         |                |         | 14,319 |          |   |         | 6,347  | 
|                                   | Capital lease obligations               |                |         |       |          |   |         | 1,370  | 
|                                   | Subordinated notes                      |                |         | 136    |          |   |         | 136    | 
|                                   |                                         |                |         |        |          |  
|                                   |                                         |                | 20,785  |        |          |   | 14,856  |       
|                                   |                                         |                |         |        |          |  
|New England Dough:                 |                                         |                |         |        |          |   |         |       
|                                   | $14.4 million term loans                |                |         |       |          |   |         | 13,487 | 
|                                   | $12 million revolving line of credit    |                |         |       |          |   |         | 1,606  | 
|                                   |                                         |                |         |        |          |  
|                                   |                                         |                |        |        |          |   | 15,093  |       
|                                   |                                         |                |         |        |          |  
|KremeKo:                           |                                         |                |         |        |          |   |         |       
|                                   | Credit facility                         |                |         |       |          |   |         | 11,581 | 
|                                   | Building and equipment loans            |                |         |       |          |   |         | 2,199  | 
|                                   | Capital lease obligations               |                |         |       |          |   |         | 358    | 
|                                   |                                         |                |         |        |          |  
|                                   |                                         |                |        |        |          |   | 14,138  |       
|                                   |                                         |                |         |        |          |  
|Montana Mills                      |                                         |                | 19      |        |          |   |        |       
|                                   |                                         |                |         |        |          |  
|                                   |                                         |                | 145,256 |        |          |   | 139,047 |       
|Less: current maturities           |                                         |                | (8,142  | )      |          |   | (48,097 | )     
|                                   |                                         |                |         |        |          |  
|                                   |                                         | $              | 137,114 |        |          | $ | 90,950  |       
|                                   |                                         |                |         |        |          |  



|            |  |            |         | 
|----------- |  | ---------- | ------- | 
|            |  | (In        |        
|Fiscal Year |  | thousands) |        
|            |  |            |        
|2006        |  | $          | 48,097  | 
|2007        |  |            | 2,707   | 
|2008        |  |            | 88,097  | 
|2009        |  |            | 10      | 
|2010        |  |            |        | 
|Thereafter  |  |            | 136     | 
|            |  |            |        
|            |  | $          | 139,047 | 
|            |  |            |        

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                           
| | --------------------------
| | $150 MILLION BANK FACILITY













| |                         
| | ------------------------
| | CONSOLIDATED FRANCHISEES



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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)














| |                  
| | -----------------
| | LEASE OBLIGATIONS



|                                                        |  |                |         |  |         |   |        |  
|------------------------------------------------------- |  | -------------- | ------- |  | ------- | - | ------ | -
|                                                        |  | Operating      |         |  | Capital |  
|Fiscal Year                                             |  | Leases         |         |  | Leases  |  
|                                                        |  |                |         |  |         |  
|                                                        |  | (In thousands) |        
|2006                                                    |  | $              | 17,852  |  |         | $ | 6,800  |  
|2007                                                    |  |                | 17,030  |  |         |   | 2,959  |  
|2008                                                    |  |                | 15,610  |  |         |   | 543    |  
|2009                                                    |  |                | 15,148  |  |         |   | 12     |  
|2010                                                    |  |                | 15,237  |  |         |   |       |  
|Thereafter                                              |  |                | 265,426 |  |         |   |       |  
|                                                        |  |                |         |  |         |  
|                                                        |  | $              | 346,303 |  |         |   | 10,314 |  
|                                                        |  |                |         |  |         |  
|Less: portion representing interest and executory costs |  |                |         |  |         |   | (1,226 | )
|                                                        |  |                |         |  |         |  
|                                                        |  |                |         |  |         | $ | 9,088  |  
|                                                        |  |                |         |  |         |  



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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                          
| | -------------------------
| | CASH PAYMENTS OF INTEREST



Note 12  Other Long-Term Obligations




|                                                                                                           |  |                |        |  |          |   |        | 
|---------------------------------------------------------------------------------------------------------- |  | -------------- | ------ |  | -------- | - | ------ | 
|                                                                                                           |  | Feb. 1,        |        |  | Jan. 30, |  
|                                                                                                           |  | 2004           |        |  | 2005     |  
|                                                                                                           |  |                |        |  |          |  
|                                                                                                           |  | (restated)     |        |  |         
|                                                                                                           |  | (In thousands) |       
|Deferred rent expense                                                                                      |  | $              | 5,625  |  |          | $ | 8,845  | 
|Non-current portion of self-insurance claims, principally
    workers compensation (Notes 1, 6, 9 and 10) |  |                | 5,168  |  |          |   | 5,899  | 
|Mirror 401(k) plan liability (Notes 9 and 22)                                                              |  |                | 1,388  |  |          |   | 1,673  | 
|Non-current portion of lease termination costs (Note 14)                                                   |  |                |       |  |          |   | 1,360  | 
|Non-current portion of deferred franchise fee revenue                                                      |  |                | 1,079  |  |          |   | 1,359  | 
|Non-current portion of interest rate swap liability                                                        |  |                | 1,728  |  |          |   |       | 
|Other                                                                                                      |  |                | 7,270  |  |          |   | 7,311  | 
|                                                                                                           |  |                |        |  |          |  
|                                                                                                           |  | $              | 22,258 |  |          | $ | 26,447 | 
|                                                                                                           |  |                |        |  |          |  

Note 13  Commitments and Contingencies






| |                            
| | ---------------------------
| | Governmental Investigations



| |                  
| | -----------------
| | SEC Investigation





| |                                     
| | ------------------------------------
| | United States Attorney Investigation





| |                           
| | --------------------------
| | Department of Labor Review



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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                             
| | ----------------------------
| | State Franchise/ FTC Inquiry





| |           
| | ----------
| | Litigation



| |                                 
| | --------------------------------
| | Federal Securities Class Actions

10b-5




| |                               
| | ------------------------------
| | Shareholder Derivative Actions





Wright v. Krispy Kreme Doughnuts, Inc.,
et al. Blackwell v. Krispy Kreme Doughnuts, Inc.,
et al. Andrews v.
Krispy Kreme Doughnuts, Inc., et al.




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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




Wright


Wright, Blackwell Andrews Wright, Blackwell Andrews Wright, Blackwell Andrews Wright v. Krispy Kreme Doughnuts, Inc., et al.




Wright




Andrews v. Krispy Kreme Doughnuts, Inc.,
et al. Lockwood v. Krispy Kreme Doughnuts, Inc.,
et al. Andrews




| |                                     
| | ------------------------------------
| | State Court Books and Records Action

Nomm v. Krispy Kreme, Inc.


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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)






| |                   
| | ------------------
| | ERISA Class Action





| |                      
| | ---------------------
| | Franchisee Litigation









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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)














|  |        
|- | -------
| | KremeKo



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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)










| |                                    
| | -----------------------------------
| | Other Contingencies and Commitments









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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)








| |                  
| | -----------------
| | Arbitration Award



Note 14  Impairment Charges and Lease
Termination Costs




|                         |                                                                  |                          |   |         |   |          |   |   |   |   |         |         |         | 
|------------------------ | ---------------------------------------------------------------- | ------------------------ | - | ------- | - | -------- | - | - | - | - | ------- | ------- | ------- | 
|                         |                                                                  | Year Ended               |  
|                         |                                                                  |                          |  
|                         |                                                                  | Feb. 2,                  |   | Feb. 1, |   | Jan, 30, |  
|                         |                                                                  | 2003                     |   | 2004    |   | 2005     |  
|                         |                                                                  |                          |   |         |   |          |  
|                         |                                                                  | (In thousands)           |  
|Impairment charges:      |                                                                  |                          |   |         |   |          |   |   |   |   |         |        
|                         | Impairment of goodwill                                           |                          | $ |        |   |          | $ |  |   |   | $       | 131,609 |        
|                         | Impairment of long-lived assets                                  |                          |   |        |   |          |   |  |   |   |         | 25,953  |        
|                         | Impairment of reacquired franchise rights                        |                          |   |        |   |          |   |  |   |   |         | 600     |        
|                         | Other                                                            |                          |   |        |   |          |   |  |   |   |         | 825     |        
|                         |                                                                  |                          |   |         |   |          |   |   |  
|                         |                                                                  | Total impairment charges |   |         |  |          |   |   |  |   |         |         | 158,987 | 
|                         |                                                                  |                          |   |         |   |          |   |   |  
|Lease termination costs: |                                                                  |                          |   |         |   |          |   |   |   |   |         |        
|                         | Gross provision for termination costs                            |                          |   |        |   |          |   |  |   |   |         | 3,134   |        
|                         | Less  reversal of previously recorded deferred rent
    expense |                          |   |        |   |          |   |  |   |   |         | (274    | )      
|                         |                                                                  |                          |   |         |   |          |   |   |  
|                         |                                                                  | Net provision            |   |         |  |          |   |   |  |   |         |         | 2,860   | 
|                         |                                                                  |                          |   |         |   |          |   |   |  
|                         |                                                                  | $                        |  |         |   | $        |  |   |   | $ | 161,847 |        
|                         |                                                                  |                          |   |         |   |          |   |   |  

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                                                                               |                                                                                                                                   |                |   |         |  |          |   |   |  |   |       |       |  
|---------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | -------------- | - | ------- |  | -------- | - | - |  | - | ----- | ----- | -
|                                                                                               |                                                                                                                                   | Year Ended     |  
|                                                                                               |                                                                                                                                   |                |  
|                                                                                               |                                                                                                                                   | Feb. 2,        |   | Feb. 1, |  | Jan, 30, |  
|                                                                                               |                                                                                                                                   | 2003           |   | 2004    |  | 2005     |  
|                                                                                               |                                                                                                                                   |                |   |         |  |          |  
|                                                                                               |                                                                                                                                   | (In thousands) |  
|Balance at beginning of year                                                                   |                                                                                                                                   | $              |  |         |  | $        |  |   |  | $ |      |      
|Provision for lease termination costs:                                                         |                                                                                                                                   |                |   |         |  |          |   |   |  |   |       |      
|                                                                                               | Provisions associated with store closings                                                                                         |                |   |        |  |          |   |  |  |   |       | 3,323 |  
|                                                                                               | Net reversals of previously recorded provisions resulting from
    settlements with lessors and adjustments of previous estimates |                |   |        |  |          |   |  |  |   |       | (237  | )
|                                                                                               | Accretion of discount                                                                                                             |                |   |        |  |          |   |  |  |   |       | 48    |  
|                                                                                               |                                                                                                                                   |                |   |         |  |          |   |   | 
|                                                                                               |                                                                                                                                   |                |  |         |  |          |  |   |  |   | 3,134 |      
|                                                                                               | Payments                                                                                                                          |                |   |         |  |          |   |   |  |   |       | (853  | )
|                                                                                               |                                                                                                                                   |                |   |         |  |          |   |   | 
|Balance at end of year                                                                         |                                                                                                                                   | $              |   |         |  | $        |   |   |  | $ | 2,281 |      
|                                                                                               |                                                                                                                                   |                |   |         |  |          |   |   | 
|Accrued lease termination costs are included in the consolidated
    balance sheet as follows: |                                                                                                                                   |                |   |         |  |          |   |   |  |   |       |      
|                                                                                               | Accrued liabilities                                                                                                               |                | $ |        |  |          | $ |  |  |   | $     | 921   |  
|                                                                                               | Other long-term obligations                                                                                                       |                |   |        |  |          |   |  |  |   |       | 1,360 |  
|                                                                                               |                                                                                                                                   |                |   |         |  |          |   |   | 
|                                                                                               |                                                                                                                                   | $              |  |         |  | $        |  |   |  | $ | 2,281 |      
|                                                                                               |                                                                                                                                   |                |   |         |  |          |   |   | 

Note 15  Other Income and Expense




|                                                      |  |                |        |   |            |   |       |          |  |   |        |  
|----------------------------------------------------- |  | -------------- | ------ | - | ---------- | - | ----- | -------- |  | - | ------ | -
|                                                      |  | Year Ended     |       
|                                                      |  |                |       
|                                                      |  | Feb. 2,        |        |   | Feb. 1,    |   |       | Jan, 30, | 
|                                                      |  | 2003           |        |   | 2004       |   |       | 2005     | 
|                                                      |  |                |        |   |            |   |       |          | 
|                                                      |  | (restated)     |        |   | (restated) |   |       |         
|                                                      |  | (In thousands) |       
|Gain (loss) on disposals of property and equipment    |  | $              | (934   | ) |            | $ | (939  | )        |  | $ | (4,535 | )
|Foreign currency gains and (losses)                   |  |                | (350   | ) |            |   | 267   |          |  |   | 170    |  
|Gain on sale of stores to franchisee                  |  |                |       |   |            |   | 2,725 |          |  |   |       |  
|Impairment charge related to Equity Method Franchisee |  |                |       |   |            |   |      |          |  |   | (1,545 | )
|Adjustment to carrying value of written option        |  |                |       |   |            |   |      |          |  |   | (400   | )
|                                                      |  |                |        |   |            |   |       |          | 
|                                                      |  | $              | (1,284 | ) |            | $ | 2,053 |          |  | $ | (6,310 | )
|                                                      |  |                |        |   |            |   |       |          | 

Note 16  Income Taxes




|         |  |                |        |  |            |   |        |          |  |   |        | 
|-------- |  | -------------- | ------ |  | ---------- | - | ------ | -------- |  | - | ------ | 
|         |  | Year Ended     |       
|         |  |                |       
|         |  | Feb. 2,        |        |  | Feb. 1,    |   |        | Jan, 30, | 
|         |  | 2003           |        |  | 2004       |   |        | 2005     | 
|         |  |                |        |  |            |   |        |          | 
|         |  | (restated)     |        |  | (restated) |   |        |         
|         |  | (In thousands) |       
|Current  |  | $              | 19,663 |  |            | $ | 35,947 |          |  | $ | 1,764  | 
|Deferred |  |                | 56     |  |            |   | (3,491 | )        |  |   | 10,117 | 
|         |  |                |        |  |            |   |        |          | 
|         |  | $              | 19,719 |  |            | $ | 32,456 |          |  | $ | 11,881 | 
|         |  |                |        |  |            |   |        |          | 

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                  |  |                |        |  |            |   |        |          |  |   |        | 
|--------------------------------- |  | -------------- | ------ |  | ---------- | - | ------ | -------- |  | - | ------ | 
|                                  |  | Year Ended     |       
|                                  |  |                |       
|                                  |  | Feb. 2,        |        |  | Feb. 1,    |   |        | Jan, 30, | 
|                                  |  | 2003           |        |  | 2004       |   |        | 2005     | 
|                                  |  |                |        |  |            |   |        |          | 
|                                  |  | (restated)     |        |  | (restated) |   |        |         
|                                  |  | (In thousands) |       
|Income from continuing operations |  | $              | 19,719 |  |            | $ | 33,146 |          |  | $ | 9,674  | 
|Discontinued operations           |  |                |       |  |            |   | (690   | )        |  |   | 2,207  | 
|                                  |  |                |        |  |            |   |        |          | 
|                                  |  | $              | 19,719 |  |            | $ | 32,456 |          |  | $ | 11,881 | 
|                                  |  |                |        |  |            |   |        |          | 



|                                                 |          |                                         |        |        |            |  |        |          |        |  |          |          |          |  
|------------------------------------------------ | -------- | --------------------------------------- | ------ | ------ | ---------- |  | ------ | -------- | ------ |  | -------- | -------- | -------- | -
|                                                 |          | Year Ended                              |       
|                                                 |          |                                         |       
|                                                 |          | Feb. 2,                                 |        |        | Feb. 1,    |  |        | Jan, 30, |       
|                                                 |          | 2003                                    |        |        | 2004       |  |        | 2005     |       
|                                                 |          |                                         |        |        |            |  |        |          |       
|                                                 |          | (restated)                              |        |        | (restated) |  |        |         
|                                                 |          | (In thousands)                          |       
|Income (loss) from continuing operations:        |          |                                         |        |        |            |  |        |          |        |  |          |         
|                                                 | Domestic |                                         | $      | 52,817 |            |  | $      | 87,107   |        |  | $        | (131,061 | )       
|                                                 | Foreign  |                                         |        | (2,040 | )          |  |        | (4,116   | )      |  |          | (16,319  | )       
|                                                 |          |                                         |        |        |            |  |        |          |       
|                                                 |          |                                         | 50,777 |        |            |  | 82,991 |          |        |  | (147,380 | )       
|Loss from discontinued operations (all domestic) |          |                                         |       |        |            |  | (1,972 | )        |        |  | (37,847  | )       
|                                                 |          |                                         |        |        |            |  |        |          |       
|                                                 |          | Total income (loss) before income taxes |        | $      | 50,777     |  |        | $        | 81,019 |  |          | $        | (185,227 | )
|                                                 |          |                                         |        |        |            |  |        |          |       



|                                                           |  |                |        |  |            |   |        |          |  |   |         |  
|---------------------------------------------------------- |  | -------------- | ------ |  | ---------- | - | ------ | -------- |  | - | ------- | -
|                                                           |  | Year Ended     |       
|                                                           |  |                |       
|                                                           |  | Feb. 2,        |        |  | Feb. 1,    |   |        | Jan. 30, | 
|                                                           |  | 2003           |        |  | 2004       |   |        | 2005     | 
|                                                           |  |                |        |  |            |   |        |          | 
|                                                           |  | (restated)     |        |  | (restated) |   |        |         
|                                                           |  | (In thousands) |       
|Income taxes at statutory federal rate                     |  | $              | 17,772 |  |            | $ | 28,357 |          |  | $ | (64,829 | )
|State income taxes                                         |  |                | 1,227  |  |            |   | 2,613  |          |  |   | (5,811  | )
|Foreign losses with no tax benefit                         |  |                | 714    |  |            |   | 1,441  |          |  |   | 5,712   |  
|Impairment of intangible assets                            |  |                |       |  |            |   |       |          |  |   | 12,396  |  
|Valuation allowance provided on deferred income tax assets |  |                |       |  |            |   |       |          |  |   | 65,160  |  
|Other                                                      |  |                | 6      |  |            |   | 45     |          |  |   | (747    | )
|                                                           |  |                |        |  |            |   |        |          | 
|                                                           |  | $              | 19,719 |  |            | $ | 32,456 |          |  | $ | 11,881  |  
|                                                           |  |                |        |  |            |   |        |          | 



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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                     |           |                |       |        |          |   |        |   | 
|------------------------------------ | --------- | -------------- | ----- | ------ | -------- | - | ------ | - | 
|                                     |           | Feb. 1,        |       |        | Jan. 30, |  
|                                     |           | 2004           |       |        | 2005     |  
|                                     |           |                |       |        |          |  
|                                     |           | (restated)     |       |        |         
|                                     |           | (In thousands) |      
|Net current assets                   |           | $              | 7,405 |        |          | $ | 3,913  |  
|Net non-current assets (liabilities) |           |                | 2,941 |        |          |   | (3,913 | )
|                                     |           |                |       |        |          |  
|                                     | Net asset |                | $     | 10,346 |          |   | $      |  | 
|                                     |           |                |       |        |          |  



|                                 |                                          |                                                   |                                                        |         |          |        |   |         |         |        | 
|-------------------------------- | ---------------------------------------- | ------------------------------------------------- | ------------------------------------------------------ | ------- | -------- | ------ | - | ------- | ------- | ------ | 
|                                 |                                          | Feb. 1,                                           |                                                        |         | Jan. 30, |       
|                                 |                                          | 2004                                              |                                                        |         | 2005     |       
|                                 |                                          |                                                   |                                                        |         |          |       
|                                 |                                          | (restated)                                        |                                                        |         |         
|                                 |                                          | (In thousands)                                    |                                                       
|Deferred income tax assets:      |                                          |                                                   |                                                        |         |          |        |   |        
|                                 | Deferred compensation                    |                                                   | $                                                      | 609     |          |        | $ | 549     |        
|                                 | Insurance                                |                                                   |                                                        | 3,180   |          |        |   | 4,431   |        
|                                 | Deferred revenue                         |                                                   |                                                        | 2,093   |          |        |   | 2,041   |        
|                                 | Charitable contributions carryforward    |                                                   |                                                        | 1,393   |          |        |   | 3,322   |        
|                                 | Gain on hedging transactions             |                                                   |                                                        | 853     |          |        |   | 660     |        
|                                 | Other current assets                     |                                                   |                                                        | 1,985   |          |        |   | 6,745   |        
|                                 | Goodwill and other intangible assets     |                                                   |                                                        | 686     |          |        |   | 45,639  |        
|                                 | Other current liabilities                |                                                   |                                                        | 2,735   |          |        |   | 6,699   |        
|                                 | Other non-current liabilities            |                                                   |                                                        | 1,784   |          |        |   | 4,853   |        
|                                 | Federal tax credit carryforwards         |                                                   |                                                        | 701     |          |        |   | 1,330   |        
|                                 | Federal net operating loss carryforwards |                                                   |                                                        | 9,241   |          |        |   | 12,999  |        
|                                 | State tax credit carryforwards           |                                                   |                                                        | 539     |          |        |   | 537     |        
|                                 | State net operating loss carryforwards   |                                                   |                                                        | 5,880   |          |        |   | 5,880   |        
|                                 |                                          |                                                   |                                                        |         |          |       
|                                 |                                          | Gross deferred income tax assets                  |                                                        |         | 31,679   |        |   |         | 95,685  |       
|                                 |                                          | Valuation allowance on deferred income tax assets |                                                        |         | (5,240   | )      |   |         | (72,428 | )     
|                                 |                                          |                                                   |                                                        |         |          |       
|                                 |                                          |                                                   | Deferred income tax assets, net of valuation allowance |         |          | 26,439 |   |         |         | 23,257 | 
|                                 |                                          |                                                   |                                                        |         |          |       
|Deferred income tax liabilities: |                                          |                                                   |                                                        |         |          |        |   |        
|                                 | Cumulative translation adjustment        |                                                   |                                                        | (426    | )        |        |   | (1,019  | )      
|                                 | Property and equipment                   |                                                   |                                                        | (14,816 | )        |        |   | (21,117 | )      
|                                 | Other non-current assets                 |                                                   |                                                        | (292    | )        |        |   | (835    | )      
|                                 | Other                                    |                                                   |                                                        | (559    | )        |        |   | (286    | )      
|                                 |                                          |                                                   |                                                        |         |          |       
|                                 |                                          | Gross deferred income tax liabilities             |                                                        |         | (16,093  | )      |   |         | (23,257 | )     
|                                 |                                          |                                                   |                                                        |         |          |       
|                                 |                                          | Net deferred income tax asset                     |                                                        | $       | 10,346   |        |   | $       |        |       
|                                 |                                          |                                                   |                                                        |         |          |       



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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)






Note 17  Shareholders Equity




| |                                                             
| | ------------------------------------------------------------
| | STOCK OPTION PLANS, RESTRICTED STOCK AWARDS AND
    WARRANTS





|                                |  |                |            |   |                 |          |                |                |                |   |                |          |  |                |           |  |  |   |       | 
|------------------------------- |  | -------------- | ---------- | - | --------------- | -------- | -------------- | -------------- | -------------- | - | -------------- | -------- |  | -------------- | --------- |  |  | - | ----- | 
|                                |  |                |            |   |                 | Weighted |                |                | Shares Subject |   |                | Weighted | 
|                                |  | Shares Subject |            |   | Range of        |          |                | Average        |                |   | to Exercisable |          |  | Average        |          
|                                |  | to Option      |            |   | Exercise Prices |          |                | Exercise Price |                |   | Options        |          |  | Exercise Price |          
|                                |  |                |            |   |                 |          |                |                |                |   |                |          |  |                |          
|Outstanding at February 3, 2002 |  |                | 9,628,300  |   |                 |          |                |                |                | $ | 7.90           |          |  |                | 2,976,200 |  |  | $ | 4.06  | 
|Granted                         |  |                | 1,186,200  |   |                 | $        | 30.98 - $37.25 |                |                |   | 35.11          |          |  |                |           |  |  |   |       | 
|Exercised                       |  |                | (1,187,300 | ) |                 |          |                |                |                |   | 6.01           |          |  |                |           |  |  |   |       | 
|Canceled                        |  |                | (186,400   | ) |                 |          |                |                |                |   | 4.84           |          |  |                |           |  |  |   |       | 
|                                |  |                |            |   |                 |          |                |                |                |   |                |          |  |                |          
|Outstanding at February 2, 2003 |  |                | 9,440,800  |   |                 |          |                |                |                | $ | 11.60          |          |  |                | 4,567,800 |  |  | $ | 5.68  | 
|Granted                         |  |                | 1,829,200  |   |                 | $        | 28.11 - 44.22  |                |                |   | 37.65          |          |  |                |           |  |  |   |       | 
|Assumed through acquisition     |  |                | 45,100     |   |                 |          |                |                |                |   | 32.83          |          |  |                |           |  |  |   |       | 
|Exercised                       |  |                | (3,300,000 | ) |                 |          |                |                |                |   | 5.91           |          |  |                |           |  |  |   |       | 
|Canceled                        |  |                | (539,700   | ) |                 |          |                |                |                |   | 29.63          |          |  |                |           |  |  |   |       | 
|                                |  |                |            |   |                 |          |                |                |                |   |                |          |  |                |          
|Outstanding at February 1, 2004 |  |                | 7,475,400  |   |                 |          |                |                |                | $ | 19.31          |          |  |                | 4,281,500 |  |  | $ | 8.56  | 
|Granted                         |  |                | 1,113,500  |   |                 | $        | 14.04 - $38.71 |                |                |   | 15.00          |          |  |                |           |  |  |   |       | 
|Exercised                       |  |                | (471,000   | ) |                 |          |                |                |                |   | 2.48           |          |  |                |           |  |  |   |       | 
|Canceled                        |  |                | (669,400   | ) |                 |          |                |                |                |   | 28.63          |          |  |                |           |  |  |   |       | 
|                                |  |                |            |   |                 |          |                |                |                |   |                |          |  |                |          
|Outstanding at January 30, 2005 |  |                | 7,448,500  |   |                 |          |                |                |                | $ | 18.89          |          |  |                | 4,918,700 |  |  | $ | 14.39 | 
|                                |  |                |            |   |                 |          |                |                |                |   |                |          |  |                |          



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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                |  |                     |           |                            |                          |  |                  |                |  |   |        |                  |  |                |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- | -------------------------- | ------------------------ |  | ---------------- | -------------- |  | - | ------ | ---------------- |  | -------------- | --------- |  |  | - | ----- | 
|                |  | Options Outstanding |           |                            | Options Exercisable      | 
|                |  |                     |           |                            |                          | 
|Range of        |  |                     |           | Weighted Average Remaining |                          |  | Weighted Average |                |  |   |        | Weighted Average | 
|Exercise Prices |  | Shares              |           |                            | Contractual Life (Years) |  |                  | Exercise Price |  |   | Shares |                  |  | Exercise Price |          
|                |  |                     |           |                            |                          |  |                  |                |  |   |        |                  |  |                |          
|$ 1.30 - $ 6.66 |  |                     | 2,653,000 |                            |                          |  | 3.6              |                |  | $ | 1.47   |                  |  |                | 2,599,700 |  |  | $ | 1.40  | 
|$13.33 - $19.99 |  |                     | 1,507,500 |                            |                          |  | 7.8              |                |  | $ | 14.50  |                  |  |                | 578,600   |  |  | $ | 14.93 | 
|$20.00 - $26.65 |  |                     | 35,000    |                            |                          |  | 6.3              |                |  | $ | 22.06  |                  |  |                | 22,500    |  |  | $ | 22.06 | 
|$26.66 - $33.32 |  |                     | 1,207,600 |                            |                          |  | 6.5              |                |  | $ | 29.20  |                  |  |                | 868,400   |  |  | $ | 29.50 | 
|$33.33 - $39.98 |  |                     | 1,302,100 |                            |                          |  | 7.6              |                |  | $ | 35.34  |                  |  |                | 585,600   |  |  | $ | 35.39 | 
|$39.99 - $46.64 |  |                     | 743,100   |                            |                          |  | 8.3              |                |  | $ | 44.19  |                  |  |                | 263,700   |  |  | $ | 44.16 | 
|$59.97 - $66.63 |  |                     | 200       |                            |                          |  | 7.1              |                |  | $ | 66.63  |                  |  |                | 200       |  |  | $ | 66.63 | 

WARRANTS.








| |                        
| | -----------------------
| | SHAREHOLDER RIGHTS PLAN







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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)






Note 18  Segment Information








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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                       |                                                 |                                             |   |          |            |  |   |          |         |  |   |          |          |  
|-------------------------------------- | ----------------------------------------------- | ------------------------------------------- | - | -------- | ---------- |  | - | -------- | ------- |  | - | -------- | -------- | -
|                                       |                                                 | Year Ended                                  |  
|                                       |                                                 |                                             |  
|                                       |                                                 | Feb. 2,                                     |   |          | Feb. 1,    |  |   | Jan. 30, |        
|                                       |                                                 | 2003                                        |   |          | 2004       |  |   | 2005     |        
|                                       |                                                 |                                             |   |          |            |  |   |          |        
|                                       |                                                 | (restated)                                  |   |          | (restated) |  |   |         
|                                       |                                                 | (In thousands)                              |  
|Revenues:                              |                                                 |                                             |   |          |            |  |   |          |         |  |   |         
|                                       | Company Stores                                  |                                             | $ | 319,886  |            |  | $ | 441,707  |         |  | $ | 508,100  |         
|                                       | Franchise                                       |                                             |   | 19,156   |            |  |   | 23,506   |         |  |   | 24,720   |         
|                                       | KKM&D                                           |                                             |   | 275,185  |            |  |   | 350,998  |         |  |   | 351,530  |         
|                                       | Intersegment sales eliminations                 |                                             |   | (123,499 | )          |  |   | (166,866 | )       |  |   | (176,584 | )       
|                                       |                                                 |                                             |   |          |            |  |   |          |        
|                                       |                                                 | Total revenues                              |   | $        | 490,728    |  |   | $        | 649,345 |  |   | $        | 707,766  |  
|                                       |                                                 |                                             |   |          |            |  |   |          |        
|Operating income:                      |                                                 |                                             |   |          |            |  |   |          |         |  |   |         
|                                       | Company Stores                                  |                                             | $ | 31,912   |            |  | $ | 42,675   |         |  | $ | 10,489   |         
|                                       | Franchise                                       |                                             |   | 14,172   |            |  |   | 18,702   |         |  |   | 16,542   |         
|                                       | KKM&D                                           |                                             |   | 50,911   |            |  |   | 73,662   |         |  |   | 52,558   |         
|                                       | Unallocated general and administrative expenses |                                             |   | (31,659  | )          |  |   | (46,883  | )       |  |   | (57,339  | )       
|                                       | Impairment charges and lease termination costs  |                                             |   |         |            |  |   |         |         |  |   | (161,847 | )       
|                                       | Arbitration award                               |                                             |   | (9,075   | )          |  |   | 525      |         |  |   |         |         
|                                       |                                                 |                                             |   |          |            |  |   |          |        
|                                       |                                                 | Total operating income (loss)               |   | $        | 56,261     |  |   | $        | 88,681  |  |   | $        | (139,597 | )
|                                       |                                                 |                                             |   |          |            |  |   |          |        
|Depreciation and amortization expense: |                                                 |                                             |   |          |            |  |   |          |         |  |   |         
|                                       | Company Stores                                  |                                             | $ | 11,151   |            |  | $ | 17,390   |         |  | $ | 27,743   |         
|                                       | Franchise                                       |                                             |   | 108      |            |  |   | 173      |         |  |   | 172      |         
|                                       | KKM&D                                           |                                             |   | 1,830    |            |  |   | 3,093    |         |  |   | 3,152    |         
|                                       | Corporate administration                        |                                             |   | 1,586    |            |  |   | 1,653    |         |  |   | 867      |         
|                                       |                                                 |                                             |   |          |            |  |   |          |        
|                                       |                                                 | Total depreciation and amortization expense |   | $        | 14,675     |  |   | $        | 22,309  |  |   | $        | 31,934   |  
|                                       |                                                 |                                             |   |          |            |  |   |          |        



Note 19  Investments in Franchisees




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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                         
| | ------------------------
| | CONSOLIDATED FRANCHISEES



|                        |  |                                                                            |  |             |      |       |         |                |             |               |  |             |          |  |  |   |        | 
|----------------------- |  | -------------------------------------------------------------------------- |  | ----------- | ---- | ----- | ------- | -------------- | ----------- | ------------- |  | ----------- | -------- |  |  | - | ------ | 
|                        |  |                                                                            |  | Ownership % |      |       |         |                |            
|                        |  |                                                                            |  |             |      |       |         |                |            
|                        |  | Geographic                                                                 |  |             |      | Third |         |                | Loan/ Lease |               |  | Fiscal 2005 |         
|                        |  | Market                                                                     |  | KKD         |      |       | Parties |                |             | Guarantees(1) |  |             | Revenues | 
|                        |  |                                                                            |  |             |      |       |         |                |             |               |  |             |          | 
|                        |  |                                                                            |  |             |      |       |         | (In thousands) |            
|Freedom Rings, LLC      |  | Eastern Pennsylvania, Delaware, Southern New Jersey                        |  |             | 70.0 | %     |         |                | 30.0        | %             |  | $           | 920      |  |  | $ | 20,837 | 
|Glazed Investments, LLC |  | Colorado, Minnesota, Wisconsin                                             |  |             | 85.9 | %     |         |                | 14.1        | %             |  | $           | 9,963    |  |  | $ | 50,066 | 
|New England Dough, LLC  |  | Connecticut, Maine, Massachusetts, Rhode Island New Hampshire,
    Vermont |  |             | 57.0 | %     |         |                | 43.0        | %             |  | $           | 8,628    |  |  | $ | 16,617 | 
|KremeKo, Inc.           |  | Central and Eastern Canada                                                 |  |             | 40.6 | %     |         |                | 59.4        | %             |  | $           | 9,823    |  |  | $ | 23,158 | 






|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Included in the disclosures of aggregate indebtedness and lease
    obligations of the Company and its subsidiaries set forth in
    Note 11.





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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)














| |                          
| | -------------------------
| | Equity Method Franchisees



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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                        |  |                                                        |  |                  |    |             |     |  |       |         |  |  |      |  
|--------------------------------------- |  | ------------------------------------------------------ |  | ---------------- | -- | ----------- | --- |  | ----- | ------- |  |  | ---- | -
|                                        |  |                                                        |  |                  |    | Ownership % |    
|                                        |  |                                                        |  | Number of        |    |             |     | 
|                                        |  |                                                        |  | Stores as of     |    |             |     |  | Third |        
|                                        |  | Geographic Market                                      |  | January 30, 2005 |    |             | KKD |  |       | Parties | 
|                                        |  |                                                        |  |                  |    |             |     |  |       |         | 
|A-OK, LLC                               |  | Arkansas, Oklahoma                                     |  |                  | 6  |             |     |  | 30.3  | %       |  |  | 69.7 | %
|Amazing Glazed, LLC                     |  | Pennsylvania (Pittsburgh)                              |  |                  | 7  |             |     |  | 30.3  | %       |  |  | 69.7 | %
|Amazing Hot Glazers, LLC                |  | Pennsylvania (Erie)                                    |  |                  | 2  |             |     |  | 33.3  | %       |  |  | 66.7 | %
|Caribbean Glaze Corporation             |  | Puerto Rico                                            |  |                  |   |             |     |  | 30.0  | %       |  |  | 70.0 | %
|KK-TX I, L.P.                           |  | Texas (Amarillo, Lubbock)                              |  |                  | 2  |             |     |  | 33.3  | %       |  |  | 66.7 | %
|KK Wyotana, LLC                         |  | Wyoming, Montana                                       |  |                  | 1  |             |     |  | 33.3  | %       |  |  | 66.7 | %
|KKNY, LLC                               |  | New York City,
    Northern New Jersey                 |  |                  | 9  |             |     |  | 30.3  | %       |  |  | 69.7 | %
|KremeWorks, LLC                         |  | Alaska, Hawaii, Oregon,
    Washington, Western Canada |  |                  | 12 |             |     |  | 25.0  | %       |  |  | 75.0 | %
|Krispy Kreme Australia Pty Limited      |  | Australia/ New Zealand                                 |  |                  | 5  |             |     |  | 35.0  | %       |  |  | 65.0 | %
|Krispy Kreme of South Florida, LLC      |  | Southern Florida                                       |  |                  | 6  |             |     |  | 35.3  | %       |  |  | 64.7 | %
|Krispy Kreme U.K. Limited               |  | United Kingdom,
    Republic of Ireland                |  |                  | 5  |             |     |  | 35.1  | %       |  |  | 64.9 | %
|Krispy Kreme Mexico, S. de R.L. de C.V. |  | Mexico                                                 |  |                  | 3  |             |     |  | 30.0  | %       |  |  | 70.0 | %
|Priz Doughnuts, LP                      |  | Texas (El Paso),
    Mexico (Ciudad Juarez)            |  |                  | 2  |             |     |  | 33.3  | %       |  |  | 66.7 | %



|                                        |  |                                  |        |     |         |   |        |        |       |   |             |  |  |           |        |  |  |   |        |  
|--------------------------------------- |  | -------------------------------- | ------ | --- | ------- | - | ------ | ------ | ----- | - | ----------- |  |  | --------- | ------ |  |  | - | ------ | -
|                                        |  | Summary Financial Information(1) |       
|                                        |  |                                  |       
|                                        |  |                                  |        | Net |         |   |        |        | Total |  
|                                        |  | Net                              |        |     | Income/ |   |        | Total  |       |   | Total       |  |  | Equity    |       
|                                        |  | Sales                            |        |     | (Loss)  |   |        | Assets |       |   | Liabilities |  |  | (Deficit) |       
|                                        |  |                                  |        |     |         |   |        |        |       |   |             |  |  |           |       
|                                        |  | (In thousands)                   |       
|A-OK, LLC                               |  | $                                | 16,749 |     |         | $ | 789    |        |       | $ | 8,212       |  |  | $         | 8,840  |  |  | $ | (628   | )
|Amazing Glazed, LLC                     |  |                                  | 15,685 |     |         |   | (1,053 | )      |       |   | 13,240      |  |  |           | 13,081 |  |  |   | 159    |  
|Amazing Hot Glazers, LLC                |  |                                  | 6,990  |     |         |   | 31     |        |       |   | 4,205       |  |  |           | 3,684  |  |  |   | 521    |  
|Caribbean Glaze Corporation             |  |                                  |       |     |         |   | (200   | )      |       |   | 310         |  |  |           | 111    |  |  |   | 199    |  
|KK-TX I, L.P.                           |  |                                  | 4,859  |     |         |   | 98     |        |       |   | 2,975       |  |  |           | 3,106  |  |  |   | (131   | )
|KK Wyotana, LLC                         |  |                                  | 1,055  |     |         |   | (142   | )      |       |   | 1,673       |  |  |           | 1,820  |  |  |   | (147   | )
|KKNY, LLC                               |  |                                  | 22,599 |     |         |   | (5,990 | )      |       |   | 21,356      |  |  |           | 11,351 |  |  |   | 10,005 |  
|KremeWorks, LLC                         |  |                                  | 39,365 |     |         |   | 1,477  |        |       |   | 37,050      |  |  |           | 34,709 |  |  |   | 2,341  |  
|Krispy Kreme Australia Pty Limited      |  |                                  | 19,893 |     |         |   | (1,782 | )      |       |   | 16,656      |  |  |           | 15,376 |  |  |   | 1,280  |  
|Krispy Kreme of South Florida, LLC      |  |                                  | 18,199 |     |         |   | 1,076  |        |       |   | 10,921      |  |  |           | 11,677 |  |  |   | (756   | )
|Krispy Kreme U.K. Limited               |  |                                  | 8,200  |     |         |   | (4,310 | )      |       |   | 16,156      |  |  |           | 6,953  |  |  |   | 9,203  |  
|Krispy Kreme Mexico, S. de R.L. de C.V. |  |                                  | 5,156  |     |         |   | 60     |        |       |   | 4,901       |  |  |           | 1,549  |  |  |   | 3,352  |  
|Priz Doughnuts, LP                      |  |                                  | 3,839  |     |         |   | 70     |        |       |   | 2,589       |  |  |           | 2,365  |  |  |   | 224    |  






|    |                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The net sales and net income (loss) shown for each of these
    franchisees represents the amounts reported by the franchisee
    for calendar 2004, 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, 2004.

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                                          |  |                  |        |   |             |   |                  |         |  |          |           |  |  |            |       |  |  |   |        | 
|--------------------------------------------------------- |  | ---------------- | ------ | - | ----------- | - | ---------------- | ------- |  | -------- | --------- |  |  | ---------- | ----- |  |  | - | ------ | 
|                                                          |  | February 1, 2004 |       
|                                                          |  |                  |       
|                                                          |  | (restated)       |       
|                                                          |  | Investment       |        |   |             |   | Notes Receivable |         |  | Loan and |          
|                                                          |  | and              |        |   | Trade       |   |                  |         |  |          | Lease     | 
|                                                          |  | Advances         |        |   | Receivables |   |                  | Current |  |          | Long-term |  |  | Guarantees |      
|                                                          |  |                  |        |   |             |   |                  |         |  |          |           |  |  |            |      
|                                                          |  | (In thousands)   |       
|A-OK, LLC                                                 |  | $                | 260    |   |             | $ | 1,118            |         |  | $        | 56        |  |  | $          | 118   |  |  | $ | 1,320  | 
|Amazing Glazed, LLC                                       |  |                  | 289    |   |             |   | 1,318            |         |  |          | 71        |  |  |            | 150   |  |  |   |       | 
|Amazing Hot Glazers, LLC                                  |  |                  | 155    |   |             |   | 257              |         |  |          | 22        |  |  |            | 48    |  |  |   | 948    | 
|Entrepreneurship and Economic Development Investment, LLC |  |                  | 544    |   |             |   | 178              |         |  |          | 22        |  |  |            |      |  |  |   |       | 
|KK-TX I, L.P.                                             |  |                  | (156   | ) |             |   | 769              |         |  |          |          |  |  |            |      |  |  |   | 612    | 
|KK Wyotana, LLC                                           |  |                  |       |   |             |   |                 |         |  |          |          |  |  |            |      |  |  |   |       | 
|KKNY, LLC                                                 |  |                  | 238    |   |             |   | 1,003            |         |  |          |          |  |  |            |      |  |  |   |       | 
|KremeKo, Inc.                                             |  |                  | 6,520  |   |             |   | 3,659            |         |  |          |          |  |  |            |      |  |  |   | 7,488  | 
|Kremeworks, LLC                                           |  |                  | 208    |   |             |   | 2,489            |         |  |          |          |  |  |            |      |  |  |   |       | 
|Krispy Kreme Australia Pty Limited                        |  |                  | 1,074  |   |             |   | 878              |         |  |          |          |  |  |            | 1,598 |  |  |   | 1,994  | 
|Krispy Kreme of South Florida, LLC                        |  |                  | 2,585  |   |             |   | 734              |         |  |          |          |  |  |            | 4,123 |  |  |   | 1,694  | 
|Krispy Kreme U.K. Limited                                 |  |                  | 1,677  |   |             |   | 343              |         |  |          |          |  |  |            |      |  |  |   |       | 
|Krispy Kreme Mexico, S. de R.L. de C.V.                   |  |                  | 681    |   |             |   | 1,491            |         |  |          |          |  |  |            |      |  |  |   |       | 
|New England Dough, LLC                                    |  |                  | 509    |   |             |   | 1,558            |         |  |          | 118       |  |  |            | 251   |  |  |   | 6,206  | 
|Priz Doughnuts, LP                                        |  |                  |       |   |             |   | 105              |         |  |          | 23        |  |  |            | 47    |  |  |   |       | 
|                                                          |  |                  |        |   |             |   |                  |         |  |          |           |  |  |            |      
|                                                          |  | $                | 14,584 |   |             | $ | 15,900           |         |  | $        | 312       |  |  | $          | 6,335 |  |  | $ | 20,262 | 
|                                                          |  |                  |        |   |             |   |                  |         |  |          |           |  |  |            |      

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NOTES TO FINANCIAL STATEMENTS  (Continued)


|                                        |  |                  |       |   |             |   |                  |         |  |          |           |  |  |            |       |  |  |   |        | 
|--------------------------------------- |  | ---------------- | ----- | - | ----------- | - | ---------------- | ------- |  | -------- | --------- |  |  | ---------- | ----- |  |  | - | ------ | 
|                                        |  | January 30, 2005 |      
|                                        |  |                  |      
|                                        |  | Investment       |       |   |             |   | Notes Receivable |         |  | Loan and |          
|                                        |  | and              |       |   | Trade       |   |                  |         |  |          | Lease     | 
|                                        |  | Advances         |       |   | Receivables |   |                  | Current |  |          | Long-term |  |  | Guarantees |      
|                                        |  |                  |       |   |             |   |                  |         |  |          |           |  |  |            |      
|                                        |  | (In thousands)   |      
|A-OK, LLC                               |  | $                | (33   | ) |             | $ | 1,222            |         |  | $        | 58        |  |  | $          | 55    |  |  | $ | 3,001  | 
|Amazing Glazed, LLC                     |  |                  | 22    |   |             |   | 443              |         |  |          | 73        |  |  |            | 76    |  |  |   | 2,590  | 
|Amazing Hot Glazers, LLC                |  |                  | 175   |   |             |   | 122              |         |  |          | 23        |  |  |            | 22    |  |  |   | 951    | 
|Caribbean Glaze Corporation             |  |                  | 90    |   |             |   |                 |         |  |          |          |  |  |            |      |  |  |   |       | 
|KK-TX I, L.P.                           |  |                  | (44   | ) |             |   | 110              |         |  |          |          |  |  |            |      |  |  |   | 1,578  | 
|KK Wyotana, LLC                         |  |                  |      |   |             |   | 51               |         |  |          |          |  |  |            |      |  |  |   |       | 
|KKNY, LLC                               |  |                  | (7    | ) |             |   | 1,199            |         |  |          |          |  |  |            |      |  |  |   |       | 
|Kremeworks, LLC                         |  |                  | 638   |   |             |   | 3,072            |         |  |          | 900       |  |  |            |      |  |  |   | 2,667  | 
|Krispy Kreme Australia Pty Limited      |  |                  | 385   |   |             |   | 1,551            |         |  |          | 922       |  |  |            | 1,767 |  |  |   | 4,419  | 
|Krispy Kreme of South Florida, LLC      |  |                  | 413   |   |             |   | 1,310            |         |  |          |          |  |  |            | 20    |  |  |   | 8,068  | 
|Krispy Kreme U.K. Limited               |  |                  | 3,327 |   |             |   | 1,456            |         |  |          |          |  |  |            |      |  |  |   | 851    | 
|Krispy Kreme Mexico, S. de R.L. de C.V. |  |                  | 1,007 |   |             |   | 1,363            |         |  |          |          |  |  |            |      |  |  |   |       | 
|Priz Doughnuts, LP                      |  |                  |      |   |             |   | 905              |         |  |          | 24        |  |  |            | 18    |  |  |   | 468    | 
|                                        |  |                  |       |   |             |   |                  |         |  |          |           |  |  |            |      
|                                        |  | $                | 5,973 |   |             | $ | 12,804           |         |  | $        | 2,000     |  |  | $          | 1,958 |  |  | $ | 24,593 | 
|                                        |  |                  |       |   |             |   |                  |         |  |          |           |  |  |            |      







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NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                   |       |               |  |                |       |        |                                        |   |       |       |  |   |       |       |  |      |     |       |      |   |       |            |  |   |     |       |  |   |       |       | 
|---------------------------------- | ----- | ------------- |  | -------------- | ----- | ------ | -------------------------------------- | - | ----- | ----- |  | - | ----- | ----- |  | ---- | --- | ----- | ---- | - | ----- | ---------- |  | - | --- | ----- |  | - | ----- | ----- | 
|                                   |       |               |  | Total Loan/    |       |        | Amounts Expiring in Fiscal Year Ending |  
|                                   |       | Guarantee     |  | Lease          |       |        |                                        |  
|                                   |       | Percentages   |  | Guarantees     |       |        | 2006                                   |   |       | 2007  |  |   | 2008  |       |  | 2009 |     |       | 2010 |   |       | Thereafter | 
|                                   |       |               |  |                |       |        |                                        |   |       |       |  |   |       |       |  |      |     |       |      |   |       |            | 
|                                   |       |               |  | (In thousands) |      
|A-OK, LLC                          |       | 22.3% - 33.3% |  | $              | 3,001 |        |                                        | $ | 240   |       |  | $ | 241   |       |  | $    | 254 |       |      | $ | 239   |            |  | $ | 273 |       |  | $ | 1,754 |      
|Amazing Glazed, LLC                |       | 33.3%         |  |                | 2,590 |        |                                        |   | 280   |       |  |   | 280   |       |  |      | 280 |       |      |   | 280   |            |  |   | 280 |       |  |   | 1,190 |      
|Amazing Hot Glazers, LLC           |       | 33.3%         |  |                | 951   |        |                                        |   | 97    |       |  |   | 102   |       |  |      | 108 |       |      |   | 113   |            |  |   | 119 |       |  |   | 412   |      
|KK-TX I, L.P.                      |       | 30.0% - 33.3% |  |                | 1,578 |        |                                        |   | 127   |       |  |   | 142   |       |  |      | 150 |       |      |   | 147   |            |  |   | 140 |       |  |   | 872   |      
|Kremeworks, LLC                    |       | 20.0%         |  |                | 2,667 |        |                                        |   | 202   |       |  |   | 203   |       |  |      | 203 |       |      |   | 1,089 |            |  |   | 970 |       |  |   |      |      
|Krispy Kreme Australia Pty Limited |       | 35.0%         |  |                | 4,419 |        |                                        |   | 3,093 |       |  |   | 1,326 |       |  |      |    |       |      |   |      |            |  |   |    |       |  |   |      |      
|Krispy Kreme of South Florida, LLC |       | 35.0% - 35.3% |  |                | 8,068 |        |                                        |   | 914   |       |  |   | 593   |       |  |      | 618 |       |      |   | 553   |            |  |   | 565 |       |  |   | 4,825 |      
|Krispy Kreme U.K. Limited          |       |              |  |                | 851   |        |                                        |   | 106   |       |  |   | 117   |       |  |      | 127 |       |      |   | 136   |            |  |   | 145 |       |  |   | 220   |      
|Priz Doughnuts, LP                 |       | 33.3%         |  |                | 468   |        |                                        |   | 46    |       |  |   | 42    |       |  |      | 45  |       |      |   | 48    |            |  |   | 51  |       |  |   | 236   |      
|                                   |       |               |  |                |       |        |                                        |   |       |       |  |   |       |       |  |      |     |       |      |   |       |            | 
|                                   | Total |               |  |                | $     | 24,593 |                                        |   | $     | 5,105 |  |   | $     | 3,046 |  |      | $   | 1,785 |      |   | $     | 2,605      |  |   | $   | 2,543 |  |   | $     | 9,509 | 
|                                   |       |               |  |                |       |        |                                        |   |       |       |  |   |       |       |  |      |     |       |      |   |       |            | 





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NOTES TO FINANCIAL STATEMENTS  (Continued)






Note 20  Acquisitions








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NOTES TO FINANCIAL STATEMENTS  (Continued)
















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NOTES TO FINANCIAL STATEMENTS  (Continued)






|                           |  |                           |         |  |              |   |         | 
|-------------------------- |  | ------------------------- | ------- |  | ------------ | - | ------- | 
|                           |  | Feb. 2, 2003              |         |  | Feb. 1, 2004 |  
|                           |  |                           |         |  |              |  
|                           |  | (Unaudited)               |        
|                           |  | (In Thousands, Except Per |        
|                           |  | Share Amounts)            |        
|Total revenues             |  | $                         | 538,499 |  |              | $ | 661,371 | 
|Net income                 |  | $                         | 38,043  |  |              | $ | 51,368  | 
|Diluted earnings per share |  | $                         | .63     |  |              | $ | .82     | 



Note 21  Related Party Transactions








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NOTES TO FINANCIAL STATEMENTS  (Continued)










Note 22  Employee Benefit Plans












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NOTES TO FINANCIAL STATEMENTS  (Continued)








Note 23  Incentive Compensation






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NOTES TO FINANCIAL STATEMENTS  (Continued)


Note 24  Discontinued Operations








|                                                                                     |  |                |        |   |          |   |         |  
|------------------------------------------------------------------------------------ |  | -------------- | ------ | - | -------- | - | ------- | -
|                                                                                     |  | Year Ended     |       
|                                                                                     |  |                |       
|                                                                                     |  | Feb. 1,        |        |   | Jan. 30, |  
|                                                                                     |  | 2004           |        |   | 2005     |  
|                                                                                     |  |                |        |   |          |  
|                                                                                     |  | (In thousands) |       
|Revenues                                                                             |  | $              | 6,747  |   |          | $ | 3,711   |  
|                                                                                     |  |                |        |   |          |  
|Loss before income taxes, including impairment charges of
    $35,113 in fiscal 2005 |  | $              | (1,972 | ) |          | $ | (37,847 | )
|Provision for income taxes                                                           |  |                | 690    |   |          |   | (2,207  | )
|                                                                                     |  |                |        |   |          |  
|Net loss from discontinued operations                                                |  | $              | (1,282 | ) |          | $ | (40,054 | )
|                                                                                     |  |                |        |   |          |  

Note 25  Selected Quarterly Financial Data
(Unaudited)




|                                                      |                                       |                                       |         |         |            |   |         |            |  |   |            |         |  |   |         |         | 
|----------------------------------------------------- | ------------------------------------- | ------------------------------------- | ------- | ------- | ---------- | - | ------- | ---------- |  | - | ---------- | ------- |  | - | ------- | ------- | 
|                                                      |                                       | Three Months Ended                    |        
|                                                      |                                       |                                       |        
|                                                      |                                       | May 4,                                |         |         | Aug. 3,    |   |         | Nov. 2,    |  |   | Feb. 1,    |        
|                                                      |                                       | 2003                                  |         |         | 2003       |   |         | 2003       |  |   | 2004       |        
|                                                      |                                       |                                       |         |         |            |   |         |            |  |   |            |        
|                                                      |                                       | (restated)                            |         |         | (restated) |   |         | (restated) |  |   | (restated) |        
|                                                      |                                       | (In thousands, except per share data) |        
|Revenues                                              |                                       | $                                     | 146,048 |         |            | $ | 156,044 |            |  | $ | 164,995    |         |  | $ | 182,258 |        
|Operating expenses:                                   |                                       |                                       |         |         |            |   |         |            |  |   |            |         |  |   |         |        
|                                                      | Direct operating expenses             |                                       |         | 110,382 |            |   |         | 119,039    |  |   |            | 124,115 |  |   |         | 140,114 | 
|                                                      | General and administrative expenses   |                                       |         | 9,152   |            |   |         | 9,447      |  |   |            | 9,278   |  |   |         | 17,353  | 
|                                                      | Depreciation and amortization expense |                                       |         | 4,828   |            |   |         | 5,232      |  |   |            | 5,641   |  |   |         | 6,608   | 
|Arbitration award                                     |                                       |                                       | (525    | )       |            |   |        |            |  |   |           |         |  |   |        |        
|                                                      |                                       |                                       |         |         |            |   |         |            |  |   |            |        
|Operating income                                      |                                       |                                       | 22,211  |         |            |   | 22,326  |            |  |   | 25,961     |         |  |   | 18,183  |        
|Interest and other income (expense), net              |                                       |                                       | 698     |         |            |   | (2,645  | )          |  |   | (1,860     | )       |  |   | (1,883  | )      
|                                                      |                                       |                                       |         |         |            |   |         |            |  |   |            |        
|Income from continuing operations before income taxes |                                       |                                       | 22,909  |         |            |   | 19,681  |            |  |   | 24,101     |         |  |   | 16,300  |        
|Provision for income taxes                            |                                       |                                       | 9,054   |         |            |   | 7,919   |            |  |   | 9,580      |         |  |   | 6,593   |        
|                                                      |                                       |                                       |         |         |            |   |         |            |  |   |            |        
|Income from continuing operations                     |                                       |                                       | 13,855  |         |            |   | 11,762  |            |  |   | 14,521     |         |  |   | 9,707   |        
|Discontinued operations                               |                                       |                                       |        |         |            |   | (439    | )          |  |   | (468       | )       |  |   | (375    | )      
|                                                      |                                       |                                       |         |         |            |   |         |            |  |   |            |        
|Net income                                            |                                       | $                                     | 13,855  |         |            | $ | 11,323  |            |  | $ | 14,053     |         |  | $ | 9,332   |        
|                                                      |                                       |                                       |         |         |            |   |         |            |  |   |            |        

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NOTES TO FINANCIAL STATEMENTS  (Continued)


|                                     |                                   |                                       |   |     |            |  |   |            |   |  |            |      |   |  |   |      |  
|------------------------------------ | --------------------------------- | ------------------------------------- | - | --- | ---------- |  | - | ---------- | - |  | ---------- | ---- | - |  | - | ---- | -
|                                     |                                   | Three Months Ended                    |  
|                                     |                                   |                                       |  
|                                     |                                   | May 4,                                |   |     | Aug. 3,    |  |   | Nov. 2,    |   |  | Feb. 1,    |     
|                                     |                                   | 2003                                  |   |     | 2003       |  |   | 2003       |   |  | 2004       |     
|                                     |                                   |                                       |   |     |            |  |   |            |   |  |            |     
|                                     |                                   | (restated)                            |   |     | (restated) |  |   | (restated) |   |  | (restated) |     
|                                     |                                   | (In thousands, except per share data) |  
|Earnings per common share  basic:   |                                   |                                       |   |     |            |  |   |            |   |  |            |      |   |  |   |     
|                                     | Income from continuing operations |                                       | $ | .24 |            |  | $ | .20        |   |  | $          | .24  |   |  | $ | .16  |  
|                                     | Discontinued operations           |                                       |   |    |            |  |   | (.01       | ) |  |            | (.01 | ) |  |   | (.01 | )
|                                     |                                   |                                       |   |     |            |  |   |            |   |  |            |     
|                                     | Net income                        |                                       | $ | .24 |            |  | $ | .19        |   |  | $          | .23  |   |  | $ | .15  |  
|                                     |                                   |                                       |   |     |            |  |   |            |   |  |            |     
|Earnings per common share  diluted: |                                   |                                       |   |     |            |  |   |            |   |  |            |      |   |  |   |     
|                                     | Income from continuing operations |                                       | $ | .23 |            |  | $ | .19        |   |  | $          | .23  |   |  | $ | .15  |  
|                                     | Discontinued operations           |                                       |   |    |            |  |   | (.01       | ) |  |            | (.01 | ) |  |   |     |  
|                                     |                                   |                                       |   |     |            |  |   |            |   |  |            |     
|                                     | Net income                        |                                       | $ | .23 |            |  | $ | .18        |   |  | $          | .22  |   |  | $ | .15  |  
|                                     |                                   |                                       |   |     |            |  |   |            |   |  |            |     

|                                                                             |                                                |                                       |         |         |            |   |         |            |  |   |          |         |  |   |         |         | 
|---------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------------- | ------- | ------- | ---------- | - | ------- | ---------- |  | - | -------- | ------- |  | - | ------- | ------- | 
|                                                                             |                                                | Three Months Ended                    |        
|                                                                             |                                                |                                       |        
|                                                                             |                                                | May 2,                                |         |         | Aug. 1,    |   |         | Oct. 31,   |  |   | Jan. 30, |        
|                                                                             |                                                | 2004                                  |         |         | 2004       |   |         | 2004       |  |   | 2005     |        
|                                                                             |                                                |                                       |         |         |            |   |         |            |  |   |          |        
|                                                                             |                                                | (restated)                            |         |         | (restated) |   |         | (restated) |  |   |         
|                                                                             |                                                | (In thousands, except per share data) |        
|Revenues                                                                     |                                                | $                                     | 183,437 |         |            | $ | 188,230 |            |  | $ | 174,393  |         |  | $ | 161,706 |        
|Operating expenses:                                                          |                                                |                                       |         |         |            |   |         |            |  |   |          |         |  |   |         |        
|                                                                             | Direct operating expenses                      |                                       |         | 142,430 |            |   |         | 155,298    |  |   |          | 149,194 |  |   |         | 150,188 | 
|                                                                             | General and administrative expenses            |                                       |         | 11,462  |            |   |         | 11,586     |  |   |          | 12,518  |  |   |         | 20,906  | 
|                                                                             | Depreciation and amortization expense          |                                       |         | 7,040   |            |   |         | 7,731      |  |   |          | 8,554   |  |   |         | 8,609   | 
|                                                                             | Impairment charges and lease termination costs |                                       |         | 6,179   |            |   |         | 1,420      |  |   |          | 142,657 |  |   |         | 11,591  | 
|                                                                             |                                                |                                       |         |         |            |   |         |            |  |   |          |        
|Operating income (loss)                                                      |                                                |                                       | 16,326  |         |            |   | 12,195  |            |  |   | (138,530 | )       |  |   | (29,588 | )      
|Interest and other income (expense), net                                     |                                                |                                       | (2,106  | )       |            |   | (355    | )          |  |   | 954      |         |  |   | (6,276  | )      
|                                                                             |                                                |                                       |         |         |            |   |         |            |  |   |          |        
|Income (loss) from continuing operations before income taxes                 |                                                |                                       | 14,220  |         |            |   | 11,840  |            |  |   | (137,576 | )       |  |   | (35,864 | )      
|Provision for income taxes                                                   |                                                |                                       | 5,202   |         |            |   | 4,605   |            |  |   | (133     | )       |  |   |        |        
|                                                                             |                                                |                                       |         |         |            |   |         |            |  |   |          |        
|Income (loss) from continuing operations                                     |                                                |                                       | 9,018   |         |            |   | 7,235   |            |  |   | (137,443 | )       |  |   | (35,864 | )      
|Discontinued operations                                                      |                                                |                                       | (34,277 | )       |            |   | (480    | )          |  |   | (5,076   | )       |  |   | (221    | )      
|                                                                             |                                                |                                       |         |         |            |   |         |            |  |   |          |        
|Income (loss) before cumulative effect of change in accounting
    principle |                                                |                                       | (25,259 | )       |            |   | 6,755   |            |  |   | (142,519 | )       |  |   | (36,085 | )      
|Cumulative effect of change in accounting principle                          |                                                |                                       | (1,231  | )       |            |   |        |            |  |   |         |         |  |   |        |        
|                                                                             |                                                |                                       |         |         |            |   |         |            |  |   |          |        
|Net income (loss)                                                            |                                                | $                                     | (26,490 | )       |            | $ | 6,755   |            |  | $ | (142,519 | )       |  | $ | (36,085 | )      
|                                                                             |                                                |                                       |         |         |            |   |         |            |  |   |          |        

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NOTES TO FINANCIAL STATEMENTS  (Continued)


|                                          |                                                     |                                       |   |      |            |  |   |            |   |  |          |       |   |  |   |      |  
|----------------------------------------- | --------------------------------------------------- | ------------------------------------- | - | ---- | ---------- |  | - | ---------- | - |  | -------- | ----- | - |  | - | ---- | -
|                                          |                                                     | Three Months Ended                    |  
|                                          |                                                     |                                       |  
|                                          |                                                     | May 2,                                |   |      | Aug. 1,    |  |   | Oct. 31,   |   |  | Jan. 30, |      
|                                          |                                                     | 2004                                  |   |      | 2004       |  |   | 2004       |   |  | 2005     |      
|                                          |                                                     |                                       |   |      |            |  |   |            |   |  |          |      
|                                          |                                                     | (restated)                            |   |      | (restated) |  |   | (restated) |   |  |         
|                                          |                                                     | (In thousands, except per share data) |  
|Income (loss) per common share  basic:   |                                                     |                                       |   |      |            |  |   |            |   |  |          |       |   |  |   |     
|                                          | Income (loss) from continuing operations            |                                       | $ | .15  |            |  | $ | .12        |   |  | $        | (2.23 | ) |  | $ | (.58 | )
|                                          | Discontinued operations                             |                                       |   | (.56 | )          |  |   | (.01       | ) |  |          | (.08  | ) |  |   |     |  
|                                          | Cumulative effect of change in accounting principle |                                       |   | (.02 | )          |  |   |           |   |  |          |      |   |  |   |     |  
|                                          |                                                     |                                       |   |      |            |  |   |            |   |  |          |      
|                                          | Net income (loss)                                   |                                       | $ | (.43 | )          |  | $ | .11        |   |  | $        | (2.31 | ) |  | $ | (.58 | )
|                                          |                                                     |                                       |   |      |            |  |   |            |   |  |          |      
|Income (loss) per common share  diluted: |                                                     |                                       |   |      |            |  |   |            |   |  |          |       |   |  |   |     
|                                          | Income (loss) from continuing operations            |                                       | $ | .14  |            |  | $ | .11        |   |  | $        | (2.23 | ) |  | $ | (.58 | )
|                                          | Discontinued operations                             |                                       |   | (.54 | )          |  |   |           |   |  |          | (.08  | ) |  |   |     |  
|                                          | Cumulative effect of change in accounting principle |                                       |   | (.02 | )          |  |   |           |   |  |          |      |   |  |   |     |  
|                                          |                                                     |                                       |   |      |            |  |   |            |   |  |          |      
|                                          | Net income (loss)                                   |                                       | $ | (.42 | )          |  | $ | .11        |   |  | $        | (2.31 | ) |  | $ | (.58 | )
|                                          |                                                     |                                       |   |      |            |  |   |            |   |  |          |      

8-K.


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NOTES TO FINANCIAL STATEMENTS  (Continued)


10-Q


|                                                      |                                       |                                       |         |         |              |   |         |            |   |   |          |         |  |              |         |         |  |   |         |         |  
|----------------------------------------------------- | ------------------------------------- | ------------------------------------- | ------- | ------- | ------------ | - | ------- | ---------- | - | - | -------- | ------- |  | ------------ | ------- | ------- |  | - | ------- | ------- | -
|                                                      |                                       | Three Months Ended                    |        
|                                                      |                                       |                                       |        
|                                                      |                                       | May 4, 2003                           |         |         | Aug. 3, 2003 |  
|                                                      |                                       |                                       |         |         |              |  
|                                                      |                                       | As                                    |         |         |              |   | As      |            |   |  
|                                                      |                                       | Originally                            |         |         | As           |   |         | Originally |   |   | As       |         |  | As           |        
|                                                      |                                       | Reported                              |         |         | Restated     |   |         | Reported   |   |   | Restated |         |  | Reclassified |        
|                                                      |                                       |                                       |         |         |              |   |         |            |   |   |          |         |  |              |        
|                                                      |                                       | (In thousands, except per share data) |        
|Revenues                                              |                                       | $                                     | 148,660 |         |              | $ | 146,048 |            |   | $ | 161,790  |         |  | $            | 158,658 |         |  | $ | 156,044 |        
|Operating expenses:                                   |                                       |                                       |         |         |              |   |         |            |   |   |          |         |  |              |         |         |  |   |         |        
|                                                      | Direct operating expenses             |                                       |         | 112,480 |              |   |         | 110,382    |   |   |          | 123,705 |  |              |         | 122,168 |  |   |         | 119,039 |  
|                                                      | General and administrative expenses   |                                       |         | 8,902   |              |   |         | 9,152      |   |   |          | 9,060   |  |              |         | 9,447   |  |   |         | 9,447   |  
|                                                      | Depreciation and amortization expense |                                       |         | 4,101   |              |   |         | 4,828      |   |   |          | 4,703   |  |              |         | 5,402   |  |   |         | 5,232   |  
|                                                      | Arbitration award                     |                                       |         | (525    | )            |   |         | (525       | ) |   |          |        |  |              |         |        |  |   |         |        |  
|                                                      |                                       |                                       |         |         |              |   |         |            |   |   |          |         |  |              |        
|Operating income                                      |                                       |                                       | 23,702  |         |              |   | 22,211  |            |   |   | 24,322   |         |  |              | 21,641  |         |  |   | 22,326  |        
|Interest and other income (expense), net              |                                       |                                       | (1,974  | )       |              |   | 698     |            |   |   | (2,543   | )       |  |              | (2,636  | )       |  |   | (2,645  | )      
|                                                      |                                       |                                       |         |         |              |   |         |            |   |   |          |         |  |              |        
|Income from continuing operations before income taxes |                                       |                                       | 21,728  |         |              |   | 22,909  |            |   |   | 21,779   |         |  |              | 19,005  |         |  |   | 19,681  |        
|Provision for income taxes                            |                                       |                                       | 8,588   |         |              |   | 9,054   |            |   |   | 8,778    |         |  |              | 7,682   |         |  |   | 7,919   |        
|                                                      |                                       |                                       |         |         |              |   |         |            |   |   |          |         |  |              |        
|Income from continuing operations                     |                                       |                                       | 13,140  |         |              |   | 13,855  |            |   |   | 13,001   |         |  |              | 11,323  |         |  |   | 11,762  |        
|Discontinued operations                               |                                       |                                       |        |         |              |   |        |            |   |   |         |         |  |              |        |         |  |   | (439    | )      
|                                                      |                                       |                                       |         |         |              |   |         |            |   |   |          |         |  |              |        
|                                                      | Net income                            |                                       | $       | 13,140  |              |   | $       | 13,855     |   |   | $        | 13,001  |  |              | $       | 11,323  |  |   | $       | 11,323  |  
|                                                      |                                       |                                       |         |         |              |   |         |            |   |   |          |         |  |              |        
|Earnings per common share  basic:                    |                                       |                                       |         |         |              |   |         |            |   |   |          |         |  |              |         |         |  |   |         |        
|                                                      | Income from continuing operations     |                                       | $       | .23     |              |   | $       | .24        |   |   | $        | .22     |  |              | $       | .19     |  |   | $       | .20     |  
|                                                      | Discontinued operations               |                                       |         |        |              |   |         |           |   |   |          |        |  |              |         |        |  |   |         | (.01    | )
|                                                      |                                       |                                       |         |         |              |   |         |            |   |   |          |         |  |              |        
|                                                      | Net income                            |                                       | $       | .23     |              |   | $       | .24        |   |   | $        | .22     |  |              | $       | .19     |  |   | $       | .19     |  
|                                                      |                                       |                                       |         |         |              |   |         |            |   |   |          |         |  |              |        
|Earnings per common share  diluted:                  |                                       |                                       |         |         |              |   |         |            |   |   |          |         |  |              |         |         |  |   |         |        
|                                                      | Income from continuing operations     |                                       | $       | .22     |              |   | $       | .23        |   |   | $        | .21     |  |              | $       | .18     |  |   | $       | .19     |  
|                                                      | Discontinued operations               |                                       |         |        |              |   |         |           |   |   |          |        |  |              |         |        |  |   |         | (.01    | )
|                                                      |                                       |                                       |         |         |              |   |         |            |   |   |          |         |  |              |        
|                                                      | Net income                            |                                       | $       | .22     |              |   | $       | .23        |   |   | $        | .21     |  |              | $       | .18     |  |   | $       | .18     |  
|                                                      |                                       |                                       |         |         |              |   |         |            |   |   |          |         |  |              |        

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


|                                                      |                                       |                                       |         |         |              |   |         |              |  |   |            |         |   |          |         |         |              |   |         |         |  |   |         |         |  
|----------------------------------------------------- | ------------------------------------- | ------------------------------------- | ------- | ------- | ------------ | - | ------- | ------------ |  | - | ---------- | ------- | - | -------- | ------- | ------- | ------------ | - | ------- | ------- |  | - | ------- | ------- | -
|                                                      |                                       | Three Months Ended                    |        
|                                                      |                                       |                                       |        
|                                                      |                                       | Nov 2, 2003                           |         |         | Feb. 1, 2004 |  
|                                                      |                                       |                                       |         |         |              |  
|                                                      |                                       | As                                    |         |         |              |   | As      |              |  |  
|                                                      |                                       | Originally                            |         |         | As           |   |         | As           |  |   | Originally |         |   | As       |         |         | As           |  
|                                                      |                                       | Reported                              |         |         | Restated     |   |         | Reclassified |  |   | Reported   |         |   | Restated |         |         | Reclassified |  
|                                                      |                                       |                                       |         |         |              |   |         |              |  |   |            |         |   |          |         |         |              |  
|                                                      |                                       | (In thousands, except per share data) |        
|Revenues                                              |                                       | $                                     | 169,629 |         |              | $ | 166,862 |              |  | $ | 164,995    |         |   | $        | 185,513 |         |              | $ | 184,524 |         |  | $ | 182,258 |        
|Operating expenses:                                   |                                       |                                       |         |         |              |   |         |              |  |   |            |         |   |          |         |         |              |   |         |         |  |   |         |        
|                                                      | Direct operating expenses             |                                       |         | 129,229 |              |   |         | 126,578      |  |   |            | 124,115 |   |          |         | 141,982 |              |   |         | 142,757 |  |   |         | 140,114 |  
|                                                      | General and administrative expenses   |                                       |         | 9,400   |              |   |         | 9,278        |  |   |            | 9,278   |   |          |         | 9,550   |              |   |         | 17,353  |  |   |         | 17,353  |  
|                                                      | Depreciation and amortization expense |                                       |         | 4,964   |              |   |         | 5,769        |  |   |            | 5,641   |   |          |         | 5,955   |              |   |         | 6,809   |  |   |         | 6,608   |  
|                                                      | Arbitration award                     |                                       |         |        |              |   |         |             |  |   |            |        |   |          |         |        |              |   |         |        |  |   |         |        |  
|                                                      |                                       |                                       |         |         |              |   |         |              |  |   |            |         |   |          |         |         |              |  
|Operating income                                      |                                       |                                       | 26,036  |         |              |   | 25,237  |              |  |   | 25,961     |         |   |          | 28,026  |         |              |   | 17,605  |         |  |   | 18,183  |        
|Interest and other income (expense), net              |                                       |                                       | (1,880  | )       |              |   | (1,856  | )            |  |   | (1,860     | )       |   |          | (1,012  | )       |              |   | (1,881  | )       |  |   | (1,883  | )      
|                                                      |                                       |                                       |         |         |              |   |         |              |  |   |            |         |   |          |         |         |              |  
|Income from continuing operations before income taxes |                                       |                                       | 24,156  |         |              |   | 23,381  |              |  |   | 24,101     |         |   |          | 27,014  |         |              |   | 15,724  |         |  |   | 16,300  |        
|Provision for income taxes                            |                                       |                                       | 9,634   |         |              |   | 9,328   |              |  |   | 9,580      |         |   |          | 10,590  |         |              |   | 6,392   |         |  |   | 6,593   |        
|                                                      |                                       |                                       |         |         |              |   |         |              |  |   |            |         |   |          |         |         |              |  
|Income from continuing operations                     |                                       |                                       | 14,522  |         |              |   | 14,053  |              |  |   | 14,521     |         |   |          | 16,424  |         |              |   | 9,332   |         |  |   | 9,707   |        
|Discontinued operations                               |                                       |                                       |        |         |              |   |        |              |  |   | (468       | )       |   |          |        |         |              |   |        |         |  |   | (375    | )      
|                                                      |                                       |                                       |         |         |              |   |         |              |  |   |            |         |   |          |         |         |              |  
|                                                      | Net income                            |                                       | $       | 14,522  |              |   | $       | 14,053       |  |   | $          | 14,053  |   |          | $       | 16,424  |              |   | $       | 9,332   |  |   | $       | 9,332   |  
|                                                      |                                       |                                       |         |         |              |   |         |              |  |   |            |         |   |          |         |         |              |  
|Earnings per common share  basic:                    |                                       |                                       |         |         |              |   |         |              |  |   |            |         |   |          |         |         |              |   |         |         |  |   |         |        
|                                                      | Income from continuing operations     |                                       | $       | .24     |              |   | $       | .23          |  |   | $          | .24     |   |          | $       | .27     |              |   | $       | .15     |  |   | $       | .16     |  
|                                                      | Discontinued operations               |                                       |         |        |              |   |         |             |  |   |            | (.01    | ) |          |         |        |              |   |         |        |  |   |         | (.01    | )
|                                                      |                                       |                                       |         |         |              |   |         |              |  |   |            |         |   |          |         |         |              |  
|                                                      | Net income                            |                                       | $       | .24     |              |   | $       | .23          |  |   | $          | .23     |   |          | $       | .27     |              |   | $       | .15     |  |   | $       | .15     |  
|                                                      |                                       |                                       |         |         |              |   |         |              |  |   |            |         |   |          |         |         |              |  
|Earnings per common share  diluted:                  |                                       |                                       |         |         |              |   |         |              |  |   |            |         |   |          |         |         |              |   |         |         |  |   |         |        
|                                                      | Income from continuing operations     |                                       | $       | .23     |              |   | $       | .22          |  |   | $          | .23     |   |          | $       | .26     |              |   | $       | .15     |  |   | $       | .15     |  
|                                                      | Discontinued operations               |                                       |         |        |              |   |         |             |  |   |            | (.01    | ) |          |         |        |              |   |         |        |  |   |         |        |  
|                                                      |                                       |                                       |         |         |              |   |         |              |  |   |            |         |   |          |         |         |              |  
|                                                      | Net income                            |                                       | $       | .23     |              |   | $       | .22          |  |   | $          | .22     |   |          | $       | .26     |              |   | $       | .15     |  |   | $       | .15     |  
|                                                      |                                       |                                       |         |         |              |   |         |              |  |   |            |         |   |          |         |         |              |  

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


|                                                                             |                                                     |                                       |         |         |              |   |         |              |   |   |          |         |   |            |         |         |             |   |         |         |   |   |          |         |  
|---------------------------------------------------------------------------- | --------------------------------------------------- | ------------------------------------- | ------- | ------- | ------------ | - | ------- | ------------ | - | - | -------- | ------- | - | ---------- | ------- | ------- | ----------- | - | ------- | ------- | - | - | -------- | ------- | -
|                                                                             |                                                     | Three Months Ended                    |        
|                                                                             |                                                     |                                       |        
|                                                                             |                                                     | May 2, 2004                           |         |         | Aug. 1, 2004 |   |         | Oct 31, 2004 |  
|                                                                             |                                                     |                                       |         |         |              |   |         |              |  
|                                                                             |                                                     | As                                    |         |         |              |   | As      |              |   |   |          | As      |   |            |        
|                                                                             |                                                     | Originally                            |         |         | As           |   |         | Originally   |   |   | As       |         |   | Originally |         |         |            
|                                                                             |                                                     | Reported                              |         |         | Restated     |   |         | Reported     |   |   | Restated |         |   | Reported   |         |         | As Restated |  
|                                                                             |                                                     |                                       |         |         |              |   |         |              |   |   |          |         |   |            |         |         |             |  
|                                                                             |                                                     | (In thousands, except per share data) |        
|Revenues                                                                     |                                                     | $                                     | 184,356 |         |              | $ | 183,437 |              |   | $ | 177,448  |         |   | $          | 188,230 |         |             | $ | 170,137 |         |   | $ | 174,393  |        
|Operating expenses:                                                          |                                                     |                                       |         |         |              |   |         |              |   |   |          |         |   |            |         |         |             |   |         |         |   |   |          |        
|                                                                             | Direct operating expenses                           |                                       |         | 141,383 |              |   |         | 142,430      |   |   |          | 145,633 |   |            |         | 155,298 |             |   |         | 143,597 |   |   |          | 149,194 |  
|                                                                             | General and administrative expenses                 |                                       |         | 10,664  |              |   |         | 11,462       |   |   |          | 11,845  |   |            |         | 11,586  |             |   |         | 12,419  |   |   |          | 12,518  |  
|                                                                             | Depreciation and amortization expense               |                                       |         | 6,130   |              |   |         | 7,040        |   |   |          | 6,328   |   |            |         | 7,731   |             |   |         | 7,038   |   |   |          | 8,554   |  
|                                                                             | Impairment charges and store closing costs          |                                       |         | 7,543   |              |   |         | 6,179        |   |   |          | 1,802   |   |            |         | 1,420   |             |   |         | 5,520   |   |   |          | 142,657 |  
|                                                                             |                                                     |                                       |         |         |              |   |         |              |   |   |          |         |   |            |         |         |             |  
|Operating income (loss)                                                      |                                                     |                                       | 18,636  |         |              |   | 16,326  |              |   |   | 11,840   |         |   |            | 12,195  |         |             |   | 1,563   |         |   |   | (138,530 | )      
|Interest and other income (expense), net                                     |                                                     |                                       | (2,114  | )       |              |   | (2,106  | )            |   |   | (1,158   | )       |   |            | (355    | )       |             |   | (2,152  | )       |   |   | 954      |        
|                                                                             |                                                     |                                       |         |         |              |   |         |              |   |   |          |         |   |            |         |         |             |  
|Income (loss) from continuing operations before income taxes                 |                                                     |                                       | 16,522  |         |              |   | 14,220  |              |   |   | 10,682   |         |   |            | 11,840  |         |             |   | (589    | )       |   |   | (137,576 | )      
|Provision for income taxes                                                   |                                                     |                                       | 6,675   |         |              |   | 5,202   |              |   |   | 4,438    |         |   |            | 4,605   |         |             |   | 430     |         |   |   | (133     | )      
|                                                                             |                                                     |                                       |         |         |              |   |         |              |   |   |          |         |   |            |         |         |             |  
|Income (loss) from continuing operations                                     |                                                     |                                       | 9,847   |         |              |   | 9,018   |              |   |   | 6,244    |         |   |            | 7,235   |         |             |   | (1,019  | )       |   |   | (137,443 | )      
|Discontinued operations                                                      |                                                     |                                       | (34,285 | )       |              |   | (34,277 | )            |   |   | (480     | )       |   |            | (480    | )       |             |   | (1,976  | )       |   |   | (5,076   | )      
|                                                                             |                                                     |                                       |         |         |              |   |         |              |   |   |          |         |   |            |         |         |             |  
|Income (loss) before cumulative effect of change in accounting
    principle |                                                     |                                       | (24,438 | )       |              |   | (25,259 | )            |   |   | 5,764    |         |   |            | 6,755   |         |             |   | (2,995  | )       |   |   | (142,519 | )      
|Cumulative effect of change in accounting principle                          |                                                     |                                       |        |         |              |   | (1,231  | )            |   |   |         |         |   |            |        |         |             |   |        |         |   |   |         |        
|                                                                             |                                                     |                                       |         |         |              |   |         |              |   |   |          |         |   |            |         |         |             |  
|Net income (loss)                                                            |                                                     | $                                     | (24,438 | )       |              | $ | (26,490 | )            |   | $ | 5,764    |         |   | $          | 6,755   |         |             | $ | (2,995  | )       |   | $ | (142,519 | )      
|                                                                             |                                                     |                                       |         |         |              |   |         |              |   |   |          |         |   |            |         |         |             |  
|Earnings (loss) per common share  basic:                                    |                                                     |                                       |         |         |              |   |         |              |   |   |          |         |   |            |         |         |             |   |         |         |   |   |          |        
|                                                                             | Income (loss) from continuing operations            |                                       | $       | .16     |              |   | $       | .15          |   |   | $        | .10     |   |            | $       | .12     |             |   | $       | (.02    | ) |   | $        | (2.23   | )
|                                                                             | Discontinued operations                             |                                       |         | (.56    | )            |   |         | (.56         | ) |   |          | (.01    | ) |            |         | (.01    | )           |   |         | (.03    | ) |   |          | (.08    | )
|                                                                             | Cumulative effect of change in accounting principle |                                       |         |        |              |   |         | (.02         | ) |   |          |        |   |            |         |        |             |   |         |        |   |   |          |        |  
|                                                                             |                                                     |                                       |         |         |              |   |         |              |   |   |          |         |   |            |         |         |             |  
|                                                                             | Net income (loss)                                   |                                       | $       | (.40    | )            |   | $       | (.43         | ) |   | $        | .09     |   |            | $       | .11     |             |   | $       | (.05    | ) |   | $        | (2.31   | )
|                                                                             |                                                     |                                       |         |         |              |   |         |              |   |   |          |         |   |            |         |         |             |  

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


|                                     |                                                     |                                       |   |      |              |  |    |              |   |  |          |      |   |            |   |     |             |  |   |      |   |  |   |       |  
|------------------------------------ | --------------------------------------------------- | ------------------------------------- | - | ---- | ------------ |  | -- | ------------ | - |  | -------- | ---- | - | ---------- | - | --- | ----------- |  | - | ---- | - |  | - | ----- | -
|                                     |                                                     | Three Months Ended                    |  
|                                     |                                                     |                                       |  
|                                     |                                                     | May 2, 2004                           |   |      | Aug. 1, 2004 |  |    | Oct 31, 2004 |  
|                                     |                                                     |                                       |   |      |              |  |    |              |  
|                                     |                                                     | As                                    |   |      |              |  | As |              |   |  |          | As   |   |            |  
|                                     |                                                     | Originally                            |   |      | As           |  |    | Originally   |   |  | As       |      |   | Originally |   |     |            
|                                     |                                                     | Reported                              |   |      | Restated     |  |    | Reported     |   |  | Restated |      |   | Reported   |   |     | As Restated | 
|                                     |                                                     |                                       |   |      |              |  |    |              |   |  |          |      |   |            |   |     |             | 
|                                     |                                                     | (In thousands, except per share data) |  
|Earnings per common share  diluted: |                                                     |                                       |   |      |              |  |    |              |   |  |          |      |   |            |   |     |             |  |   |      |   |  |   |      
|                                     | Income (loss) from continuing operations            |                                       | $ | .16  |              |  | $  | .14          |   |  | $        | .10  |   |            | $ | .11 |             |  | $ | (.02 | ) |  | $ | (2.23 | )
|                                     | Discontinued operations                             |                                       |   | (.54 | )            |  |    | (.54         | ) |  |          | (.01 | ) |            |   |    |             |  |   | (.03 | ) |  |   | (.08  | )
|                                     | Cumulative effect of change in accounting principle |                                       |   |     |              |  |    | (.02         | ) |  |          |     |   |            |   |    |             |  |   |     |   |  |   |      |  
|                                     |                                                     |                                       |   |      |              |  |    |              |   |  |          |      |   |            |   |     |             | 
|                                     | Net income (loss)                                   |                                       | $ | (.38 | )            |  | $  | (.42         | ) |  | $        | .09  |   |            | $ | .11 |             |  | $ | (.05 | ) |  | $ | (2.31 | )
|                                     |                                                     |                                       |   |      |              |  |    |              |   |  |          |      |   |            |   |     |             | 



|                                                             |                                                                         |                             |         |        |         |   |         |         |   |   |         |        |   |      |         |      |   |   |         |        |  
|------------------------------------------------------------ | ----------------------------------------------------------------------- | --------------------------- | ------- | ------ | ------- | - | ------- | ------- | - | - | ------- | ------ | - | ---- | ------- | ---- | - | - | ------- | ------ | -
|                                                             |                                                                         | RevenuesThree Months Ended |        
|                                                             |                                                                         |                             |        
|                                                             |                                                                         | May 4,                      |         |        | Aug. 3, |   |         | Nov. 2, |   |   | Feb. 1, |        |   |     
|                                                             |                                                                         | 2003                        |         |        | 2003    |   |         | 2003    |   |   | 2004    |        |   | Year |        
|                                                             |                                                                         |                             |         |        |         |   |         |         |   |   |         |        |   |      |        
|                                                             |                                                                         | (In thousands)              |        
|As originally reported                                       |                                                                         | $                           | 148,660 |        |         | $ | 161,790 |         |   | $ | 169,629 |        |   | $    | 185,513 |      |   | $ | 665,592 |       
|                                                             |                                                                         |                             |         |        |         |   |         |         |   |   |         |        |   |      |        
|Restatement adjustments:                                     |                                                                         |                             |         |        |         |   |         |         |   |   |         |        |   |      |         |      |   |   |         |       
|                                                             | Revenue recognition on pre-acquisition sales to acquired
    franchisee |                             |         | (1,488 | )       |   |         | (2,760  | ) |   |         | (1,886 | ) |      |         |     |   |   |         | (6,134 | )
|                                                             | Revenue recognition on equipment sales                                  |                             |         | (1,172 | )       |   |         | 538     |   |   |         | (594   | ) |      |         | (891 | ) |   |         | (2,119 | )
|                                                             | Equipment sales associated with franchise acquisition                   |                             |         |       |         |   |         | (744    | ) |   |         |       |   |      |         |     |   |   |         | (744   | )
|                                                             | Other adjustments                                                       |                             |         | 48     |         |   |         | (166    | ) |   |         | (287   | ) |      |         | (98  | ) |   |         | (503   | )
|                                                             |                                                                         |                             |         |        |         |   |         |         |   |   |         |        |   |      |        
|                                                             | Total adjustments                                                       |                             |         | (2,612 | )       |   |         | (3,132  | ) |   |         | (2,767 | ) |      |         | (989 | ) |   |         | (9,500 | )
|                                                             |                                                                         |                             |         |        |         |   |         |         |   |   |         |        |   |      |        
|As restated                                                  |                                                                         |                             | 146,048 |        |         |   | 158,658 |         |   |   | 166,862 |        |   |      | 184,524 |      |   |   | 656,092 |       
|Reclassification of Montana Mills to discontinued operations |                                                                         |                             |        |        |         |   | (2,614  | )       |   |   | (1,867  | )      |   |      | (2,266  | )    |   |   | (6,747  | )     
|                                                             |                                                                         |                             |         |        |         |   |         |         |   |   |         |        |   |      |        
|As reclassified                                              |                                                                         | $                           | 146,048 |        |         | $ | 156,044 |         |   | $ | 164,995 |        |   | $    | 182,258 |      |   | $ | 649,345 |       
|                                                             |                                                                         |                             |         |        |         |   |         |         |   |   |         |        |   |      |        

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


|                                                             |                                                                         |                                     |        |        |         |   |        |         |   |   |         |      |   |      |        |         |   |   |         |         |  
|------------------------------------------------------------ | ----------------------------------------------------------------------- | ----------------------------------- | ------ | ------ | ------- | - | ------ | ------- | - | - | ------- | ---- | - | ---- | ------ | ------- | - | - | ------- | ------- | -
|                                                             |                                                                         | Operating IncomeThree Months Ended |       
|                                                             |                                                                         |                                     |       
|                                                             |                                                                         | May 4,                              |        |        | Aug. 3, |   |        | Nov. 2, |   |   | Feb. 1, |      |   |     
|                                                             |                                                                         | 2003                                |        |        | 2003    |   |        | 2003    |   |   | 2004    |      |   | Year |       
|                                                             |                                                                         |                                     |        |        |         |   |        |         |   |   |         |      |   |      |       
|                                                             |                                                                         | (In thousands)                      |       
|As originally reported                                       |                                                                         | $                                   | 23,702 |        |         | $ | 24,322 |         |   | $ | 26,036  |      |   | $    | 28,026 |         |   | $ | 102,086 |        
|                                                             |                                                                         |                                     |        |        |         |   |        |         |   |   |         |      |   |      |       
|Restatement adjustments:                                     |                                                                         |                                     |        |        |         |   |        |         |   |   |         |      |   |      |        |         |   |   |         |        
|                                                             | Revenue recognition on pre-acquisition sales to acquired
    franchisee |                                     |        | (446   | )       |   |        | (828    | ) |   |         | (566 | ) |      |        |        |   |   |         | (1,840  | )
|                                                             | Revenue recognition on equipment sales                                  |                                     |        | (384   | )       |   |        | 99      |   |   |         | (156 | ) |      |        | (722    | ) |   |         | (1,163  | )
|                                                             | Equipment sales associated with franchise acquisition                   |                                     |        |       |         |   |        | (604    | ) |   |         |     |   |      |        |        |   |   |         | (604    | )
|                                                             | Compensation expense associated with acquired franchises                |                                     |        |       |         |   |        |        |   |   |         |     |   |      |        | (4,401  | ) |   |         | (4,401  | )
|                                                             | Acquisition premium paid to owner of acquired franchise                 |                                     |        |       |         |   |        |        |   |   |         |     |   |      |        | (1,867  | ) |   |         | (1,867  | )
|                                                             | Management fee associated with acquired franchise                       |                                     |        |       |         |   |        |        |   |   |         |     |   |      |        | (597    | ) |   |         | (597    | )
|                                                             | Other payments associated with acquired franchise                       |                                     |        |       |         |   |        |        |   |   |         | (512 | ) |      |        | (635    | ) |   |         | (1,147  | )
|                                                             | Lease and depreciation accounting                                       |                                     |        | (550   | )       |   |        | (348    | ) |   |         | (453 | ) |      |        | (175    | ) |   |         | (1,526  | )
|                                                             | Commodity futures contracts                                             |                                     |        | 142    |         |   |        | 112     |   |   |         | 98   |   |      |        | 848     |   |   |         | 1,200   |  
|                                                             | Intercompany profit on sales of equipment                               |                                     |        | (84    | )       |   |        | (95     | ) |   |         | (342 | ) |      |        | (220    | ) |   |         | (741    | )
|                                                             | Vacation pay                                                            |                                     |        | (73    | )       |   |        | (73     | ) |   |         | (73  | ) |      |        | (71     | ) |   |         | (290    | )
|                                                             | Elimination of initial franchise fees                                   |                                     |        | (3     | )       |   |        | (121    | ) |   |         | (144 | ) |      |        | (74     | ) |   |         | (342    | )
|                                                             | Capitalized trademark costs                                             |                                     |        | (17    | )       |   |        | (105    | ) |   |         | (194 | ) |      |        | (72     | ) |   |         | (388    | )
|                                                             | Charitable contributions                                                |                                     |        | (192   | )       |   |        | 132     |   |   |         | 141  |   |      |        | (108    | ) |   |         | (27     | )
|                                                             | Equipment loss provision                                                |                                     |        |       |         |   |        | (174    | ) |   |         |     |   |      |        | (865    | ) |   |         | (1,039  | )
|                                                             | Incentive compensation accruals                                         |                                     |        | (447   | )       |   |        | (487    | ) |   |         | 934  |   |      |        |        |   |   |         |        |  
|                                                             | Other adjustments                                                       |                                     |        | 563    |         |   |        | (189    | ) |   |         | 468  |   |      |        | (1,462  | ) |   |         | (620    | )
|                                                             |                                                                         |                                     |        |        |         |   |        |         |   |   |         |      |   |      |       
|                                                             | Total adjustments                                                       |                                     |        | (1,491 | )       |   |        | (2,681  | ) |   |         | (799 | ) |      |        | (10,421 | ) |   |         | (15,392 | )
|                                                             |                                                                         |                                     |        |        |         |   |        |         |   |   |         |      |   |      |       
|As restated                                                  |                                                                         |                                     | 22,211 |        |         |   | 21,641 |         |   |   | 25,237  |      |   |      | 17,605 |         |   |   | 86,694  |        
|Reclassification of Montana Mills to discontinued operations |                                                                         |                                     |       |        |         |   | 685    |         |   |   | 724     |      |   |      | 578    |         |   |   | 1,987   |        
|                                                             |                                                                         |                                     |        |        |         |   |        |         |   |   |         |      |   |      |       
|As reclassified                                              |                                                                         | $                                   | 22,211 |        |         | $ | 22,326 |         |   | $ | 25,961  |      |   | $    | 18,183 |         |   | $ | 88,681  |        
|                                                             |                                                                         |                                     |        |        |         |   |        |         |   |   |         |      |   |      |       

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


|                                              |                                                                         |                                      |        |       |         |   |        |         |   |   |         |      |   |      |        |        |   |   |        |        |  
|--------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------ | ------ | ----- | ------- | - | ------ | ------- | - | - | ------- | ---- | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                              |                                                                         | Net income (loss)Three Months Ended |       
|                                              |                                                                         |                                      |       
|                                              |                                                                         | May 4,                               |        |       | Aug. 3, |   |        | Nov. 2, |   |   | Feb. 1, |      |   |     
|                                              |                                                                         | 2003                                 |        |       | 2003    |   |        | 2003    |   |   | 2004    |      |   | Year |       
|                                              |                                                                         |                                      |        |       |         |   |        |         |   |   |         |      |   |      |       
|                                              |                                                                         | (In thousands)                       |       
|As originally reported                        |                                                                         | $                                    | 13,140 |       |         | $ | 13,001 |         |   | $ | 14,522  |      |   | $    | 16,424 |        |   | $ | 57,087 |       
|                                              |                                                                         |                                      |        |       |         |   |        |         |   |   |         |      |   |      |       
|Restatement adjustments, net of income taxes: |                                                                         |                                      |        |       |         |   |        |         |   |   |         |      |   |      |        |        |   |   |        |       
|                                              | Revenue recognition on pre-acquisition sales to acquired
    franchisee |                                      |        | (270  | )       |   |        | (501    | ) |   |         | (342 | ) |      |        |       |   |   |        | (1,113 | )
|                                              | Revenue recognition on equipment sales                                  |                                      |        | (232  | )       |   |        | 60      |   |   |         | (94  | ) |      |        | (437   | ) |   |        | (703   | )
|                                              | Equipment sales associated with franchise acquisition                   |                                      |        |      |         |   |        | (365    | ) |   |         |     |   |      |        |       |   |   |        | (365   | )
|                                              | Compensation expense associated with acquired franchises                |                                      |        |      |         |   |        |        |   |   |         |     |   |      |        | (2,663 | ) |   |        | (2,663 | )
|                                              | Acquisition premium paid to owner of acquired franchise                 |                                      |        |      |         |   |        |        |   |   |         |     |   |      |        | (1,130 | ) |   |        | (1,130 | )
|                                              | Management fee associated with acquired franchise                       |                                      |        |      |         |   |        |        |   |   |         |     |   |      |        | (361   | ) |   |        | (361   | )
|                                              | Other payments associated with acquired franchise                       |                                      |        |      |         |   |        |        |   |   |         | (310 | ) |      |        | (384   | ) |   |        | (694   | )
|                                              | Lease and depreciation accounting                                       |                                      |        | (333  | )       |   |        | (211    | ) |   |         | (274 | ) |      |        | (106   | ) |   |        | (924   | )
|                                              | Commodity futures contracts                                             |                                      |        | 86    |         |   |        | 68      |   |   |         | 59   |   |      |        | 513    |   |   |        | 726    |  
|                                              | Intercompany profit on sales of equipment                               |                                      |        | (51   | )       |   |        | (57     | ) |   |         | (207 | ) |      |        | (133   | ) |   |        | (448   | )
|                                              | Vacation pay                                                            |                                      |        | (44   | )       |   |        | (44     | ) |   |         | (44  | ) |      |        | (43    | ) |   |        | (175   | )
|                                              | Elimination of initial franchise fees                                   |                                      |        | (2    | )       |   |        | (73     | ) |   |         | (87  | ) |      |        | (45    | ) |   |        | (207   | )
|                                              | Capitalized trademark costs                                             |                                      |        | (10   | )       |   |        | (64     | ) |   |         | (117 | ) |      |        | (44    | ) |   |        | (235   | )
|                                              | Charitable contributions                                                |                                      |        | (116  | )       |   |        | 80      |   |   |         | 85   |   |      |        | (65    | ) |   |        | (16    | )
|                                              | Equipment loss provision                                                |                                      |        |      |         |   |        | (105    | ) |   |         |     |   |      |        | (523   | ) |   |        | (628   | )
|                                              | Sale of store to franchisee                                             |                                      |        | 1,649 |         |   |        |        |   |   |         |     |   |      |        |       |   |   |        | 1,649  |  
|                                              | Foreign currency translation and transactions                           |                                      |        |      |         |   |        |        |   |   |         |     |   |      |        | (659   | ) |   |        | (659   | )
|                                              | Incentive compensation accruals                                         |                                      |        | (270  | )       |   |        | (295    | ) |   |         | 565  |   |      |        |       |   |   |        |       |  
|                                              | Other adjustments                                                       |                                      |        | 308   |         |   |        | (171    | ) |   |         | 297  |   |      |        | (1,012 | ) |   |        | (578   | )
|                                              |                                                                         |                                      |        |       |         |   |        |         |   |   |         |      |   |      |       
|                                              | Total adjustments                                                       |                                      |        | 715   |         |   |        | (1,678  | ) |   |         | (469 | ) |      |        | (7,092 | ) |   |        | (8,524 | )
|                                              |                                                                         |                                      |        |       |         |   |        |         |   |   |         |      |   |      |       
|As restated                                   |                                                                         | $                                    | 13,855 |       |         | $ | 11,323 |         |   | $ | 14,053  |      |   | $    | 9,332  |        |   | $ | 48,563 |       
|                                              |                                                                         |                                      |        |       |         |   |        |         |   |   |         |      |   |      |       

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


|                         |                                                                            |                             |         |      |         |   |         |          |   |   |         |        |  
|------------------------ | -------------------------------------------------------------------------- | --------------------------- | ------- | ---- | ------- | - | ------- | -------- | - | - | ------- | ------ | -
|                         |                                                                            | RevenuesThree Months Ended |        
|                         |                                                                            |                             |        
|                         |                                                                            | May 2,                      |         |      | Aug. 1, |   |         | Oct. 31, |  
|                         |                                                                            | 2004                        |         |      | 2004    |   |         | 2004     |  
|                         |                                                                            |                             |         |      |         |   |         |          |  
|                         |                                                                            | (In thousands)              |        
|As originally reported   |                                                                            | $                           | 184,356 |      |         | $ | 177,448 |          |   | $ | 170,137 |       
|                         |                                                                            |                             |         |      |         |   |         |          |  
|Restatement adjustments: |                                                                            |                             |         |      |         |   |         |          |   |   |         |       
|                         | Adoption of FIN 46(R)  consolidation of KremeKo
    and New England Dough |                             |         |     |         |   |         | 9,474    |   |   |         | 5,804  |  
|                         | Revenue recognition on equipment sales                                     |                             |         | (993 | )       |   |         | 1,365    |   |   |         | (1,510 | )
|                         | Other adjustments                                                          |                             |         | 74   |         |   |         | (57      | ) |   |         | (38    | )
|                         |                                                                            |                             |         |      |         |   |         |          |  
|                         | Total adjustments                                                          |                             |         | (919 | )       |   |         | 10,782   |   |   |         | 4,256  |  
|                         |                                                                            |                             |         |      |         |   |         |          |  
|As restated              |                                                                            | $                           | 183,437 |      |         | $ | 188,230 |          |   | $ | 174,393 |       
|                         |                                                                            |                             |         |      |         |   |         |          |  

|                         |                                                                            |                                      |        |        |         |   |        |          |   |   |          |          |  
|------------------------ | -------------------------------------------------------------------------- | ------------------------------------ | ------ | ------ | ------- | - | ------ | -------- | - | - | -------- | -------- | -
|                         |                                                                            | Operating income (loss)Three Months |       
|                         |                                                                            | Ended                                |       
|                         |                                                                            |                                      |       
|                         |                                                                            | May 2,                               |        |        | Aug. 1, |   |        | Oct. 31, |  
|                         |                                                                            | 2004                                 |        |        | 2004    |   |        | 2004     |  
|                         |                                                                            |                                      |        |        |         |   |        |          |  
|                         |                                                                            | (In thousands)                       |       
|As originally reported   |                                                                            | $                                    | 18,636 |        |         | $ | 11,840 |          |   | $ | 1,563    |         
|                         |                                                                            |                                      |        |        |         |   |        |          |  
|Restatement adjustments: |                                                                            |                                      |        |        |         |   |        |          |   |   |          |         
|                         | Impairment of intangibles                                                  |                                      |        |       |         |   |        |         |   |   |          | (132,148 | )
|                         | Adoption of FIN 46(R)  consolidation of KremeKo
    and New England Dough |                                      |        |       |         |   |        | (406     | ) |   |          | (5,665   | )
|                         | Revenue recognition on equipment sales                                     |                                      |        | (1,704 | )       |   |        | 1,091    |   |   |          | (511     | )
|                         | Lease and depreciation accounting                                          |                                      |        | (229   | )       |   |        | (250     | ) |   |          | (665     | )
|                         | Commodity futures contracts                                                |                                      |        | (428   | )       |   |        | (957     | ) |   |          | 236      |  
|                         | Intercompany profit on sales of equipment                                  |                                      |        | 62     |         |   |        | 174      |   |   |          | (421     | )
|                         | Vacation pay                                                               |                                      |        | (96    | )       |   |        | (97      | ) |   |          | (96      | )
|                         | Elimination of initial franchise fees                                      |                                      |        | (52    | )       |   |        | (67      | ) |   |          | (18      | )
|                         | Capitalized trademark costs                                                |                                      |        | (77    | )       |   |        | 29       |   |   |          | (91      | )
|                         | Charitable contributions                                                   |                                      |        | (742   | )       |   |        | 8        |   |   |          | 122      |  
|                         | Equipment loss provision                                                   |                                      |        | 1,039  |         |   |        |         |   |   |          |         |  
|                         | Contingent proceeds related to sale of franchise                           |                                      |        |       |         |   |        | 500      |   |   |          |         |  
|                         | Other adjustments                                                          |                                      |        | (83    | )       |   |        | 330      |   |   |          | (836     | )
|                         |                                                                            |                                      |        |        |         |   |        |          |  
|                         | Total adjustments                                                          |                                      |        | (2,310 | )       |   |        | 355      |   |   |          | (140,093 | )
|                         |                                                                            |                                      |        |        |         |   |        |          |  
|As restated              |                                                                            | $                                    | 16,326 |        |         | $ | 12,195 |          |   | $ | (138,530 | )       
|                         |                                                                            |                                      |        |        |         |   |        |          |  

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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


|                                              |                                                           |                                |         |        |         |   |       |          |   |   |          |          |  
|--------------------------------------------- | --------------------------------------------------------- | ------------------------------ | ------- | ------ | ------- | - | ----- | -------- | - | - | -------- | -------- | -
|                                              |                                                           | Net income (loss)Three Months |        
|                                              |                                                           | Ended                          |        
|                                              |                                                           |                                |        
|                                              |                                                           | May 2,                         |         |        | Aug. 1, |   |       | Oct. 31, |  
|                                              |                                                           | 2004                           |         |        | 2004    |   |       | 2004     |  
|                                              |                                                           |                                |         |        |         |   |       |          |  
|                                              |                                                           | (In thousands)                 |        
|As originally reported                        |                                                           | $                              | (24,438 | )      |         | $ | 5,764 |          |   | $ | (2,995   | )       
|                                              |                                                           |                                |         |        |         |   |       |          |  
|Restatement adjustments, net of income taxes: |                                                           |                                |         |        |         |   |       |          |   |   |          |         
|                                              | Impairment of intangibles                                 |                                |         |       |         |   |       |         |   |   |          | (82,196  | )
|                                              | Adoption of FIN 46(R)  cumulative effect of
    adoption |                                |         | (1,231 | )       |   |       |         |   |   |          |         |  
|                                              | Revenue recognition on equipment sales                    |                                |         | (1,050 | )       |   |       | 673      |   |   |          | (318     | )
|                                              | Lease and depreciation accounting                         |                                |         | (141   | )       |   |       | (154     | ) |   |          | (414     | )
|                                              | Commodity futures contracts                               |                                |         | (264   | )       |   |       | (590     | ) |   |          | 147      |  
|                                              | Intercompany profit on sales of equipment                 |                                |         | 38     |         |   |       | 107      |   |   |          | (262     | )
|                                              | Vacation pay                                              |                                |         | (59    | )       |   |       | (60      | ) |   |          | (60      | )
|                                              | Elimination of initial franchise fees                     |                                |         | (32    | )       |   |       | (41      | ) |   |          | (11      | )
|                                              | Capitalized trademark costs                               |                                |         | (47    | )       |   |       | 18       |   |   |          | (57      | )
|                                              | Charitable contributions                                  |                                |         | (457   | )       |   |       | 5        |   |   |          | 76       |  
|                                              | Equipment loss provision                                  |                                |         | 640    |         |   |       |         |   |   |          |         |  
|                                              | Sale of store to franchisee                               |                                |         |       |         |   |       |         |   |   |          | (961     | )
|                                              | Foreign currency translation and transactions             |                                |         | 78     |         |   |       | (66      | ) |   |          | (238     | )
|                                              | Contingent proceeds related to sale of franchise          |                                |         |       |         |   |       | 309      |   |   |          |         |  
|                                              | Valuation allowance for deferred income tax assets        |                                |         |       |         |   |       |         |   |   |          | (54,197  | )
|                                              | Other adjustments                                         |                                |         | 473    |         |   |       | 790      |   |   |          | (1,033   | )
|                                              |                                                           |                                |         |        |         |   |       |          |  
|                                              | Total adjustments                                         |                                |         | (2,052 | )       |   |       | 991      |   |   |          | (139,524 | )
|                                              |                                                           |                                |         |        |         |   |       |          |  
|As restated                                   |                                                           | $                              | (26,490 | )      |         | $ | 6,755 |          |   | $ | (142,519 | )       
|                                              |                                                           |                                |         |        |         |   |       |          |  





| |                          
| | -------------------------
| | Impairment of Intangibles

10-Q


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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                      
| | ---------------------
| | Adoption of FIN 46(R)



|  |                                               
|- | ----------------------------------------------
| | Consolidation of KremeKo and New England Dough







|  |                              
|- | -----------------------------
| | Cumulative effect of adoption







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KRISPY KREME DOUGHNUTS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)






| |                                
| | -------------------------------
| | Incentive Compensation Accruals









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








|         |                         
|-------- | ------------------------
|Item 9A. | CONTROLS AND PROCEDURES.



| |                                                 
| | ------------------------------------------------
| | Evaluation of Disclosure Controls and Procedures

10-K, 13a-15(e) 15d-15(e) 10-K 10-K






| |                                                                     
| | --------------------------------------------------------------------
| | Managements Report on Internal Control over
    Financial Reporting

13a-15(f) 15d-15(f)


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Internal Control  Integrated
Framework










| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our former chief executive officer, who retired from the Company
    in January 2005 under the circumstances discussed in Item 1
    under the caption Significant Events Since Our Last
    Regular Periodic Report  Management/Board of Director
    Changes, and our former chief operating officer, who
    resigned from the Company in August 2004 (together, former
    senior management), did not establish and maintain a
    proper tone and control consciousness. Specifically, former
    senior management through its actions did not emphasize the
    importance of internal control over financial reporting and
    adherence to our code of business conduct and ethics.                                                                                                             
|
| |  | We failed to implement adequate assignment of authority and
    responsibility and the necessary lines of communication between
    operations and finance personnel. Specifically, there was
    inadequate sharing of financial information within and across
    our corporate and divisional offices and other operating
    facilities to adequately raise issues to the appropriate level
    of accounting and financial reporting personnel. Further, we did
    not maintain effective controls over the communication and
    maintenance of information regarding significant transactions
    and events with certain of our franchisees, such as the signing
    of letters of intent and definitive agreements and the
    guaranteeing of certain obligations of certain of our
    franchisees.
|
| |  | We did not maintain formalized and consistent finance and
    accounting policies and procedures nor did we maintain adequate
    controls with respect to the review, supervision and monitoring
    of our accounting operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | We did not maintain a sufficient complement of personnel with an
    appropriate level of accounting knowledge, experience and
    training in the application of GAAP commensurate with our
    financial reporting requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We did not maintain effective controls over the preparation and
    review of recurring and nonrecurring journal entries.
    Specifically, effective controls were not designed and in place
    to ensure that journal entries were prepared with sufficient
    supporting documentation and that those entries were reviewed
    and approved to ensure the completeness, accuracy and
    appropriateness of the entries recorded.                                                                                                                                                                                                                                                                                                                
|
| |  | We did not maintain effective controls to ensure that our
    financial statement accounts were complete and accurate and that
    they were analyzed and agreed to detailed supporting
    documentation. Specifically, we did not maintain effective
    controls to ensure that account reconciliations over certain
    balance sheet accounts were properly performed, reviewed and
    approved.                                                                                                                                                                                                                                                                                                                                                 
|
| |  | We did not maintain effective controls over the accounting for
    acquisitions and divestitures. Specifically, effective controls
    were not designed and in place to ensure that such transactions
    were accounted for in accordance with GAAP. This control
    deficiency and the control environment deficiencies described
    under paragraph 1 above resulted in the failure to prevent
    or detect errors in the accounting for certain of the
    Companys acquisitions, including the improper recording of
    income or failure to properly record expense with respect to
    certain transactions with the acquired companies, where that
    accounting was not consistent with the economic substance of the
    transactions.
|
| |  | We did not maintain effective controls over our accounting for
    consolidated franchisees and equity method franchisees.
    Specifically, we did not maintain effective controls to ensure
    completeness and accuracy related to the consolidation of our
    franchisees accounted for on a consolidated basis. Also, we did
    not maintain effective controls to ensure completeness and
    accuracy of our financial statement accounts related to
    franchisees accounted for on the equity method in accordance
    with GAAP.                                                                                                                                                                                                         
|
| |  | We did not maintain effective controls over the completeness and
    accuracy of intercompany eliminations with respect to the profit
    to be eliminated for intercompany equipment sales and for
    franchise fees earned from franchisees accounted for under the
    equity method of accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | We did not maintain effective controls to ensure that our
    financial statement accounts related to translation of financial
    statement accounts denominated in foreign currencies and
    translation of foreign currency transaction gains or losses were
    completely and accurately recorded in accordance with GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                       





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Internal Control  Integrated
Framework




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Remediation








| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | All officers or employees who the Special Committee believed had
    any substantial involvement in or responsibility for the
    accounting errors addressed by the Restatement are no longer in
    our employ.
|
| |  | Our new management team will highlight its commitment to
    designing, implementing and maintaining an effective internal
    control environment by, among other things:                                       



| |   |                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Redistributing to all of our employees our Code of Business
    Conduct and Ethics, which, among other things, reiterated to our
    employees the previously implemented ethics hotline through
    which employees at all levels can anonymously submit information
    regarding unethical behavior and other irregularities they
    become aware of or have observed;
|
| |  | Implementing and documenting quarterly meetings between our
    Legal, Finance and Operations departments to discuss various
    operational and financial reporting issues facing us, including,
    among others, franchisee matters (including acquisitions and
    divestitures), store openings and closings and periodic
    comparative financial results;         
|
| |  | Improving our communication channels to ensure that our Finance
    department is informed of the execution of all material
    agreements on a timely basis;                                                                                                                                                                                                             
|
| |  | Creating and maintaining a Finance accounting policies and
    procedures manual; and                                                                                                                                                                                                                                                                                     
|
| |  | Increasing the resources devoted to our internal audit function
    and our assessment and evaluation of our internal control over
    financial reporting and disclosures controls and procedures.                                                                                                                                                                       



| |   |                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have implemented hiring, training and retention of personnel
    plans that are designed to ensure that we have sufficient
    personnel with knowledge, experience and training in the
    application of GAAP commensurate with our financial reporting
    requirements.

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| |   |                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We will implement controls over recurring and nonrecurring
    journal entries which will include requiring supporting
    documentation be attached to all journal entries prior to their
    being reviewed and approved in connection with completing our
    financial statements for future periods;
|
| |  | We will complete periodic account reconciliations for all
    significant balance sheet accounts, which will be reviewed by
    appropriate finance personnel; and                                                                                                                                       
|
| |  | The quarterly meetings we are implementing between our Legal,
    Finance and Operations departments to discuss various
    operational and financial reporting issues facing us.                                                                                                                        

Additional Control Deficiencies Not Constituting Material
Weaknesses




Managements Conclusions on the Remediation










| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Significantly extending the fiscal 2005 reporting process,
    thereby allowing us to conduct additional analyses and make
    additional adjustments as necessary to ensure the accuracy and
    completeness of our financial reporting; and
|
| |  | Retaining on an interim basis outside consultants with relevant
    accounting experience, skills and knowledge, working under our
    supervision and direction, to assist with the Restatement and
    our fiscal 2005 closing.             

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10-K


Subsequent Material Changes in Internal Control over
Financial Reporting






| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We experienced significant turnover in our accounting personnel;                                                                                                                                                  
|
| |  | Attention of the accounting personnel has been on the
    preparation of fiscal 2005 financial statements and the
    restatement of financial statements for prior periods and not on
    subsequent periods; and
|
| |  | Our ability to improve our control processing and implement our
    remediation initiatives has been limited.                                                                                                     








|         |                   
|-------- | ------------------
|Item 9B. | OTHER INFORMATION.



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PART III







|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Directors and Executive Officers




|                      |  |     |    |  |          |                                                                              
|--------------------- |  | --- | -- |  | -------- | -----------------------------------------------------------------------------
|Name                  |  | Age |    |  | Position
|                      |  |     |    |  |         
|James H. Morgan       |  |     | 58 |  |          | Director, Chairman of Board(2),(3)                                           
|Daryl G. Brewster     |  |     | 49 |  |          | Director, President and Chief Executive Officer                              
|Mary Davis Holt       |  |     | 55 |  |          | Director(1),(3)                                                              
|William T. Lynch, Jr. |  |     | 63 |  |          | Director(1),(3)                                                              
|Robert S. McCoy, Jr.  |  |     | 67 |  |          | Director, Chairman of Audit Committee(1),(3)                                 
|Robert L. Strickland  |  |     | 75 |  |          | Director, Vice Chairman of Board, Chairman of Governance
    Committee(2),(3)
|Michael H. Sutton     |  |     | 65 |  |          | Director, Co-Chair of Special Committee(4)                                   
|Lizanne Thomas        |  |     | 48 |  |          | Director, Co-Chair of Special Committee(4)                                   
|Togo D. West, Jr.     |  |     | 63 |  |          | Director, Chairman of Compensation Committee(2),(3)                          
|Michael C. Phalen     |  |     | 36 |  |          | Chief Financial Officer                                                      
|Douglas R. Muir       |  |     | 52 |  |          | Chief Accounting Officer                                                     
|Jeffrey L. Jervik     |  |     | 49 |  |          | Executive Vice President of Operations                                       
|Stephen F. Cooper     |  |     | 59 |  |          | Chief Restructuring Officer                                                  






|    |                                      
|--- | -------------------------------------
|(1) | Member of the Audit Committee.       
|   
|(2) | Member of the Compensation Committee.
|   
|(3) | Member of the Governance Committee.  
|   
|(4) | Member of the Special Committee.     

James H. Morgan


Daryl G. Brewster


Mary Davis Holt


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William T. Lynch, Jr.


Robert S. McCoy, Jr.


Robert L. Strickland


Michael H. Sutton


Lizanne Thomas


Togo D. West, Jr.


Michael C. Phalen


Douglas R. Muir


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17-year


Jeffrey L. Jervik


Stephen F. Cooper


Emeritus Directors




Determination of Independence




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| |   |                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | If a director is an executive officer of another company which
    does business with Krispy Kreme and the annual revenues derived
    from that business are less than 1% of either companys
    total revenues for the last fiscal year.                                                                                                            
|
| |  | If a director is a director, officer or trustee of a charitable
    organization and Krispy Kremes annual charitable
    contributions to the organization (exclusive of gift-match
    payments) are less than 1% of the organizations total
    annual charitable receipts during the last fiscal year of such
    organization.                   
|
| |  | If a director is a partner of or of counsel to a law firm that
    performs legal services for Krispy Kreme and payments made by
    Krispy Kreme to the firm during a fiscal year are not for legal
    services performed by the director or his immediate family and
    do not exceed 1% of the firms gross revenues for the last
    fiscal year.

Non-Management Directors




Communications with Directors






Section 16(a) Beneficial Ownership Reporting
Compliance




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Audit Committee; Audit Committee Financial Expert




S-K).


Code of Ethics


http://www.krispykreme.com/investorrelations.html


NYSE and SEC Certifications




10-K.


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|         |                        
|-------- | -----------------------
|Item 11. | EXECUTIVE COMPENSATION.

Executive Compensation




Summary Compensation Table


|                      |                                        |      |      |                     |        |              |            |         |         |                        |                 |            |  |        |         |         |           |  |   |         |  |              |        |         |  |   |   |   |  |   |   |        | 
|--------------------- | -------------------------------------- | ---- | ---- | ------------------- | ------ | ------------ | ---------- | ------- | ------- | ---------------------- | --------------- | ---------- |  | ------ | ------- | ------- | --------- |  | - | ------- |  | ------------ | ------ | ------- |  | - | - | - |  | - | - | ------ | 
|                      |                                        |      |      |                     |        |              |            |         |         | Long-Term Compensation |                 |           
|                      |                                        |      |      |                     |        |              |            |         |         |                        |                 |           
|                      |                                        |      |      |                     |        | Awards       |            |         | Payouts |                        |                
|                      |                                        |      |      | Annual Compensation |        |              |            |         |         |                        |                 |           
|                      |                                        |      |      |                     |        |              | Restricted |         |         | Securities             |                 |            |  |        |        
|                      |                                        |      |      |                     |        | Other Annual |            |         | Stock   |                        |                 | Underlying |  |        | LTIP    |         | All Other | 
|Named Officer         |                                        | Year |      |                     | Salary |              |            | Bonus   |         |                        | Compensation(1) |            |  | Awards |         |         | Options   |  |   | Payouts |  | Compensation |       
|                      |                                        |      |      |                     |        |              |            |         |         |                        |                 |            |  |        |         |         |           |  |   |         |  |              |       
|Scott A. Livengood(2) |                                        |      | 2005 |                     |        | $            | 593,462    |         |         | $                      |                |            |  | $      | 226,467 |         |           |  |  |         |  |              | 80,000 |         |  | $ |  |   |  | $ |  |       
|                      | Former Chairman of the                 |      |      | 2004                |        |              |            | 545,833 |         |                        |                 |           |  |        |         | 312,988 |           |  |   |        |  |              |        | 253,500 |  |   |   |  |  |   |   |       | 
|                      | Board, President and                   |      |      | 2003                |        |              |            | 495,833 |         |                        |                 | 231,805    |  |        |         | 398,226 |           |  |   |        |  |              |        | 80,000  |  |   |   |  |  |   |   | 12,106 | 
|                      | Chief Executive Officer                |      |      |                     |        |              |            |         |         |                        |                 |            |  |        |         |         |           |  |   |         |  |              |        |         |  |   |   |   |  |   |   |        | 
|Stephen F. Cooper(3)  |                                        |      | 2005 |                     |        |              |           |         |         |                        |                |            |  |        |        |         |           |  |  |         |  |              |       |         |  |   |  |   |  |   |  |       
|                      | Former Chief Executive                 |      |      | 2004                |        |              |            |        |         |                        |                 |           |  |        |         |        |           |  |   |        |  |              |        |        |  |   |   |  |  |   |   |       | 
|                      | Officer                                |      |      | 2003                |        |              |            |        |         |                        |                 |           |  |        |         |        |           |  |   |        |  |              |        |        |  |   |   |  |  |   |   |       | 
|John N. McAleer(4)    |                                        |      | 2005 |                     |        |              | 290,125    |         |         |                        |                |            |  |        | 70,146  |         |           |  |  |         |  |              | 24,000 |         |  |   |  |   |  |   |  |       
|                      | Former Director and Executive          |      |      | 2004                |        |              |            | 272,917 |         |                        |                 |           |  |        |         | 151,663 |           |  |   |        |  |              |        | 84,500  |  |   |   |  |  |   |   |       | 
|                      | Vice President Concept                 |      |      | 2003                |        |              |            | 248,333 |         |                        |                 | 99,456     |  |        |         | 112,124 |           |  |   |        |  |              |        | 24,000  |  |   |   |  |  |   |   | 4,618  | 
|                      | Development                            |      |      |                     |        |              |            |         |         |                        |                 |            |  |        |         |         |           |  |   |         |  |              |        |         |  |   |   |   |  |   |   |        | 
|Frank Murphy(5)       |                                        |      | 2005 |                     |        |              | 371,250    |         |         |                        |                |            |  |        | 61,866  |         |           |  |  |         |  |              | 48,000 |         |  |   |  |   |  |   |  |       
|                      | Former Executive Vice                  |      |      | 2004                |        |              |            | 327,500 |         |                        |                 |           |  |        |         | 83,243  |           |  |   |        |  |              |        | 78,000  |  |   |   |  |  |   |   |       | 
|                      | President, General Counsel,            |      |      | 2003                |        |              |            | 233,077 |         |                        |                 | 108,965    |  |        |         | 45,450  |           |  |   |        |  |              |        | 248,000 |  |   |   |  |  |   |   |       | 
|                      | Chief Governance Officer and Secretary |      |      |                     |        |              |            |         |         |                        |                 |            |  |        |         |         |           |  |   |         |  |              |        |         |  |   |   |   |  |   |   |        | 
|Michael C. Phalen(6)  |                                        |      | 2005 |                     |        |              | 300,000    |         |         |                        | 300,000         |            |  |        | 97,438  |         |           |  |  |         |  |              | 48,000 |         |  |   |  |   |  |   |  |       
|                      | Chief Financial Officer                |      |      | 2004                |        |              |            | 25,000  |         |                        |                 |           |  |        |         | 3,000   |           |  |   |        |  |              |        | 75,000  |  |   |   |  |  |   |   |       | 
|                      |                                        |      |      | 2003                |        |              |            |        |         |                        |                 |           |  |        |         |        |           |  |   |        |  |              |        |        |  |   |   |  |  |   |   |       | 
|Steven G. Panagos(7)  |                                        |      | 2005 |                     |        |              |           |         |         |                        |                |            |  |        |        |         |           |  |  |         |  |              |       |         |  |   |  |   |  |   |  |       
|                      | Former President and                   |      |      | 2004                |        |              |            |        |         |                        |                 |           |  |        |         |        |           |  |   |        |  |              |        |        |  |   |   |  |  |   |   |       | 
|                      | Chief Operating Officer                |      |      | 2003                |        |              |            |        |         |                        |                 |           |  |        |         |        |           |  |   |        |  |              |        |        |  |   |   |  |  |   |   |       | 
|John W. Tate(8)       |                                        |      | 2005 |                     |        |              | 297,564    |         |         |                        |                |            |  |        | 44,985  |         |           |  |  |         |  |              | 60,000 |         |  |   |  |   |  |   |  |       
|                      | Former Chief Operating                 |      |      | 2004                |        |              |            | 436,667 |         |                        |                 |           |  |        |         | 136,676 |           |  |   |        |  |              |        | 70,000  |  |   |   |  |  |   |   |       | 
|                      | Officer of Krispy                      |      |      | 2003                |        |              |            | 397,917 |         |                        |                 | 186,028    |  |        |         | 66,942  |           |  |   |        |  |              |        | 60,000  |  |   |   |  |  |   |   | 9,543  | 
|                      | Kreme and President of                 |      |      |                     |        |              |            |         |         |                        |                 |            |  |        |         |         |           |  |   |         |  |              |        |         |  |   |   |   |  |   |   |        | 
|                      | KKM&D                                  |      |      |                     |        |              |            |         |         |                        |                 |            |  |        |         |         |           |  |   |         |  |              |        |         |  |   |   |   |  |   |   |        | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In accordance with SEC regulations, the following discloses
    information concerning each perquisite or other personal benefit
    received by a named officer during each of the last three fiscal
    years where such perquisite or other personal benefit exceeded
    25% of the total perquisites and personal benefits received by
    such named officer during such year. Other annual compensation
    for Mr. Livengood includes: (1) tax and estate
    planning services, including a
    gross-up for taxes due,
    of $86,018 and

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | $140,283 for fiscal 2004 and fiscal 2003, respectively, and
    (2) $117,790, $164,294 and $159,471 in fiscal 2005, fiscal
    2004 and fiscal 2003, respectively, for use of corporate
    aircraft. Other annual compensation for Mr. McAleer
    includes: (1) $26,394, $104,247 and $42,485 in fiscal 2005,
    fiscal 2004 and fiscal 2003, respectively, for use of corporate
    aircraft and (2) an automobile allowance of $38,772 for
    each of fiscal 2005, fiscal 2004 and fiscal 2003. Other annual
    compensation for Mr. Murphy includes: (1) $42,486 in
    fiscal 2004 for use of corporate aircraft, (2) an
    automobile allowance of $37,200, $37,200 and $28,902 for fiscal
    2005, fiscal 2004 and fiscal 2003, respectively, and
    (3) $20,173 and $12,670 in fiscal 2005 and fiscal 2003,
    respectively, for reimbursement of club dues, grossed up for
    taxes due. Other annual compensation for Mr. Phalen
    consists of: (1) an automobile allowance of $36,000 and
    $3,000 for fiscal 2005 and fiscal 2004, respectively, and
    (2) $61,438 in fiscal 2005 for reimbursement of relocation
    expenses. Other annual compensation for Mr. Tate includes:
    (1) tax and estate planning services of $13,687 for fiscal
    2005, including a
    gross-up for taxes due,
    (2) $77,080 in fiscal 2004 for use of corporate aircraft
    and (3) an automobile allowance of $21,623, $38,772 and
    $38,772 for fiscal 2005, fiscal 2004 and fiscal 2003,
    respectively. For purposes of the Summary Compensation
    Table, the Company values the personal use of corporate
    aircraft under the incremental cost method. The incremental cost
    method represents the incremental cost to the Company of
    personal usage of corporate aircraft and is calculated based on
    the direct operating costs to the Company, including fuel costs,
    crew fees and travel expenses, trip-related repairs and
    maintenance, landing fees and other direct operating costs.
|   
|(2) | Under the circumstances discussed in Item 1 under the
    caption Significant Events Since Our Last Regular Periodic
    Report  Management/ Board of Directors Changes,
    Mr. Livengood retired as Chairman of the Board, President
    and Chief Executive Officer of the Company and resigned as a
    director of the Company on January 17, 2005. The Company
    and Mr. Livengood entered into a consulting agreement
    effective January 17, 2005. On June 3, 2005, the
    Company informed Mr. Livengood that his failure to
    cooperate with the Special Committees investigation
    constituted a breach of the Consulting Agreement, that the
    payment of consulting fees and continued medical coverage would
    therefore cease and that the term of the agreement would not be
    extended past its initial six-month term. See
     Employment Contracts and Termination of
    Employment and Change-In-Control Arrangements for a
    description of this consulting agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(3) | Mr. Cooper, Chairman of KZC, was named the Companys
    Chief Executive Officer, replacing Mr. Livengood, on
    January 18, 2005. On March 6, 2006, Mr. Cooper
    resigned as the Companys Chief Executive Officer and was
    appointed our Chief Restructuring Officer. Mr. Cooper did
    not receive a salary or bonus or any other compensation from the
    Company in his role as Chief Executive Officer. Mr. Cooper
    is Chairman of KZC, the entity to which the Company pays fees
    and expenses under a Services Agreement (see
     Employment Contracts and Termination of
    Employment and Change-In-Control Arrangements below for a
    description of the Services Agreement). However, Mr. Cooper
    does not own, directly or indirectly, any equity interests in
    KZC, and he is not guaranteed any portion of any revenues or
    earnings generated by KZC from Krispy Kreme (including with
    regard to the warrant issued to KZC).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(4) | Mr. McAleer retired as an executive officer and resigned as
    a director of Krispy Kreme effective September 30, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(5) | Mr. Murphy commenced his employment with Krispy Kreme in
    April 2002. The compensation package extended to Mr. Murphy
    at the time he commenced employment included options for
    200,000 shares of Krispy Kremes common stock.
    Mr. Murphy resigned as an executive officer of Krispy Kreme
    effective December 1, 2005, at which time all of his
    unvested options were forfeited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(6) | Mr. Phalen commenced his employment with Krispy Kreme in
    January 2004. The compensation package extended to
    Mr. Phalen at the time he commenced employment included
    options for 75,000 shares of Krispy Kremes common
    stock. Mr. Phalens bonus pursuant to his employment
    agreement for fiscal 2005 was paid in August 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(7) | Mr. Panagos, a Managing Director of KZC, was named the
    Companys President and Chief Operating Officer, on
    January 18, 2005. On March 6, 2006, Mr. Panagos
    resigned as the Companys                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | President and Chief Operating Officer and was appointed our
    Director of Restructuring. Mr. Panagos did not receive a
    salary or bonus or any other compensation from the Company in
    his role as President and Chief Operating Officer.
    Mr. Panagos is a Managing Director of KZC, the entity to
    which the Company pays fees and expenses under a Services
    Agreement (see  Employment Contracts and
    Termination of Employment and Change-In-Control
    Arrangements below for a description of the Services
    Agreement). However, Mr. Panagos does not own, directly or
    indirectly, any equity interests in KZC, and he is not
    guaranteed any portion of any revenues or earnings generated by
    KZC from Krispy Kreme (including with regard to the warrant
    issued to KZC).
|   
|(8) | Mr. Tate joined the Company in fiscal 2001 and received
    restricted stock awards valued at $165,000 in such fiscal year.
    Mr. Tate resigned as an executive officer of Krispy Kreme
    effective August 23, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Option Grants in Fiscal 2005




|                      |  |              |        |                   |            |  |      |             |                            |   |                             |                       |                  |    |              |  |     |   |         |  |  |   |           | 
|--------------------- |  | ------------ | ------ | ----------------- | ---------- |  | ---- | ----------- | -------------------------- | - | --------------------------- | --------------------- | ---------------- | -- | ------------ |  | --- | - | ------- |  |  | - | --------- | 
|                      |  |              |        | Individual Grants |            |  |      |             |                           
|                      |  |              |        |                   |            |  |      |             | Potential Realizable Value |  
|                      |  |              |        | % of Total        |            |  |      |             |                            |   | at Assumed Annual Rates     |                      
|                      |  |              |        | Number of         |            |  |      |             |                            |   | of Stock Price Appreciation |                      
|                      |  | Options      |        |                   | Securities |  |      |             |                            |   |                             | for Option Term as of |                 
|                      |  | Granted to   |        |                   | Underlying |  |      | Exercise or |                            |   |                             |                       | January 30, 2005 |   
|                      |  | Employees in |        |                   | Options    |  |      | Base Price  |                            |   | Expiration                  |                       |                  |    |             
|Name                  |  | Fiscal Year  |        |                   | Granted    |  |      | ($/Share)   |                            |   | Date                        |                       |                  | 5% |              |  | 10% |  
|                      |  |              |        |                   |            |  |      |             |                            |   |                             |                       |                  |    |              |  |     |  
|Scott A. Livengood(1) |  |              | 80,000 |                   |            |  | 7.18 | %           |                            | $ | 14.04                       |                       |                  |    | Aug. 9, 2014 |  |     | $ | 706,374 |  |  | $ | 1,790,092 | 
|Stephen F. Cooper(2)  |  |              |       |                   |            |  |     |             |                            |   |                            |                       |                  |    |             |  |     |   |        |  |  |   |          | 
|John N. McAleer(3)    |  |              | 24,000 |                   |            |  | 2.16 | %           |                            | $ | 14.04                       |                       |                  |    | Aug. 9, 2014 |  |     |   | 211,912 |  |  |   | 537,027   | 
|Frank Murphy(4)       |  |              | 48,000 |                   |            |  | 4.31 | %           |                            | $ | 14.04                       |                       |                  |    | Aug. 9, 2014 |  |     |   | 423,825 |  |  |   | 1,074,055 | 
|Michael C. Phalen     |  |              | 48,000 |                   |            |  | 4.31 | %           |                            | $ | 14.04                       |                       |                  |    | Aug. 9, 2014 |  |     |   | 423,825 |  |  |   | 1,074,055 | 
|Steven G. Panagos(5)  |  |              |       |                   |            |  |     |             |                            |   |                            |                       |                  |    |             |  |     |   |        |  |  |   |          | 
|John W. Tate(6)       |  |              | 60,000 |                   |            |  | 5.39 | %           |                            | $ | 14.04                       |                       |                  |    | Aug. 9, 2014 |  |     |   | 529,781 |  |  |   | 1,342,569 | 






|    |                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Livengood retired as an executive officer of Krispy
    Kreme on January 17, 2005.                                                                                                                                                                              
|   
|(2) | Mr. Cooper was named the Companys Chief Executive
    Officer effective January 18, 2005. On March 6, 2006,
    Mr. Cooper resigned as the Companys Chief Executive
    Officer and was appointed our Chief Restructuring Officer.                                
|   
|(3) | Mr. McAleer retired as an executive officer of Krispy Kreme
    effective September 30, 2005.                                                                                                                                                                       
|   
|(4) | Mr. Murphy resigned as an executive officer of Krispy Kreme
    effective December 1, 2005, at which time his unvested
    options to purchase 36,000 of these 48,000 shares were
    forfeited.                                                                    
|   
|(5) | Mr. Panagos was named the Companys President and
    Chief Operating Officer effective January 18, 2005. On
    March 6, 2006, Mr. Panagos resigned as the
    Companys President and Chief Operating Officer and was
    appointed our Director of Restructuring.
|   
|(6) | Mr. Tate resigned as an executive officer of Krispy Kreme
    effective August 23, 2004, at which time these options were
    forfeited.                                                                                                                            

167



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Aggregated Option Exercises in Fiscal 2005 and


2005 Fiscal Year-End Option Values


in-the


|                      |  |                   |   |  |                |               |                            |             |                      |                         |               |  |  |             |         |  |               |   |           |  |  |   |   | 
|--------------------- |  | ----------------- | - |  | -------------- | ------------- | -------------------------- | ----------- | -------------------- | ----------------------- | ------------- |  |  | ----------- | ------- |  | ------------- | - | --------- |  |  | - | - | 
|                      |  |                   |   |  |                | Common Shares |                            |             | Value of Unexercised
|                      |  | Number of         |   |  |                |               | Underlying Unexercised     |             |                      | In-the-Money Options at
|                      |  | Securities        |   |  |                |               | Options at Fiscal Year-End |             |                      | Fiscal Year-End        
|                      |  | Underlying        |   |  |                |               |                            |             |                      |                        
|Named Officer         |  | Options Exercised |   |  | Value Received |               |                            | Exercisable |                      |                         | Unexercisable |  |  | Exercisable |         |  | Unexercisable
|                      |  |                   |   |  |                |               |                            |             |                      |                         |               |  |  |             |         |  |              
|Scott A. Livengood(1) |  |                   |  |  |                |               |                           |             |                      |                         | 1,710,254     |  |  |             |        |  |               | $ | 6,003,357 |  |  | $ |  | 
|Stephen F. Cooper(2)  |  |                   |  |  |                |               |                           |             |                      |                         |              |  |  |             |        |  |               |   |          |  |  |   |  | 
|John N. McAleer(3)    |  |                   |  |  |                |               |                           |             |                      |                         | 591,125       |  |  |             | 105,375 |  |               |   | 3,974,400 |  |  |   |  | 
|Frank Murphy(4)       |  |                   |  |  |                |               |                           |             |                      |                         | 143,500       |  |  |             | 230,500 |  |               |   |          |  |  |   |  | 
|Michael C. Phalen     |  |                   |  |  |                |               |                           |             |                      |                         | 18,750        |  |  |             | 104,250 |  |               |   |          |  |  |   |  | 
|Steven G. Panagos(5)  |  |                   |  |  |                |               |                           |             |                      |                         |              |  |  |             |        |  |               |   |          |  |  |   |  | 
|John W. Tate(6)       |  |                   |  |  |                |               |                           |             |                      |                         |              |  |  |             |        |  |               |   |          |  |  |   |  | 






|    |                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Livengood retired as an executive officer of Krispy
    Kreme on January 17, 2005.                                                                                                                                                                              
|   
|(2) | Mr. Cooper was named the Companys Chief Executive
    Officer effective January 18, 2005. On March 6, 2006,
    Mr. Cooper resigned as the Companys Chief Executive
    Officer and was appointed our Chief Restructuring Officer.                                
|   
|(3) | Mr. McAleer retired as an executive officer of Krispy Kreme
    effective September 30, 2005.                                                                                                                                                                       
|   
|(4) | Mr. Murphy resigned as an executive officer of Krispy Kreme
    effective December 1, 2005. As a result of his resignation,
    Mr. Murphy forfeited options to
    purchase 137,000 shares.                                                                        
|   
|(5) | Mr. Panagos was named the Companys President and
    Chief Operating Officer effective January 18, 2005. On
    March 6, 2006, Mr. Panagos resigned as the
    Companys President and Chief Operating Officer and was
    appointed our Director of Restructuring.
|   
|(6) | Mr. Tate resigned as an executive officer of Krispy Kreme
    effective August 23, 2004.                                                                                                                                                                            

Directors Compensation




168



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Employment Contracts and Termination of Employment and
Change-In-Control Arrangements




| |                     
| | --------------------
| | Employment Contracts



Daryl G. Brewster.










| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | An amount equal to his current annual base salary through the
    termination date;                                 
|
| |  | An amount equal to two times the sum of the base salary and the
    target annual bonus for the year of termination;

169



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| |   |                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An amount, payable as soon as practicable following the date of
    termination, equal to a bonus for the year of termination
    calculated as a pro-rated target annual bonus for the number of
    months during the bonus year prior to the date of termination;
|
| |  | Full vesting of all restricted shares and full exercisability of
    all stock options held on the date of termination; and                                                                                                                                         
|
| |  | Medical benefits for up to eighteen months after the date of
    termination.                                                                                                                                                                                       







Michael C. Phalen. out-of






| |   |                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An amount equal to his current annual base salary and
    non-incentive compensation through the expiration date of the
    agreement, or a lump sum payment equal to his current annual
    base salary and non-incentive compensation due, discounted at
    the rate of 6% per annum; and
|
| |  | A lump sum payment, payable within 30 days of termination,
    equal to his current monthly base salary multiplied by the
    number of months between the month of discharge and the
    preceding January 6; and                                                                          
|
| |  | A lump sum payment, payable within 30 days of termination,
    equal to three times his bonus, calculated at 50% of his
    annualized base salary for the then current fiscal year and
    discounted at the rate of 6% per annum.                                                         





170



---



##### Table of Contents









Jeffrey L. Jervik.






| |   |                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | If the termination occurs within the first twelve months of the
    agreement, Mr. Jervik will receive his then-current base
    salary for six months as severance pay, and up to an additional
    six months, on a
    month-to-month basis,
    if Mr. Jervik remains unemployed despite diligent efforts
    to find employment; or
|
| |  | If the termination occurs at any time after the first
    anniversary of the agreement, Mr. Jervik will receive his
    base salary, non-incentive compensation, bonuses and benefits
    through the date of termination.                                                                                                              

month-to






171



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Scott A. Livengood.




John N. McAleer.


John W. Tate.


172



---



##### Table of Contents





Frank Murphy.




| |                               
| | ------------------------------
| | Change of Control Arrangements





| |                       
| | ----------------------
| | KZC Services Agreement

month-to


out-of




173



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Compensation Committee Interlocks and Insider
Participation




Report of the Compensation Committee on Executive
Compensation








| |                                                
| | -----------------------------------------------
| | Executive Compensation Policies for Fiscal 2005





| |   |                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Link executive compensation to Krispy Kremes long-term
    economic performance;                                                                                                                                                                  
|
| |  | Promote the achievement of economic goals and focus executive
    officers on the creation of shareholder value;                                                                                                                                   
|
| |  | Maximize Krispy Kremes growth opportunities and combine
    both variable executive compensation and fixed
    compensation; and                                                                                                                  
|
| |  | Attract and retain well-qualified executive officers who would
    lead Krispy Kreme and achieve and inspire superior performance
    and further align the interests of these key employees with the
    interests of Krispy Kremes shareholders.



174



---



##### Table of Contents









Stock Ownership by Officers and Other Employees




| |                                                          
| | ---------------------------------------------------------
| | Principal Executive Compensation Elements for Fiscal 2005



Base Salary.


Annual Incentives.




175



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##### Table of Contents





Long-Term Stock Incentives.


Benefits and Perquisites.




| |                                                               
| | --------------------------------------------------------------
| | The Chief Executive Officers Compensation for Fiscal
    2005







| |                                  
| | ---------------------------------
| | Compensation Deductibility Policy





| |                            
| | ---------------------------
| | Compensation Committee(1)  
|
| | Togo D. West, Jr., Chairman
| | James H. Morgan            
| | Robert L. Strickland       






|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Dr. Su Hua Newton, who was a member of the Compensation
    Committee in fiscal 2005, resigned as a director effective
    December 31, 2005.

176



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##### Table of Contents



Stock Performance Graph







|                             |  |  |          |     |  |             |  |   |             |  |  |             |   |     |             |  |  |             |     |  |  |  |   |     |  |  |  |   |     |  | 
|---------------------------- |  |  | -------- | --- |  | ----------- |  | - | ----------- |  |  | ----------- | - | --- | ----------- |  |  | ----------- | --- |  |  |  | - | --- |  |  |  | - | --- |  | 
|                             |  |  |          |     |  |             |  |   |             |  |  |             |   |     |             |  |  |             |     |  |  |  |   |     | 
|                             |  |  | April 5, |     |  | January 26, |  |   | February 1, |  |  | January 31, |   |     | January 30, |  |  | January 28, |    
|                             |  |  | 2000     |     |  | 2001        |  |   | 2002        |  |  | 2003        |   |     | 2004        |  |  | 2005        |    
|                             |  |  |          |     |  |             |  |   |             |  |  |             |   |     |             |  |  |             |     |  |  |  |   |     | 
|Krispy Kreme Doughnuts, Inc. |  |  | $        | 100 |  |             |  | $ | 178         |  |  |             | $ | 422 |             |  |  | $           | 329 |  |  |  | $ | 385 |  |  |  | $ | 94  |  | 
|                             |  |  |          |     |  |             |  |   |             |  |  |             |   |     |             |  |  |             |     |  |  |  |   |     | 
|NYSE Composite Index         |  |  |          | 100 |  |             |  |   | 101         |  |  |             |   | 89  |             |  |  |             | 71  |  |  |  |   | 95  |  |  |  |   | 102 |  | 
|                             |  |  |          |     |  |             |  |   |             |  |  |             |   |     |             |  |  |             |     |  |  |  |   |     | 
|S&P 500 Restaurants Index    |  |  |          | 100 |  |             |  |   | 87          |  |  |             |   | 92  |             |  |  |             | 64  |  |  |  |   | 103 |  |  |  |   | 135 |  | 
|                             |  |  |          |     |  |             |  |   |             |  |  |             |   |     |             |  |  |             |     |  |  |  |   |     | 

177



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

Security Ownership of Certain Beneficial Owners and
Management




| |                                 
| | --------------------------------
| | Directors and Executive Officers



|                                                             |  |                    |           |            |              |  |      |  
|------------------------------------------------------------ |  | ------------------ | --------- | ---------- | ------------ |  | ---- | -
|                                                             |  |                    |           | Percentage |             
|                                                             |  | Number of Shares   |           |            | Beneficially | 
|Name of Beneficial Owner                                     |  | Beneficially Owned |           |            | Owned        | 
|                                                             |  |                    |           |            |              | 
|Daryl G. Brewster(1)                                         |  |                    |          |            |              |  |     |  
|Stephen F. Cooper(2)                                         |  |                    |          |            |              |  |     |  
|Mary Davis Holt(3)                                           |  |                    | 72,750    |            |              |  | *    |  
|Scott A. Livengood(4)                                        |  |                    | 1,721,825 |            |              |  | 2.7  | %
|William T. Lynch, Jr.(5)                                     |  |                    | 190,975   |            |              |  | *    |  
|John N. McAleer(6)                                           |  |                    | 4,467,326 |            |              |  | 7.1  | %
|Robert S. McCoy, Jr.(7)                                      |  |                    | 6,196     |            |              |  | *    |  
|James H. Morgan(8)                                           |  |                    | 128,750   |            |              |  | *    |  
|Frank Murphy(9)                                              |  |                    | 241,000   |            |              |  | *    |  
|Steven G. Panagos(10)                                        |  |                    |          |            |              |  |     |  
|Michael C. Phalen(11)                                        |  |                    | 49,500    |            |              |  | *    |  
|Robert L. Strickland(12)                                     |  |                    | 266,750   |            |              |  | *    |  
|Michael H. Sutton                                            |  |                    |          |            |              |  |     |  
|John W. Tate(13)                                             |  |                    | 8,684     |            |              |  | *    |  
|Lizanne Thomas                                               |  |                    |          |            |              |  |     |  
|Togo D. West, Jr.(14)                                        |  |                    | 95,000    |            |              |  | *    |  
|All directors and executive officers as a group (18 persons) |  |                    | 7,248,756 |            |              |  | 11.2 | %






| |   |                      
| | - | ---------------------
| | * | Less than one percent



| |     |                                                                                                                                                                                                                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Mr. Brewster was appointed as a director and President and
    Chief Executive Officer effective March 6, 2006.                                                                                                                                                                                                           
|
| | (2) | Mr. Cooper was named Chief Executive Officer effective
    January 18, 2005. On March 6, 2006, Mr. Cooper
    resigned as the Companys Chief Executive Officer and was
    appointed our Chief Restructuring Officer.                                                                                                    
|
| | (3) | Represents shares issuable upon the exercise of currently
    exercisable stock options.                                                                                                                                                                                                                                  
|
| | (4) | Consists of (a) 62 shares held by a tax-qualified
    trust pursuant to the Krispy Kreme Profit Sharing Stock
    Ownership Plan; (b) 11,509 shares held under the
    Krispy Kreme Nonqualified Stock Ownership Plan; and
    (c) 1,710,254 shares issuable upon the exercise of
    currently exercisable stock options.
|
| | (5) | Includes 136,675 shares issuable upon the exercise of
    currently exercisable stock options.                                                                                                                                                                                                                            

178



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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (6) | Includes (a) 3,157,452 shares held by Jubilee
    Investments Limited Partnership described in the table under
     Beneficial Owners of More Than 5% of Common
    Stock below, of which Mr. McAleer is one of six
    general partners; (b) 4,000 shares held by Jennifer A.
    McAleer, Mr. McAleers daughter;
    (c) 4,000 shares held by Lauren E. McAleer,
    Mr. McAleers daughter; (d) 4,000 shares
    held by Alexander B. McAleer, Mr. McAleers son;
    (e) 3,181 shares held by a tax-qualified trust
    pursuant to the Krispy Kreme Profit Sharing Stock Ownership
    Plan; (f) 5,331 shares held under the Krispy Kreme
    Nonqualified Stock Ownership Plan; and
    (g) 696,500 shares issuable upon the exercise of
    currently exercisable stock options.
|
| | (7) | Consists of (a) 300 shares held by IRA account f/b/o
    Robert S. McCoy, Jr.; and (b) 5,896 shares
    issuable upon the exercise of currently exercisable stock
    options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (8) | Consists of (a) 4,000 shares owned beneficially by
    Margaret O. Morgan, Mr. Morgans spouse; and
    (b) 124,750 shares issuable upon the exercise of
    currently exercisable stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (9) | Includes 237,000 shares issuable upon the exercise of
    currently exercisable stock options. Mr. Murphy resigned as
    an executive officer of Krispy Kreme effective December 1,
    2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



|     |                                                                                                                                                                                                                                                                                                                                          
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Mr. Panagos was named President and Chief Operating Officer
    effective January 18, 2005. On March 6, 2006,
    Mr. Panagos resigned as the Companys President and
    Chief Operating Officer and was appointed our Director of
    Restructuring.                                                                                   
|    
|(11) | Represents shares issuable upon the exercise of currently
    exercisable stock options.                                                                                                                                                                                                                                                 
|    
|(12) | Consists of (a) 236,000 shares held by the Robert
    Louis Strickland Revocable Living Trust, a trust of which
    Mr. Strickland is the sole trustee;
    (b) 12,000 shares held by Elizabeth Strickland,
    Mr. Stricklands spouse; and
    (c) 18,750 shares issuable upon the exercise of
    currently exercisable stock options.
|    
|(13) | Includes (a) 182 shares held by a tax-qualified trust
    pursuant to the Krispy Kreme Profit Sharing Stock Ownership
    Plan; and (b) 178 shares held under the Krispy Kreme
    Nonqualified Stock Ownership Plan.                                                                                                                    
|    
|(14) | Includes 87,000 shares issuable upon the exercise of
    currently exercisable stock options.                                                                                                                                                                                                                                            

179



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| |                                                  
| | -------------------------------------------------
| | Beneficial Owners of More Than 5% of Common Stock



|                                        |                                                        |                    |           |     |                    |  |       |  | 
|--------------------------------------- | ------------------------------------------------------ | ------------------ | --------- | --- | ------------------ |  | ----- |  | 
|                                        |                                                        | Number of Shares   |           |     | Percentage         | 
|Name and Address of Beneficial Owner    |                                                        | Beneficially Owned |           |     | Beneficially Owned | 
|                                        |                                                        |                    |           |     |                    | 
|Jefferies Asset Management, LLC         |                                                        |                    | 6,000,000 | (1) |                    |  | 9.7%  | 
|                                        | The Metro Center                                       |                    |           |     |                    |  |       |  | 
|                                        | One Station Place                                      |                    |           |     |                    |  |       |  | 
|                                        | Three North Stamford, CT 06902                         |                    |           |     |                    |  |       |  | 
|Jefferies Paragon Master Fund, Ltd.     |                                                        |                    |           |     |                    |  |       | 
|                                        | Walker House, Mary Street                              |                    |           |     |                    |  |       |  | 
|                                        | George Town, Grand Cayman Islands, British West Indies |                    |           |     |                    |  |       |  | 
|Courage Capital Management, LLC         |                                                        |                    | 7,417,400 | (2) |                    |  | 12.0% | 
|                                        | Richard C. Patton                                      |                    |           |     |                    |  |       |  | 
|                                        | Donald Farris                                          |                    |           |     |                    |  |       |  | 
|                                        | 4400 Harding Road, Ste 503                             |                    |           |     |                    |  |       |  | 
|                                        | Nashville, TN 37205                                    |                    |           |     |                    |  |       |  | 
|Goldman, Sachs & Co.                    |                                                        |                    | 4,050,125 | (3) |                    |  | 6.5%  | 
|                                        | The Goldman Sachs Group, Inc.                          |                    |           |     |                    |  |       |  | 
|                                        | 85 Broad Street                                        |                    |           |     |                    |  |       |  | 
|                                        | New York, NY 10004                                     |                    |           |     |                    |  |       |  | 
|Jubilee Investments Limited Partnership |                                                        |                    | 3,157,452 | (4) |                    |  | 5.1%  | 
|                                        | 435 Westover Avenue                                    |                    |           |     |                    |  |       |  | 
|                                        | Winston-Salem, NC 27104                                |                    |           |     |                    |  |       |  | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This information is based on Schedule 13G/ A filed jointly
    with the SEC on February 14, 2006 by Jefferies Asset
    Management, LLC and Jefferies Paragon Master Fund, Ltd.
    According to the Schedule 13G/ A, Jefferies Asset
    Management, LLC and Jefferies Paragon Master Fund, Ltd.
    have shared voting power and shared dispositive power with
    respect to 6,000,000 shares. Jefferies Asset
    Management, LLC filed the Schedule 13G/ A as investment
    manager to Jefferies Paragon Master Fund, Ltd.                                                                                                                                                                                                                                                                                                           
|   
|(2) | This information is based on Schedule 13G/ A filed with the
    SEC on January 25, 2006 by Courage Capital Management, LLC,
    Richard C. Patton and Donald Farris. According to the
    Schedule 13G/ A, Courage Capital Management, LLC, Richard
    C. Patton and Donald Farris have shared voting power and shared
    dispositive power with respect to 7,417,400 shares. Courage
    Capital Management, LLC is an investment advisor registered
    pursuant to Section 203 of the Investment Advisors Act of
    1940, as amended, and has the discretion to vote and dispose of
    all of all of the shares reported in the Schedule 13G/ A.
    Richard C. Patton and Donald Farris are members and managers of
    Courage Capital Management, LLC and may therefore be deemed to
    be the beneficial owners of such shares.
|   
|(3) | This information is based on Schedule 13G/ A filed with the
    SEC on February 3, 2006 by Goldman, Sachs & Co.
    and The Goldman Sachs Group, Inc. According to the
    Schedule 13G/ A, Goldman, Sachs & Co. and The
    Goldman Sachs Group, Inc. have shared voting power with respect
    to 4,036,025 shares and shared dispositive power with
    respect to 4,050,125 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(4) | Jubilee Investments Limited Partnership, formerly McAleer
    Investments Limited Partnership, is a partnership established by
    members of the McAleer family, including John N. McAleer, as
    described in the table under  Directors and
    Executive Officers above, to hold shares of Krispy Kreme
    common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The other general partners of Jubilee Investments Limited
    Partnership are Patricia Dorgan, Sandra M. Middlebrooks, Jeanne
    Sanderford, Shannon M. Silvernail and Elizabeth Tillman, all of
    whom are sisters of John N. McAleer. While none of the general
    partners has the sole power to dispose of or vote the shares
    owned by the limited partnership, each of them, including John
    N. McAleer, may be

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | deemed to have shared dispositive and voting power. In addition
    to the 3,157,452 shares held by Jubilee Investments Limited
    Partnership, the general partners beneficially own, directly or
    indirectly, the following numbers of shares: John N.
    McAleer   1,186,499 shares; Patricia
    Dorgan  503,363 shares; Sandra M.
    Middlebrooks  456,204 shares; Jeanne
    Sanderford  468,154 shares; Shannon M.
    Silvernail  564,884 shares; and Elizabeth
    Tillman  541,836 shares.

Securities Authorized for Issuance Under Equity Compensation
Plans




|                                                             |  |                      |           |     |                      |                      |                         |                         |  |  |           |    
|------------------------------------------------------------ |  | -------------------- | --------- | --- | -------------------- | -------------------- | ----------------------- | ----------------------- |  |  | --------- | ---
|                                                             |  |                      |           |     |                      | Number of Securities |                        
|                                                             |  | Number of            |           |     |                      |                      | Remaining Available for |                        
|                                                             |  | Securities to Be     |           |     |                      |                      | Future Issuance Under   |                        
|                                                             |  | Issued upon          |           |     | Weighted Average     |                      |                         | Equity Compensation     | 
|                                                             |  | Exercise of          |           |     | Exercise Price of    |                      |                         | Plans (Excluding        | 
|                                                             |  | Outstanding Options, |           |     | Outstanding Options, |                      |                         | Securities Reflected in | 
|                                                             |  | Warrants and Rights  |           |     | Warrants and Rights  |                      |                         | Column (a))             | 
|Plan Category                                                |  | (a)                  |           |     | (b)                  |                      |                         | (c)                     | 
|                                                             |  |                      |           |     |                      |                      |                         |                         | 
|Equity compensation plans approved by shareholders           |  |                      | 4,768,800 | (1) |                      | $                    | 28.60                   |                         |  |  | 6,748,200 | (2)
|Equity compensation plans not approved by shareholders(3)(4) |  |                      | 2,679,700 | (3) |                      |                      | 1.60                    |                         |  |  |          |    
|                                                             |  |                      |           |     |                      |                      |                         |                         | 
|Total                                                        |  |                      | 7,448,500 |     |                      | $                    | 18.89                   |                         |  |  | 6,748,200 |    






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents shares of common stock issuable pursuant to
    outstanding options under the 2000 Stock Incentive Plan and a
    stock option plan assumed effective April 7, 2003 upon the
    acquisition of Montana Mills (the Montana Mills
    Plan). At January 30, 2005, approximately 4,600
    options with a weighted average exercise price of $35.23
    remained outstanding under the Montana Mills Plan. The Company
    has not made, and will not make, any future grants of options
    under the Montana Mills Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(2) | Represents shares of common stock which may be issued pursuant
    to awards under the 2000 Stock Incentive Plan and the Employee
    Stock Purchase Plan. Under the Employee Stock Purchase Plan each
    employee of the Company or any participating subsidiary (other
    than those whose customary employment was for not more than five
    months per calendar year) was eligible to participate after the
    employee completed 12 months of employment, and each
    participant could elect to purchase shares of Company common
    stock at the end of quarterly offering periods. The amount of
    shares that could be purchased was based on the amount of
    payroll deductions a participant elected to have withheld and
    applied at the end of the purchase period to the purchase of
    shares (ranging from 1 to 15% of the participants base
    compensation). The purchase price for the shares was the lesser
    of the fair market value of the shares on the first day of the
    purchase period or the last day of the purchase period.
    Effective October 21, 2005, the Company halted purchases
    under the Employee Stock Purchase Plan.
|   
|(3) | Represents shares of common stock issuable pursuant to
    outstanding options under the 1998 Stock Option Plan. The 1998
    Stock Option Plan was adopted prior to the initial public
    offering of the Companys common stock, and it was not
    submitted for approval by shareholders. The plan provides for
    the grant of stock options to employees, directors and
    consultants, as determined by the Compensation Committee, and it
    is administered by the Compensation Committee. No grants have
    been made under the 1998 Stock Option Plan subsequent to
    April 5, 2000, and the Company will not make any further
    grants under that plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(4) | The Company maintained a Nonqualified Stock Ownership Plan under
    which management or other highly compensated employees selected
    by the Compensation Committee could participate. The plan was
    designed to provide benefits that could not be provided under
    the Companys tax-qualified Profit Sharing Stock Ownership
    Plan due to Internal Revenue Code limitations. Each year the
    Company credited benefits under the plan based on a
    discretionary percentage of the employees compensation in
    excess of Internal Revenue Code limits. Amounts credited under
    the plan were deemed to be                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | invested in Company stock, and benefits were payable in the form
    of Company stock or, at the election of the participant, in
    cash. No amounts were credited to participants in the plan in
    fiscal 2004 or 2005. The Company also maintained a Nonqualified
    Deferred Compensation Plan under which management or other
    highly compensated employees selected by the Compensation
    Committee could participate. The plan was designed to allow
    participants to defer a portion of their compensation. Amounts
    deferred under the plan could, at the election of the
    participant, be deemed to be invested in Company stock, and
    benefits deemed vested in Company stock were payable in the form
    of Company stock or, at the election of the participant, in
    cash. The ability of participants to deem investments to be in
    Company stock was suspended effective November 8, 2005.
    Neither the Nonqualified Stock Ownership Plan nor the
    Nonqualified Deferred Compensation Plan was submitted for
    shareholder approval.

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|         |                                                
|-------- | -----------------------------------------------
|Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Associates License Agreements with Related Parties






|                                      |                                  |                   |       |  | 
|------------------------------------- | -------------------------------- | ----------------- | ----- |  | 
|Emeritus Director and                 |                                  | Fiscal Year Ended |      
|Franchise Companies                   |                                  | January 30, 2005  |      
|                                      |                                  |                   |      
|                                      |                                  | (In thousands)    |      
|Frank E. Guthrie:                     |                                  | $                 | 1,017 | 
|                                      | Augusta Doughnut Company         |                   |       |  | 
|                                      | Classic City Doughnuts Corp.     |                   |       |  | 
|Frank E. Guthrie and Robert L. McCoy: |                                  | $                 | 3,371 | 
|                                      | Magic City Doughnuts Corporation |                   |       |  | 
|Robert L. McCoy:                      |                                  | $                 | 5,362 | 
|                                      | Gulf-Fla. Holdings, Inc.         |                   |       |  | 
|Steven D. Smith:                      |                                  | $                 | 2,501 | 
|                                      | Dales Doughnut Corp.            |                   |       |  | 
|                                      | Dales Doughnuts of Dothan, Inc. |                   |       |  | 
|                                      | Smiths Doughnuts, Inc.           |                   |       |  | 



Relationship with Kroll Zolfo Cooper




Other Relationships




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|         |                                        
|-------- | ---------------------------------------
|Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Fees




|                   |       |                                        |           |           |      |   |         |           |  |   |         |         | 
|------------------ | ----- | -------------------------------------- | --------- | --------- | ---- | - | ------- | --------- |  | - | ------- | ------- | 
|                   |       | Fees Billed in Last Three Fiscal Years |          
|                   |       |                                        |          
|                   |       | 2006(1)                                |           |           | 2005 |   |         | 2004      | 
|                   |       |                                        |           |           |      |   |         |           | 
|Audit Fees         |       | $                                      | 3,501,500 |           |      | $ | 520,967 |           |  | $ | 296,900 |        
|Audit-Related Fees |       |                                        | 44,550    |           |      |   | 213,566 |           |  |   | 134,250 |        
|Tax Fees           |       |                                        | 172,199   |           |      |   | 295,743 |           |  |   | 302,099 |        
|All Other Fees     |       |                                        | 3,900     |           |      |   |        |           |  |   | 42,501  |        
|                   |       |                                        |           |           |      |   |         |           | 
|                   | Total |                                        | $         | 3,722,149 |      |   | $       | 1,030,276 |  |   | $       | 775,300 | 
|                   |       |                                        |           |           |      |   |         |           | 






|    |                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes fees relating to the audit of the fiscal 2005 financial
    statements and the restatement of the prior years
    financial statements.

Audit Fees 10-Q


Audit-Related Fees


Tax Fees


All Other Fees


Pre-Approval of Audit and Non-Audit Services




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PART IV







|         |                                            
|-------- | -------------------------------------------
|Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.



|    |                                   
|--- | ----------------------------------
|(a) | Financial Statements and Schedules

Financial Statements.


Financial Statement Schedules.




|    |         
|--- | --------
|(b) | Exhibits

|        |    |     |  |                         |  |                                                                                                                                                                                                                                                                                                                                                      
|------- | -- | --- |  | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |                        
|Number  |    |     |  | Description of 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
    December 22, 2005)                                                                                                                                                              
|        | 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  |  |                        |  | Specimen Montana Mills Redeemable Common Stock Purchase Warrant
    Certificate (incorporated by reference to Exhibit 4.2 of
    Montana Mills Registration Statement on Form SB-2
    (Commission File No. 333-86956) filed with the Commission
    on April 25, 2002)                                                                             
|        | 4  | .4  |  |                        |  | Form of Montana Mills Redeemable Common Stock Purchase Warrant
    Agreement (incorporated by reference to Exhibit 4.3 of
    Montana Mills Registration Statement on Form SB-2
    (Commission File No. 333-86956) filed with the Commission
    on April 25, 2002)                                                                                
|        | 4  | .5  |  |                        |  | 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)                                                                                     
|        | 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 (incorporated by reference to
    Exhibit 10.3 to the Registrants Registration
    Statement on Form S-1 (Commission File No. 333-92909),
    filed with the Commission on December 16, 1999)                                                                                                                         
|        | 10 | .3  |  |                        |  | Form of Franchise Agreement (incorporated by reference to
    Exhibit 10.4 to the Registrants Registration
    Statement on Form S-1 (Commission File No. 333-92909),
    filed with the Commission on December 16, 1999)                                                                                                                           
|        | 10 | .4* |  |                        |  | Form of International Franchise Agreement**                                                                                                                                                                                                                                                                                                          
|        | 10 | .5* |  |                        |  | Form of International Development Agreement**                                                                                                                                                                                                                                                                                                        
|        | 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)**                                                                                  
|        | 10 | .8  |  |                        |  | Long-Term Incentive Plan dated January 30, 1993
    (incorporated by reference to Exhibit 10.24 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)**                                                                             

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|        |    |      |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ---- |  | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |                        
|Number  |    |      |  | Description of Exhibits
|        |    |      |  |                        
|        | 10 | .9   |  |                        |  | Form of Promissory Note relating to termination of Long-Term
    Incentive Plan (incorporated by reference to Exhibit 10.25
    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 | .10  |  |                        |  | Form of Restricted Stock Purchase Agreement (incorporated by
    reference to Exhibit 10.26 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 | .11  |  |                        |  | Form of Promissory Note relating to restricted stock purchases
    (incorporated by reference to Exhibit 10.27 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 | .12  |  |                        |  | Employment Agreement dated August 10, 1999 between Krispy
    Kreme Doughnut Corporation and Scott A. Livengood (incorporated
    by reference to Exhibit 10.29 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 | .13  |  |                        |  | Consulting Agreement, effective January 17, 2005 by and
    between Krispy Kreme Doughnuts, Inc. and Scott A. Livengood
    (incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on Form 8-K filed
    January 18, 2005)                                                                                                                                                                                                                                                                               
|        | 10 | .14  |  |                        |  | 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 | .15  |  |                        |  | Written Description of Employment Arrangements, effective
    June 27, 2005, between the Registrant and Douglas R. Muir
    (incorporated by reference to Item 5.02 of the
    Registrants Current Report on Form 8-K filed
    July 8, 2005)**                                                                                                                                                                                                                                                                                    
|        | 10 | .16  |  |                        |  | Employment Agreement, dated October 26, 2005 between Krispy
    Kreme Doughnut Corporation and Jeffrey L. Jervik
    (incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on Form 8-K filed
    November 1, 2005)**                                                                                                                                                                                                                                                                                    
|        | 10 | .17  |  |                        |  | Employment Agreement, dated as of March 6, 2006, between
    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 | .18  |  |                        |  | 1998 Employee and Non-Employee Director Stock Option Plan of
    Montana Mills (incorporated by reference to Exhibit 10.3 to
    Montana Mills Amendment No. 1 to Registration Statement on
    Form SB-2 (Commission File No. 333-86956), filed with
    the Commission on June 7, 2002)                                                                                                                                                                                                                                           
|        | 10 | .19  |  |                        |  | 2000 Stock Incentive Plan (incorporated by reference to
    Exhibit 10.1 to the Registrants Registration
    Statement on Form S-8 (Commission File No. 333-47326),
    filed with the Commission on October 4, 2000)**                                                                                                                                                                                                                                                                                                            
|        | 10 | .20* |  |                        |  | Krispy Kreme Doughnut Corporation Nonqualified Deferred
    Compensation Plan, effective October 1, 2000**                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .21* |  |                        |  | Krispy Kreme Doughnut Corporation Nonqualified Stock Ownership
    Plan, effective February 1, 1999**                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 10 | .22  |  |                        |  | First Lien Credit Agreement (the First Lien Credit
    Agreement) dated as of April 1, 2005, among KKDC,
    KKDI, the Subsidiary Guarantors party thereto, the Lenders party
    thereto, Credit Suisse First Boston, as Administrative Agent and
    Issuing Lender, and Wells Fargo Foothill, Inc., as Collateral
    Agent (the First Lien Collateral Agent), Issuing
    Lender and Swingline Lender (incorporated by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K filed April 7, 2005)
|        | 10 | .23  |  |                        |  | Second Lien Credit Agreement (the Second Lien Credit
    Agreement) dated as of April 1, 2005, among KKDC,
    KKDI, the Subsidiary Guarantors party thereto, the Lenders party
    thereto, Credit Suisse First Boston, as Administrative Agent
    (the Administrative Agent), Paying Agent, Fronting
    Bank and Collateral Agent (the Second Lien Collateral
    Agent) (incorporated by reference to Exhibit 10.2 to
    the Registrants Current Report on Form 8-K filed
    April 7, 2005)                           

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|        |    |     |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                      
|------- | -- | --- |  | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |                        
|Number  |    |     |  | Description of Exhibits
|        |    |     |  |                        
|        | 10 | .24 |  |                        |  | First Lien Security Agreement dated as of April 1, 2005,
    among KKDC, KKDI, the other Obligors named therein and the First
    Lien Collateral Agent (incorporated by reference to
    Exhibit 10.3 to the Registrants Current Report on
    Form 8-K filed April 7, 2005)                                                                                       
|        | 10 | .25 |  |                        |  | Second Lien Security Agreement dated as of April 1, 2005,
    among KKDC, KKDI, the other Obligors named therein and the
    Second Lien Collateral Agent (incorporated by reference to
    Exhibit 10.4 to the Registrants Current Report on
    Form 8-K filed April 7, 2005)                                                                                     
|        | 10 | .26 |  |                        |  | Collateral Agency and Intercreditor Agreement dated as of
    April 1, 2005, among KKDC, KKDI, the Subsidiary Guarantors
    party thereto, the First Lien Collateral Agent, the Second Lien
    Collateral Agent and the Administrative Agent (incorporated by
    reference to Exhibit 10.5 to the Registrants Current
    Report on Form 8-K filed April 7, 2005)
|        | 10 | .27 |  |                        |  | Waiver and Amendment No. 1, dated as of October 14,
    2005, to the First Lien Credit Agreement (incorporated by
    reference to Exhibit 10.1 to the Registrants Current
    Report on Form 8-K filed October 18, 2005)                                                                                                                                           
|        | 10 | .28 |  |                        |  | Waiver and Amendment No. 1, dated as of October 14,
    2005, to the Second Lien Credit Agreement (incorporated by
    reference to Exhibit 10.2 to the Registrants Current
    Report on Form 8-K filed October 18, 2005)                                                                                                                                          
|        | 10 | .29 |  |                        |  | Waiver and Amendment No. 2, dated as of October 25,
    2005, to the First Lien Credit Agreement (incorporated by
    reference to Exhibit 10.1 to the Registrants Current
    Report on Form 8-K filed November 3, 2005)                                                                                                                                           
|        | 10 | .30 |  |                        |  | Waiver and Amendment No. 2, dated as of October 25,
    2005, to the Second Lien Credit Agreement (incorporated by
    reference to Exhibit 10.2 to the Registrants Current
    Report on Form 8-K filed November 3, 2005)                                                                                                                                          
|        | 10 | .31 |  |                        |  | Amendment No. 3, dated as of December 12, 2005, to the
    First Lien Credit Agreement (incorporated by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K filed December 13, 2005)                                                                                                                                                    
|        | 10 | .32 |  |                        |  | Amendment No. 3, dated as of December 12, 2005, to the
    Second Lien Credit Agreement (incorporated by reference to
    Exhibit 10.2 to the Registrants Current Report on
    Form 8-K filed December 13, 2005)                                                                                                                                                   
|        | 10 | .33 |  |                        |  | Waiver and Amendment No. 4, dated as of March 30,
    2006, to the First Lien Credit Agreement (incorporated by
    reference to Exhibit 10.1 to the Registrants Current
    Report on Form 8-K filed April 5, 2006)                                                                                                                                                
|        | 10 | .34 |  |                        |  | Waiver and Amendment No. 4, dated as of March 30,
    2006, to the Second Lien Credit Agreement (incorporated by
    reference to Exhibit 10.2 to the Registrants Current
    Report on Form 8-K filed April 5, 2006)                                                                                                                                               
|        | 10 | .35 |  |                        |  | Services Agreement entered into on February 8, 2005, by and
    between Krispy Kreme Doughnuts, Inc. and Stephen F. Cooper,
    Steven G. Panagos and Kroll Zolfo Cooper LLC, dated as of
    January 18, 2005 (incorporated by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K filed February 10, 2005)**                          
|        | 10 | .36 |  |                        |  | Letter Agreement dated March 10, 2005, by and between
    Krispy Kreme Doughnuts, Inc., Stephen F. Cooper,
    Steven G. Panagos and Kroll Zolfo Cooper LLC (incorporated
    by reference to Exhibit 10.1 to the Registrants
    Current Report on Form 8-K filed March 18, 2005)**                                                                                
|        | 10 | .37 |  |                        |  | Amendment to Services Agreement dated as of March 31, 2005,
    by and between KKDI, Stephen F. Cooper, Steven G.
    Panagos and KZC (incorporated by reference to Exhibit 10.1
    to the Registrants Current Report on Form 8-K filed
    April 6, 2005)**                                                                                                       
|        | 10 | .38 |  |                        |  | Letter Agreement dated as of April 20, 2005, by and between
    Krispy Kreme Doughnuts, Inc., Stephen F. Cooper,
    Steven G. Panagos and Kroll Zolfo Cooper LLC (incorporated
    by reference to Exhibit 10.1 to the Registrants
    Current Report on Form 8-K filed April 26, 2005)**                                                                          
|        | 10 | .39 |  |                        |  | Letter Agreement dated as of May 24, 2005, by and between
    Krispy Kreme Doughnuts, Inc., Stephen F. Cooper,
    Steven G. Panagos and Kroll Zolfo Cooper LLC (incorporated
    by reference to Exhibit 10.1 to the Registrants
    Current Report on Form 8-K filed May 27, 2005)**                                                                              

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|        |     |      |  |                         |  |                                                                                                                                                                                                                                                                                    
|------- | --- | ---- |  | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |      |  |                        
|Number  |     |      |  | Description of Exhibits
|        |     |      |  |                        
|        | 10  | .40  |  |                        |  | Letter Agreement dated June 27, 2005, by and between Krispy
    Kreme Doughnuts, Inc., Stephen F. Cooper, Steven G.
    Panagos and Kroll Zolfo Cooper LLC (incorporated by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K filed June 28, 2005)**
|        | 10  | .41  |  |                        |  | 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  | .42* |  |                        |  | 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)**                                                                                    
|        | 21* |      |  |                        |  | List of Subsidiaries                                                                                                                                                                                                                                                               
|        | 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.

188



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##### Table of Contents






SIGNATURES






| |                             
| | ----------------------------
| | Krispy Kreme Doughnuts, Inc.



| |     |                      
| | --- | ---------------------
| | By: | /s/ Michael C. Phalen

| |                         
| | ------------------------
| |                         
| | Name:  Michael C. Phalen

| |        |                        
| | ------ | -----------------------
| | Title: | Chief Financial Officer



POWER OF ATTORNEY


attorney-in 10-K attorney-in 10-K attorney-in




|                                       |  |                                                                
|-------------------------------------- |  | ---------------------------------------------------------------
|Signature                              |  | Title                                                          
|                                       |  |                                                                
|                                      
|/s/ James H. MorganJames H. Morgan     |  | Chairman of the Board of Directors                             
|                                      
|/s/ Daryl G. BrewsterDaryl G. Brewster |  | Director, Chief Executive Officer (Principal Executive Officer)
|                                      
|/s/ Michael C. PhalenMichael C. Phalen |  | Chief Financial Officer (Principal Financial Officer)          
|                                      
|/s/ Douglas R. MuirDouglas R. Muir     |  | Chief Accounting Officer (Principal Accounting Officer)        
|                                      
|/s/ Mary Davis HoltMary Davis Holt     |  | Director                                                       
|                                      
|/s/ William T. LynchWilliam T. Lynch   |  | Director                                                       

189



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##### Table of Contents



|                                             |  |         
|-------------------------------------------- |  | --------
|Signature                                    |  | Title   
|                                             |  |         
|                                            
|/s/ Robert S. McCoy, Jr.Robert S. McCoy, Jr. |  | Director
|                                            
|/s/ Robert L. StricklandRobert L. Strickland |  | Director
|                                            
|/s/ Michael H. SuttonMichael H. Sutton       |  | Director
|                                            
|/s/ Lizanne ThomasLizanne Thomas             |  | Director
|                                            
|/s/ Togo D. West, Jr.Togo D. West, Jr.       |  | Director

190