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

Commission file number
001-16485

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

|North
      Carolina                                                                                                                                                                                                                                                                                                                                                                           | 56-2169715                                
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------
|(State or other
      jurisdiction of                                                                                                                                                                                                                                                                                                                                                          | (I.R.S. Employer
      Identification No.)
|incorporation or
      organization)                                                                                                                                                                                                                                                                                                                                                           |                                           
|                                                                                                                                                                                                                                                                                                                                                                                               |                                           
|370 Knollwood
      Street,                                                                                                                                                                                                                                                                                                                                                                    | 27103                                     
|Winston-Salem,
      North Carolina                                                                                                                                                                                                                                                                                                                                                            | (Zip
      Code)                          
|(Address of
      principal executive offices)                                                                                                                                                                                                                                                                                                                                                 |                                           
|                                                                                                                                                                                                                                                                                                                                                                                              
|Registrants telephone number, including area
    code:                                                                                                                                                                                                                                                                                                                                       
|(336) 725-2981                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                              
|Securities registered pursuant to Section 12(b) of the
      Act:                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                               | Name
    of                               
|                                                                                                                                                                                                                                                                                                                                                                                               | Each
      Exchange                       
|                                                                                                                                                                                                                                                                                                                                                                                               | on
      Which                            
|Title of Each Class                                                                                                                                                                                                                                                                                                                                                                            | Registered                                
|Common Stock, No Par
      Value                                                                                                                                                                                                                                                                                                                                                               | New York Stock
      Exchange             
|Preferred Share
      Purchase Rights                                                                                                                                                                                                                                                                                                                                                          | New York Stock
      Exchange             
|                                                                                                                                                                                                                                                                                                                                                                                              
|Securities
      registered pursuant to Section 12(g) of the Act:None                                                                                                                                                                                                                                                                                                                         
|Indicate by check mark if the
      registrant is a well-known seasoned issuer, as defined in Rule 405 of the
      Securities Act. Yes oNoþ                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                              
|Indicate by check mark if the registrant is not required to file reports
      pursuant to Section 13 or Section 15(d) of the Act.  Yes oNoþ                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                              
|Indicate by check mark whether the registrant (1) has filed all
      reports required to be filed by Section 13 or 15(d) of the Securities
      Exchange Act of 1934 during the preceding 12 months (or for such shorter
      period that the registrant was required to file such reports), and (2) has
      been subject to such filing requirements for the past 90 days. Yes þ    No o
|                                                                                                                                                                                                                                                                                                                                                                                              
|Indicate by check mark if disclosure of delinquent filers pursuant to Item
      405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,
      and will not be contained, to the best of registrants knowledge, in
      definitive proxy or information statements incorporated by reference in
      Part III of this Form 10-K or any amendment to this Form 10-K. þ   
|                                                                                                                                                                                                                                                                                                                                                                                              
|Indicate by check mark whether the registrant is a large
      accelerated filer, an accelerated filer, a non-accelerated filer, or a
      smaller reporting company. See the definitions of large accelerated
      filer, accelerated filer and smaller reporting company in Rule 12b-2
      of the Exchange Act.                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                              
|Large accelerated filer
      o     Accelerated filer þ     Non-accelerated filer o     Smaller
      Reporting Company o                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                              
|Indicate by check mark whether the registrant is a shell
      company (as defined in Rule 12b-2 of the Act).  Yes oNo þ                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                              
|The aggregate market value of voting and
      non-voting common equity of the registrant held by nonaffiliates of the
      registrant as of August 1, 2008 was $275.4
million.                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                              
|Number of shares of Common Stock, no par value, outstanding as of March
      27, 2009: 67,507,041.                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                              
|DOCUMENTS INCORPORATED BY
      REFERENCE:                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                              
|Portions of the definitive proxy
      statement for the registrants 2009 Annual Meeting of Shareholders to be
      held on June 16, 2009 are incorporated by reference into Part III
      hereof.                                                                                                                                                                                         

---

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TABLE OF CONTENTS

|                                 |  |                                                                                                    |  | Page
|-------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | ----
|FORWARD-LOOKING
      STATEMENTS |  | 1                                                                                                 
|PART I                          
|Item 1.                          |  | Business                                                                                           |  | 2   
|Item 1A.                         |  | Risk Factors                                                                                       |  | 13  
|Item
1B.                         |  | Unresolved Staff
      Comments                                                                    |  | 19  
|Item 2.                          |  | Properties                                                                                         |  | 19  
|Item 3.                          |  | Legal
      Proceedings                                                                            |  | 20  
|Item 4.                          |  | Submission of Matters to a Vote
      of Security Holders                                          |  | 22  
|PART
      II                   
|Item 5.                          |  | Market for Registrants Common
      Equity, Related Stockholder Matters                           |  |     
|                                 |  | and Issuer Purchases of Equity
      Securities                                                    |  | 23  
|Item 6.                          |  | Selected
      Financial Data                                                                      |  | 25  
|Item 7.                          |  | Managements Discussion and
      Analysis of Financial Condition and Results of Operations        |  | 26  
|Item
7A.                         |  | Quantitative and
      Qualitative Disclosures about Market Risk                                   |  | 57  
|Item 8.                          |  | Financial Statements and
      Supplementary Data                                                  |  | 59  
|Item 9.                          |  | Changes in and
      Disagreements with Accountants on Accounting and Financial
      Disclosure   |  | 100 
|Item 9A.                         |  | Controls and Procedures                                                                            |  | 100 
|Item
9B.                         |  | Other
      Information                                                                            |  | 101 
|PART III                        
|Item
10.                         |  | Directors,
      Executive Officers and Corporate Governance                                       |  | 101 
|Item 11.                         |  | Executive Compensation                                                                             |  | 101 
|Item
12.                         |  | Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder |  |     
|                                 |  | Matters                                                                                            |  | 101 
|Item 13.                         |  | Certain Relationships and Related
      Transactions, and Director Independence                    |  | 101 
|Item
14.                         |  | Principal
      Accountant Fees and Services                                                       |  | 101 
|PART IV                         
|Item
15.                         |  | Exhibits and
      Financial Statement Schedules                                                   |  | 102 
|SIGNATURES                       |  | 110                                                                                               

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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 to fiscal 2010, fiscal 2009, fiscal 2008, fiscal 2007, fiscal 2006
and fiscal 2005 mean the fiscal years ended January 31, 2010,
February 1, 2009, February 3, 2008, January 28, 2007, January 29, 2006 and
January 30, 2005, respectively. Please note that fiscal 2008 contained 53
weeks.

FORWARD-LOOKING
STATEMENTS

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

- the quality of Company and franchise store
  operations;
- our ability, and our dependence on the ability of
  our franchisees, to execute on our and their business plans;
- our relationships with our
  franchisees;
- our ability to implement our international growth
  strategy;
- our ability to implement our new domestic
  operating model;
- 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 and trade
  secrets;
- risks associated with our high levels of
  indebtedness;
- restrictions on our operations and compliance with
  covenants contained in our secured credit facilities;
- changes in customer preferences and
  perceptions;
- 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 (the SEC).



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

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

---

PART I

Item 1. BUSINESS.

Overview

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

As of
February 1, 2009, there were 523 Krispy Kreme stores operated systemwide in 36
U.S. states and in the District of Columbia, Australia, Bahrain, Canada,
Indonesia, Japan, Kuwait, Lebanon, Mexico, the Philippines, Puerto Rico, Qatar,
Saudi Arabia, South Korea, the United Arab Emirates and the United Kingdom. The
ownership and location of those stores is as follows:

Domestic
    
    International
    
    TotalCompany Stores
    
    
    93
    
    
    
    
    
    
    93Franchise
      Stores
    
    
    132
    
    
    
    298
    
    
    430Total
    
    
    225
    
    
    
    298
    
    
    523


Of the 523 total stores, there were
281 factory stores and 242 satellites.

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

Approximately 56% of total domestic store sales (including sales by both
Company and franchise stores) represent on-premises sales, and substantially all
sales by stores outside the United States are on-premises.

Business Operations

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

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

- ***On-premises sales.***On-premises sales consist of sales to customers visiting our factory
  and satellite stores, including sales made through drive-through windows,
  along with discounted sales to community organizations that in turn sell
  doughnuts for fundraising purposes. Each of our stores generally offers at
  least 15 of our more than 20 varieties of doughnuts, including our signature
  Original Glazed® doughnut. We also sell
  complementary products and beverages, including drip coffees,
  espresso-based coffees, both coffee-based and noncoffee-based frozen drinks
  and packaged and fountain beverages.



2

---

- 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 and
  packaged sweets, primarily on a branded basis (i.e., bearing the Krispy Kreme
  brand name), to a variety of retail customers, such as convenience stores,
  grocery stores/mass merchants and other food service and institutional
  accounts. Doughnuts are sold to these customers on trays for display and sale
  in glass-enclosed cases and in packages for display and sale on both
  stand-alone display units and on our customers
  shelves.These sales channels are
  designed to generate incremental sales, increase market penetration and brand
  awareness, increase consumer convenience and optimize utilization of our
  stores production capacity.We accomplish
  off-premises sales through our direct store delivery system, or DSD, through
  which we deliver fresh doughnuts, both packaged and unpackaged, to our
  off-premises customers. Our off-premises customers include Amerada Hess,
  BiLo/Brunos, Exxon/Mobil, Food Lion, Kroger, Speedway SuperAmerica, Wal-Mart
  and Wilco/Hess. Our route drivers are capable of taking customer orders and
  delivering products directly to our customers retail locations, where they
  are typically merchandised from Krispy Kreme branded displays. We have also
  developed national account relationships and implemented electronic invoicing
  and payment systems with many large DSD customers.

Franchise.Through our Franchise
segment, we generate revenues through the collection of development
and franchise fees and royalties. Royalties from franchisees are payable
based upon a percentage of franchise store sales and, as a result, our royalty
revenues are dependent on level of sales by our franchisees. Most of our
domestic franchisees sell doughnuts and other products through both the
on-premises and off-premises channels discussed above under  Company Stores,
while substantially all sales by franchisees outside the United States are made
through the on-premises channel.

KK
Supply Chain.KK Supply Chain produces
doughnut mixes and manufactures our doughnut-making equipment, which all
franchisees are required to purchase. Additionally, KK Supply Chain operates a
distribution center that provides Krispy Kreme stores with supplies for the
critical areas of their business. KK Supply Chain generates revenues on sales of
doughnut mixes, supplies, ingredients and equipment to franchisees. It supports
both Company and franchisee stores by providing product knowledge and technical
skills, controlling critical production and distribution processes and
collective purchasing of certain materials.

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

KK Supply Chain has three business
units:

- Mix manufacturing.We produce all of our proprietary doughnut mixes, which our
  franchisees are required to purchase, at our manufacturing facility in
  Winston-Salem, North Carolina, but have a backup source to manufacture our
  doughnut mixes in the event of the loss of our Winston-Salem facility. For
  certain international franchisees, we produce a concentrate which is shipped
  internationally where it is then combined with other ingredients sourced
  locally by contract mix manufacturers pursuant to the terms of agreements with
  us or with our franchisee. We control production of doughnut mixes and
  concentrate and monitor the performance of international contract
  manufacturers in order to ensure that our products meet our high quality
  standards, which include: Receiving
  truckloads of shipment of our main ingredients regularly; 
  Testing each incoming shipment of key ingredients; and  Testing
  each batch of mix.

3

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In February
2009, we entered into an agreement with BakeMark USA LLC of Pico Rivera,
California, to manufacture certain doughnut mixes for regions outside the
Southeastern United States and to provide doughnut mix production in the event
of a disruption of business at our Winston-Salem, North Carolina
facility.

- 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 operating procedures, produces
  doughnuts with uniform consistency and quality.Our line of doughnut-making machines includes machines that
  produce doughnuts at rates of approximately 65, 150, 270, 600 and 1,000 dozen
  doughnuts per hour. The largest of these machines (the 600 and 1,000 dozen per
  hour machines) are used primarily in a subset of our factory stores called
  commissaries, which are production facilities used principally to serve
  off-premises customers domestically and to supplement factory stores focused
  on on-premises sales internationally.We also sell smaller machines, which we refer to as tunnel ovens and
  which are used in hot shops, that are manufactured by others and that complete
  the final steps of the production process by heating unglazed doughnuts
  to prepare them for the glazing process.
- Distribution.We operate a distribution center in Winston-Salem, North Carolina
  which supplies key supplies, including doughnut mixes, icings and fillings,
  other food ingredients, coffee, juices, uniforms and various other items to
  domestic stores in the Eastern United States and to certain international
  franchise stores. In May 2008, we subcontracted with an independent
  distributor to supply the domestic stores not supplied from Winston-Salem,
  which generally consist of stores west of the Mississippi River. These stores
  previously were supplied from a distribution center in Southern California,
  which we closed in August 2008.We
  provide many of the beverages offered in our stores, substantially all of
  which are purchased from third parties. Our beverage program includes drip
  coffees, both coffee-based and noncoffee-based frozen drinks, packaged and
  fountain beverages and, in many of our shops, a complete line of
  espresso-based coffees including flavors. See  Products  Beverages.
   Most of our domestic franchisees have agreed contractually
  through our Supply Chain Alliance Program to purchase all of their
  requirements for the critical areas of their business from KK Supply Chain. We
  believe that our ability to distribute supplies to our operators produces
  several advantages, including: Economies of scale.We are able to
  purchase key supplies at volume discount prices, which may be lower than those
  that would be available to our operators individually. In addition, we are
  selective in choosing our suppliers and require that they meet certain
  standards with regard to quality and reliability.Also, inventory is managed on a systemwide basis rather than at the
  store level.Convenience.Our
  distribution center and our independent contract distributor carry the key
  items necessary for store operation. We believe this strategy of having one
  ordering and delivery system for store operations enables the store operators
  to focus their time and energies on running their stores, rather than managing
  multiple supplier and distribution relationships.

Krispy Kreme Brand
Elements

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

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

4

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

Store Format and
Development

Store
Format.We classify a store as either a
factory store or a satellite store. Our traditional factory store has the
capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily, and
often engage in both on-premises and off-premises sales. Other factory stores,
including small factory stores which have less production capacity than
relatively larger factory stores, serve only the on-premises distribution
channel. Commissaries, which are production facilities used principally to serve
off-premises customers domestically and to supplement factory stores focused on
on-premises sales internationally, have the highest production capabilities of
our factory stores. As of February 1, 2009, there were 19 commissaries
systemwide, six of which were operated by the Company.

Satellite
stores consist primarily of the hot shop, fresh shop and kiosk store formats,
each of which is substantially smaller than a traditional factory store. Hot
shop stores contain tunnel oven doughnut heating and finishing equipment that
allows customers to have a hot doughnut experience throughout the day. Our fresh
shops and our free-standing kiosk locations do not contain doughnut heating
equipment. In each of these formats, we typically sell fresh doughnuts and
beverages, with the doughnuts supplied by nearby factory stores. As of February
1, 2009, 141 fresh shops, 49 hot shops and 52 kiosks were open systemwide. We
operated 10 of the hot shops. We continue to view the fresh shop, hot shops and
kiosk formats as additional ways to achieve market penetration in a variety of
market sizes and settings.

Domestic Store Development.As of
February 1, 2009, there were a total of 225 domestic stores, of which 187 were
factory stores and 38 were satellite stores. These store numbers reflect six
domestic store openings and 26 domestic store closings in fiscal 2009. Of the
six stores opened in fiscal 2009, five were satellite stores, and all six were
franchise stores. Of the 26 stores closed in fiscal 2009, five were Company
stores. The Company currently plans to open a modest number of new
Company-operated satellite stores in fiscal 2010, and domestic franchisees also
may open additional satellite stores as we work to refine our store formats for
new domestic stores. However, we do not expect that we or our franchisees will
open a significant number of domestic factory stores in the near
future.

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

**International Store Development.** Markets outside
the United States are a source of growth. As of February 1, 2009, there were a
total of 298 Krispy Kreme stores (including 204 satellites) operated
internationally, which were located in Australia, Bahrain, Canada, Indonesia,
Japan, Kuwait, Lebanon, Mexico, the Philippines, Puerto Rico, Qatar, Saudi
Arabia, South Korea, the United Arab Emirates and the United Kingdom. In fiscal
2009, 114 new international stores were opened, and 20 international stores were
closed. Based upon our continued research and experience with our international
stores, we are focusing additional international development efforts primarily
on opportunities in markets in Asia and the Middle East. We are focusing on
these two geographic areas because of their favorable population demographics,
relatively high levels of consumer sweet goods consumption and the popularity of
Western brands in these markets. Existing development and franchise agreements
for territories outside the United States (which include the countries listed
above) provide

5

---

for the development of over 160 additional
stores in fiscal 2010 and thereafter. Our ability to expand in these or other
international markets, however, will depend on a number of factors, including
attracting experienced and well capitalized franchisees, demand for our product,
our ability to supply or obtain the ingredients and equipment necessary to
produce our products and local laws or policies of the particular
countries.

Set forth
below is a table containing certain store information as of the end of fiscal
2009, fiscal 2008 and fiscal 2007.

|                                 |  | At
      February 1, |     | At
      February 3, |  | At
      January 28,
|-------------------------------- |  | -------------------- | --- | -------------------- |  | --------------------
|                                 |  | 2009                 |     | 2008                 |  | 2007                
|By Owner:                        |  |                      |     |                      |  |                     
|Company Stores                   |  |                      | 93  |                      |  |                     
|Franchise
      Stores           |  |                      | 430 |                      |  |                     
|Total
      Systemwide           |  |                      | 523 |                      |  |                     
|By Type:                         |  |                      |     |                      |  |                     
|Factory
      Stores             |  |                      |     |                      |  |                     
|Company                          |  |                      | 83  |                      |  |                     
|Franchise                        |  |                      | 198 |                      |  |                     
|Total Factory
      Stores       |  |                      | 281 |                      |  |                     
|Satellites                       |  |                      |     |                      |  |                     
|Company                          |  |                      | 10  |                      |  |                     
|Franchise                        |  |                      | 232 |                      |  |                     
|Total
      Satellites           |  |                      | 242 |                      |  |                     
|Total
      Systemwide           |  |                      | 523 |                      |  |                     
|By Location:                     |  |                      |     |                      |  |                     
|Domestic
      Stores            |  |                      |     |                      |  |                     
|Company                          |  |                      | 93  |                      |  |                     
|Franchise                        |  |                      | 132 |                      |  |                     
|Total
      Domestic Stores      |  |                      | 225 |                      |  |                     
|International
      Stores:      |  |                      |     |                      |  |                     
|Company                          |  |                      |    |                      |  |                     
|Franchise                        |  |                      | 298 |                      |  |                     
|Total
      International Stores |  |                      | 298 |                      |  |                     
|Total
      Systemwide           |  |                      | 523 |                      |  |                     

Set forth
below is a table presenting our revenues by geographic region for fiscal 2009,
2008 and 2007. Revenues by geographic region are presented by attributing
revenues from external customers on the basis of the location to which the
Companys products are delivered or, in the case of franchise segment revenues,
the location of the franchise store from which the franchise revenue is
derived.

|                                |  | Year Ended    
|------------------------------- |  | --------------
|                                |  | Feb.
      1, 
|                                |  | 2009          
|                                |  | (In thousands)
|Revenues by geographic region:  |  |               
|United States                   |  | $332,061      
|Outside the
      United States |  | 51,923        
|Total revenues                  |  | $383,984      

6

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Store Operations

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

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

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

Quality standards and customer service.We encourage our employees to be courteous, helpful, knowledgeable and
attentive. We emphasize the importance of performance by linking a portion of
both a Company store managers and an assistant Company store managers
incentive compensation to profitability and customer service. We also encourage
high levels of customer service and the maintenance of our quality standards by
frequently monitoring our stores through a variety of methods, including
periodic quality audits, mystery shoppers and a toll-free number. In addition,
our customer experience department handles customer comments and conducts
routine satisfaction surveys of our off-premises customers.

Management and staffing.Our
President  U.S. Stores, along with other corporate officers responsible for
store operations, is responsible for corporate interaction with our regional
vice presidents, market managers and store management. Through our regional vice
presidents and market managers, each of whom is responsible for a specific
geographic region, we communicate frequently with all store managers and their
staff using store audits, weekly communications by telephone or e-mail and both
scheduled and surprise store visits.

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

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

Store Ownership

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

Company stores.As of February 1,
2009, Krispy Kreme owned 93 stores. Many of these stores were developed between
1937 and 1996 and are located predominantly in the Southeastern United States.
These stores were designed as wholesale bakeries and generate a majority of
their revenues through off-premises sales. Through acquisitions of associate and
area developer franchisees market rights and related stores, as well as through
new store construction, the number of Company stores located outside the
Southeast has increased. In the past three fiscal years, we have examined the
performance of each of our Company stores and closed 25 underperforming
stores.

Franchisee stores.As of February
1, 2009, a total of 46 franchisees operated 430 stores systemwide. The Company
has two principal categories of franchisees: associates and area developers.
Approximately 60% of franchisees are area developers, and those area developers
operated approximately 88% of the total number of franchise stores.

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

Associates
are typically parties to 15-year licensing agreements that are renewed
automatically for successive five-year periods, unless previously terminated by
either party. These licensing agreements generally permit associates to operate
Krispy Kreme stores within a specific territory. Associates generally
pay royalties of 3.0% of on-premises sales and 1.0% of all other sales. Some
associates also contribute 0.75% of all sales to the Company-administered public
relations and advertising fund, which we refer to as the Brand Fund. Our
associates who were shareholders prior to our initial public offering in April
2000 have license agreements which were extended for a period of 20 years
following that offering. We do not plan to license any new Krispy Kreme
franchisees under the terms of the associate license agreement.

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

As of
February 1, 2009, we had an equity interest in four of the area developers. We
do not currently expect to own any equity interests in any area developers that
may be formed in the future.

Each of our
domestic and international area developers has been required to enter into two
types of agreements: a development agreement, which establishes the number of
stores to be developed in an area, and a franchise agreement for each store
opened. With respect to our international area developers, most have entered
into one agreement covering both store development and store operations for each
store opened. Area developers typically pay development and franchise fees
ranging from $15,000 to $50,000 for each store they develop. The franchise
agreements with domestic and international area developers typically provide for
the payment of royalties of 4.5% and 6.0% of sales, respectively. For fiscal
2009, the Company elected to reduce the royalty rate payable by domestic area
developers on off-premises sales from 4.5% to 3.5%, and the Company has informed
its domestic area developers that it will reduce the royalty rate on
off-premises sales to 2.5% for fiscal 2010. Off-premises sales represented
approximately 30% of domestic area developer sales and approximately 5% of
international area developer sales in fiscal 2009.

Our current
standard franchise agreement for area developers provides for a 15-year term.
Upon expiration of the term, an area developer typically has the right to
acquire a successor franchise on terms and conditions of the franchise agreement
that we are then using and subject to certain conditions. The agreement can be
terminated for a number of reasons, including the failure of the franchisee to
comply with system standards or to make timely payments within applicable grace
periods, subject to state law. The franchise agreements with domestic and
international area developers typically provide for contributions to the Brand
Fund of 1.0% and 0.25% of sales, respectively. In fiscal 2009, the Company
elected to reduce the Brand Fund contribution rate for domestic area developers
to 0.75%.

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

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

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Franchisee financial performance.Over the past several years, domestic franchisees have closed a large
number of stores in an effort to improve their overall financial performance.
Several franchisees have been experiencing financial pressures which, in certain
instances, have become exacerbated during fiscal 2008 and fiscal 2009. During
fiscal 2008, two of our domestic franchisees filed for reorganization under
Chapter 11 of the United States Bankruptcy Code. One of these bankruptcy cases
was substantially concluded in February 2008 upon the sale of the franchisees
assets to, and assumption of most of its franchise agreements by, a successor
franchisee. The other franchise operation is continuing to operate under court
supervision. In the third quarter of fiscal 2009, our franchisee in Hong Kong
commenced liquidation proceedings, and has since closed the nine stores it
operated. We believe franchisees will close additional stores in the future, and
the number of such closures may be significant. Royalty revenues and most KK
Supply Chain revenues are directly related to sales by franchise stores and,
accordingly, the success of franchisees operations has a direct effect on our
revenues, results of operations and cash flows.

Refranchising.We plan to
refranchise certain geographic markets, expected to consist principally of, but
not necessarily limited to, markets outside our traditional base in the
Southeastern United States. The franchise rights and other assets in many of
these markets were acquired by us in business combinations in prior years. In
fiscal 2009, we refranchised one idled store acquired by us from a failed
franchisee, refranchised two domestic operating stores to a new franchisee, and
refranchised our four Company stores in Canada to a new franchisee. We received
no proceeds in connection with any of these refranchising
transactions.

Products

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

Complementary products.In fiscal
2009, we began testing of a new soft serve menu of traditional cones, shakes and
sundaes paired with a variety of toppings. In fiscal 2010, we will be expanding
our testing of the concept, which we call Kool Kreme,® into
additional Company stores. Our Company store tests, combined with testing by two
of our franchisees, will give us additional assessments of consumer acceptance
on which to base a rollout decision.

Beverages.We have implemented a
complete beverage program which includes drip coffees, both coffee-based and
noncoffee-based frozen drinks, juices, sodas, milks, water and packaged and
fountain beverages. In addition, many of our stores offer a complete line of
espresso-based coffees, including flavors. We continue to seek to improve our
beverage program.

Marketing

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

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

Relationship Marketing.Many of
our brand-building activities are grassroots-based and focused on building
customer and community relevancy by developing relationships with our
constituents  consumers, local non-profit organizations and businesses.
Specific initiatives include:

- Good neighbor product deliveries to create trial uses;
- Sponsorship of local events and nonprofit organizations;



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- Friends of Krispy Kreme eNewsletters
  sent to customers registered to receive monthly updates about new products,
  promotions and store openings;
- Fundraising programs designed to assist
  local charitable organizations to raise money for their non-profit causes; and
- Digital marketing efforts including use
  of social media sites such as Facebook and Twitter to communicate product and
  promotional activity, new store openings and local store marketing
  programs.

Public
Relations.We utilize media relations,
product placement and event marketing as vehicles to generate brand awareness
and trial usage for our products. Our public relations activity creates
opportunities for media and consumers to interact with the Krispy Kreme brand.
Our key messages are as follows:

- Krispy Kreme is the preferred doughnut
  of choice for people nationwide;
- Krispy Kreme is a trusted food retailer
  with a long history of providing superior, innovative products and delivering
  quality customer service; and
- Krispy Kreme encourages its customers to
  stay engaged with the Company and its promotions through its Friends of Krispy
  Kreme program.

Advertising and Sales Promotions.Grass roots marketing has been central to building our brand awareness.
Although our marketing strategy has not historically employed traditional
advertising, we occasionally utilize free-standing newspaper inserts, direct
mail, radio, television and/or sales promotions to generate awareness and usage
of our products. Advertising and sales promotion activity center around our
heritage events and shaped doughnut varieties, such as Valentines Day Hearts,
Fall Footballs, Halloween Pumpkins and Holiday Snowmen.

Brand
Fund.We administer a public relations
and advertising fund, which we refer to as the Brand Fund. Franchise agreements
with domestic area developers and international area developers require these
franchisees to contribute 1.0% and 0.25% of their sales, respectively, to the
Brand Fund. Company stores contribute to the Brand Fund on the same basis as
domestic area developers, as do some associate franchisees. In fiscal 2009, the
Company reduced the contribution from its associate and domestic area developer
franchisees to 0.75%. Proceeds from the Brand Fund are utilized to develop
programs to increase sales and brand awareness and build brand affinity. Brand
Fund proceeds are also utilized to measure consumer feedback and the performance
of our products and stores. In fiscal 2009, we and our franchisees contributed
approximately $2.6 million to the Brand Fund.

Competition

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

In the
packaged doughnut market, an array of doughnuts is typically merchandised on a
free-standing branded display. We compete for sales with many sweet treats,
including those made by well-known producers, such as Dolly Madison, Entenmanns
and Hostess, and regional brands.

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Trademarks and Trade
Names

Our doughnut
shops are operated under the Krispy Kreme® trademark, and we use many
federally registered trademarks and service marks, including Krispy Kreme
Original Glazed® and Hot Krispy Kreme Original Glazed Now®
and the logos associated with these marks. We have also registered some of our
trademarks in approximately 40 other countries. We generally license the use of
these trademarks to our franchisees for the operation of their doughnut
shops.

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

Government Regulation

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

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

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

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

The Company
conducts business outside the United States in compliance with all foreign and
domestic laws and regulations governing international trade.

Franchise regulation.We must
comply with regulations adopted by the Federal Trade Commission (the FTC) and
with several state and foreign laws that regulate the offer and sale of
franchises. The FTCs Trade Regulation Rule on Franchising (FTC Rule) and
certain state and foreign laws require that we furnish prospective franchisees
with a franchise disclosure document containing information prescribed by the
FTC Rule and applicable state and foreign laws and regulations. Our franchise
disclosure document complies with current FTC disclosure requirements, and we
register in domestic and foreign jurisdictions that require registration for the
sale of franchises.

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

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

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

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

Employees

We employ
approximately 3,860 people. Of these, approximately 180 are employed in our
headquarters and administrative offices and approximately 150 are employed in
our manufacturing and distribution center. In our Krispy Kreme stores, we have
approximately 3,530 employees. Of our total workforce, approximately 2,700 are
full-time employees, of which approximately 540 are managers and supervisors,
including approximately 350 store employees.

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

Available Information

The Company
maintains a website at the following address: www.krispykreme.com. The
information on the Companys website is available for information purposes only
and is not incorporated by reference in this Annual Report on Form
10-K.

We make
available on or through our website certain reports and amendments to those
reports, if applicable, that we file with or furnish to the SEC in accordance
with the Securities Exchange Act of 1934 (the Exchange Act). These include our
annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current
reports on Form 8-K and amendments to those reports. We make this information
available on our website free of charge as soon as reasonably practicable after
we electronically file the information with, or furnish it to, the
SEC.

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

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Item 1A. RISK FACTORS.

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

RISKS RELATING TO OUR
BUSINESS

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

We incurred
net losses of $42.2 million, $67.1 million and $4.1 million in fiscal 2007, 2008
and 2009, respectively. We also experienced a decline in revenues in each of the
last three fiscal years. The revenue decline reflects fewer Company stores in
operation, a decline in domestic royalty revenues and in sales of mixes and
other ingredients resulting from lower sales by the Companys domestic
franchisees. The reduction in revenues also reflects, to a limited extent,
decisions by the Company to reduce certain royalties and fees charged to
franchisees, as well as to decisions to lower selling prices of certain goods
sold to franchisees. Lower revenues have adversely affected operating margins
because of the fixed or semi-fixed nature of many of our direct operating
expenses. In addition, we have recorded significant asset impairment charges,
principally related to underperforming Company stores and, in fiscal 2008, a
manufacturing and distribution facility we divested. We may experience further
revenue declines, asset impairments and net losses in the future.

Store
profitability is sensitive to changes in sales volume.

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

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

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

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

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

Area
developers and associates, which are all independent contractors and not Krispy
Kreme employees, contributed (including through purchases from KK Supply Chain)
approximately 31% of our total revenues in fiscal 2009. We rely in part on these
area developers and associates and the manner in which they operate their
locations to develop and promote our business. We occasionally have disputes
with franchisees. Future disputes could materially adversely affect our
business, financial condition and results of operations. We provide training and
support to area developers and associates, but the quality of franchise store
operations may be diminished by

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any number of factors beyond our control.
The failure of our area developers and associates to operate franchises
successfully could have a material adverse effect on us, our reputation and our
brands, and could materially adversely affect our business, financial condition
and results of operations. In addition, although we do not control our
franchisees and they operate as independent contractors, actions taken by any of
our franchisees may be seen by the public as actions taken by us, which, in
turn, could adversely affect our reputation or brands.

Reduced
access to financing by our franchisees on reasonable terms, which the Company
believes occurred in fiscal 2009, could adversely affect our future operations
by limiting franchisees ability to open new stores or leading to additional
franchisee store closures, which would in turn reduce our franchise revenues and
KK Supply Chain revenues. Most area development agreements specify a schedule
for opening stores in the territory covered by the agreement. These schedules
form the basis for our expectations regarding the number and timing of new
Krispy Kreme store openings. In the past, Krispy Kreme has agreed to extend or
modify development schedules for certain area developers and may do so in the
future.

Several
franchisees have been experiencing financial pressures which, in certain
instances, increased in fiscal 2009. We have guaranteed certain obligations of
franchisees in which we have an equity interest. Financial pressures on these
franchisees increase the likelihood that we would be required to perform under
these guarantees. During fiscal 2008, two of our domestic franchisees filed for
reorganization under Chapter 11 of the United States Bankruptcy Code and in
fiscal 2009, our franchisee in Hong Kong commenced liquidation proceedings and
closed the nine stores it operated. Franchisees opened 120 stores and closed 40
stores in fiscal 2009. Royalty revenues and most KK Supply Chain revenues are
directly related to sales by franchise stores and, accordingly, the success of
franchisees operations has a direct effect on our revenues, results of
operations and cash flows.

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

As we work
to stabilize our operations and to refine our store format for new domestic
stores, we do not expect that we or our franchisees will open a significant
number of domestic factory stores in the near future, although we currently plan
to open a modest number of new Company-operated satellite stores in fiscal 2010,
and domestic franchisees also may open additional satellite stores. Our recent
growth strategy has depended on the opening of new Krispy Kreme stores
internationally. Our ability to expand our store base both domestically and
internationally is influenced by factors beyond our and our franchisees
control, which may slow store development and impair our strategy. The success
of these new stores will be dependent in part on a number of factors, which
neither we nor our franchisees can control.

Our new
domestic store operating model may not be successful.

We are
working to refine our domestic store operating model to focus on small retail
concept shops, including both satellite shops and shops that manufacture
doughnuts but which are smaller and have lower capacity than traditional factory
stores. Satellite stores in a market are provided doughnuts from a single
traditional factory store or commissary at which all doughnut production for the
market takes place. The Company currently plans to open a modest number of new
Company-operated satellite stores in fiscal 2010, and domestic franchisees also
may open additional satellite stores as we work to refine our store formats for
new domestic stores. However, we do not expect that we or our franchisees will
open a significant number of domestic factory stores in the near future. We
cannot predict whether this new model will be successful in increasing our
profitability.

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

As of
February 1, 2009, there were 298 Krispy Kreme stores operated outside of the
United States, all of which were operated by franchisees. These stores conduct
business in the local currency of the country in which they are located. Amounts
payable to us by our international franchisees are based on a conversion of the

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royalties and other fees to U.S. dollars
using the prevailing exchange rate. In particular, the royalties are based on a
percentage of net sales generated by our foreign franchisees operations. Our
revenues from international franchisees are exposed to the potentially adverse
effects of our franchisees operations, currency exchange rates, local economic
conditions, political instability and other risks associated with doing business
in foreign countries. To the extent that the portion of our revenues generated
from international operations increases in the future, our exposure to changes
in foreign economic conditions and currency fluctuations will increase.
Recently, the U.S. dollar has strengthened relative to many other currencies;
strengthening of the U.S. dollar relative to the currencies of international
franchisees adversely affects revenue in our Franchise segment, and also makes
goods imported by and purchased in U.S. dollars more costly to these
franchisees.

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

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

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

Flour,
shortening and sugar are our three most significant ingredients. The prices of
wheat and soybean oil, which are the principal components of flour and
shortening respectively, reached record highs in fiscal 2009, although recent
economic conditions have led to significant reductions in the market prices of
agricultural and other commodities, including wheat and soybean oil. Adverse
changes in commodity prices could adversely affect the Companys profitability
and liquidity.

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

We are the
exclusive supplier of doughnut mixes for all domestic and international Krispy
Kreme stores. We also are the exclusive supplier of other key ingredients and
flavors to all domestic Company stores, most domestic franchise stores and some
international franchise stores. We manufacture the doughnut mixes at our mix
manufacturing facility located in Winston-Salem, North Carolina. We distribute
doughnut mixes and other key ingredients and flavors from our distribution
center in Winston-Salem and using an independent contract distributor for Krispy
Kreme shops west of the Mississippi River. We have a backup source to
manufacture our doughnut mixes in the event of the loss of our Winston-Salem
facility. Nevertheless, an interruption of production capacity at our
manufacturing facility could impede our ability or that of our franchisees to
make doughnuts. In addition, in the event that any of our supplier relationships
terminate unexpectedly, even where we have multiple suppliers for the same
ingredient, we may not be able to obtain adequate quantities of the same
high-quality ingredient at competitive prices.

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

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

15

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

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

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

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

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

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

We have
several large off-premises customers. Our top two such customers accounted
for approximately 10.8% of total Company store sales during fiscal 2009. The
loss of one of our large national off-premises customers could adversely affect
our results of operations across all business segments. These customers do not
enter into long-term contracts; instead, they make purchase decisions based on a
combination of price, product quality, consumer demand and service quality. They
may in the future use more of their shelf space, including space currently used
for our products, for other products, including private label products. If our
sales to one or more of these customers are reduced, this reduction may
adversely affect our business.

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

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

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

16

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Loss of our
trade secret recipes could adversely affect our sales.

We derive
significant competitive benefit from the fact that our doughnut recipes are
trade secrets. Although we take commercially reasonable steps to safeguard our
trade secrets, should they become known to competitors, our competitive position
could suffer substantially.

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

Our
indebtedness for borrowed money as of February 1, 2009 was approximately $74.9
million, including $74.4 million under our secured credit facilities. Our debt
service obligations with respect to this indebtedness could have an adverse
impact on our earnings and cash flow for as long as the indebtedness is
outstanding.

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

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

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

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

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

We have
sought and received waivers of defaults and amendments to covenants from the
lenders under our current and former secured credit facilities. While we were
able to obtain these waivers and amendments, in some cases at a significant
additional cost, there is no assurance that we will not require additional
waivers or amendments or that any future waivers or amendments will be granted.
In the event of a default, the absence of waivers or amendments could result in
acceleration of all or substantially all of our indebtedness and the loss of the
assets securing our indebtedness. As a result of amendments and waivers in
fiscal 2008, 2009 and 2010, we have paid fees of approximately $2.7 million and
the interest rate on the loans has increased from LIBOR + 2.75% to LIBOR + 7.50%
(with a LIBOR floor of 3.25%). Any future amendments or waivers could result in
additional fees or rate increases, which could have a material adverse effect on
our financial position, results of operations and cash flows.

17

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RISKS RELATING TO THE FOOD SERVICE
INDUSTRY

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

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

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

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

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

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

18

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RISKS RELATING TO OWNERSHIP OF OUR
COMMON STOCK

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

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

- Changes in general conditions in the
  economy or the financial markets;
- Variations in our quarterly operating
  results or our operating results failing to meet the expectations of
  securities analysts or investors in a particular period;
- Changes in financial estimates by
  securities analysts;
- Other developments affecting Krispy
  Kreme, our industry, customers or competitors; and
- The operating and stock price
  performance of companies that investors deem comparable to Krispy
  Kreme.

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

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

Item 1B. UNRESOLVED STAFF
COMMENTS.

None.

Item 2. PROPERTIES.

Stores.As of February 1, 2009,
there were 523 Krispy Kreme stores systemwide, of which 93 were Company stores
and 430 were operated by franchisees.

- As of February 1, 2009, all of our
  Company stores, except commissaries, had on-premises sales, and approximately
  58 of our Company factory stores also engaged in off-premises
sales.
- Of the 93 Company stores as of February
  1, 2009, we owned the land and building for 47 stores, we owned the building
  and leased the land for 29 stores and leased both the land and building for 17
  stores.

KK
Supply Chain facilities.We own a 147,000
square foot mix manufacturing plant and distribution center in Winston-Salem,
North Carolina. Additionally, we own a 103,000 square foot facility in
Winston-Salem, which we use primarily as our equipment manufacturing facility
and training facility.

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

19

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Item 3. LEGAL
PROCEEDINGS.

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

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

TAG
Litigation

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

Fairfax
County, Virginia Environmental Matter

Since 2004,
the Company has operated a commissary in Fairfax County, Virginia. Fairfax
County has investigated alleged damage to its sewer system near the commissary.
The Company has cooperated with Fairfax Countys investigation and is also
conducting its own investigation of the sewer system and the causes of any
alleged damage. On February 12, 2009, Fairfax County notified us that it
believes that the Companys wastewater discharge was the cause of the alleged
damage, and Fairfax County has demanded payment from the Company of
approximately $2.0 million. The Company disputes that it is the cause of any
alleged damage to the sewer system, and discussions with Fairfax County are
ongoing.

The Company
cannot predict the likelihood of an unfavorable outcome with respect to the TAG
and Fairfax County matters, or the amount or range of potential loss with
respect to them, and, accordingly, no provision for loss with respect to these
matters has been reflected in the consolidated financial statements.

Other Litigation and
Investigations

SEC and
United States Attorney Investigations

In October
2004 , the staff of the SEC advised the Company that the SEC had entered a
formal order of investigation concerning the Company. In February 2005, the
United States Attorney for the Southern District of New York advised the Company
that it would seek to conduct interviews of certain then-current and former
officers and employees of the Company. The Company understood the investigations
related to the alleged conduct of certain former officers and directors of the
Company described below underFederal
Securities Class Actions and Settlement Thereof and Federal Court Shareholder
Derivative Actions and Partial Settlement Thereof.The Company cooperated with both investigations.

On March 4,
2009, the SEC entered an order resolving its investigation of the Company.
Pursuant to the order, the Company consented to a cease and desist order against
future violations of provisions of the Exchange Act and related rules concerning
filing of accurate reports with the SEC, the maintenance of accurate books,
records and accounts in reasonable detail, and the maintenance of a sufficient
system of internal accounting controls. The Company did not admit or deny the
findings in the order, and the order contained no monetary payments or other
sanctions against the Company. Concurrently with the Companys settlement, the
four former officers of the Company who were subjects of the investigation also
reached settlements with the SEC to resolve those investigations.

20

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The Company
has had no substantive contact with the United States Attorneys Office for over
a year, and the Company does not anticipate any further contact from the United
States Attorneys Office concerning its investigation.

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

Beginning in
May 2004, a series of purported securities class actions were filed on behalf of
persons who purchased the Companys publicly traded securities between August
21, 2003 and May 7, 2004 against the Company and certain of its former officers
in the United States District Court for the Middle District of North Carolina,
alleging violations of federal securities law in connection with various public
statements made by the Company. All the actions ultimately were
consolidated.

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

In October
2006, the Company entered into a Stipulation and Settlement Agreement (the
Stipulation) with the lead plaintiffs in the securities class action, the
derivative plaintiffs and all defendants named in the class action and
derivative litigation, except for Mr. Livengood, providing for the settlement of
the securities class action and a partial settlement of the derivative action.
The Stipulation contained no admission of fault or wrongdoing by the Company or
the other defendants. In February 2007, the Court entered final judgment
dismissing all claims with respect to all defendants in the derivative action,
except for claims that the Company may assert against Mr. Livengood, and entered
final judgment dismissing all claims with respect to all defendants in the
securities class action.

With respect
to the securities class action, the settlement class received total
consideration of approximately $76.0 million, consisting of a cash payment of
approximately $35.0 million made by the Companys directors and officers
insurers, cash payments of $100,000 each made by each of a former Chief
Operating Officer and former Chief Financial Officer of the Company, a cash
payment of $4 million made by the Companys independent registered public
accounting firm, and common stock and warrants to purchase common stock issued
by the Company having an estimated aggregate value of approximately $36.9
million as of their issuance on March 2, 2007. Claims against all defendants
were dismissed with prejudice; however, claims that the Company may have against
Mr. Livengood that may be asserted by the Company in the derivative action for
contribution to the securities class action settlement or otherwise under
applicable law are expressly preserved.

The
Stipulation also provided for the settlement and dismissal with prejudice of
claims against all defendants in the derivative action, except for claims
against Mr. Livengood. The Company has been in negotiations with Mr. Livengood
but has not reached agreement to resolve the derivative claims against
him.

The Company
issued 1,833,828 shares of its common stock and warrants to purchase 4,296,523
shares of its common stock at a price of $12.21 per share in connection with the
Stipulation. The Company recorded a charge to earnings in fiscal 2006 for the
fair value of the stock and warrants, measured as of the date on which the
Company agreed to settle the litigation, and adjusted that charge in subsequent
periods to reflect changes in the securities fair value until their issuance in
the first quarter of fiscal 2008. Such subsequent adjustments resulted in a
non-cash charge to fiscal 2007 earnings of $16.0 million and a non-cash credit
to fiscal 2008 earnings of $14.9 million.

In
connection with the settlement of the securities class action and the partial
settlement of the derivative litigation, the Company agreed with its insurers to
limit its claims for reimbursement for legal fees and costs incurred in
connection with those proceedings, and the related SEC and U.S. Attorney
investigations, to a specified reserve fund in the amount of $3.4 million (of
which approximately $1.2 million remains as of February 1, 2009). Counsel for
the plaintiffs in the settled shareholder derivative actions have deferred their

21

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application for fees until conclusion of
the remaining derivative action involving Mr. Livengood, and there can be no
assurance as to the amount the Company will be required to pay to such counsel
or that the remaining reserve fund at such time will be sufficient to reimburse
the Company for such amount or for any other costs the Company may incur in
concluding these matters.

*FACTA Litigation*

In October
2007, a purported nationwide class action was filed against the Company and ten
fictitiously named defendants in the United States District Court for the
Central District of California. Plaintiff asserted a single cause of action for
alleged willful violation of the provisions of the federal Fair and Accurate
Credit Transactions Act related to electronic printing of certain credit card
and debit card receipts. In August 2008, the Company entered into an agreement
settling the case, which settlement had no material effect on the Companys
financial statements.

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

No matters were submitted to a vote
of security holders during the fourth quarter of fiscal 2009.

22

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PART II

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

Market Information

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

High
    
    LowYear
      Ended February 3, 2008:First Quarter
    
    $
    13.20
    
    $
    9.71Second
      Quarter
    
    
    10.49
    
    
    6.80Third Quarter
    
    
    7.33
    
    
    2.91Fourth
      Quarter
    
    
    4.19
    
    
    2.23Year Ended February
      1, 2009:First
      Quarter
    
    $
    3.48
    
    $
    2.50Second
Quarter
    
    
    5.65
    
    
    3.00Third
      Quarter
    
    
    4.72
    
    
    1.76Fourth
Quarter
    
    
    3.00
    
    
    1.35


Holders

As of April 10, 2009, there were
approximately 14,700 shareholders of record of our common stock.

Dividends

We did not
pay any dividends in fiscal 2009 or fiscal 2008. We intend to retain any
earnings to finance our business and do not anticipate paying cash dividends in
the foreseeable future. Furthermore, the terms of our secured credit facilities
prohibit the payment of dividends on our common stock.

Securities Authorized for Issuance
Under Equity Compensation Plans

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

Recent Sales of Unregistered
Securities

None.

Purchases of Equity
Securities

No purchases were made by or on
behalf of the Company of its equity securities in fiscal 2009.

23

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Stock Performance Graph

The
performance graph shown below compares the percentage change in the cumulative
total shareholder return on our common stock against the cumulative total return
of the NYSE Composite Index and Standard & Poors Restaurants Index for the
period from January 30, 2004 through January 30, 2009. The graph assumes an
initial investment of $100 and the reinvestment of dividends.

Comparison of Cumulative Total Return



|                                   | January        | January        | January        | January        | February      | January       
|---------------------------------- | -------------- | -------------- | -------------- | -------------- | ------------- | --------------
|                                   | 30,
      2004 | 28,
      2005 | 27,
      2006 | 26,
      2007 | 1,
      2008 | 30,
      2009
|                                   |                |                |                |                |               |               
|Krispy Kreme
      Doughnuts, Inc. | $              | 100.00         | $              | 24.30          | $             | 14.96         
|NYSE Composite
      Index         |                | 100.00         |                | 107.33         |               | 123.57        
|S&P 500
      Restaurants Index    |                | 100.00         |                | 131.12         |               | 153.89        

24

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Item 6. SELECTED FINANCIAL
DATA.

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

|                                                                        |  | Year Ended                                                      
|----------------------------------------------------------------------- |  | ----------------------------------------------------------------
|                                                                        |  | Feb. 1,                                                         
|                                                                        |  | 2009                                                            
|                                                                        |  | (In thousands, except per share and number of stores
      data)
|STATEMENT OF OPERATIONS DATA:                                           |  |                                                                 
|Revenues                                                                |  | $                                                               
|Operating expenses:                                                     |  |                                                                 
|Direct operating expenses
      (exclusive of depreciation shown below) |  |                                                                 
|General and administrative
      expenses                               |  |                                                                 
|Depreciation and amortization
      expense                             |  |                                                                 
|Impairment charges and lease
      termination costs                    |  |                                                                 
|Settlement of
    litigation                                            |  |                                                                 
|Other operating (income) and
      expenses, net                        |  |                                                                 
|Operating income
      (loss)                                           |  |                                                                 
|Interest income                                                         |  |                                                                 
|Interest
    expense                                                    |  |                                                                 
|Loss on
      extinguishment of debt                                    |  |                                                                 
|Equity in losses of
      equity method franchisees                     |  |                                                                 
|Minority interests in results of consolidated franchises                |  |                                                                 
|Other non-operating
      income and (expense), net                     |  |                                                                 
|Loss
      from continuing operations before income taxes               |  |                                                                 
|Provision for income
      taxes (benefit)                              |  |                                                                 
|Loss
      from continuing operations                                   |  | $                                                               
|Loss from continuing
      operations per common share                  |  |                                                                 
|Basic                                                                   |  | $                                                               
|Diluted                                                                 |  | $                                                               
|BALANCE
      SHEET DATA (AT END OF YEAR):                              |  |                                                                 
|Working capital
      (deficit)(1)                                      |  | $                                                               
|Total
      assets                                                      |  |                                                                 
|Long-term debt, less
      current maturities                           |  |                                                                 
|Total
      shareholders equity                                        |  |                                                                 
|Number of stores at end
      of year:                                  |  |                                                                 
|Company                                                                 |  |                                                                 
|Franchise                                                               |  |                                                                 
|Systemwide                                                              |  |                                                                 

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

25

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

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

Company Overview

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

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

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

Traditional
factory stores have the capacity to produce from 4,000 dozen to over 10,000
dozen doughnuts daily. Commissaries, which are production facilities used
principally to serve off-premises customers domestically and to supplement
factory stores focused on on-premises sales internationally, have the highest
production capacities of factory stores. As of February 1, 2009, there were 19
commissaries systemwide, six of which were operated by the Company. Traditional
factory stores often engage in both on-premises and off-premises sales, with the
allocation between such channels dependent on the particular capacity of the
store and the characteristics of the markets in which the stores operate. Other
factory stores, including small factory stores which have less production
capacity than relatively larger traditional factory stores, serve only the
on-premises distribution channel. Each factory store has significant fixed or
semi-fixed costs, and margins and profitability are significantly affected by
doughnut production volume and sales. As of February 1, 2009, there were 281
Krispy Kreme factory stores systemwide, consisting of 83 Company stores and 198
franchise stores.

Satellite
stores, all of which serve only the on-premises distribution channel, consist
primarily of the hot shop, fresh shop and kiosk formats. The Company has begun
introducing hot shops, which utilize tunnel oven doughnut heating and finishing
equipment scaled to accommodate principally on-premises sales. Hot shop
equipment allows customers to have a hot doughnut experience throughout the day.
Fresh shops and free-standing kiosks are satellite stores that do not contain
doughnut heating equipment. Each of these three small shop formats is
substantially smaller than a traditional factory store. In each of these three
formats, the Company typically sells fresh doughnuts and beverages, with the
doughnuts supplied by nearby factory stores. As of February 1, 2009, 49 hot
shops, 141 fresh shops and 52 kiosks were open systemwide; the Company operated
10 of the hot shops. The Company views the hot shop, fresh shop and kiosk
formats as additional ways to achieve market penetration in a variety of market
sizes and settings.

The Company
is working to refine its domestic store operating model to focus on small retail
concept shops, including both satellite shops and shops that manufacture
doughnuts but which are smaller and have lower capacity than traditional factory
stores. Satellite stores in a market are provided doughnuts from a single
traditional factory store or commissary at which all doughnut production for the
market takes place. The objectives of the small retail concept model are to,
among other things:

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

26

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

The Company
currently plans to open a modest number of new Company-operated satellite stores
in fiscal 2010, and domestic franchisees also may open additional satellite
stores. However, the Company does not expect that it or its franchisees will
open a significant number of domestic factory stores in the near future. The
Company also plans to extend its testing of soft serve dairy products into
additional locations in fiscal 2010. The Company intends to finance these
capital expenditures using existing cash balances and internally generated
funds.Accordingly, completion of these capital
projects is dependent upon the sufficiency of such funds to meet the Companys
capital expenditure needs, after providing for the Companys other cash
requirements, including debt service. The Company has converted six of its
traditional factory stores to hot shops using tunnel oven equipment to reduce
operating costs and increase the number of hours each day the stores offer the
Companys hot Original Glazed® doughnuts. Certain franchisees also
have converted a few factory stores to hot shops.

In addition,
the Company plans to refranchise certain geographic markets, expected to consist
principally of, but not necessarily limited to, markets outside the Companys
traditional base in the Southeastern United States. The franchise rights and
other assets in many of these markets were acquired by the Company in business
combinations in prior years. In fiscal 2009, the Company refranchised one idled
store acquired by the Company from a failed franchisee, refranchised two
domestic operating stores to a new franchisee, and refranchised the four Company
stores in Canada to a new franchisee. The Company received no proceeds in
connection with any of these refranchising transactions.

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

Markets
outside the United States are a source of growth. As of February 1, 2009, there
were a total of 298 Krispy Kreme stores (including 204 satellites) operated
internationally, which were located in Australia, Bahrain, Canada, Indonesia,
Japan, Kuwait, Lebanon, Mexico, the Philippines, Puerto Rico, Qatar, Saudi
Arabia, South Korea, the United Arab Emirates and the United Kingdom. In fiscal
2009, 114 new international stores were opened, and 20 international stores were
closed. Based on continued research and experience with international stores,
the Company is focusing international development efforts primarily on
opportunities in markets in Asia and the Middle East. Existing development and
franchise agreements for territories outside the United States (which include
the countries listed above) provide for the development of over 160 additional
stores in fiscal 2010 and thereafter.

The Company
has equity interests in the franchisees operating stores in Mexico and Western
Canada. The Company currently does not expect to own equity interests in
international area developers formed in the future.

The Company
is vertically integrated to help maintain the consistency and quality of
products throughout the Krispy Kreme system. In addition, through vertical
integration, the Company utilizes volume-buying power, which the Company
believes helps lower the cost of supplies to stores and enhances profitability.
The supply chain business unit, KK Supply Chain, produces doughnut mixes and
manufactures doughnut-making equipment, which all factory stores are required to
purchase. The Company manufactures doughnut mix at its facility in
Winston-Salem, North Carolina. In February 2009, the Company entered into an
agreement with an independent food company to manufacture certain doughnut mixes
for regions outside the Southeastern United States and to provide doughnut mix
production in the event of a disruption of business at the Winston-Salem
facility.

Additionally, KK Supply Chain operates a distribution center which
supplies domestic stores in the Eastern United States and certain international
franchise stores with key supplies. In May 2008, the Company subcontracted with
an independent distributor to supply the domestic stores not supplied from the
Winston-Salem distribution

27

---

facility, which generally consist of
stores west of the Mississippi River. These stores were previously supplied from
a distribution center in Southern California that closed in August 2008. The
Supply Chain business unit is volume-driven, and its economics are enhanced by
the opening of new stores and the growth of sales by existing stores.

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

- Company Stores.The Company Stores
  segment is comprised of the operating activities of the stores operated by the
  Company. These stores sell doughnuts and complementary products through the
  sales channels described above under Company Overview. Expenses for this
  business segment include store level expenses along with direct general and
  administrative expenses and certain allocated corporate costs.
- Franchise.The Franchise segment
  consists of the Companys store franchise operations. The Company has two
  principal franchise programs: the associate program, which is the Companys
  original franchising program developed in the 1940s, and the area developer
  program, which was developed in the mid-1990s. Associates generally pay
  royalties of 3.0% of on-premises sales and 1.0% of all other sales. The
  franchise agreements with area developers typically provide for the payment of
  royalties of 4.5% to 6.0% of all sales and one-time development and franchise
  fees ranging from $15,000 to $50,000 per store. For fiscal 2009, the Company
  elected to reduce the royalty rate payable by domestic area developers on
  off-premises sales from 4.5% to 3.5%, and the Company has informed its
  domestic area developers that it will reduce the royalty rate on off-premises
  sales to 2.5% in fiscal 2010. Expenses for this business segment include costs
  incurred to recruit new franchisees, to assist with store openings, to assist
  in the development of marketing and promotional programs, and to monitor and
  aid in the performance of these stores, as well as direct general and
  administrative expenses and certain allocated corporate costs.
- KK
  Supply Chain.The KK Supply Chain segment
  buys and processes ingredients it uses to produce doughnut mixes and
  manufactures doughnut-making equipment that all factory stores are required to
  purchase. The KK Supply Chain segment also purchases and sells key supplies,
  including icings and fillings, other food ingredients, juices, signage,
  display cases, uniforms and other items to both Company and franchisee-owned
  stores. All intersegment sales from the KK Supply Chain segment to the Company
  Stores segment have been eliminated in consolidation. Expenses for this
  business unit include all expenses incurred at the manufacturing and
  distribution level along with direct general and administrative expenses and
  certain allocated corporate costs.

The FTCs
Trade Regulation Rule on Franchising (FTC Rule) and certain state and foreign
laws require the Company to furnish prospective franchisees with a franchise
disclosure document containing information prescribed by the FTC Rule and
applicable state and foreign laws and regulations. The Companys Franchise
Disclosure Document complies with current FTC disclosure requirements, and the
Company has registered in domestic and foreign jurisdictions that require
registration for the sale of franchises.

Several
franchisees have been experiencing financial pressures which, in certain
instances, became exacerbated during fiscal 2008 and fiscal 2009. The Company
has guaranteed certain obligations of franchisees in which it has an equity
interest, as described in Other Commitments and Contingencies in Note 12 and
Note 18 to the consolidated financial statements appearing elsewhere herein.
Such guarantees totaled $9.0 million as of February 1, 2009 and the aggregate
recorded liability for estimated payments under such guarantees was $2.7 million
at that date. Subsequent to February 1, 2009, the Companys aggregate franchisee
loan and lease guarantee exposure was reduced to $4.6 million. During fiscal
2008, two of the Companys domestic franchisees filed for reorganization under
Chapter 11 of the United States Bankruptcy Code. One of these bankruptcy cases
was substantially concluded in February 2008 upon the sale of the franchisees
assets to, and assumption of most of its franchise agreements by, a successor
franchisee. The other franchise operation is continuing to operate under court
supervision. In the third quarter of fiscal 2009, the Companys franchisee in
Hong Kong commenced liquidation proceedings, and has since closed the nine
stores it operated.

Franchisees
opened 120 stores and closed 40 stores in fiscal 2009. Royalty revenues and most
of KK Supply Chain revenues are directly related to sales by franchise stores
and, accordingly, the success of franchisees operations has a direct effect on
the Companys revenues, results of operations and cash flows.

28

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Results of Operations

The
following table presents the Companys operating results for fiscal 2009, 2008
and 2007 expressed as a percentage of total revenues (percentage amounts may not
add to totals due to rounding).

|                                                                                         |  | Year Ended
|---------------------------------------------------------------------------------------- |  | ----------
|                                                                                         |  | Feb. 1,   
|                                                                                         |  | 2009      
|Revenues                                                                                 |  | 100.0     
|Operating
      expenses:                                                                |  |           
|Direct operating expenses
      (exclusive of depreciation and amortization shown below) |  | 89.8      
|General and administrative
      expenses                                                |  | 6.1       
|Depreciation and amortization
      expense                                              |  | 2.3       
|Impairment charges and lease
      termination costs                                     |  | 0.1       
|Settlement of
    litigation                                                             |  |          
|Other operating (income) and
      expense, net                                          |  | 0.4       
|Operating income (loss)                                                                  |  | 1.2       

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

|                              |  | NUMBER OF FACTORY
    STORES
|----------------------------- |  | ----------------------------
|                              |  | **COMPANY**                 
|JANUARY
      29, 2006        |  |                             
|Opened                        |  |                             
|Closed                        |  |                             
|Transferred                   |  |                             
|Converted to satellites       |  |                             
|JANUARY 28,
    2007          |  |                             
|Opened                        |  |                             
|Closed                        |  |                             
|Transferred                   |  |                             
|Converted to
      satellites |  |                             
|FEBRUARY 3, 2008              |  |                             
|Opened                        |  |                             
|Closed                        |  |                             
|Transferred                   |  |                             
|Converted from satellites     |  |                             
|Converted to
      satellites |  |                             
|FEBRUARY 1, 2009              |  |                             

29

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

|                                    |  | NUMBER OF SATELLITE
    STORES
|----------------------------------- |  | ------------------------------
|                                    |  | COMPANY                       
|JANUARY
      29, 2006              |  |                               
|Opened                              |  |                               
|Closed                              |  |                               
|Transferred                         |  |                               
|Converted from factory stores       |  |                               
|JANUARY 28,
    2007                |  |                               
|Opened                              |  |                               
|Closed                              |  |                               
|Converted from factory stores       |  |                               
|FEBRUARY 3,
    2008                |  |                               
|Opened                              |  |                               
|Closed                              |  |                               
|Transferred                         |  |                               
|Converted from factory
      stores |  |                               
|Converted to factory stores         |  |                               
|FEBRUARY 1,
    2009                |  |                               

Data on the aggregate number of
factory and satellite stores as of February 1, 2009 appear in the table
below.

|                      |  | NUMBER OF STORES
|--------------------- |  | ----------------
|                      |  | COMPANY         
|FACTORY
      STORES: |  |                 
|Domestic              |  |                 
|International         |  |                 
|Total factory stores  |  |                 
|SATELLITES:           |  |                 
|Domestic:             |  |                 
|Hot shops             |  |                 
|Fresh shops           |  |                 
|Kiosks                |  |                 
|Total domestic        |  |                 
|International:        |  |                 
|Hot shops             |  |                 
|Fresh shops           |  |                 
|Kiosks                |  |                 
|Total international   |  |                 
|Total satellites      |  |                 

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

30

---

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

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

|                                          |  | Fiscal Year           
|----------------------------------------- |  | ----------------------
|                                          |  | 2009                  
|                                          |  | (Dollars in thousands)
|Average
      weekly sales per store (1): |  |                       
|Company                                   |  | $                     
|Systemwide                                |  | $                     
|Store operating
      weeks:              |  |                       
|Company                                   |  |                       
|Systemwide                                |  |                       

|(1) |  | Excludes intrasystem sales
      between Company and franchise stores.
|--- |  | ----------------------------------------------------------------------

FISCAL 2009 COMPARED TO FISCAL
2008

Overview

Excluding
sales for the 53rd week in fiscal 2008, systemwide sales decreased approximately
0.1% in fiscal 2009 compared to fiscal 2008, reflecting a 15.1% decrease in
average weekly sales per store, partially offset by a 17.6% increase in store
operating weeks. The systemwide sales decrease measured on a 52-week basis
reflects an 11.0% decrease in Company Stores sales, partially offset by a 6.8%
increase in franchise store sales compared to the prior year. The total number
of factory stores at the end of the fiscal 2009 was 281, consisting of 83
Company stores and 198 franchise stores. Satellite stores made up approximately
46% of the total systemwide store count as of February 1, 2009, compared to
approximately 34% at February 3, 2008. Systemwide average weekly sales per store
are lower than Company average weekly sales per store principally because
satellite stores, which generally have lower average weekly sales than factory
stores, have to date been operated almost exclusively by franchisees. In
addition, the increasing percentage of total stores which are satellite stores
has the effect of reducing the overall systemwide average weekly sales per
store.

Revenues

Total
revenues decreased 10.6% to $384.0 million for the fiscal year ended February 1,
2009 from $429.3 million for the fiscal year ended February 3, 2008. Excluding
revenues for the 53rd week of fiscal 2008, revenues for fiscal 2009 decreased
8.9% from $421.3 million in fiscal 2008. Revenues by business segment (expressed
in dollars and as a percentage of total revenues) are set forth in the table
below (percentage amounts may not add to totals due to rounding).

31

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|                                      |  | Year Ended            
|------------------------------------- |  | ----------------------
|                                      |  | Feb. 1,               
|                                      |  | 2009                  
|                                      |  | (Dollars in thousands)
|REVENUES BY BUSINESS SEGMENT:         |  |                       
|Company
      Stores                  |  | $                     
|Franchise                             |  |                       
|KK Supply
      Chain:                |  |                       
|Total revenues                        |  |                       
|Less  intersegment sales elimination |  |                       
|External KK Supply Chain revenues     |  |                       
|Total revenues                        |  | $                     
|                                     
|PERCENTAGE OF TOTAL REVENUES:         |  |                       
|Company
      Stores                  |  |                       
|Franchise                             |  |                       
|KK Supply
      Chain                 |  |                       
|Total revenues                        |  |                       

Company
Stores Revenues.Company Stores revenues were
$265.9 million in fiscal 2009 compared to $304.4 million in fiscal 2008.
Excluding the 53rd week of fiscal 2008, Company Stores revenues decreased 11.0%
in fiscal 2009 from $298.9 million in fiscal 2008. The decrease in revenues
(measured on a 52-week basis) reflects a 7.7% decline in store operating weeks
and a 4.2% decrease in average weekly sales per store. The decrease in store
operating weeks reflects the refranchising or closure of 18 Company factory
stores and three Company satellite stores since the end of fiscal 2007. The
Company continuously reviews the performance of its stores and may decide to
close additional locations, and the number of such closures may be
significant.

On-premises
sales (which include fundraising sales) comprised approximately 45% and 43% of
total Company Stores revenues in fiscal 2009 and 2008, respectively, with the
balance comprised of off-premises sales.

The
following table sets forth statistical data with respect to on- and off-premises
sales by Company stores. All comparisons have been made excluding the 53rd week
from fiscal 2008. The change in same store sales is computed by dividing the
aggregate on-premises sales (including fundraising sales) during the current
year period for all stores which had been open for more than 56 consecutive
weeks during the current year (but only to the extent such sales occurred in the
57th or later week of each stores operation) by the aggregate on-premises sales
of such stores for the comparable weeks in the preceding year. Once a store has
been open for at least 57 consecutive weeks, its sales are included in the
computation of same stores sales for all subsequent periods. In the event a
store is closed temporarily (for example, for remodeling) and has no sales
during one or more weeks, such stores sales for the comparable weeks during the
earlier or subsequent period are excluded from the same store sales computation.
For off-premises sales, average weekly number of doors represents the average
number of customer locations to which product deliveries are made during a week,
and average weekly sales per door represents the average weekly sales to each
such location.

52 Weeks EndedFeb. 1,
    
    Jan. 27,2009
    
    2008ON-PREMISES:Change in same store sales
    
    (0.7
    )%
    
    0.0
    %OFF-PREMISES:Change in average weekly number of doors
    
    (7.0
    )%
    
    (1.1
    )%Change in average weekly sales per door
    
    (7.5
    )%
    
    (6.4
    )%


32

---

On-premises
same stores sales decreased in fiscal 2009 compared to fiscal 2008, generally
reflecting a decrease in customer traffic partially offset by an increase in the
average guest check. The Company is implementing programs designed to improve
on-premises sales, including increased focus on local store marketing efforts,
improved employee training, store refurbishment efforts and the introduction of
new products. In the off-premises distribution channel, the decrease in the
average weekly number of doors represents a decrease in both the grocery/mass
merchant channel and in the convenience store channel. The average weekly sales
per door fell in both channels. A decrease in average weekly sales per door
generally adversely affects profitability because of the increased significance
of delivery costs in relation to sales. However, the Company is designing and
implementing strategies to increase average per door sales and reduce costs in
the off-premises channel. Those strategies include improved route management and
route consolidation (including elimination of or reduction in the number of
stops at relatively low volume doors), new sales incentives and
performance-based pay programs, and increased emphasis on relatively longer
shelf-life products.

The Company
increased on-premises selling prices in late fiscal 2008 and increased
off-premises selling prices in early fiscal 2009 to partially offset rising
costs, particularly increased costs of doughnut mixes and shortening due to
rising agricultural commodity prices. The Company believes the selling price
increases have adversely affected sales volumes, particularly in the
off-premises channel.

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

Year EndedFeb. 1,
    
    Feb. 3,2009
    
    2008(Dollars in thousands)Royalties
    
    $
    22,752
    
    $
    20,377Development and
      franchise fees
    
    
    2,463
    
    
    2,341Other
    
    
    322
    
    
    240Total Franchise revenues
    
    $
    25,537
    
    $
    22,958


Excluding
the 53rd week of fiscal 2008, Franchise revenues increased 13.5% to $25.5
million in fiscal 2009 from $22.5 million in fiscal 2008.

Royalty
revenues measured on a 52-week basis rose to $22.8 million in fiscal 2009 from
$19.9 million in fiscal 2008. Sales by franchise stores, as reported by the
franchisees, were approximately $509 million in fiscal 2009 and $476 million
(measured on a 52 week basis) in fiscal 2008. Changes in the rates of exchange
between the U.S. dollar and the foreign currencies in which the Companys
international franchisees do business reduced sales by international frachisees
measured in U.S. dollars by approximately $10 million in the fourth quarter of
fiscal 2009 and for fiscal 2009 as a whole compared to the prior periods. All of
the growth in franchisee sales in fiscal 2009 was attributable to an increase in
the number of franchise stores outside the United States. Domestic franchisee
sales fell in fiscal 2009 compared to fiscal 2008, principally due to store
closings. The Company did not recognize as revenue approximately $1.0 million
and $2.6 million of uncollected royalties which accrued during fiscal 2009 and
2008, respectively, because the Company did not believe collection of these
royalties was reasonably assured. The unrecorded revenue in fiscal 2009 relates
principally to international franchisees, while the unrecorded revenue in fiscal
2008 related principally to domestic franchisees.

Development
and franchise fees increased to $2.5 million in fiscal 2009 from $2.3 million in
fiscal 2008 due to an increase in store openings by international franchisees.
Development and franchise fees did not increase proportionately with the number
of store openings principally because a greater percentage of fiscal 2009
openings were satellite stores compared to fiscal 2008; development and
franchise fees per store are lower for satellite stores than for factory
stores.

33

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Franchisees
opened 120 stores and closed 40 stores in fiscal 2009. Royalty revenues are
directly related to sales by franchise stores and, accordingly, the success of
franchisees operations has a direct effect on the Companys revenues, results
of operations and cash flows.

KK Supply
Chain Revenues.KK Supply Chain revenues were
$92.6 million in fiscal 2009 compared to $101.9 million in fiscal 2008.
Excluding the 53rd week in fiscal 2008, KK Supply Chain revenues decreased 7.4%
from $99.9 million in fiscal 2008. The most significant reason for the decrease
in revenues (measured on a 52-week basis) was lower unit sales of mixes,
ingredients and supplies resulting from lower sales by Company and domestic
franchise stores. In addition, an increasing percentage of franchisee sales is
attributable to sales by franchisees outside North America. Many of the
ingredients and supplies used by international franchisees are acquired locally
instead of from KK Supply Chain. The decline in the KK Supply Chain revenue due
to lower unit volume was partially offset by an increase in revenue resulting
from price increases for mixes and certain other ingredients instituted by KK
Supply Chain in fiscal 2009 in order to offset increases in materials costs. The
KK Supply Chain revenue decrease was also attributable to a decrease in sales of
equipment and equipment services in fiscal 2009 compared to fiscal 2008.
Franchisee expansion in fiscal 2009 was comprised principally of satellite
stores, which require less equipment than do factory stores. Sales of equipment
and related services (including signage, beverage equipment, furniture, fixtures
and similar items sold through the KK Supply Chain distribution centers)
represented approximately 7% and 12% of KK Supply Chain revenues in fiscal 2009
and 2008, respectively.

Franchisees
opened 120 stores and closed 40 stores in fiscal 2009. A significant majority of
KK Supply Chains revenues are directly related to sales by franchise stores
and, accordingly, the success of franchisees operations has a direct effect on
the Companys revenues, results of operations and cash flows.

Direct Operating
Expenses

Direct
operating expenses, which exclude depreciation and amortization expense, were
89.8% of revenues in fiscal 2009 compared to 88.5% of revenues in fiscal 2008.
Direct operating expenses by business segment (expressed in dollars and as a
percentage of applicable segment revenues) are set forth in the table below.
Such operating expenses are consistent with the segment operating income data
set forth in Note 17 to the consolidated financial statements appearing
elsewhere herein.

|                                                                                |  | Year Ended            
|------------------------------------------------------------------------------- |  | ----------------------
|                                                                                |  | Feb. 1,               
|                                                                                |  | 2009                  
|                                                                                |  | (Dollars in thousands)
|DIRECT OPERATING EXPENSES BY BUSINESS SEGMENT:                                  |  |                       
|Company
      Stores                                                            |  | $                     
|Franchise                                                                       |  |                       
|KK Supply
      Chain:                                                          |  |                       
|Total direct operating expenses                                                 |  |                       
|Less  intersegment eliminations                                                |  |                       
|KK Supply Chain direct operating expenses, less
      intersegment eliminations |  |                       
|Total direct operating expenses                                                 |  | $                     
|                                                                               
|DIRECT OPERATING EXPENSES AS A PERCENTAGE OF SEGMENT                            |  |                       
|REVENUES:                                                                       |  |                       
|Company
      Stores                                                            |  |                       
|Franchise                                                                       |  |                       
|KK Supply Chain
      (before intersegment eliminations)                        |  |                       
|Total direct operating expenses                                                 |  |                       

34

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Company
Stores Direct Operating Expenses.Company
Stores direct operating expenses as a percentage of Company Stores revenues
increased to 100.8% for fiscal 2009 from 98.5% in fiscal 2008. Higher costs for
materials resulting from price increases instituted by KK Supply Chain in fiscal
2009 in order to offset higher raw materials costs, higher fuel costs and the
adverse effects on delivery efficiency of lower average weekly sales per door
more than offset selling price increases and the benefit of closing
underperforming stores. Recent economic conditions have led to significant
reductions in the market prices of agricultural commodities and fuel which have
resulted in price reductions by KK Supply Chain in the fourth quarter of fiscal
2009 and in the first quarter of fiscal 2010.

The Company
is implementing programs intended to improve store operations and reduce costs
as a percentage of revenues, including improved employee training and the
introduction of improved food and labor cost management tools. In addition, the
Company is implementing programs designed to improve the profitability of sales
into the off-premises distribution channel, where declines in the average weekly
sales per door adversely affect profitability because of the increased
significance of delivery costs in relation to sales. Those strategies include
improved route management and route consolidation (including elimination of or
reduction in the number of stops at relatively low volume doors), new sales
incentives and performance-based pay programs, and increased emphasis on
relatively longer shelf-life products.

Franchise
Direct Operating Expenses.Franchise direct
operating expenses include costs to recruit new franchisees, to assist in store
openings, to support franchisee operations and marketing efforts, as well as
direct general and administrative expenses and allocated corporate costs. The
increase in Franchise direct operating expenses in fiscal 2009 compared to
fiscal 2008 reflects a bad debt provision of approximately $1.3 million
principally related to credit exposure on international franchisees, partially
offset by lower allocated corporate costs resulting from cost reduction efforts
and lower store opening support expenses. Costs to support franchise store
openings decline as individual franchisees gain experience opening stores and
develop internal resources to assist in store openings.

KK Supply
Chain Direct Operating Expenses.KK Supply
Chain direct operating expenses as a percentage of KK Supply Chain revenues
before intersegment eliminations increased to 87.1% in fiscal 2009 from 85.0% in
fiscal 2008. A significant component of the increase was a charge of
approximately $1.7 million (approximately 0.9% of KK Supply Chain revenues
before intersegment eliminations) related to the Companys former third-party
freight consolidator. For many years, the Company utilized a third-party freight
consolidator to review and pay freight bills on behalf of the Company. During
the second quarter of fiscal 2009, the Company made routine payments to the
third-party freight consolidator which were improperly not remitted to the
freight carriers. The actions of the third-party freight consolidator, which has
since filed for bankruptcy protection, resulted in a loss to the Company which
the Company currently does not expect to recover. The Company has since changed
its procedures to pay freight carriers directly and taken other actions to
mitigate this and similar risks.

The cost of
raw materials used in the production of doughnut mix and of other goods sold to
Company and franchise stores was higher in fiscal 2009 than in fiscal 2008. In
particular, the prices of flour and shortening and the products from which they
are made were significantly higher in fiscal 2009 compared to fiscal 2008.
During fiscal 2009, KK Supply Chain increased the prices charged to Company and
franchise stores for doughnut mixes, shortening and other goods in order to
mitigate increases in the cost of these raw materials. However, while KK Supply
Chain increased prices to cover its increased costs, profit margins as a
percentage of sales decreased. Recent economic conditions have led to
significant reductions in the price of certain commodities, including wheat and
food oils. These reductions have lowered KK Supply Chains cost of flour and
shortening, and enabled KK Supply Chain to reduce the prices charged to the
Company and franchise stores for doughnut mixes and shortening in the fourth
quarter of fiscal 2009. These prices were lowered further in the first quarter
of fiscal 2010 to reflect additional cost reductions.

KK Supply
Chain direct operating expenses include a net credit of approximately $950,000
to the bad debt provision in fiscal 2009 compared to a charge of approximately
$1.5 million in fiscal 2008. The net credit in fiscal 2009 reflects a reduction
in the allowance for doubtful accounts resulting principally from a decrease in
credit exposure with respect to certain franchisees and a recovery of certain
receivables previously reserved, partially offset by bad debt provisions
recorded with respect to other franchise receivables. As of February 1, 2009,
the Companys allowance for doubtful accounts from franchisees totaled
approximately $2.8 million.

35

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General and Administrative
Expenses

General and
administrative expenses decreased to $23.5 million in fiscal 2009 from $26.3
million in fiscal 2008. General and administrative expenses in fiscal 2008
include approximately $2.7 million recorded in the fourth quarter for severance
costs related to the resignation of the Companys former chief executive
officer, of which approximately $1.6 million was share-based compensation
(including accelerated vesting of certain equity awards). The decrease in
general and administrative expenses also reflects a decrease in other
share-based compensation expense of approximately $700,000 due principally to
executive officer turnover resulting in the forfeiture of stock and option
awards, and the elimination of most incentive compensation costs in fiscal 2009
due to the Companys failure to achieve incentive compensation targets for the
year, which reduced incentive compensation costs by approximately $1.0 million
from fiscal 2008. These decreases in general and administrative expenses were
partially offset by a charge of approximately $1.1 million in fiscal 2009
related to changes in the Companys vacation policy.

General and
administrative expenses in fiscal 2009 include an out of period credit of
approximately $600,000 related to the Companys self-insured workers
compensation program, and these costs in fiscal 2008 include unusual credits of
$480,000 relating to the settlement of certain charitable pledge
obligations.

General and
administrative expenses include professional fees and expenses related to the
investigations and securities litigation described in Note 12 to the
consolidated financial statements included elsewhere herein, which totaled
approximately $1.3 million in fiscal 2009 and $1.1 million in fiscal 2008. The
Company expects these costs will be substantially reduced in fiscal 2010 as a
result of the conclusion of the SEC investigation.

*Depreciation and Amortization Expense*

Depreciation
and amortization expense decreased to $8.7 million in fiscal 2009 from $18.4
million in fiscal 2008. The decline in depreciation and amortization expense is
attributable principally to the reduction in the number of Company factory
stores operating in fiscal 2009 compared to fiscal 2008, and to a lower
depreciable base of property and equipment resulting from impairment writedowns.
In addition, depreciation and amortization expense decreased approximately $4.3
million in fiscal 2009 compared to fiscal 2008 as a result of the Companys
divestiture in January 2008 of its manufacturing and distribution facility in
Effingham, Illinois.

*Impairment Charges and Lease Termination Costs*

Impairment
charges and lease termination costs were $548,000 in fiscal 2009 compared to
$62.1 million in fiscal 2008.

Impairment
charges related to long-lived assets totaled $1.1 million in fiscal 2009 and
$56.0 million in fiscal 2008, of which approximately $900,000 and $44.1 million,
respectively, related to underperforming stores. The charges relate to stores
closed or expected to be closed, as well as charges with respect to stores
management believes will not generate sufficient future cash flows to enable the
Company to recover the carrying value of the stores assets, but which
management has not yet decided to close. The Company closed six stores in fiscal
2009 and nine stores in fiscal 2008. The Company tests long-lived assets for
impairment when events or changes in circumstances indicate that their carrying
value may not be recoverable. These events and changes in circumstances include
store closing decisions, the effects of changing costs (including commodity
costs) on current results of operations, observed trends in operating results,
and evidence of changed circumstances observed as a part of periodic reforecasts
of future operating results and as part of the Companys annual budgeting
process. The Company records impairment charges associated with stores in the
accounting period in which a store closing decision is made or in which the
carrying value of the store is otherwise determined to be
nonrecoverable.

In addition,
in fiscal 2008, the Company recorded an impairment charge of approximately $10.4
million with respect to its KK Supply Chain manufacturing and distribution
facility in Effingham, Illinois, based on managements revised expectations
about the use and ultimate disposition of that facility. During the second
quarter of fiscal 2008, the Company decided to divest the facility and
determined that the projected cash flows from operation and ultimate sale of the
facility were less than its carrying value; accordingly, the Company

36

---

recorded an impairment charge to reduce
the carrying value of the facility and related equipment to their estimated fair
value. In the fourth quarter of fiscal 2008, the Company sold these assets for
approximately $10.9 million cash (net of expenses), which approximated the
Companys earlier estimate of their disposal value. Also during fiscal 2008, the
Company decided to close its KK Supply Chain coffee roasting operation and to
sell the related assets, and recorded an impairment charge of approximately $1.5
million to reduce the carrying value of those assets to their estimated disposal
value of $1.9 million. The Company sold these assets for approximately $1.9
million cash during the third quarter of fiscal 2008.

Lease
termination costs represent the net present value of remaining contractual lease
payments related to closed stores, after reduction by estimated sublease
rentals, and are recorded when the lease contract is terminated or, if earlier,
the date on which the Company ceases use of the leased property. In fiscal 2009,
changes in estimated sublease rentals on a closed store that was subsequently
refranchised and the realization of proceeds on an assignment of another closed
store lease resulted in $1.2 million of credits to the provision for lease
termination costs. These credits, in combination with the reversal of
approximately $800,000 of previously recorded deferred rent expense related to
stores closed during the year and approximately $1.5 million of charges related
to other closed store leases, resulted in a net credit in the provision for
lease termination costs of $502,000 in fiscal 2009. In fiscal 2008, the Company
received proceeds of $966,000 on the assignment of leases related to closed
stores, reversed approximately $1.7 million of previously recorded deferred rent
expense related to stores closed during the year and recorded approximately $1.7
million of charges related to other closed store leases, resulting in a net
provision for lease termination costs of $1.0 million in fiscal 2008.

The Company
plans to refranchise certain geographic markets, expected to consist principally
of, but not necessarily limited to, markets outside the Companys traditional
base in the Southeastern United States. The franchise rights and other assets in
many of these markets were acquired by the Company in business combinations in
prior years. In fiscal 2009, the Company refranchised one idled store acquired
by the Company from a failed franchisee, refranchised two domestic operating
stores to a new franchisee, and refranchised the four Company stores in Canada
to a new franchisee. The Company received no proceeds in connection with any of
these transactions. With the exception of a non-cash gain related to foreign
currency translation arising from the Canadian disposal, no significant gain or
loss was recognized as a result of the refranchisings. The Company cannot
predict the likelihood of refranchising any additional stores or markets or the
amount of proceeds, if any, which might be received therefrom, including the
amounts which might be realized from the sale of store assets and the execution
of any related franchise agreements. Refranchising could result in the
recognition of impairment losses on the related assets.

*Settlement of Litigation*

In the first
quarter of fiscal 2008, the Company issued common stock and warrants to acquire
common stock in connection with the settlement of a federal securities class
action and to settle, in part, certain shareholder derivative actions, as more
fully described in Item 3, Legal Proceedings and in Note 12 to the
consolidated financial statements appearing elsewhere herein. The Company
recorded a charge to earnings in fiscal 2006 for the fair value of the stock and
warrants, measured as of the date on which the Company agreed to settle the
litigation, and adjusted that charge in subsequent periods to reflect changes in
the securities fair value until their issuance in the first quarter of fiscal
2008. Such subsequent adjustment resulted in a non-cash credit to fiscal 2008
earnings of $14.9 million.

*Interest Income*

Interest
income decreased to $331,000 in fiscal 2009 from $1.4 million in fiscal 2008
primarily due to lower short term interest rates in fiscal 2009 compared to
fiscal 2008.

*Interest Expense*

Interest
expense increased to $10.7 million in fiscal 2009 from $9.8 million in fiscal
2008. Interest accruing on outstanding indebtedness was lower in fiscal 2009
than in fiscal 2008 because of a reduction in outstanding debt since the first
quarter of fiscal 2008. This lower interest on outstanding indebtedness was
partially offset by

37

---

higher lender margin and fees resulting
from the amendments to the Companys 2007 Secured Credit Facilities as described
under Liquidity and Capital Resources below and in Note 10 to the consolidated
financial statements appearing elsewhere herein. In addition, in fiscal 2009 the
Company charged to interest expense approximately $260,000 of fees and expenses
associated with the amendments, and expensed approximately $290,000 of
unamortized debt issuance costs associated with the reduction in the size of the
Companys revolving credit facility from $50 million to $30 million.

Interest
expense for fiscal 2009 reflects a non-cash charge of approximately $800,000
resulting from marking to market the Companys liabilities related to interest
rate derivatives. As more fully described in Liquidity and Capital Resources
below and Note 10 to the consolidated financial statements appearing elsewhere
herein, effective April 9, 2008, the Company discontinued hedge accounting for
certain interest rate derivatives as a result of amendments to its credit
facilities. As a consequence of the discontinuance of hedge accounting, changes
in the fair value of the derivative contracts subsequent to April 8, 2008 are
reflected in earnings as they occur. Amounts included in accumulated other
comprehensive income related to changes in the fair value of the derivative
contracts for periods prior to April 9, 2008 are being charged to earnings
through April 2010 when the underlying hedged transactions (interest expense on
long-term debt) affect earnings. As of February 1, 2009, the fair value of the
derivative liability was approximately $2.3 million, which is included in
accrued liabilities in the accompanying consolidated balance sheet. Accumulated
other comprehensive income as of February 1, 2009 includes an unamortized
accumulated loss related to these derivatives of approximately $800,000 (net of
income taxes of approximately $500,000). Interest expense for the fiscal year
ended February 1, 2009 includes approximately $970,000 of amortization of this
accumulated loss.

*Loss
on Extinguishment of Debt*

During the
first quarter of fiscal 2008, the Company closed the 2007 Secured Credit
Facilities and used the proceeds to retire other indebtedness, as more fully
described in Note 10 to the consolidated financial statements appearing
elsewhere herein. The Company recorded a loss on extinguishment of debt of
approximately $9.6 million, consisting of a $4.1 million prepayment fee related
to the other indebtedness and a $5.5 million write-off of unamortized deferred
financing costs related to that debt.

*Equity in Losses of Equity Method Franchisees*

Equity in
losses of equity method franchisees totaled $786,000 in fiscal 2009 compared to
$933,000 in fiscal 2008. This caption represents the Companys share of
operating results of equity method franchisees which develop and operate Krispy
Kreme stores.

*Other
Non-Operating Income and Expense, Net*

Other
non-operating income and expense in fiscal 2009 includes a non-cash gain of
approximately $2.8 million relating to the disposition of the Companys Canadian
subsidiary in connection with the refranchising of the Companys four stores in
Eastern Canada, substantially all of which represents the cumulative foreign
currency translation adjustment related to the Canadian operations which, prior
to the sale of the stores, had been reflected, net of tax, in accumulated other
comprehensive income. In addition, other non-operating income and expense in
fiscal 2009 includes a non-cash gain of $931,000 on the disposal of an
investment in an Equity Method Franchisee, largely offset by a $900,000 charge
for collectability risk on a note receivable from another Equity Method
Franchisee, as described in Note 18 to the consolidated financial statements
appearing elsewhere herein.

Other
non-operating income and expense in fiscal 2008 includes a provision of $3.0
million recorded in the fourth quarter for estimated payments under the
Companys guarantees of certain debt and leases related to an Equity Method
Franchisee. During the fourth quarter of fiscal 2008, the franchisee defaulted
on certain of the obligations guaranteed by the Company and, while there was no
demand on the Company to perform under the guarantees, the Company believed it
was probable that demand would be made on the Company to perform under some, and
potentially all, of them. In fiscal 2009, the Company made payments of
approximately $250,000 related to these guarantees. As of February 1, 2009, the
accrued liability for potential guarantee payments related to this franchisee
was $2.7 million, which, after giving effect to transactions occurring after
year end described in Note

38

---

18 to the consolidated financial
statements appearing elsewhere herein, approximated the Companys aggregate loan
guarantee exposure to the franchisee, all of the lease guarantees having been
released. In addition, other non-operating income and expense in fiscal 2008
includes an impairment charge of approximately $550,000 to reduce the carrying
value of the Companys investment in a franchisee to its estimated fair value,
partially offset by a gain of approximately $260,000 resulting from additional
proceeds from the prior sale of an interest in another franchisee.

The Company
has a 30% interest in KK Mexico, whose operating results have been adversely
affected by economic weakness in that country. The franchisee also has been
adversely affected by a significant decline in the value of the countrys
currency relative to the U.S. dollar, which has made the cost of goods imported
from the U.S. more expensive, and which has increased the amount of cash
required to service the portion of the franchisees debt that is denominated in
U.S. dollars. If this investment, which has a carrying value of $1.2 million at
February 1, 2009, suffers a loss in value that is other than temporary, the
Company would be required to reduce the carrying value of the investment to
reflect that loss in value, with a corresponding charge to earnings.

*Provision for Income Taxes*

The
provision for income taxes was $503,000 and $2.3 million in fiscal 2009 and
fiscal 2008, respectively. Each of these amounts includes adjustments to the
valuation allowance for deferred income tax assets to maintain such allowance at
an amount sufficient to reduce the Companys aggregate net deferred income tax
assets to zero, as well as a provision for income taxes estimated to be payable
currently. The deferred income tax provision for fiscal 2009 includes $1.2
million of deferred income taxes related to the cumulative foreign currency
translation gain associated with the Companys operations in Eastern Canada
which, prior to the sale of the operations in the fourth quarter of fiscal 2009
and the resulting recognition of the gain, was included in accumulated other
comprehensive income. In addition, the fiscal 2009 income tax provision includes
a credit of approximately $1.8 million to reduce accruals for uncertain tax
positions, principally as a result of the dissolution of one of the Companys
foreign subsidiaries and the resolution of related income tax
uncertainties.

*Net
Loss*

The Company incurred net losses of
$4.1 million and $67.1 million in fiscal 2009 and 2008, respectively.

FISCAL 2008 COMPARED TO FISCAL
2007

*Overview*

The
Companys fiscal year ends on the Sunday closest to January 31, which
periodically results in a 53-week year. Fiscal 2008 contained 53
weeks.

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

39

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Revenues

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

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

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

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

40

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

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


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

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

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


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

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

41

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

Franchisees
opened 88 stores and closed 26 stores in fiscal 2008. Royalty revenues are
directly related to sales by franchise stores and, accordingly, the success of
franchisees operations has a direct effect on the Companys revenues, results
of operations and cash flows.

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

Franchisees
opened 88 stores and closed 26 stores in fiscal 2008. A significant majority of
KK Supply Chains revenues are directly related to sales by franchise stores
and, accordingly, the success of franchisees operations has a direct effect on
the Companys revenues, results of operations and cash flows.

*Direct Operating
Expenses*

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

42

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

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

Company
Stores Direct Operating Expenses.Company
Stores direct operating expenses as a percentage of Company Stores revenues
increased to 98.5% in fiscal 2008 from 94.3% in fiscal 2007. The increase
reflects, among other things, higher costs of doughnut mix and certain other
ingredients resulting from price increases instituted by KK Supply Chain in
order to partially offset higher raw materials costs, as well as increased
direct labor and higher delivery vehicle and marketing costs as a percentage of
revenues.

The Company
experienced a decline in the average weekly sales per door in the off-premises
distribution channel in fiscal 2008. A decrease in average weekly sales per door
generally adversely affects profitability because of the increased significance
of delivery costs in relation to sales. In addition, delivery costs have been
rising due to, among other things, rising fuel costs.

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

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

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

43

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

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

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

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

General and
Administrative Expenses

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

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

44

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

Depreciation
and Amortization Expense

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

Impairment
Charges and Lease Termination Costs

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

Impairment
charges related to long-lived assets totaled $56.0 million in fiscal 2008 and
$9.4 million in fiscal 2007, of which approximately $44.1 million and $9.4
million, respectively, related to the Company Stores segment. Approximately
$23.3 million of the fiscal 2008 charges in the Company Stores segment were
recorded in the fourth quarter. The charges relate to stores closed or expected
to be closed, as well as charges with respect to stores management believed
would not generate sufficient future cash flows to enable the Company to recover
the carrying value of the stores assets, but which management had not yet
decided to close. The Company closed nine factory stores in fiscal 2008 and
eight factory stores in fiscal 2007. The Company tests other long-lived assets
for impairment when events or changes in circumstances indicate that their
carrying value may not be recoverable. These events and changes in circumstances
include store closing decisions, the effects of changing costs (including
commodity costs) on current results of operations, observed trends in operating
results, and evidence of changed circumstances observed as a part of periodic
reforecasts of future operating results and as part of the Companys annual
budgeting process. The Company records impairment charges associated with stores
in the accounting period in which a store closing decision is made or in which
the carrying value of the store is otherwise determined to be nonrecoverable. In
addition, during fiscal 2008 the Company recorded an impairment charge of
approximately $10.4 million related to its manufacturing and distribution
facility in Effingham, Illinois, which the Company divested as described in Note
13 to the consolidated financial statements appearing elsewhere herein. Such
charge is net of a credit of approximately $600,000 recorded upon the sale of
the facility in the fourth quarter to adjust earlier estimates of its net
realizable value. Finally, the Company recorded an impairment charge of
approximately $1.5 million in fiscal 2008 to reduce the carrying value of its KK
Supply Chain coffee roasting assets to their estimated disposal value of $1.9
million. The Company sold these assets for approximately $1.9 million during the
third quarter of fiscal 2008.

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

45

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

Settlement of
Litigation

In the first
quarter of fiscal 2008, the Company issued common stock and warrants to acquire
common stock in connection with the settlement of a federal securities class
action and to settle, in part, certain shareholder derivative actions, as more
fully described in Item 3, Legal Proceedings and in Note 12 to the
consolidated financial statements appearing elsewhere herein. The Company
recorded a charge to earnings in fiscal 2006 for the fair value of the stock and
warrants, measured as of the date on which the Company agreed to settle the
litigation, and adjusted that charge in subsequent periods to reflect changes in
the securities fair value until their issuance in the first quarter of fiscal
2008. Such subsequent adjustments resulted in a non-cash credit to fiscal 2008
earnings of $14.9 million and a non-cash charge to fiscal 2007 earnings of $16.0
million.

Interest
Income

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

Interest
Expense

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

Loss on
Extinguishment of Debt

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

Equity in
Losses of Equity Method Franchisees

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

Other
Non-Operating Income and Expense, Net

Other
non-operating income and expense in fiscal 2008 includes a provision of $3.0
million recorded in the fourth quarter for estimated payments under the
Companys guarantees of certain debt and leases related to a franchisee. During
the quarter, the franchisee defaulted on certain of the obligations guaranteed
by the Company and, while there was no demand on the Company to perform under
the guarantees, the Company believed it was probable that demand would be made
on the Company to perform under some, and potentially all, of them. The charge
represented approximately 25% of the Companys aggregate then-existing exposure
under the guarantees. Other non-operating income and expense in fiscal 2007
includes gains of approximately $7.3 million arising

46

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principally from the sale of the Companys
investments in Krispy Kreme Australia and Krispy Kreme UK, and a charge of
approximately $450,000 for estimated payments under a Company guarantee of
certain obligations of a franchisee.

Provision for
Income Taxes

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

Net
Loss

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

Liquidity and Capital
Resources

The
following table summarizes the Companys cash flows from operating, investing
and financing activities for fiscal 2009, 2008 and 2007:

|                                                           |  | Year Ended    
|---------------------------------------------------------- |  | --------------
|                                                           |  | Feb. 1,       
|                                                           |  | 2009          
|                                                           |  | (In thousands)
|Net cash provided by operating activities                  |  | $             
|Net cash
      provided by (used for) investing activities |  |               
|Net cash used for financing activities                     |  |               
|Effect of
      exchange rate changes on cash              |  |               
|Cash balances of subsidiaries at date of deconsolidation   |  |               
|Net
      increase (decrease) in cash and cash equivalents |  | $             

Cash Flows from Operating
Activities

Net cash
provided by operating activities was $16.6 million in fiscal 2009, $9.7 million
in fiscal 2008 and $22.1 million in fiscal 2007.

The increase
in cash provided by operating activities in fiscal 2009 compared to fiscal 2008
reflects decreases in receivables from off-premises doughnut customers resulting
from lower sales to those customers, as well as decreases in receivables from
franchisees resulting from lower sales of doughnut mix, other ingredients and
supplies to franchisees in fiscal 2009 compared to fiscal 2008. A decline in
inventory levels resulting from, among other things, the closure of KK Supply
Chains California distribution center also contributed to the improvement.
These factors were partially offset by a decrease in accounts payable and
accrued liabilities resulting from, among other things, the elimination of most
corporate incentive compensation costs in fiscal 2009 due to the Companys
failure to achieve its incentive compensation targets for the year.

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

47

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Cash
provided by operating activities in fiscal 2009, 2008 and 2007 was affected by
professional and other fees related to the investigations and securities
litigation described in Note 12 to the consolidated financial statements
appearing elsewhere herein. These fees and expenses reduced operating cash flows
by approximately $1.5 million, $4.2 million and $8.4 million in fiscal 2009,
2008 and 2007, respectively. The Company expects these costs will be
substantially reduced in fiscal 2010 as a result of the conclusion of the SEC
investigation.

Cash Flows from Investing
Activities

Net cash
used for investing activities was approximately $4.3 million in fiscal 2009
compared to net cash provided by investing activities of $13.1 million in fiscal
2008 and $14.0 million in fiscal 2007.

Cash used
for capital expenditures decreased to $4.7 million in fiscal 2009 from $5.5
million in fiscal 2008. The Company currently plans to open a modest number of
new Company-operated small retail concept stores in fiscal 2010 and,
accordingly, the Company expects that capital expenditures in fiscal 2010 will
be approximately twice that of fiscal 2009. The Company intends to finance these
capital expenditures using existing cash balances and internally generated
funds. Accordingly, completion of these capital projects is dependent upon the
sufficiency of such funds to meet the Companys capital expenditure needs, after
providing for the Companys other cash requirements, including debt
service.

In fiscal
2009, 2008 and 2007, the Company realized proceeds from the sale of property and
equipment of $748,000, $18.3 million and $9.7 million, respectively, which,
except for approximately $10.9 million (net of expenses) received in fiscal 2008
from the sale of a mix manufacturing and distribution facility, related
principally to the sale of closed stores.

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

Also in
fiscal 2007, the Company paid approximately $818,000 (net of a recovery of
$282,000) to settle its obligations under its guarantees of a portion of the
indebtedness of a former subsidiary, and purchased three stores from one of its
franchisees for $2.9 million cash.

Cash Flows from Financing
Activities

Net cash
used for financing activities was $1.4 million in fiscal 2009, $34.4 million in
fiscal 2008 and $15.5 million in fiscal 2007.

During
fiscal 2009, the Company repaid approximately $2.0 million of principal on its
term loan and capitalized lease indebtedness, consisting of approximately $1.2
million of scheduled amortization and a prepayment of approximately $750,000
from the proceeds of the assignment of a lease related to a closed store.
Additionally, the Company paid approximately $695,000 in fees to its lenders in
fiscal 2009 to amend its credit facilities as described below and in Note 10 to
the consolidated financial statements appearing elsewhere herein.

In fiscal
2009, the Company received $3.1 million in proceeds from the exercise of stock
options. During the same period, present and former employees surrendered common
shares having an aggregate fair value of $2.1 million to pay the exercise price
of options exercised and to reimburse the Company for the minimum statutory
withholding taxes paid by the Company on behalf of present and former employees
arising from such exercise and from the vesting of restricted stock awards,
which has been reflected as an investing cash outflow.

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

48

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During
fiscal 2007, financing activities included scheduled principal payments of
long-term debt. In addition, pursuant to the provisions of the Companys former
secured credit facilities, in fiscal 2007 the Company prepaid approximately $7.6
million of the debt thereunder using proceeds from the sale of certain property
and equipment, and repaid an additional $3.6 million using proceeds from the
sale of the Companys interest in its franchisee in the United
Kingdom.

Business Conditions, Uncertainties and
Liquidity

The Company
experienced a decline in revenues and incurred net losses in each of the last
three fiscal years. The revenue decline reflects fewer Company stores in
operation, a decline in domestic royalty revenues and lower sales of mixes and
other ingredients resulting from lower sales by the Companys domestic
franchisees. Lower revenues have adversely affected operating margins because of
the fixed or semi-fixed nature of many of the Companys direct operating
expenses. In addition, price increases in the Company Stores segment were not
sufficient to fully offset steep rises in agricultural commodity costs in fiscal
2009 compared to fiscal 2008, although recent economic conditions have led to
significant reductions in the market prices of these commodities, which had a
positive effect on the Companys results of operations in the fourth quarter of
fiscal 2009, and which the Company believes will positively affect fiscal 2010
results. Sales volumes and changes in the cost of major ingredients and fuel can
have a material effect on the Companys results of operations and cash flows. In
addition, royalty revenues and most of KK Supply Chain revenues are directly
related to sales by franchise stores and, accordingly, the success of
franchisees operations has a direct effect on the Companys revenues, results
of operations and cash flows.

The Company
generated net cash from operating activities of $16.6 million, $9.7 million and
$22.1 million, in fiscal 2009, 2008, and 2007, respectively. Net cash provided
by operating activities in fiscal 2008 reflects a cash outflow of approximately
$4.1 million for a prepayment penalty on the refinancing of indebtedness. Asset
dispositions generated investing cash flows of $18.3 million in fiscal 2008 and
$9.7 million in fiscal 2007, with the majority of such proceeds used to reduce
outstanding borrowings under the Companys secured credit facilities.

The
Companys 2007 Secured Credit Facilities described in Note 10 to the consolidated financial statements appearing elsewhere herein are the Companys
principal source of external financing. These facilities consist of a term loan
having an outstanding principal balance of $74.4 million as of February 1, 2009
which matures in February 2014 and a $25 million revolving credit facility
maturing in February 2013.

The 2007
Secured Credit Facilities contain significant financial covenants as described
in Note 10 to the consolidated financial statements appearing elsewhere herein.
The Company was in compliance with those financial covenants as of February 1,
2009, although those covenants were scheduled to become more stringent in fiscal
2010. Subsequent to year end, the Company executed amendments to the credit
facilities which, among other things, relaxed the interest coverage ratio
covenants contained therein through fiscal 2012. In connection with the
amendments, the Company prepaid $20 million of the principal balance outstanding
under the term loan, paid fees of approximately $1.9 million, and agreed to
increase the rate of interest on outstanding loans by 200 basis points annually.
Any future amendments or waivers could result in additional fees or rate
increases.

Based on the
Companys current working capital and the fiscal 2010 operating plan, management
believes the Company can comply with the amended financial covenants and that
the Company can meet its projected operating, investing and financing cash
requirements.

Failure to
comply with the financial covenants contained in the 2007 Secured Credit
Facilities, or the occurrence or failure to occur of certain events, would cause
the Company to default under the facilities. The Company would attempt to
negotiate waivers of any such default, should one occur. There can be no
assurance that the Company would be able to negotiate any such waivers, and the
costs or conditions associated with any such waivers could be significant. In
the absence of a waiver of, or forbearance with respect to, any such default,
the Companys lenders would be able to exercise their rights under the credit
agreement including, but not limited to, accelerating maturity of outstanding
indebtedness and asserting their rights with respect to the collateral.
Acceleration of the maturity of indebtedness under the 2007 Secured Credit
Facilities could have a material adverse effect on the Companys financial
position, results of operations and cash flows. In the event that credit under
the 2007 Secured Credit Facilities were not available to the Company, there can
be no assurance that alternative sources of credit would be available to the
Company or, if they are available, under what terms or at what cost.

49

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Capital Resources, Contractual
Obligations and Off-Balance Sheet Arrangements

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

Debt

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

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

The 2007
Revolver contains provisions which permit the Company to obtain letters of
credit. Issuance of letters of credit under these provisions constitutes usage
of the lending commitments, and reduces the amount available for cash borrowings
under the 2007 Revolver. The commitments under the 2007 Revolver were reduced to
$25 million from $30 million in connection with the amendments to the 2007
Secured Credit Facilities executed in April 2009 (the April 2009 Amendments).
In connection with the April 2009 Amendments, the Company prepaid $20 million of
the principal balance outstanding under the 2007 Term Loan. The Company expects
to record a charge of approximately $1 million in the first quarter of fiscal
2010 related to the amendments.

Interest on
borrowings under the 2007 Revolver and 2007 Term Loan is payable either at LIBOR
or at the Alternate Base Rate (which is the greater of Fed funds rate plus 0.50%
or the prime rate), in each case plus the Applicable Margin. After giving effect
to the April 2009 Amendments, the Applicable Margin for LIBOR-based loans and
for Alternate Base Rate-based loans was 7.50% and 6.50%, respectively (5.50% and
4.50%, respectively, prior to the April 2009 Amendments). In addition, the
secured credit facilities provide that LIBOR-based loans shall be computed based
upon the greater of the relevant LIBOR rate or 3.25%.

The Company
is required to pay a fee equal to the Applicable Margin for LIBOR-based loans on
the outstanding amount of letters of credit issued under the 2007 Revolver, as
well as a fronting fee of 0.25% of the amount of such letter of credit payable
to the letter of credit issuer. There also is a fee on the unused portion of the
2007 Revolver lending commitment, which increased from 0.75% to 1.00% in
connection with the April 2009 Amendments.

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

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

50

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The 2007
Secured Credit Facilities require the Company to meet certain financial tests,
including a maximum consolidated leverage ratio (expressed as a ratio of total
debt to Consolidated EBITDA) and a minimum consolidated interest coverage ratio
(expressed as a ratio of Consolidated EBITDA to net interest expense), computed
based upon Consolidated EBITDA and net interest expense for the most recent four
fiscal quarters and total debt as of the end of such four-quarter period. As of
February 1, 2009, the consolidated leverage ratio was required to be not greater
than 4.75 to 1.0 and the consolidated interest coverage ratio was required to be
not less than 2.5 to 1.0. As of February 1, 2009, the Companys consolidated
leverage ratio was approximately 4.1 to 1.0 and the Companys consolidated
interest coverage ratio was approximately 2.7 to 1.0. The maximum consolidated
leverage ratio declines during fiscal 2010 to 4.0 to 1.0 and declines thereafter
until it reaches 2.0 to 1.0 in fiscal 2013. The minimum consolidated interest
coverage ratio decreases during fiscal 2010 to 2.35 to 1.0 and increases
thereafter until it reaches 4.50 to 1.0 in fiscal 2013. Consolidated EBITDA is
a non-GAAP measure and is defined in the 2007 Secured Credit Facilities to mean,
generally, consolidated net income or loss, exclusive of unrealized gains and
losses on hedging instruments, gains or losses on the early extinguishment of
debt and provisions for payments on guarantees of franchisee obligations plus
the sum of net interest expense, income taxes, depreciation and amortization,
non-cash charges, store closure costs, costs associated with certain litigation
and investigations, and extraordinary professional fees; and minus payments, if
any, on guarantees of franchisee obligations in excess of $3 million in any
rolling 4-quarter period and the sum of non-cash credits. Effective in April
2009, net interest expense excludes amounts paid under the interest rate
derivative contracts described below. In addition, the 2007 Secured Credit
Facilities contain other covenants which, among other things, limit the
incurrence of additional indebtedness (including guarantees), liens, investments
(including investments in and advances to franchisees which own and operate
Krispy Kreme stores), dividends, transactions with affiliates, asset sales,
acquisitions, capital expenditures, mergers and consolidations, prepayments of
other indebtedness and other activities customarily restricted in such
agreements. The 2007 Secured Credit Facilities also prohibit the transfer of
cash or other assets to KKDI from its subsidiaries, whether by dividend, loan or
otherwise, but provide for exceptions to enable KKDI to pay taxes and operating
expenses and certain judgment and settlement costs.

The
operation of the restrictive financial covenants described above may limit the
amount the Company may borrow under the 2007 Revolver. In addition, the maximum
amount which may be borrowed under the 2007 Revolver is reduced by the amount of
outstanding letters of credit, which totaled approximately $16.0 million as of
February 1, 2009. The maximum additional borrowing available to the Company as
of February 1, 2009 was approximately $9.0 million (computed on a pro forma
basis after giving effect to the April 2009 Amendments).

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

In May 2007,
the Company entered into interest rate derivative contracts having an aggregate
notional principal amount of $60 million. The derivative contracts eliminate the
Companys exposure, with respect to such notional amount, to increases in three
month LIBOR beyond 5.40% through April 2010, and eliminate the Companys ability
to benefit from a reduction in three month LIBOR below 4.48% for the same
period. These derivatives were accounted for as cash flow hedges from their
inception through April 8, 2008. Hedge accounting was discontinued on that date
because the derivative contracts could no longer be shown to be effective (as
defined in Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities) in hedging interest rate risk as
a result of the April Amendments, which provide that interest on LIBOR-based
borrowings is payable at the greater of the LIBOR rate for the selected interest
period or 3.25%. As a consequence of the discontinuance of hedge accounting,
changes in the fair value of the derivative contracts subsequent to April 8,
2008 are reflected in earnings as they occur. Amounts included in accumulated
other comprehensive income related to changes in the fair value of the
derivative contracts for periods prior to April 9, 2008 are being charged to
earnings in the periods in which the hedged forecasted transaction (interest on
$60 million of the principal balance of the 2007 Term Loan) affects earnings. As
of February 1, 2009, the fair value of the derivatives was a liability of
approximately $2.3 million, which is included in accrued liabilities in the
accompanying consolidated balance sheet. Accumulated other comprehensive income
as of February 1, 2009 includes an unamortized accumulated loss related to these
derivatives of approximately $800,000 (net of income taxes of approximately
$500,000).

51

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Leases

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

Off-Balance
Sheet Arrangements

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

Contractual Cash Obligations at
February 1, 2009

The Companys contractual cash
obligations as of February 1, 2009 are as follows:

|                                                                                                                    |  |                |         |      | Payments Due In
|------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ---- | ---------------
|                                                                                                                    |  |                |         |      | Less           
|                                                                                                                    |  |                |         |      | Than           
|                                                                                                                    |  | Total          |         | 1    |                
|                                                                                                                    |  | Amount         |         | Year |                
|                                                                                                                    |  | (In thousands)
|Long-term debt
      (excluding capital lease
      obligations),       including current maturities (1)            |  | $              | 74,416  |      | $              
|Interest payment
      obligations (2)(3)                                                                           |  |                | 33,373  |      |                
|Payment obligations on interest rate hedge (4)                                                                      |  |                | 1,938   |      |                
|Capital lease
      obligations                                                                                     |  |                | 451     |      |                
|Operating lease obligations                                                                                         |  |                | 120,561 |      |                
|Purchase
      obligations                                                                                          |  |                | 32,487  |      |                
|Guarantee obligations (5)                                                                                           |  |                | 9,010   |      |                
|Other long-term
      obligations, including current
      portion,       reflected on the Companys balance sheet: |  |                |         |      |                
|Self-insurance claims                                                                                               |  |                | 17,185  |      |                
|401(k) mirror plan liability                                                                                        |  |                | 287     |      |                
|Total                                                                                                               |  | $              | 289,708 |      | $              

|(1) |  | Long-term debt (excluding capital lease obligations), including current maturities
      has been computed on a proforma basis to reflect the prepayment in April
      2009 of $20 million of borrowings outstanding under the Companys secured
      credit facilities in connection with amendments to these
    facilities.                                                                              
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|(2) |  | Estimated interest payments for
      variable rate debt are based upon the forward LIBOR interest rate curve as
      of January 30, 2009 and have been computed on a pro forma basis to give
      effect to the amendments to the Companys secured credit facilities
      executed in April 2009 and to reflect the prepayment of $20 million of the
      borrowings outstanding under these facilities.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|(3) |  | Represents estimated amounts
      payable without reduction for any amount due to the Company or payable by
      the Company pursuant to an interest rate derivative agreement. See Note 10
      to the consolidated financial statements appearing elsewhere
    herein.                                                                                                                                  
|   
|(4) |  | Interest rates utilized to
      estimate payments on the interest rate derivative are based upon the
      forward LIBOR interest rate curve as of January 30, 2009.                                                                                                                                                                                                                                         
|   
|(5) |  | Amounts represent 100% of the
      Companys aggregate exposure at February 1, 2009 under loan and lease
      guarantees related to franchisees in which the Company has an ownership
      interest. Subsequent to February 1, 2009, the aggregate amount of such
      exposure was reduced to $4.6 million.                                                                                              

52

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The
preceding table of contractual cash obligations excludes income tax liabilities
of approximately $500,000 as of February 1, 2009 for unrecognized tax benefits
due to uncertainty in predicting the timing of any such related
payments.

Capital Requirements

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

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

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

Inflation

The Company
does not believe that general price inflation has had a material effect on its
results of operations in recent years. However, prices of agricultural
commodities have been trending upward in recent years, and those price increases
have had a significant effect on the cost of flour and shortening, the two most
significant ingredients used in the production of the Companys
products.

Critical Accounting
Policies

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

Allowance for
Doubtful Accounts

Accounts
receivable arise primarily from royalties earned on sales by the Companys
franchisees, sales by KK Supply Chain to our franchisees of equipment, mix and
other supplies necessary to operate a Krispy Kreme store, as well as from
off-premises sales by company stores to convenience and grocery stores and other
customers. During the three years in the period ended February 1, 2009, some of
the Companys franchisees experienced financial difficulties or for other
reasons did not comply with the normal payment terms for settlement of amounts
due to the Company. The Company has recorded provisions for doubtful accounts
related to its accounts receivable, including receivables from franchisees, in
amounts which management believes are sufficient to provide for losses estimated
to be sustained on realization of these receivables. Such estimates inherently
involve uncertainties and assessments of the outcome of future events, and
changes in facts and circumstances may result in adjustments to the provision
for doubtful accounts.

53

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Goodwill and
Identifiable Intangible Assets

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

For
intangible assets with indefinite lives, the Company performs the annual test
for impairment as of December 31. The impairment test for indefinite-lived
intangible assets involves comparing the fair value of such assets with their
carrying value, with any excess of carrying value over fair value recorded as an
impairment charge. The goodwill impairment test involves determining the fair
values of the reporting units to which goodwill is assigned and comparing those
fair values to the reporting units carrying values, including goodwill. To
determine fair value for each reporting unit, the Company uses the discounted
cash flows that the reporting unit can be expected to generate in the future.
This valuation method requires management to project revenues, operating
expenses, working capital investment, capital spending and cash flows for the
reporting units over a multi-year period, as well as determine the weighted
average cost of capital to be used as a discount rate. The Company also
considers the estimated fair values of its reporting units relative to the
Companys overall market capitalization in connection with its goodwill
impairment assessment. Significant management judgment is involved in preparing
these estimates. Changes in projections or estimates could significantly change
the estimated fair value of reporting units. In addition, if management uses
different assumptions or estimates in the future or if conditions exist in
future periods that are different than those anticipated, future operating
results and the balances of goodwill in the future could be affected by
impairment charges. Impairment analyses of goodwill resulted in impairment
charges of approximately $4.6 million in fiscal 2008 and $1.1 million in fiscal
2007. There were no goodwill impairment charges in fiscal 2009. As of February
1, 2009, the remaining goodwill had a carrying value of $23.5 million, all of
which was associated with the Franchise segment. The risk of goodwill impairment
would increase in the event that the Franchise segment operating results were to
significantly deteriorate or the overall market capitalization of the Company
were to decline below the book value of the Companys shareholders
equity.

Asset
Impairment

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

Determining
undiscounted cash flows and the fair value of an asset group involves estimating
future cash flows, revenues, operating expenses and disposal values. The
projections of these amounts represent managements best estimates at the time
of the review. If different cash flows had been estimated, property and
equipment balances and related impairment charges could have been affected.
Further, if management uses different assumptions or estimates in the future or
if conditions exist in future periods that are different than those anticipated,
future operating results could be affected. In addition, the sale of assets
whose carrying value has been reduced by impairment charges could result in the
recognition of gains or losses to the extent the sales proceeds realized differ
from the reduced carrying amount of the assets. In fiscal 2009, fiscal 2008 and
fiscal 2007, the Company recorded impairment charges related to long-lived
assets totaling approximately $1.0 million, $56.0 million and $9.4 million,
respectively. Additional impairment charges may be necessary in future
years.

54

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Insurance

The Company
is subject to workers compensation, vehicle and general liability claims. The
Company is self-insured for the cost of all workers compensation, vehicle and
general liability claims up to the amount of stop-loss insurance coverage
purchased by the Company from commercial insurance carriers. The Company
maintains accruals for the estimated cost of claims on an undiscounted basis,
without regard to the effects of stop-loss coverage, using actuarial methods
which evaluate known open and incurred but not reported claims and consider
historical loss development experience. In addition, the Company records
receivables from the insurance carriers for claims amounts estimated to be
recovered under the stop-loss insurance policies when these amounts are
estimable and probable of collection. The Company estimates such stop-loss
receivables using the same actuarial methods used to establish the related
claims accruals, and taking into account the amount of risk transferred to the
carriers under the stop-loss policies. Many estimates and assumptions are
involved in estimating future claims, and differences between future events and
prior estimates and assumptions could affect future operating results and result
in adjustments to these loss accruals and related insurance
receivables.

Income
Taxes

The Company
recognizes deferred tax assets and liabilities based upon managements
expectation of the future tax consequences of temporary differences between the
income tax and financial reporting bases of assets and liabilities. Deferred tax
liabilities generally represent tax expense recognized for which payment has
been deferred, or expenses which already have been deducted in the Companys tax
return but which have not yet been recognized as an expense in the consolidated
financial statements. Deferred tax assets generally represent tax deductions or
credits that will be reflected in future tax returns for which the Company has
already recorded a tax benefit in its consolidated financial statements. The
Company establishes valuation allowances for deferred income tax assets as
required under FAS 109, Accounting for Income Taxes. At February 1, 2009, the
Company has recorded a valuation allowance against deferred income tax assets of
$178.8 million, representing the total amount of such assets in excess of the
Companys deferred income tax liabilities. The valuation allowance was recorded
because management was unable to conclude, in light of the cumulative losses
realized by the Company, that realization of the net deferred income tax asset
was more likely than not. The determination of income tax expense and the
related balance sheet accounts, including valuation allowances for deferred
income tax assets, requires management to make estimates and assumptions
regarding future events, including future operating results and the outcome of
tax-related contingencies. If future events are different from those assumed or
anticipated, the amount of income tax assets and liabilities, including
valuation allowances for deferred income tax assets, could be materially
affected.

Guarantee
Liabilities

The Company
has guaranteed a portion of loan and lease obligations of certain franchisees in
which the Company owns an interest. The Company assesses the likelihood of
making any payments under the guarantees and records estimated liabilities for
anticipated payments when the Company believes that an obligation to perform
under the guarantees is probable and the amount can be reasonably estimated. No
liabilities for the guarantees were recorded at the time they were issued
because the Company believed the value of the guarantees was immaterial. As of
February 1, 2009, the Company has recorded liabilities of approximately $2.7
million related to such guarantees, which totaled approximately $9.0 million at
that date. Assessing the probability of future guarantee payments involves
estimates and assumptions regarding future events, including the future
operating results of the franchisees. If future events are different from those
assumed or anticipated, the amounts estimated to be paid pursuant to such
guarantees could change, and additional provisions to record such liabilities
could be required.

Investments in
Franchisees

The Company
has investments in certain Equity Method Franchisees, the value of which cannot
be verified by reference to quoted market prices. The Companys assessment of
the realizability of these investments involves assumptions concerning future
events, including the future operating results of the franchisees. If future
events are different from those assumed or anticipated by the Company, the
assessment of realizability of the recorded investments in these entities could
change, and impairment provisions related to these investments could be
required. As of February 1, 2009, the Companys investment in Equity Method
Franchisees was approximately $1.2 million.

55

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Stock-Based
Compensation

The Company
measures and recognizes compensation expense for share-based payment (SBP)
awards based on their fair values in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment. Because
options granted to employees differ from options on the Companys common shares
traded in the financial markets, the Company cannot determine the fair value of
options granted to employees based on observed market prices. Accordingly, the
Company estimates the fair value of stock options subject only to service
conditions using the Black-Scholes option valuation model, which requires inputs
including interest rates, expected dividends, volatility measures and employee
exercise behavior patterns. Some of the inputs the Company uses are not
market-observable and must be estimated. The fair value of stock options which
contain market conditions as well as service conditions is estimated using Monte
Carlo simulation techniques. In addition, the Company must estimate the number
of awards which ultimately will vest, and periodically adjusts such estimates to
reflect actual vesting events. Use of different estimates and assumptions would
produce different option values, which in turn would affect the amount of
compensation expense recognized.

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

Recent Accounting
Pronouncements

Effective
February 4, 2008 (the first day of fiscal 2009), the Company adopted Financial
Accounting Standards Board (FASB) Statement No. 157, Fair Value Measurements
(FAS 157), as described in Note 21 to the consolidated financial statements
appearing elsewhere herein. FAS 157 addresses how companies should measure fair
value when they are required to use a fair value measure for recognition or
disclosure purposes under GAAP. As a result of FAS 157, there is now a common
definition of fair value to be used throughout GAAP, which is expected to make
the measurement of fair value more consistent and comparable. In February 2008,
the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement
No. 157, which delayed the effective date of FAS 157 relating to nonrecurring
measurements of nonfinancial assets and nonfinancial liabilities. The Company
must adopt the FAS 157 measurement principles with respect to these nonfinancial
assets and liabilities in fiscal 2010. Adoption of FAS 157 for financial assets
and liabilities did not have any material effect on the Companys financial
position or results of operations and adoption of FAS 157 for nonfinancial
assets and liabilities is not expected to have any material effect on the
Companys financial position or results of operations. See Note 21 for
additional information regarding fair value measurement.

Effective
January 29, 2007 (the first day of fiscal 2008), the Company adopted the
provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 prescribes recognition thresholds that must be met
before a tax position is recognized in the financial statements and provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. Under FIN 48, an entity may only
recognize or continue to recognize tax positions that meet a more likely than
not threshold. The Company recorded the cumulative effect of adopting FIN 48 as
a $1.2 million credit to the opening balance of accumulated deficit as of
January 29, 2007, the date of adoption. Principally as a result of the
dissolution of one of the Companys foreign subsidiaries and the resolution of
related income tax uncertainties during fiscal 2009, the Company recorded credit
of approximately $1.8 million to the provision for income taxes to reduce the
Companys accruals for uncertain tax positions.

In February
2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115 (FAS 159). FAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. FAS 159
does not affect any existing accounting literature that requires

56

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certain assets and liabilities to be
carried at fair value. The Company adopted FAS 159 as of February 4, 2008 (the
first day of fiscal 2009) and did not elect any fair value measurement options
permitted by FAS 159 and, accordingly, FAS 159 did not have any effect on the
Companys financial position or results of operations.

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

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

The Company
is exposed to market risk from increases in interest rates on its outstanding
debt. All of the borrowings under the Companys secured credit facilities bear
interest at variable rates based upon either the Fed funds rate or LIBOR. The
interest cost of the Companys debt is affected by changes in these short-term
interest rates and increases in those rates adversely affect the Companys
results of operations. On May 16, 2007, the Company entered into interest rate
derivative contracts having an aggregate notional principal amount of $60
million. The derivative contracts eliminate the Companys exposure to increases
in three month LIBOR beyond 5.40% through April 2010, and eliminate the
Companys ability to benefit from a reduction in three month LIBOR below 4.48%
for the same period.

As of
February 1, 2009, the Company had approximately $74.9 million in borrowings
outstanding. A hypothetical increase of 100 basis points in short-term interest
rates would result in a decrease in the Companys annual interest expense of
approximately $600,000. The hypothetical rate increase would reduce amounts
payable by the Company on the $60 million outstanding notional balance of
interest rate derivatives, while resulting in no increase in interest expense on
the Companys term debt due to the operation of an interest rate floor provision
in the Companys credit agreement. The Companys credit facilities and the
related interest rate derivatives are described in Note 5 to the consolidated
financial statements appearing elsewhere herein.

The
substantial majority of the Companys revenue, expense and capital purchasing
activities are transacted in U.S. dollars. The Companys investment in its
franchisee operating in Mexico exposes the Company to exchange rate risk. In
addition, although royalties from international franchisees are payable to the
Company in U.S. dollars, changes in the rate of exchange between the U.S. dollar
and the foreign currencies used in the countries in which the international
franchisees operate affect the Companys royalty revenues. Recently, the U.S.
dollar has strengthened relative to many other currencies; strengthening of the
U.S. dollar relative to the currencies of international franchisees adversely
affects Franchise revenue. Because royalty revenues are derived from a
relatively large number of foreign countries, and royalty revenues are not
highly concentrated in a small number of countries, the Company believes that
the relatively small size of any currency hedging activities would adversely
affect the economics of hedging strategies and, accordingly, the Company
historically has not attempted to hedge these exchange rate risks.

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

In addition
to entering into forward purchase contracts, from time to time the Company
purchases exchange-traded commodity futures contracts, and options on such
contracts, for raw materials which are ingredients of its products or which are
components of such ingredients, including wheat and soybean oil. The Company
typically assigns the futures contract to a supplier in connection with entering
into a forward purchase contract for the related ingredient. There were no
unassigned commodity futures or options on such contracts as of February 1,
2009.

57

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Although the
Company utilizes forward purchase contracts and futures contracts and options on
such contracts to mitigate the risks related to commodity price fluctuations,
such contracts do not fully mitigate commodity price risk. In addition, the
portion of the Companys anticipated future commodity requirements that is
subject to such contracts varies from time to time. Prices for agricultural
commodities have been volatile in the past two years and have traded at record
high prices during this period, although recent economic conditions have led to
significant reductions in the market prices of agricultural and other
commodities, including wheat and soybean oil. Adverse changes in commodity
prices could adversely affect the Companys profitability and
liquidity.

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

|           |  | Approximate             |                         | Approximate
      Range |  |                           |  | Approximate Annual    
|---------- |  | ----------------------- | ----------------------- | ----------------------- |  | ------------------------- |  | ----------------------
|           |  | Anticipated Fiscal 2010 |                         | of Prices
      Paid In |  | Hypothetical
      Price  |  | Effect Of Hypothetical
|Ingredient |  | Purchases               |                         | Fiscal 2009             |  | Increase                  |  | Price Increase        
|           |  |                         |                         |                         |  |                           |  |                       
|Flour      |  |                         | 74.0 million lbs.       |                         |  | $0.179  $0.268/lb.       |  | $0.01/lb.             
|Shortening |  |                         | 34.4 million       lbs. |                         |  | $0.466 
      $0.746/lb. |  | $0.01/lb.             
|Sugar      |  |                         | 60.6 million lbs.       |                         |  | $0.280  $0.295/lb.       |  | $0.01/lb.             

The range of
prices paid for fiscal 2009 set forth in the table above reflect the effects of
any forward purchase contracts entered into at various times prior to delivery
of the goods and, accordingly, do not necessarily reflect the range of prices of
these ingredients prevailing in the market during the fiscal year.

58

---

Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.

|                                                                                                                |  | Page
|--------------------------------------------------------------------------------------------------------------- |  | ----
|Index to Financial Statements                                                                                   |  |     
|Report of
      Independent Registered Public Accounting Firm                                                   |  | 60  
|Consolidated balance sheet as of February 1, 2009 and February 3,
      2008                                    |  | 61  
|Consolidated
      statement of operations for each of the three years in the
period                            |  |     
|ended February 1,
      2009                                                                                    |  | 62  
|Consolidated statement of cash flows for each of the three years in
      the period                            |  |     
|ended February 1,
      2009                                                                                    |  | 63  
|Consolidated
      statement of changes in shareholders equity for each of the three years
      in the period |  |     
|ended February 1,
      2009                                                                                    |  | 64  
|Notes to financial statements                                                                                   |  | 65  
|Financial
      statement schedules:                                                                            |  |     
|Schedule I  Condensed Financial Information of
Registrant                                                      |  | 106 
|Schedule II  Valuation and Qualifying Accounts and
    Reserves                                                |  | 109 

59

---

Report of Independent Registered
Public Accounting Firm

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

In our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Krispy Kreme
Doughnuts, Inc. and its subsidiaries (the Company) at February 1, 2009 and
February 3, 2008, and the results of their operations and their cash flows for
each of the three years in the period ended February 1, 2009 in conformity with
accounting principles generally accepted in the United States of America. 
In addition, in our opinion, the financial statement schedules listed in the
accompanying index present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements.  Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of February 1,
2009, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  The Companys management is responsible for
these financial statements and financial statement schedules, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Managements Report on Internal Control over Financial Reporting under Item
9A.  Our responsibility is to express opinions on these financial
statements, on the financial statement schedules, and on the Companys internal
control over financial reporting based on our integrated audits.  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects.  Our audits of the financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.

As discussed
in Note 1 to the consolidated financial statements, the Company changed the
manner in which it accounts for uncertain tax positions effective January 29,
2007.

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

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

PricewaterhouseCoopers LLPGreensboro,
North CarolinaApril 17, 2009

60

---

KRISPY KREME DOUGHNUTS,
INC.

CONSOLIDATED BALANCE
SHEET

|                                                                                      |  | Feb. 1,        |          | Feb. 3,
|------------------------------------------------------------------------------------- |  | -------------- | -------- | -------
|                                                                                      |  | 2009           |          | 2008   
|                                                                                      |  | (In thousands)
|ASSETS                                                                               
|CURRENT
      ASSETS:                                                                 |  |                |          |        
|Cash and cash equivalents                                                             |  | $              | 35,538   |        
|Receivables                                                                           |  |                | 19,229   |        
|Accounts and notes receivable  equity method franchisees                             |  |                | 1,019    |        
|Inventories                                                                           |  |                | 15,587   |        
|Deferred income taxes                                                                 |  |                | 106      |        
|Other current
      assets                                                            |  |                | 4,327    |        
|Total current assets                                                                  |  |                | 75,806   |        
|Property and
      equipment                                                          |  |                | 85,075   |        
|Investments in equity method franchisees                                              |  |                | 1,187    |        
|Goodwill and
      other intangible assets                                            |  |                | 23,856   |        
|Other assets                                                                          |  |                | 9,002    |        
|Total assets                                                                          |  | $              | 194,926  |        
|LIABILITIES AND SHAREHOLDERS EQUITY                                                 
|CURRENT
      LIABILITIES:                                                            |  |                |          |        
|Current maturities of long-term debt                                                  |  | $              | 1,413    |        
|Accounts
      payable                                                                |  |                | 8,981    |        
|Accrued liabilities                                                                   |  |                | 29,222   |        
|Total current
      liabilities                                                       |  |                | 39,616   |        
|Long-term debt, less current maturities                                               |  |                | 73,454   |        
|Deferred income
      taxes                                                           |  |                | 106      |        
|Other long-term obligations                                                           |  |                | 23,995   |        
|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; 67,512 and
      65,370 shares |  |                |          |        
|issued and
      outstanding                                                          |  |                | 361,801  |        
|Accumulated other comprehensive income (loss)                                         |  |                | (913     | )      
|Accumulated deficit                                                                   |  |                | (303,133 | )      
|Total
      shareholders equity                                                      |  |                | 57,755   |        
|Total
      liabilities and shareholders equity                                      |  | $              | 194,926  |        

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

61

---

KRISPY KREME DOUGHNUTS,
INC.

CONSOLIDATED STATEMENT OF
OPERATIONS

|                                                                            |  | Year Ended                              
|--------------------------------------------------------------------------- |  | ----------------------------------------
|                                                                            |  | Feb. 1,                                 
|                                                                            |  | 2009                                    
|                                                                            |  | (In thousands, except per share amounts)
|Revenues                                                                    |  | $                                       
|Operating
      expenses:                                                   |  |                                         
|Direct operating expenses
      (exclusive of depreciation and amortization |  |                                         
|shown below)                                                                |  |                                         
|General and
      administrative expenses                                   |  |                                         
|Depreciation
      and amortization expense                                 |  |                                         
|Impairment
      charges and lease termination costs                        |  |                                         
|Settlement of
    litigation                                                |  |                                         
|Other
      operating (income) and expense, net                             |  |                                         
|Operating income (loss)                                                     |  |                                         
|Interest income                                                             |  |                                         
|Interest expense                                                            |  |                                         
|Loss on extinguishment of debt                                              |  |                                         
|Equity in losses of equity method franchisees                               |  |                                         
|Other non-operating income and
      (expense), net                         |  |                                         
|Loss before income taxes                                                    |  |                                         
|Provision for income taxes                                                  |  |                                         
|Net loss                                                                    |  | $                                       
|                                                                            |  |                                         
|Loss per common share:                                                      |  |                                         
|Basic                                                                       |  | $                                       
|Diluted                                                                     |  | $                                       

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

62

---

KRISPY KREME DOUGHNUTS,
INC.

CONSOLIDATED STATEMENT OF CASH
FLOWS

|                                                                                      |  | Year Ended    
|------------------------------------------------------------------------------------- |  | --------------
|                                                                                      |  | Feb. 1,       
|                                                                                      |  | 2009          
|                                                                                      |  | (In thousands)
|CASH FLOW FROM OPERATING ACTIVITIES:                                                  |  |               
|Net
    loss                                                                          |  | $             
|Adjustments to reconcile net loss to net cash provided by operating
      activities: |  |               
|Depreciation and
      amortization                                                   |  |               
|Deferred
      income taxes                                                           |  |               
|Impairment
      charges                                                              |  |               
|Settlement of
      litigation                                                        |  |               
|Accrued rent
      expense                                                            |  |               
|Loss on
      disposal of property and equipment                                      |  |               
|Gain on
      refranchise of Canadian subsidiary                                      |  |               
|Gain on
      disposal of interests in equity method franchisees                      |  |               
|Unrealized
      loss on interest rate derivatives                                    |  |               
|Share-based
      compensation                                                        |  |               
|Provision for
      doubtful accounts                                                 |  |               
|Amortization of deferred
      financing costs                                        |  |               
|Equity in
      losses of equity method franchisees                                   |  |               
|Other                                                                                 |  |               
|Change in assets
      and liabilities:                                               |  |               
|Receivables                                                                           |  |               
|Inventories                                                                           |  |               
|Other current
      and non-current assets                                            |  |               
|Accounts
      payable and accrued liabilities                                        |  |               
|Other long-term obligations                                                           |  |               
|Net cash provided by operating
activities                                             |  |               
|CASH FLOW FROM INVESTING ACTIVITIES:                                                  |  |               
|Purchase of
      property and equipment                                              |  |               
|Proceeds from disposals of property and equipment                                     |  |               
|Investments in
      franchise investees                                              |  |               
|Recovery of investments in and advances to franchise
    investee                     |  |               
|Sale of
      interests in equity method franchisee                                   |  |               
|Acquisition of stores from franchisee                                                 |  |               
|Other investing activities                                                            |  |               
|Net cash provided by (used for) investing
      activities                            |  |               
|CASH FLOW FROM
      FINANCING ACTIVITIES:                                            |  |               
|Proceeds from issuance of short-term debt                                             |  |               
|Repayment of
      short-term debt                                                    |  |               
|Proceeds from issuance of long-term debt                                              |  |               
|Repayment of
      long-term debt                                                     |  |               
|Deferred financing costs                                                              |  |               
|Proceeds from
      exercise of stock options                                         |  |               
|Net change in book overdraft                                                          |  |               
|Repurchase of common shares (Note
      16)                                           |  |               
|Net cash used for financing activities                                                |  |               
|Effect of
      exchange rate changes on cash                                         |  |               
|Cash balances of subsidiaries at date of deconsolidation                              |  |               
|Net increase
      (decrease) in cash and cash equivalents                            |  |               
|Cash and cash equivalents at beginning of year                                        |  |               
|Cash and cash
      equivalents at end of year                                        |  | $             
|Supplemental schedule of non-cash investing and financing
      activities:           |  |               
|Assets
      acquired under capital leases                                            |  | $             

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

63

---

KRISPY KREME DOUGHNUTS,
INC.

CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS EQUITY

|                                                  |  |             |   |        |   |         |   |               | Accumulated    |       |        |   |  |  |   |          |  
|------------------------------------------------- |  | ----------- | - | ------ | - | ------- | - | ------------- | -------------- | ----- | ------ | - |  |  | - | -------- | -
|                                                  |  |             |   |        |   |         |   |               | Other          |       |        |   |  |  |   |          |  
|                                                  |  | Common      |   |        |   |         |   | Comprehensive |                |       |        |   |  |  |   |         
|                                                  |  | Shares      |   | Common |   | Income  |   | Accumulated   |                |      
|                                                  |  | Outstanding |   | Stock  |   | (Loss)  |   | Deficit       |                | Total
|                                                  |  |             |   |        |   |         |   |               | (In thousands) |       |        |   |  |  |   |          |  
|BALANCE AT JANUARY 29, 2006                       |  | 61,841      |   |        | $ | 298,255 |   |               |                | $     | 1,426  |   |  |  | $ | (191,010 | )
|Comprehensive
      income (loss):                |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|Net loss for the year
      ended                 |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|January 28, 2007                                  |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   | (42,236  | )
|Foreign
      currency translation adjustment,    |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|net of income taxes of $58                        |  |             |   |        |   |         |   |               |                |       | (267   | ) |  |  |   |          |  
|Unrealized
      gain on cash flow hedge,         |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|net of income taxes of $70                        |  |             |   |        |   |         |   |               |                |       | 107    |   |  |  |   |          |  
|Total
      comprehensive loss                    |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|Issuance of common stock warrant                  |  |             |   |        |   | 6,700   |   |               |                |       |        |   |  |  |   |          |  
|Share-based
      compensation                    |  | 831         |   |        |   | 5,987   |   |               |                |       |        |   |  |  |   |          |  
|Cancellation of restricted
      shares           |  | (2          | ) |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|BALANCE AT
      JANUARY 28, 2007                 |  | 62,670      |   |        |   | 310,942 |   |               |                |       | 1,266  |   |  |  |   | (233,246 | )
|Effect of adoption of FIN 48 (Note 1)             |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   | 1,225    |  
|Comprehensive
      income (loss):                |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|Net loss for
      the year ended                 |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|February 3, 2008                                  |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   | (67,051  | )
|Foreign
      currency translation adjustment,    |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|net of income taxes of $117                       |  |             |   |        |   |         |   |               |                |       | 357    |   |  |  |   |          |  
|Unrealized
      loss on cash flow hedge,         |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|net of income taxes of $1,006                     |  |             |   |        |   |         |   |               |                |       | (1,542 | ) |  |  |   |          |  
|Total
      comprehensive loss                    |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|Exercise of stock options                         |  | 111         |   |        |   | 292     |   |               |                |       |        |   |  |  |   |          |  
|Issuance of
      common shares and warrants      |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|(Notes 12 and
      16)                           |  | 1,834       |   |        |   | 36,875  |   |               |                |       |        |   |  |  |   |          |  
|Share-based compensation                          |  | 785         |   |        |   | 7,599   |   |               |                |       |        |   |  |  |   |          |  
|Repurchase of common shares (Note
      16)       |  | (30         | ) |        |   | (93     | ) |               |                |       |        |   |  |  |   |          |  
|BALANCE AT FEBRUARY 3, 2008                       |  | 65,370      |   |        |   | 355,615 |   |               |                |       | 81     |   |  |  |   | (299,072 | )
|Comprehensive
      income (loss):                |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|Net loss for
      the year ended                 |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|February 1, 2009                                  |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   | (4,061   | )
|Recognition
      of foreign currency translation |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|adjustment upon disposal of subsidiary,           |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|net of income taxes of $1,173                     |  |             |   |        |   |         |   |               |                |       | (1,797 | ) |  |  |   |          |  
|Foreign
      currency translation adjustment,    |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|net of income taxes of $153                       |  |             |   |        |   |         |   |               |                |       | 239    |   |  |  |   |          |  
|Unrealized
      loss on cash flow hedge,         |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|net of income taxes of $14                        |  |             |   |        |   |         |   |               |                |       | (22    | ) |  |  |   |          |  
|Amortization
      of unrealized loss on          |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|interest rate derivative,                         |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|net of income taxes of $383                       |  |             |   |        |   |         |   |               |                |       | 586    |   |  |  |   |          |  
|Total
      comprehensive loss                    |  |             |   |        |   |         |   |               |                |       |        |   |  |  |   |          |  
|Exercise of stock options                         |  | 2,387       |   |        |   | 3,103   |   |               |                |       |        |   |  |  |   |          |  
|Share-based
      compensation                    |  | 301         |   |        |   | 5,152   |   |               |                |       |        |   |  |  |   |          |  
|Repurchase of common shares (Note
      16)       |  | (546        | ) |        |   | (2,069  | ) |               |                |       |        |   |  |  |   |          |  
|BALANCE AT FEBRUARY 1, 2009                       |  | 67,512      |   |        | $ | 361,801 |   |               |                | $     | (913   | ) |  |  | $ | (303,133 | )

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

64

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL
STATEMENTS

Note 1  Overview

Significant Accounting
Policies

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

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

*BASIS OF
CONSOLIDATION.*The financial statements
include the accounts of KKDI and its subsidiaries, the most significant of which
is KKDIs principal operating subsidiary, Krispy Kreme Doughnut
Corporation.

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

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

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

FISCAL
YEAR.The Companys fiscal year ends on the
Sunday closest to January 31, which periodically results in a 53-week year.
Fiscal 2009 and fiscal 2007 each contained 52 weeks while fiscal 2008 contained
53 weeks.

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

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

PROPERTY
AND EQUIPMENT.Depreciation of property and
equipment is provided using the straight-line method over the assets estimated
useful lives, which are as follows: buildings  15 to 35 years; machinery and
equipment  2 to 15 years; and leasehold improvements  lesser of the useful
life of the improvements or the lease term.

65

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

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

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

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

STORE
OPENING COSTS.Store opening costs are
expensed as incurred. Such costs were not significant in fiscal 2009, 2008 or
2007.

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

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

EARNINGS
PER SHARE.The computation of basic earnings
per share is based on the weighted average number of common shares outstanding
during the period (exclusive of shares of restricted stock which have been
issued but have not yet vested). The computation of diluted earnings per share
reflects the additional common shares that would have been outstanding if
dilutive potential common shares had been issued, computed using the treasury
stock method. Such potential common shares consist of shares issuable upon the
exercise of stock options and warrants and the vesting of currently unvested
shares of restricted stock.

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

Year EndedFeb. 1,
    
    Feb. 3,
    
    Jan. 28,2009
    
    2008
    
    2007(In thousands)Numerator: net loss
    
    $
    (4,061
    )
    
    $
    (67,051
    )
    
    $
    (42,236
    )Denominator:Basic earnings per share 
      weighted average sharesoutstanding
    
    
    65,940
    
    
    
    63,805
    
    
    
    61,871Diluted
      earnings per share  weighted average sharesoutstanding
    
    
    65,940
    
    
    
    63,805
    
    
    
    61,871


66

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

All
potentially dilutive securities have been excluded from the number of shares
used in the computation of diluted earnings per share in fiscal 2009, 2008 and
2007 because the Company incurred a net loss in each year and their inclusion
would be antidilutive.

SHARE-BASED COMPENSATION.The Company
measures and recognizes compensation expense for share-based payment awards
based on their fair values in accordance with Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment.

*CONCENTRATION OF CREDIT
RISK.*Financial instruments that subject the
Company to credit risk consist principally of receivables from off-premises
customers and franchisees and guarantees of leases and indebtedness of
franchisees. Off-premises receivables are primarily from grocery and convenience
stores. The Company maintains allowances for doubtful accounts which management
believes are sufficient to provide for losses which may be sustained on
realization of these receivables. In fiscal 2009, 2008 and 2007, no customer
accounted for more than 10% of Company-owned stores revenues. The two largest
off-premises customers collectively accounted for approximately 10.8%, 10.2% and
10.2% of Company-owned stores revenues in fiscal 2009, 2008 and 2007,
respectively. The two off-premises customers with the largest trade receivables
balances collectively accounted for approximately 22.2% and 23.5% of
off-premises doughnut customer trade receivables at February 1, 2009 and
February 3, 2008, respectively.

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

SELF-INSURANCE RISKS AND RECEIVABLES FROM INSURERS.The Company is subject to workers compensation, vehicle and
general liability claims. The Company is self-insured for the cost of all
workers compensation, vehicle and general liability claims up to the amount of
stop-loss insurance coverage purchased by the Company from commercial insurance
carriers. The Company maintains accruals for the estimated cost of claims,
without regard to the effects of stop-loss coverage, using actuarial methods
which evaluate known open and incurred but not reported claims and consider
historical loss development experience. In addition, the Company records
receivables from the insurance carriers for claims amounts estimated to be
recovered under the stop-loss insurance policies when these amounts are
estimable and probable of collection. The Company estimates such stop-loss
receivables using the same actuarial methods used to establish the related
claims accruals, and taking into account the amount of risk transferred to the
carriers under the stop-loss policies. The stop-loss policies provide coverage
for claims in excess of retained self-insurance risks, which are determined on a
claim-by-claim basis.

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

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

67

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

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

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

Feb. 1,
    
    Feb. 3,2009
    
    2008(In thousands)Accumulated other comprehensive income (loss):Unrealized losses on interest rate derivatives,
      including amounts related toan Equity Method Franchisee in fiscal 2008
    $
    (1,303
    )
    
    $
    (2,236
    )Cumulative foreign currency translation adjustments
    
    (207
    )
    
    
    2,371(1,510
    )
    
    
    135Less: deferred income taxes
    
    597
    
    
    
    (54
    )$
    (913
    )
    
    $
    81


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

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

RECENT ACCOUNTING
PRONOUNCEMENTS

Effective
February 4, 2008 (the first day of fiscal 2009), the Company adopted FASB
Statement No. 157, Fair Value Measurements (FAS 157). However, in February
2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB
Statement No. 157, which delayed the effective date of FAS 157 relating to
nonrecurring measurements of nonfinancial assets and nonfinancial liabilities.
The Company must adopt the FAS 157 measurement principles with respect to these
nonfinancial assets and liabilities in fiscal 2010. Adoption of FAS 157 for
financial assets and liabilities did not have any material effect on the
Companys financial position

68

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

or results of operations and adoption of
FAS 157 for nonfinancial assets and liabilities is not expected to have any
material effect on the Companys financial position or results of operations.
See Note 21 for additional information regarding fair value
measurement.

In February
2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115 (FAS 159). FAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. FAS 159
does not affect any existing accounting literature that requires certain assets
and liabilities to be carried at fair value. The Company adopted FAS 159 as of
February 4, 2008 (the first day of fiscal 2009) and did not elect any fair value
measurement options permitted by FAS 159 and, accordingly, adoption of FAS 159
did not have any effect on the Companys financial position or results of
operations.

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

Note 2  Business Conditions,
Uncertainties and Liquidity

The Company
experienced a decline in revenues and incurred net losses in each of the last
three fiscal years. The revenue decline reflects fewer Company stores in
operation, a decline in domestic royalty revenues and lower sales of mixes and
other ingredients resulting from lower sales by the Companys domestic
franchisees. Lower revenues have adversely affected operating margins because of
the fixed or semi-fixed nature of many of the Companys direct operating
expenses. In addition, price increases in the Company Stores segment were not
sufficient to fully offset steep rises in agricultural commodity costs in fiscal
2009 compared to fiscal 2008, although recent economic conditions have led to
significant reductions in the market prices of these commodities, which had a
positive effect on the Companys results of operations in the fourth quarter of
fiscal 2009, and which the Company believes will positively affect fiscal 2010
results. Sales volumes and changes in the cost of major ingredients and fuel can
have a material effect on the Companys results of operations and cash flows. In
addition, royalty revenues and most of KK Supply Chain revenues are directly
related to sales by franchise stores and, accordingly, the success of
franchisees operations has a direct effect on the Companys revenues, results
of operations and cash flows.

The Company
generated net cash from operating activities of $16.6 million, $9.7 million and
$22.1 million, in fiscal 2009, 2008, and 2007, respectively. Net cash provided
by operating activities in fiscal 2008 reflects a cash outflow of approximately
$4.1 million for a prepayment penalty on the refinancing of indebtedness. Asset
dispositions generated investing cash flows of $18.3 million in fiscal 2008 and
$9.7 million in fiscal 2007, with the majority of such proceeds used to reduce
outstanding borrowings under the Companys secured credit facilities.

The
Companys 2007 Secured Credit Facilities described in Note 10 are the Companys
principal source of external financing. These facilities consist of a term loan
having an outstanding principal balance of $74.4 million as of February 1, 2009
which matures in February 2014 and a $25 million revolving credit facility
maturing in February 2013.

The 2007
Secured Credit Facilities contain significant financial covenants as described
in Note 10. The Company was in compliance with those financial covenants as of
February 1, 2009, although those covenants were scheduled to become more
stringent in fiscal 2010. Subsequent to year end, the Company executed
amendments to the credit facilities which, among other things, relax the
interest coverage ratio covenant contained

69

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

therein through fiscal 2012. In connection
with the amendments, the Company prepaid $20 million of the principal balance
outstanding under the term loan, paid fees of approximately $1.9 million, and
agreed to increase the rate of interest on outstanding loans by 200 basis points
annually. Any future amendments or waivers could result in additional fees or
rate increases.

Based on the
Companys current working capital and the fiscal 2010 operating plan, management
believes the Company can comply with the amended financial covenants and that
the Company can meet its projected operating, investing and financing cash
requirements.

Failure to
comply with the financial covenants contained in the 2007 Secured Credit
Facilities, or the occurrence or failure to occur of certain events, would cause
the Company to default under the facilities. The Company would attempt to
negotiate waivers of any such default, should one occur. There can be no
assurance that the Company would be able to negotiate any such waivers, and the
costs or conditions associated with any such waivers could be significant. In
the absence of a waiver of, or forbearance with respect to, any such default,
the Companys lenders would be able to exercise their rights under the credit
agreement including, but not limited to, accelerating maturity of outstanding
indebtedness and asserting their rights with respect to the collateral.
Acceleration of the maturity of indebtedness under the 2007 Secured Credit
Facilities could have a material adverse effect on the Companys financial
position, results of operations and cash flows. In the event that credit under
the 2007 Secured Credit Facilities were not available to the Company, there can
be no assurance that alternative sources of credit would be available to the
Company or, if they are available, under what terms or at what cost.

Note 3  Receivables

The components of receivables are as
follows:

Feb. 1,
    
    Feb. 3,2009
    
    2008(In thousands)Receivables:Off-premises customers
    $
    10,413
    
    
    $
    12,769Unaffiliated franchisees
    
    11,573
    
    
    
    14,607Current portion of notes receivable
    
    100
    
    
    
    36522,086
    
    
    
    27,741Less  allowance for doubtful accounts:Off-premises customers
    
    (313
    )
    
    
    (570
    )Unaffiliated franchisees
    
    (2,544
    )
    
    
    (4,180
    )(2,857
    )
    
    
    (4,750
    )$
    19,229
    
    
    $
    22,991Receivables from Equity Method Franchisees (Notes 1 and 18):Trade
    $
    1,268
    
    
    $
    4,016Less
       allowance for doubtful accounts
    
    (249
    )
    
    
    (1,379
    )$
    1,019
    
    
    $
    2,637


70

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

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

Year EndedFeb. 1,
    
    Feb. 3,
    
    Jan. 28,2009
    
    2008
    
    2007(In thousands)Allowance for doubtful accounts related to trade
      receivables:Balance at beginning of year
    $
    4,750
    
    
    $
    2,745
    
    
    $
    13,656Provision for doubtful accounts
    
    71
    
    
    
    2,150
    
    
    
    1,836Chargeoffs
    
    (2,064
    )
    
    
    (145
    )
    
    
    (12,632
    )Other
    
    100
    
    
    
    
    
    
    
    (115
    )Balance at end of year
    $
    2,857
    
    
    $
    4,750
    
    
    $
    2,745Allowance for doubtful accounts related to Equity MethodFranchisees:Balance at beginning of year
    $
    1,379
    
    
    $
    2,903
    
    
    $
    3,160Provision for doubtful accounts
    
    199
    
    
    
    (364
    )
    
    
    1,554Chargeoffs
    
    (1,329
    )
    
    
    (1,160
    )
    
    
    (1,811
    )Balance at end of year
    $
    249
    
    
    $
    1,379
    
    
    $
    2,903


Note 4  Inventories

The
components of inventories are as follows:

Feb. 1,
    
    Feb. 3,2009
    
    2008(In thousands)Raw materials
    $
    5,625
    
    $
    6,055Work in
      progress
    
    6
    
    
    96Finished goods
    
    4,905
    
    
    5,794Purchased
      merchandise
    
    4,936
    
    
    7,969Manufacturing supplies
    
    115
    
    
    73$
    15,587
    
    $
    19,987


Note 5  Other Current
Assets

Other
current assets consist of the following:

Feb. 1,
    
    Feb. 3,2009
    
    2008(In thousands)Current portion of claims against insurance carriers related to
      self-insuranceprograms (Notes 1, 8, 9 and 11)
    $
    755
    
    $
    609Miscellaneous
      receivables
    
    416
    
    
    1,053Prepaid expenses and other
    
    3,156
    
    
    3,985$
    4,327
    
    $
    5,647


71

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Note 6  Property and
Equipment

Property and equipment consists of the following:

Feb. 1,
    
    Feb. 3,2009
    
    2008(In thousands)Land
    $
    19,091
    
    
    $
    19,058Buildings
    
    64,977
    
    
    
    64,513Leasehold improvements
    
    10,018
    
    
    
    9,918Machinery and
      equipment
    
    58,987
    
    
    
    62,327Construction in progress
    
    427
    
    
    
    25153,500
    
    
    
    155,841Less: accumulated depreciation
    
    (68,425
    )
    
    
    (64,845
    )$
    85,075
    
    
    $
    90,996


Machinery
and equipment includes assets leased under capital leases having a net book
value of approximately $451,000 and $594,000 at February 1, 2009 and February 3,
2008, respectively. Depreciation expense was $8.1 million, $17.8 million and
$20.3 million in fiscal 2009, 2008 and 2007, respectively.

Note 7  Goodwill and Other Intangible
Assets

Goodwill and other intangible assets consist of the following:

Feb. 1,
    
    Feb. 3,2009
    
    2008(In thousands)Indefinite-lived intangible assets:Goodwill associated with Franchise segment
    $
    23,496
    
    $
    23,496Reacquired franchise rights associated with Company Stores
      segment
    
    360
    
    
    360$
    23,856
    
    $
    23,856


Note 8  Other Assets

The
components of other assets are as follows:

Feb. 1,
    
    Feb. 3,2009
    
    2008(In thousands)Non-current portion of claims against insurance carriers related
      toself-insurance programs (Notes
      1, 5, 9 and 11)
    $
    3,619
    
    $
    3,838Deferred financing costs, net of accumulated amortization
    
    2,004
    
    
    2,369Deposits
    
    1,876
    
    
    1,275Computer software, net of accumulated amortization
    
    676
    
    
    1,171401(k) mirror plan assets (Notes 11 and 20)
    
    287
    
    
    368Non-current portion of notes receivable from unaffiliated
      franchisees
    
    178
    
    
    74Other
    
    362
    
    
    374$
    9,002
    
    $
    9,469


72

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Note 9  Accrued
Liabilities

The
components of accrued liabilities are as follows:

Feb. 1,
    
    Feb. 3,2009
    
    2008(In thousands)Current portion of self-insurance claims, principally workers
      compensation(Notes 1, 5, 8 and
      11)
    $
    5,086
    
    $
    4,996Accrued vacation
      pay
    
    5,001
    
    
    3,981Accrued guarantee obligations (Notes 12, 14 and 18)
    
    2,922
    
    
    3,419Accrued taxes,
      other than income
    
    2,458
    
    
    3,036Fair value of interest rate derivative
    
    2,348
    
    
    2,231Accrued
      compensation
    
    1,983
    
    
    4,846Customer deposits
    
    1,881
    
    
    2,881Accrued health
      care claims
    
    1,030
    
    
    1,377Accrued professional fees
    
    911
    
    
    1,114Accrued
      utilities
    
    779
    
    
    862Current portion of deferred franchise fee revenue
    
    708
    
    
    601Current portion
      of lease termination costs (Notes 11 and 13)
    
    364
    
    
    322Accrued interest
    
    144
    
    
    67Other
    
    3,607
    
    
    6,216$
    29,222
    
    $
    35,949


Note 10  Long Term Debt and Lease
Commitments

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

Feb. 1,
    
    Feb. 3,2009
    
    2008(In thousands)2007 Secured Credit Facilities
    $
    74,416
    
    
    $
    76,119Capital lease
      obligations
    
    451
    
    
    
    59474,867
    
    
    
    76,713Less: current
      maturities
    
    (1,413
    )
    
    
    (1,557
    )$
    73,454
    
    
    $
    75,156


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

Fiscal Year
    
    (In thousands)2010
    
    $  1,4132011
    
    9632012
    
    9632013
    
    9632014
    
    963Thereafter
    
    69,602$74,867


73

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

2007
Secured Credit Facilities

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

The 2007
Revolver contains provisions which permit the Company to obtain letters of
credit. Issuance of letters of credit under these provisions constitutes usage
of the lending commitments and reduces the amount available for cash borrowings
under the 2007 Revolver. The commitments under the 2007 Revolver were reduced to
$30 million from $50 million in connection with the amendments to the 2007
Secured Credit Facilities executed in April 2008 (the April 2008 Amendments)
and reduced to $25 million in connection with amendments to the facilities in
April 2009 (the April 2009 Amendments). In connection with the April 2009
Amendments, the Company prepaid $20 million of the principal balance outstanding
under the 2007 Term Loan.

Interest on
borrowings under the 2007 Revolver and 2007 Term Loan is payable either at LIBOR
or at the Alternate Base Rate (which is the greater of Fed funds rate plus 0.50%
or the prime rate), in each case plus the Applicable Margin. After giving effect
to the April 2009 Amendments, the Applicable Margin for LIBOR-based loans and
for Alternate Base Rate-based loans was 7.50% and 6.50%, respectively (5.50% and
4.50%, respectively, prior to the April 2009 Amendments, 3.50% and 2.50%,
respectively, prior to the April 2008 Amendments and 2.75% and 1.75%,
respectively, prior to amendments executed in January 2008 to permit the sale of
certain real estate). In addition, the April 2008 Amendments provide that
LIBOR-based loans shall be computed based upon the greater of the relevant LIBOR
rate or 3.25%.

The Company
is required to pay a fee equal to the Applicable Margin for LIBOR-based loans on
the outstanding amount of letters of credit issued under the 2007 Revolver, as
well as a fronting fee of 0.25% of the amount of such letter of credit payable
to the letter of credit issuer. There also is a fee on the unused portion of the
2007 Revolver lending commitment, which increased from 0.50% to 0.75% in
connection with the April 2008 Amendments and to 1.00% in connection with the
April 2009 Amendments.

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

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

The 2007
Secured Credit Facilities require the Company to meet certain financial tests,
including a maximum consolidated leverage ratio (expressed as a ratio of total
debt to Consolidated EBITDA) and a minimum consolidated interest coverage ratio
(expressed as a ratio of Consolidated EBITDA to net interest expense), computed
based upon Consolidated EBITDA and net interest expense for the most recent four
fiscal quarters and total debt as of the end of such four-quarter period. As of
February 1, 2009, the consolidated leverage ratio was

74

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

required to be not greater than 4.75 to
1.0 and the consolidated interest coverage ratio was required to be not less
than 2.5 to 1.0. As of February 1, 2009, the Companys consolidated leverage
ratio was approximately 4.1 to 1.0 and the Companys consolidated interest
coverage ratio was approximately 2.7 to 1.0. The maximum consolidated leverage
ratio declines during fiscal 2010 to 4.0 to 1.0 and declines thereafter until it
reaches 2.0 to 1.0 in fiscal 2013. The minimum consolidated interest coverage
ratio decreases during fiscal 2010 to 2.35 to 1.0 and increases thereafter until
it reaches 4.50 to 1.0 in fiscal 2013. Consolidated EBITDA is a non-GAAP
measure and is defined in the 2007 Secured Credit Facilities to mean, generally,
consolidated net income or loss, exclusive of unrealized gains and losses on
hedging instruments, gains or losses on the early extinguishment of debt and
provisions for payments on guarantees of franchisee obligations plus the sum of
net interest expense, income taxes, depreciation and amortization, non-cash
charges, store closure costs, costs associated with certain litigation and
investigations, and extraordinary professional fees; and minus payments, if any,
on guarantees of franchisee obligations in excess of $3 million in any rolling
4-quarter period and the sum of non-cash credits. Effective in April 2009, net
interest expense excludes amounts paid under the interest rate derivative
contracts described below. In addition, the 2007 Secured Credit Facilities
contain other covenants which, among other things, limit the incurrence of
additional indebtedness (including guarantees), liens, investments (including
investments in and advances to franchisees which own and operate Krispy Kreme
stores), dividends, transactions with affiliates, asset sales, acquisitions,
capital expenditures, mergers and consolidations, prepayments of other
indebtedness and other activities customarily restricted in such agreements. The
2007 Secured Credit Facilities also prohibit the transfer of cash or other
assets to KKDI from its subsidiaries, whether by dividend, loan or otherwise,
but provide for exceptions to enable KKDI to pay taxes and operating expenses
and certain judgment and settlement costs.

The
operation of the restrictive financial covenants described above may limit the
amount the Company may borrow under the 2007 Revolver. In addition, the maximum
amount which may be borrowed under the 2007 Revolver is reduced by the amount of
outstanding letters of credit, which totaled approximately $16.0 million as of
February 1, 2009. The maximum additional borrowing available to the Company as
of February 1, 2009 was approximately $9.0 million (computed on a pro forma
basis after giving effect to the April 2009 Amendments).

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

In May 2007,
the Company entered into interest rate derivative contracts having an aggregate
notional principal amount of $60 million. The derivative contracts eliminate the
Companys exposure, with respect to such notional amount, to increases in three
month LIBOR beyond 5.40% through April 2010, and eliminate the Companys ability
to benefit from a reduction in three month LIBOR below 4.48% for the same
period. These derivatives were accounted for as cash flow hedges from their
inception through April 8, 2008. Hedge accounting was discontinued on that date
because the derivative contracts could no longer be shown to be effective (as
defined in Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities) in hedging interest rate risk as
a result of the April Amendments, which provide that interest on LIBOR-based
borrowings is payable based upon the greater of the LIBOR rate for the selected
interest period or 3.25%. As a consequence of the discontinuance of hedge
accounting, changes in the fair value of the derivative contracts subsequent to
April 8, 2008 are reflected in earnings as they occur. Amounts included in
accumulated other comprehensive income related to changes in the fair value of
the derivative contracts for periods prior to April 9, 2008 are being charged to
earnings in the periods in which the hedged forecasted transaction (interest on
$60 million of the principal balance of the 2007 Term Loan) affects earnings. As
of February 1, 2009, the fair value of the derivatives was a liability of
approximately $2.3 million, which is included in accrued liabilities in the
accompanying consolidated balance sheet. Accumulated other comprehensive income
as of February 1, 2009 includes an unamortized accumulated loss related to these
derivatives of approximately $800,000 (net of income taxes of approximately
$500,000).

75

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Lease
Obligations

The Company
leases equipment and facilities under both capital and operating leases. The
approximate future minimum lease payments under non-cancelable leases as of
February 1, 2009 are set forth in the following table:

Operating
    
    CapitalFiscal Year
    
    Leases
    
    Leases(In thousands)2010
    $
    9,113
    
    $
    4832011
    
    8,860
    
    
    2012
    
    8,511
    
    
    2013
    
    7,483
    
    
    2014
    
    5,782
    
    
    Thereafter
    
    80,812
    
    
    $
    120,561
    
    
    483Less:
      portion representing interest and executory costs
    
    
    
    
    (32
    )$
    451


Rent
expense, net of rental income, totaled $11.8 million in fiscal 2009, $14.8
million in fiscal 2008 and $17.7 million in fiscal 2007.

Cash
Payments of Interest

Interest
paid, exclusive of deferred financing costs, totaled $8.7 million in fiscal
2009, $13.6 million in fiscal 2008 and $17.6 million in fiscal 2007.

Note 11  Other Long-Term
Obligations

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

Feb. 1,
    
    Feb. 3,2009
    
    2008(In thousands)Non-current portion of self-insurance claims, principally
      workerscompensation (Notes 1, 5, 8 and 9)
    $
    11,069
    
    $
    11,754Accrued rent
      expense
    
    6,276
    
    
    6,935Non-current portion of deferred franchise fee revenue
    
    3,137
    
    
    3,405Non-current
      portion of lease termination costs (Notes 9 and 13)
    
    1,516
    
    
    2,515401(k) mirror plan liabilities (Notes 8 and 20)
    
    287
    
    
    368Other
    
    1,710
    
    
    2,293$
    23,995
    
    $
    27,270


76

---

KRISPY KREME DOUGHNUTS, INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Note 12  Commitments and
Contingencies

Pending Matters

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

TAG
Litigation

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

Fairfax
County, Virginia Environmental Matter

Since 2004,
the Company has operated a commissary in Fairfax County, Virginia. Fairfax
County has investigated alleged damage to its sewer system near the commissary.
The Company has cooperated with Fairfax Countys investigation and is also
conducting its own investigation of the sewer system and the causes of any
alleged damage. On February 12, 2009, Fairfax County notified us that it
believes that the Companys wastewater discharge was the cause of the alleged
damage, and Fairfax County has demanded payment from the Company of
approximately $2.0 million. The Company disputes that it is the cause of any
alleged damage to the sewer system, and discussions with Fairfax County are
ongoing.

The Company
cannot predict the likelihood of an unfavorable outcome with respect to the TAG
and Fairfax County matters, or the amount or range of potential loss with
respect to them, and, accordingly, no provision for loss with respect to these
matters has been reflected in the consolidated financial statements.

Other Litigation and
Investigations

SEC and
United States Attorney Investigations

In October
2004 , the staff of the SEC advised the Company that the SEC had entered a
formal order of investigation concerning the Company. In February 2005, the
United States Attorney for the Southern District of New York advised the Company
that it would seek to conduct interviews of certain then-current and former
officers and employees of the Company. The Company understood the investigations
related to the alleged conduct of certain former officers and directors of the
Company described below underFederal
Securities Class Actions and Settlement Thereof and Federal Court Shareholder
Derivative Actions and Partial Settlement Thereof.The Company cooperated with both investigations.

On March 4,
2009, the SEC entered an order resolving its investigation of the Company.
Pursuant to the order, the Company consented to a cease and desist order against
future violations of provisions of the Exchange Act and related rules concerning
filing of accurate reports with the SEC, the maintenance of accurate books,
records and accounts in reasonable detail, and the maintenance of a sufficient
system of internal accounting controls. The Company did not admit or deny the
findings in the order, and the order contained no monetary

77

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

payments or other sanctions against the
Company. Concurrently with the Companys settlement, the four former officers of
the Company who were subjects of the investigation also reached settlements with
the SEC to resolve those investigations.

The Company
has had no substantive contact with the United States Attorneys Office for over
a year, and the Company does not anticipate any further contact from the United
States Attorneys Office concerning its investigation.

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

Beginning in
May 2004, a series of purported securities class actions were filed on behalf of
persons who purchased the Companys publicly traded securities between August
21, 2003 and May 7, 2004 against the Company and certain of its former officers
in the United States District Court for the Middle District of North Carolina,
alleging violations of federal securities law in connection with various public
statements made by the Company. All the actions ultimately were
consolidated.

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

In October
2006, the Company entered into a Stipulation and Settlement Agreement (the
Stipulation) with the lead plaintiffs in the securities class action, the
derivative plaintiffs and all defendants named in the class action and
derivative litigation, except for Mr. Livengood, providing for the settlement of
the securities class action and a partial settlement of the derivative action.
The Stipulation contained no admission of fault or wrongdoing by the Company or
the other defendants. In February 2007, the Court entered final judgment
dismissing all claims with respect to all defendants in the derivative action,
except for claims that the Company may assert against Mr. Livengood, and entered
final judgment dismissing all claims with respect to all defendants in the
securities class action.

With respect
to the securities class action, the settlement class received total
consideration of approximately $76.0 million, consisting of a cash payment of
approximately $35.0 million made by the Companys directors and officers
insurers, cash payments of $100,000 each made by each of a former Chief
Operating Officer and former Chief Financial Officer of the Company, a cash
payment of $4 million made by the Companys independent registered public
accounting firm, and common stock and warrants to purchase common stock issued
by the Company having an estimated aggregate value of approximately $36.9
million as of their issuance on March 2, 2007. Claims against all defendants
were dismissed with prejudice; however, claims that the Company may have against
Mr. Livengood that may be asserted by the Company in the derivative action for
contribution to the securities class action settlement or otherwise under
applicable law are expressly preserved.

The
Stipulation also provided for the settlement and dismissal with prejudice of
claims against all defendants in the derivative action, except for claims
against Mr. Livengood. The Company has been in negotiations with Mr. Livengood
but has not reached agreement to resolve the derivative claims against
him.

The Company
issued 1,833,828 shares of its common stock and warrants to purchase 4,296,523
shares of its common stock at a price of $12.21 per share in connection with the
Stipulation. The Company recorded a charge to earnings in fiscal 2006 for the
fair value of the stock and warrants, measured as of the date on which the
Company agreed to settle the litigation, and adjusted that charge in subsequent
periods to reflect changes in the securities fair value until their issuance in
the first quarter of fiscal 2008. Such subsequent adjustments resulted in a
non-cash charge to fiscal 2007 earnings of $16.0 million and a non-cash credit
to fiscal 2008 earnings of $14.9 million.

78

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

In
connection with the settlement of the securities class action and the partial
settlement of the derivative litigation, the Company agreed with its insurers to
limit its claims for reimbursement for legal fees and costs incurred in
connection with those proceedings, and the related SEC and U.S. Attorney
investigations, to a specified reserve fund in the amount of $3.4 million (of
which approximately $1.2 million remains as of February 1, 2009). Counsel for
the plaintiffs in the settled shareholder derivative actions have deferred their
application for fees until conclusion of the remaining derivative action
involving Mr. Livengood, and there can be no assurance as to the amount the
Company will be required to pay to such counsel or that the remaining reserve
fund at such time will be sufficient to reimburse the Company for such amount or
for any other costs the Company may incur in concluding these
matters.

FACTA
Litigation

In October
2007, a purported nationwide class action was filed against the Company and ten
fictitiously named defendants in the United States District Court for the
Central District of California. Plaintiff asserted a single cause of action for
alleged willful violation of the provisions of the federal Fair and Accurate
Credit Transactions Act related to electronic printing of certain credit card
and debit card receipts. In August 2008, the Company entered into an agreement
settling the case, which settlement had no material effect on the Companys
financial statements.

Other Legal Matters

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

Other Commitments and
Contingencies

The Company
has guaranteed certain loans and leases from third-party financial institutions
on behalf of Equity Method Franchisees primarily to assist the franchisees in
obtaining third party financing. The loans are collateralized by certain assets
of the franchisee, generally the Krispy Kreme store and related equipment. The
Companys contingent liabilities related to these guarantees totaled
approximately $9.0 million at February 1, 2009, and are summarized in Note 18.
Subsequent to February 1, 2009, the Companys aggregate franchisee loan and
lease guarantee exposure was reduced to $4.6 million. These guarantees require
payment from the Company in the event of default on payment by the respective
debtor and, if the debtor defaults, the Company may be required to pay amounts
outstanding under the related agreements in addition to the principal amount
guaranteed, including accrued interest and related fees.

The
aggregate recorded liability for these loan and lease guarantees totaled $2.7
million and $3.4 million as of February 1, 2009 and February 3, 2008,
respectively, and is included in accrued liabilities in the accompanying
consolidated balance sheet. These liabilities represent the estimated amount of
guarantee payments which the Company believed to be probable. The Company made
payments totaling approximately $650,000 related to these guarantees during
fiscal 2009, as more fully described in Note 18. While there is no current
demand on the Company to perform under any of the guarantees, there can be no
assurance that the Company will not be required to perform and, if circumstances
change from those prevailing at February 1, 2009, additional guarantee payments
or provisions for guarantee payments could be required with respect to any of
the guarantees, and such payments or provisions could be significant.

In addition,
accrued liabilities at February 1, 2009 includes approximately $200,000 recorded
in fiscal 2009 in connection with the Companys assignment of operating leases
on three stores to two new franchisees who have acquired these stores from the
Company. The Company is contingently liable to pay the rents on these stores to
the landlords in the event the franchisees fail to perform under the leases they
have assumed. The $200,000 accrual represents the estimated fair value of the
Companys contingent obligation.

79

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

One of the
Companys lenders had issued letters of credit on behalf of the Company totaling
$16.0 million at February 1, 2009, the substantial majority of which secure the
Companys reimbursement obligations to insurers under the Companys
self-insurance arrangements.

The Company
is exposed to the effects of commodity price fluctuations on the cost of
ingredients of its products, of which flour, shortening and sugar are the most
significant. In order to secure adequate supplies of product and bring greater
stability to the cost of ingredients, the Company routinely enters into forward
purchase contracts with suppliers under which the Company commits to purchasing
agreed-upon quantities of ingredients at agreed-upon prices at specified future
dates. Typically, the aggregate outstanding purchase commitment at any point in
time will range from one months to two years anticipated ingredients
purchases, depending on the ingredient. In addition, from time to time the
Company enters into contracts for the future delivery of equipment purchased for
resale and components of doughnut-making equipment manufactured by the Company.
As of February 1, 2009, the Company had approximately $32.5 million of
commitments under ingredient and other forward purchase contracts. While the
Company has multiple suppliers for most of its ingredients, the termination of
the Companys relationships with vendors with whom the Company has forward
purchase agreements, or those vendors inability to honor the purchase
commitments, could adversely affect the Companys results of operations and cash
flows.

In addition
to entering into forward purchase contracts, the Company from time to time
purchases exchange-traded commodity futures contracts or options on such
contracts for raw materials which are ingredients of the Companys products or
which are components of such ingredients, including wheat and soybean oil. The
Company typically assigns the futures contract to a supplier in connection with
entering into a forward purchase contract for the related ingredient. There were
no unassigned futures contracts as of February 1, 2009.

Note 13  Impairment Charges and Lease
Termination Costs

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

Year EndedFeb. 1,
    
    Feb. 3,
    
    Jan. 28,2009
    
    2008
    
    2007(In thousands)Impairment charges:Impairment of goodwill  Company Stores
      segment
    
    $
    
    
    
    $
    4,598
    
    
    $
    874Impairment of goodwill  KK Supply Chain segment
    
    
    
    
    
    
    
    
    
    
    213Total goodwill impairment charges
    
    
    
    
    
    
    4,598
    
    
    
    1,087Impairment of long-lived assets
    
    
    1,050
    
    
    
    55,963
    
    
    
    9,418Impairment of reacquired franchise rights
    
    
    
    
    
    
    480
    
    
    
    120Other
    
    
    
    
    
    
    
    
    
    
    137Total impairment charges
    
    
    1,050
    
    
    
    61,041
    
    
    
    10,762Lease termination costs:Provision for termination costs
    
    
    316
    
    
    
    2,683
    
    
    
    2,113Less
       reversal of previously recorded deferred rent expense
    
    
    (818
    )
    
    
    (1,651
    )
    
    
    (356
    )Net provision
    
    
    (502
    )
    
    
    1,032
    
    
    
    1,757$
    548
    
    
    $
    62,073
    
    
    $
    12,519


The goodwill
impairment charges in fiscal 2008 and 2007 were recorded to reduce the carrying
value of goodwill to its estimated fair value, which the Company estimates using
the present value of expected future cash flows. Such charges reflected
reductions in the Companys forecasted sales and earnings in certain of the
reporting units comprising the Company Stores and KK Supply Chain segments,
which caused a reduction in the estimated fair value of those reporting units.
The Company conducts its annual goodwill impairment testing as of December
31.

80

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

The Company
tests other long-lived assets for impairment when events or changes in
circumstances indicate that their carrying value may not be recoverable. These
events and changes in circumstances include store closing decisions, the effects
of changing costs (including the impact of rising commodity costs) on current
results of operations, observed trends in operating results, and evidence of
changed circumstances observed as a part of periodic reforecasts of future
operating results and as part of the Companys annual budgeting process. When
the Company concludes that the carrying value of other long-lived assets is not
recoverable (based on future projected undiscounted cash flows), the Company
records impairment charges to reduce the carrying value of those assets to their
estimated fair values. Impairment charges related to Company Stores long-lived
assets were approximately $900,000, $44.1 million and $9.4 million in fiscal
2009, 2008 and 2007, respectively. Such charges relate to underperforming
stores, including both stores closed or likely to be closed and stores
management believes will not generate sufficient future cash flows to enable the
Company to recover the carrying value of the stores assets, but which
management has not yet decided to close. The impaired store assets include
leasehold improvements, which are typically abandoned when the leased properties
revert to the lessor, and doughnut-making and other equipment.

For the
fiscal year ended February 3, 2008, the Company also recorded an impairment
charge of approximately $10.4 million with respect to its KK Supply Chain
manufacturing and distribution facility in Illinois, based on managements
revised expectations about the use and ultimate disposition of that facility.
During the second quarter, the Company decided to divest the facility and
determined that the projected cash flows from operation and ultimate sale of the
facility were less than its carrying value; accordingly, the Company recorded an
impairment charge to reduce the carrying value of the facility and related
equipment to their estimated fair value. The Company sold these assets for
approximately $10.9 million cash (net of expenses) in the fourth quarter of
fiscal 2008, and recorded a credit to impairment charges of approximately
$600,000, representing the excess of the ultimate selling price over the
previously estimated disposition value of the facility and equipment.

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

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

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

81

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

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

Year EndedFeb. 1,
    
    Feb. 3,
    
    Jan. 28,2009
    
    2008
    
    2007(In thousands)Balance at beginning of year
    
    $
    2,837
    
    
    $
    1,650
    
    
    $
    1,981Provision for lease termination costs:Provisions associated with store closings, net of
      estimated subleaserentals
    
    
    380
    
    
    
    1,961
    
    
    
    122Adjustments to previously recorded provisions resulting
      fromsettlements with lessors and adjustments of previous
      estimates
    
    
    (284
    )
    
    
    526
    
    
    
    1,824Accretion of discount
    
    
    220
    
    
    
    196
    
    
    
    167Total provision
    
    
    316
    
    
    
    2,683
    
    
    
    2,113Proceeds from assignment of leases
    
    
    748
    
    
    
    966
    
    
    
    Payments on unexpired leases, including settlements with
      lessors
    
    
    (2,021
    )
    
    
    (2,462
    )
    
    
    (2,444
    )Total reductions
    
    
    (1,273
    )
    
    
    (1,496
    )
    
    
    (2,444
    )Balance at end
      of year
    
    $
    1,880
    
    
    $
    2,837
    
    
    $
    1,650Accrued lease termination costs are included in the
      consolidatedbalance sheet as follows:Other accrued liabilities
    
    $
    364
    
    
    $
    322
    
    
    $
    189Other long-term obligations
    
    
    1,516
    
    
    
    2,515
    
    
    
    1,461$
    1,880
    
    
    $
    2,837
    
    
    $
    1,650


Note 14  Other Non-Operating Income
and Expense

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

Year EndedFeb. 1,
    
    Feb. 3,
    
    Jan. 28,2009
    
    2008
    
    2007(In thousands)Foreign currency transaction gain (loss)
    
    $
    (14
    )
    
    $
    70
    
    
    $
    163Gain on
      refranchise of Canadian subsidiary
    
    
    2,805
    
    
    
    
    
    
    
    Gain on disposal of interests in Equity Method Franchisees (Note
      18)
    
    
    931
    
    
    
    260
    
    
    
    7,308Impairment
      charges and provisions related to investments in EquityMethod Franchisees (Note 18)
    
    
    (957
    )
    
    
    (572
    )
    
    
    Provision for guarantee payments
    
    
    50
    
    
    
    (2,969
    )
    
    
    (450
    )$
    2,815
    
    
    $
    (3,211
    )
    
    $
    7,021


In the
fourth quarter of fiscal 2009, the Company refranchised its four stores in
Canada. The Company received no proceeds from the transaction. The Company
recognized a non-cash gain on the sale of the stores of $2.8 million ($1.6
million after tax), substantially all of which represents the recognition in
earnings of the cumulative foreign currency translation adjustments related to
the Canadian subsidiary which, prior to its disposition, had been reflected, net
of tax, in accumulated other comprehensive income.

82

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

During
fiscal 2008, the Company recorded a provision of $3.0 million for estimated
payments under the Companys guarantees of certain loans and leases related to a
franchisee. In the fourth quarter of fiscal 2008, the franchisee defaulted on
certain of the obligations guaranteed by the Company and, while there was no
demand on the Company to perform under the guarantees, the Company believed it
was probable that the Company would be required to perform under some, and
potentially all, of them. See Other Commitments and Contingencies in Note
12.

During
fiscal 2007, the Company recorded a provision of approximately $450,000 for
estimated payments under a Company guarantee of indebtedness of another
franchisee. In June 2008, the Company completed an agreement to dissolve the
franchisee. In connection with the dissolution of the franchisee, the Company
paid $400,000 to settle its loan guarantee related to the franchisee.

Note 15  Income Taxes

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

Year EndedFeb. 1,
    
    Feb. 3,
    
    Jan. 28,2009
    
    2008
    
    2007(In thousands)Current
    
    $
    (148
    )
    
    $
    1,435
    
    $
    1,223Deferred
    
    
    651
    
    
    
    889
    
    
    (12
    )$
    503
    
    
    $
    2,324
    
    $
    1,211


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

Year EndedFeb. 1
    
    Feb. 3,
    
    Jan. 28,2009
    
    2008
    
    2007(In thousands)Domestic
    
    $
    (1,405
    )
    
    $
    (58,491
    )
    
    $
    (45,705
    )Foreign
    
    
    (2,153
    )
    
    
    (6,236
    )
    
    
    4,680Total loss before income taxes
    
    $
    (3,558
    )
    
    $
    (64,727
    )
    
    $
    (41,025
    )


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

Year EndedFeb. 1,
    
    Feb. 3,
    
    Jan. 28,2009
    
    2008
    
    2007(In thousands)Income taxes at statutory federal rate
    
    $
    (1,245
    )
    
    $
    (22,654
    )
    
    $
    (14,359
    )State income
      taxes
    
    
    517
    
    
    
    (3,718
    )
    
    
    (1,984
    )Foreign (income) losses with no tax (cost) benefit
    
    
    47
    
    
    
    114
    
    
    
    (2,216
    )Valuation
      allowance provided on deferred income tax assets
    
    
    1,811
    
    
    
    27,642
    
    
    
    19,420Change in accruals for uncertain tax positions
    
    
    (1,472
    )
    
    
    332
    
    
    
    Change in
      accruals for interest and penalties
    
    
    (283
    )
    
    
    220
    
    
    
    Change in federal tax credit carryforwards(principally foreign tax credits)
    
    
    (1,557
    )
    
    
    (795
    )
    
    
    (916
    )Foreign
      withholding taxes
    
    
    1,361
    
    
    
    773
    
    
    
    1,033Other
    
    
    1,324
    
    
    
    410
    
    
    
    233$
    503
    
    
    $
    2,324
    
    
    $
    1,211


83

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

The Company
recorded a credit of approximately $1.8 million to the provision for income
taxes in fiscal 2009 to reduce the Companys accruals for uncertain tax
positions, principally as a result of the dissolution of one of the Companys
foreign subsidiaries and the resolution of related income tax
uncertainties.

Income tax
payments, net of refunds, were $1.3 million, $682,000 and $505,000 in fiscal
2009, 2008 and 2007, respectively. The tax payments in all three fiscal years
were comprised largely of foreign withholding taxes on revenues received from
foreign franchisees.

The components of deferred income
taxes are as follows:

Feb. 1,
    
    Feb. 3,2009
    
    2008(In thousands)Net current assets
    
    $
    106
    
    
    $
    83Net noncurrent
      liabilities
    
    
    (106
    )
    
    
    (83
    )Net asset
    
    $
    
    
    
    $
    


The tax effects of temporary
differences are as follows:

Feb. 1,
    
    Feb. 3,2009
    
    2008(In thousands)Deferred income tax assets:Goodwill and other intangible assets
    
    $
    26,177
    
    
    $
    29,830Accrued litigation settlement
    
    
    7,315
    
    
    
    7,315Allowance for doubtful accounts
    
    
    1,432
    
    
    
    2,668Other current assets
    
    
    2,127
    
    
    
    2,180Property and equipment
    
    
    7,001
    
    
    
    11,907Other non-current assets
    
    
    2,135
    
    
    
    1,084Insurance accruals
    
    
    5,060
    
    
    
    5,404Deferred revenue
    
    
    2,905
    
    
    
    3,306Other current liabilities
    
    
    4,779
    
    
    
    5,478Other non-current liabilities
    
    
    3,078
    
    
    
    3,733Share-based compensation
    
    
    4,818
    
    
    
    4,262Federal net operating loss carryforwards
    
    
    89,130
    
    
    
    79,339Federal tax credit carryforwards
    
    
    5,291
    
    
    
    3,678Charitable contributions carryforward
    
    
    3,621
    
    
    
    3,889State net operating loss and credit
      carryforwards
    
    
    12,957
    
    
    
    12,176Other
    
    
    949
    
    
    
    1,532Gross deferred income tax assets
    
    
    178,775
    
    
    
    177,781Valuation allowance on deferred income tax
      assets
    
    
    (178,775
    )
    
    
    (176,964
    )Deferred income tax assets, net of valuation
      allowance
    
    
    
    
    
    
    817Deferred income tax liabilities:Other
    
    
    
    
    
    
    (817
    )Gross deferred income tax liabilities
    
    
    
    
    
    
    (817
    )Net deferred income tax asset
    
    $
    
    
    
    $
    


84

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

The Company
has recorded a valuation allowance against deferred income tax assets of $178.8
million and $177.0 million at February 1, 2009 and February 3, 2008,
respectively, representing the amount of its deferred income tax assets in
excess of its deferred income tax liabilities. The valuation allowances were
recorded because management was unable to conclude, in light of the cumulative
loss realized by the Company for the three year period ended February 1, 2009,
that realization of the net deferred income tax asset was more likely than
not.

The Company
has approximately $266 million of federal income tax loss carryforwards expiring
in fiscal 2024 through 2029. Of this amount, approximately $18.2 million is the
result of tax deductions related to the exercise of stock options by employees,
the tax benefits of which, if subsequently realized, will be recorded as an
addition to common stock. The Company also has state income tax loss
carryforwards expiring in fiscal 2010 through 2029.

The Company
is subject to U.S. federal income tax, as well as income tax in multiple U.S.
state and local jurisdictions and a limited number of foreign jurisdictions. The
Companys income tax returns periodically are examined by the Internal Revenue
Service (IRS) and by other tax authorities in various jurisdictions. The
Company assesses the likelihood of adverse outcomes resulting from these
examinations in determining the provision for income taxes. All significant
federal, state, local and foreign income tax matters have been concluded through
fiscal 2005.

The Internal
Revenue Service recently concluded its examination of the Companys income tax
returns for fiscal 2002 through fiscal 2004. The IRS and the Company agreed to a
settlement in which the IRS permanently disallowed $5.3 million of deductions.
Because the Company has net operating loss carryforwards for federal income tax
purposes, the settlement resulted in an insignificant payment of additional
tax.

The Company
had $1.7 million of unrecognized tax benefits as of February 1, 2009. If
recognized, $500,000 of the unrecognized tax benefits would be recorded as a
part of income tax expense and affect the Companys effective income tax
rate.

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

Feb. 1,
    
    Feb. 3,2009
    
    2008(In thousands)Unrecognized tax benefits at beginning of year
    
    $
    5,130
    
    
    $
    4,540Increases for
      positions related to the current year
    
    
    4
    
    
    
    238Increases (decreases) for positions taken in prior
      years
    
    
    (1,354
    )
    
    
    794Settlements with
      taxing authorities
    
    
    (1,994
    )
    
    
    (41
    )Lapsing of statutes of limitations
    
    
    (106
    )
    
    
    (401
    )Unrecognized tax
      benefits at end of year
    
    $
    1,680
    
    
    $
    5,130


It is
reasonably possible that the total amount of unrecognized tax benefits will
decrease in fiscal 2010 by up to approximately $800,000, of which $46,000 would
be recorded as part of income tax expense if recognized. Decreases in the
unrecognized tax benefits may result from the lapsing of statutes of
limitations.

The
Companys policy is to recognize interest and penalties related to income tax
issues as components of income tax expense. The Company had approximately
$385,000 and $670,000 of accrued interest and penalties as of February 1, 2009
and February 3, 2008, respectively.

85

---

KRISPY
KREME DOUGHNUTS, INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Note 16  Shareholders
Equity

Share-Based
Compensation for Employees

The
Companys shareholders approved the 2000 Stock Incentive Plan (the 2000 Plan),
under which incentive stock options, nonqualified stock options, stock
appreciation rights, performance units, restricted stock (or units) and common
shares may be awarded through June 30, 2012. The maximum number of shares of
common stock with respect to which awards may be granted under the 2000 Plan is
9,996,000, of which 530,300 remain available for grant after fiscal 2009. The
2000 Plan provides that options may be granted with exercise prices not less
than the closing sale price of the Companys common stock on the date of
grant.

The Company
measures and recognizes compensation expense for share-based payment (SBP)
awards based on their fair values in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS
123(R)), under which the fair value of SBP awards with respect to which
employees render the requisite service necessary for the award to vest is
recognized over the related vesting period. The fair value of SBP awards which
vest in increments and for which vesting is subject solely to service conditions
is charged to expense on a straight-line basis over the aggregate vesting period
of each award, which generally ranges from three to four years. The fair value
of SBP awards which vest in increments and for which vesting is subject to both
market conditions and service conditions is charged to expense over the
estimated vesting period of each increment of the award, each of which is
treated as a separate award for accounting purposes.

The
aggregate cost of SBP awards charged to earnings in fiscal 2009, 2008 and 2007
is set forth in the following table. The Company did not realize any excess tax
benefits from the exercise of stock options during any of the three
years.

Year EndedFeb. 1,
    
    Feb. 3,
    
    Jan. 28,2009
    
    2008
    
    2007(In thousands)Costs charged to earnings related to:Stock options
    
    $
    2,181
    
    $
    2,561
    
    $
    4,978Restricted stock and restricted stock units
    
    
    2,971
    
    
    5,038
    
    
    1,009Total costs
    
    $
    5,152
    
    $
    7,599
    
    $
    5,987Costs included in:Direct operating expenses
    
    $
    2,216
    
    $
    2,384
    
    $
    2,628General and administrative expenses
    
    
    2,936
    
    
    5,215
    
    
    3,359Total costs
    
    $
    5,152
    
    $
    7,599
    
    $
    5,987


During the
fiscal year ended February 1, 2009 and February 3, 2008, the Company permitted
holders of restricted stock awards to satisfy their obligations to reimburse the
Company for the minimum required statutory withholding taxes arising from the
vesting of such awards by surrendering vested common shares in lieu of
reimbursing the Company in cash. In addition, the terms of certain stock options
granted under the Companys 1998 Stock Option Plan which were exercised in
fiscal 2009 provided that reimbursement of minimum required withholdings taxes
and payment of the exercise price could, at the election of the optionee, be
made by surrendering common shares acquired upon the exercise of such options.
The aggregate fair value of common shares surrendered related to the vesting of
restricted stock awards and the exercise of stock options was $300,000 and $1.8
million, respectively, for the fiscal year ended February 1, 2009. The aggregate
fair value of common shares surrendered related to the vesting of restricted
stock awards was $93,000 for the fiscal year

86

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

ended February 3, 2008. The aggregate fair
value of the surrendered shares of $2.1 million and $93,000 in fiscal 2009 and
fiscal 2008, respectively, has been reflected as a financing activity in the
accompanying consolidated statement of cash flows and as a repurchase of common
shares in the accompanying consolidated statement of changes in shareholders
equity.

The fair
value of stock options subject only to service conditions was estimated using
the Black-Scholes option pricing model. In addition to service conditions,
certain stock options granted in fiscal 2008 and 2007 also provide that the
price of the Companys common stock must increase by 20% and 40% after the grant
date, and remain at or above the appreciated price for at least ten consecutive
trading days, in order for the options to become vested and exercisable. The
fair value of those stock options was estimated using Monte Carlo simulation
techniques. Options granted generally have contractual terms of 10 years, the
maximum term permitted under the 2000 Plan. The weighted average assumptions
used in valuing stock options in fiscal 2009, 2008 and 2007 are set forth in the
following table:

| |                               |  | Year ended
| | ----------------------------- |  | ----------
| |                               |  | Feb. 1,   
| |                               |  | 2009      
| | Expected life of option       |  | 7.0 years 
| | Risk-free
      interest rate |  | 2.74      
| | Expected volatility of stock  |  | 50.0      
| | Expected
      dividend yield |  |          

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

The number
of options granted during fiscal 2009, 2008 and 2007 and the aggregate and
weighed average fair value of such options were as follows:

| |                                                                |  | Year
      ended
| | -------------------------------------------------------------- |  | ----------------
| |                                                                |  | Feb. 1,         
| |                                                                |  | 2009            
| | Weighted average fair value per share of options
      granted |  | $               
| | Total number of
      options granted                          |  |                 
| | Total fair value of all options granted                        |  | $               

87

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

The
following table summarizes stock option transactions for fiscal 2009, 2008 and
2007. Option transactions include options granted under the 2000 Plan as well as
options granted under the Companys 1998 Stock Option Plan (the 1998 Plan)
pursuant to which grants may no longer be awarded.

| |                                       |  |                                                  |   | Weighted  |  |               |       | Weighted   
| | ------------------------------------- |  | ------------------------------------------------ | - | --------- |  | ------------- | ----- | -----------
| |                                       |  | Shares                                           |   | Average   |  |               |       | Average    
| |                                       |  | Subject                                          |   | Exercise  |  | **Aggregate** |       | Remaining  
| |                                       |  | to                                               |   | Price     |  | Intrinsic     |       | Contractual
| |                                       |  | Option                                           |   | Per Share |  | Value         |       | Term       
| |                                       |  | (Dollars in thousands, except per share amounts)
| | Outstanding at January 29, 2006       |  | 6,078,400                                        |   |           |  | $             | 16.58 |            
| | Granted                               |  | 1,400,000                                        |   |           |  | $             | 8.52  |            
| | Exercised                             |  |                                                 |   |           |  | $             |      |            
| | Forfeited                             |  | (403,200                                         | ) |           |  | $             | 26.78 |            
| | Outstanding at January 28, 2007       |  | 7,075,200                                        |   |           |  | $             | 14.40 |            
| | Granted                               |  | 784,200                                          |   |           |  | $             | 5.21  |            
| | Exercised                             |  | (110,800                                         | ) |           |  | $             | 2.63  |            
| | Forfeited                             |  | (1,352,800                                       | ) |           |  | $             | 13.76 |            
| | Outstanding at February 3, 2008       |  | 6,395,800                                        |   |           |  | $             | 13.61 |            
| | Granted                               |  | 2,090,000                                        |   |           |  | $             | 2.25  |            
| | Exercised                             |  | (2,387,300                                       | ) |           |  | $             | 1.30  |            
| | Forfeited                             |  | (185,500                                         | ) |           |  | $             | 11.47 |            
| | Outstanding at February 1, 2009       |  | 5,913,000                                        |   |           |  | $             | 14.70 |            
| | Exercisable at
      February 1, 2009 |  | 3,501,300                                        |   |           |  | $             | 22.49 |            

Additional information regarding
stock options outstanding as of February 1, 2009 is as follows:

| |                         |  | Options Outstanding |        |             |         |              |          |       |        |                     |           |  | 
| | ----------------------- |  | ------------------- | ------ | ----------- | ------- | ------------ | -------- | ----- | ------ | ------------------- | --------- |  | 
| |                         |  |                     |        | Weighted    |         |              |          |       |        |                     |           |  | 
| |                         |  |                     |        | Average     |         |              |          |       |        | Options Exercisable |          
| |                         |  |                     |        | Remaining   |         | **Weighted** |          |       |        | Weighted           
| |                         |  |                     |        | Contractual |         | **Average**  |          |       |        | Average            
| | Range
      of          |  |                     |        |             | Life    |              | Exercise |       |        |                     | Exercise 
| | ******Exercise Prices** |  |                     | Shares |             | (Years) |              | Price    |       | Shares |                     | Price    
| | $  1.40 - $  3.41       |  | 2,627,000           |        | 8.84        |         |              | $        | 2.49  |        |                     | 535,300   |  | 
| | $  5.25 - $  9.71       |  | 544,000             |        | 6.96        |         |              | $        | 9.19  |        |                     | 304,000   |  | 
| | $10.20 - $16.94         |  | 933,600             |        | 4.05        |         |              | $        | 14.35 |        |                     | 853,600   |  | 
| | $28.11
      - $28.58   |  | 623,200             |        | 3.21        |         |              | $        | 28.34 |        |                     | 623,200   |  | 
| | $30.98 - $44.22         |  | 1,185,200           |        | 3.47        |         |              | $        | 37.39 |        |                     | 1,185,200 |  | 

88

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

In addition
to stock options, the Company periodically has awarded restricted stock and
restricted stock units (which are settled in common stock) under the 2000 Plan.
The following table summarizes changes in unvested restricted stock and
restricted stock unit awards for fiscal 2009, 2008 and 2007:

WeightedAverageUnvested
    
    Grant DateShares
    
    Fair ValueUnvested at January 29, 2006
    
    
    
    
    
    $
    Granted
    
    834,000
    
    
    
    $
    8.52Vested
    
    (87,000
    )
    
    
    $
    6.86Forfeited
    
    (3,000
    )
    
    
    $
    9.71Unvested at January 28, 2007
    
    744,000
    
    
    
    $
    8.71Granted
    
    1,552,000
    
    
    
    $
    4.68Vested
    
    (795,500
    )
    
    
    $
    4.96Forfeited
    
    (315,000
    )
    
    
    $
    7.24Unvested at February 3, 2008
    
    1,185,500
    
    
    
    $
    6.33Granted
    
    1,347,400
    
    
    
    $
    2.42Vested
    
    (483,400
    )
    
    
    $
    4.91Forfeited
    
    (215,700
    )
    
    
    $
    6.11Unvested at February 1, 2009
    
    1,833,800
    
    
    
    $
    3.86


The total
fair value as of the grant date of shares vesting during fiscal 2009, 2008 and
2007 was $2.4 million, $3.9 million and $597,000, respectively.

As of
February 1, 2009, the total unrecognized compensation cost related to SBP awards
was approximately $8.1 million. The remaining service periods over which
compensation cost will be recognized for these awards range from approximately
three months to four years, with a weighted average remaining service period of
approximately 1.3 years.

At February
1, 2009, there were approximately 8,277,100 shares of common stock reserved for
issuance pursuant to awards granted under the 2000 Plan and the 1998
Plan.

Common Shares and
Warrants Issued in Connection With Settlement of Litigation

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

The common
stock and warrants had a fair value as of January 28, 2007 of approximately
$51.8 million. The decrease in the estimated fair value of the common stock and
warrants from January 28, 2007 to their issuance on March 2, 2007 of
approximately $14.9 million was credited to earnings in the first quarter of
fiscal 2008, at which time the aggregate fair value of the securities of
approximately $36.9 million was reclassified from liabilities to common
stock.

89

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Warrant Issued in
Exchange for Services

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

Shareholder Rights
Plan

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

If the
Company is acquired in a merger or other business combination, or if 50% or more
of the Companys consolidated assets or earning power is sold after a person or
group has become an acquiring person, proper provision will be made so that each
holder of a share purchase right  other than share purchase rights beneficially
owned by the acquiring person, which will thereafter be void  will have the
right to receive, upon exercise of the share purchase right at the then current
exercise price, the number of shares of common stock of the acquiring company
which at the time of the transaction have a market value of two times the share
purchase right exercise price. If any person or group becomes an acquiring
person, proper provision shall be made so that each holder of a share purchase
right  other than share purchase rights beneficially owned by the acquiring
person, which will thereafter be void  will have the right to receive upon
exercise, and without paying the exercise price, the number of shares of Krispy
Kreme common stock with a market value equal to the share purchase right
exercise price.

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

90

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

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

Note 17  Segment
Information

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

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

91

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

The
following table presents the results of operations of the Companys operating
segments for fiscal 2009, 2008 and 2007. Segment operating income is
consolidated operating income before unallocated general and administrative
expenses, impairment charges and lease termination costs and settlement of
litigation.

Year EndedFeb. 1,
    
    Feb. 3,
    
    Jan. 28,2009
    
    2008
    
    2007(In thousands)Revenues:Company Stores
    
    $
    265,890
    
    
    $
    304,444
    
    
    $
    326,199Franchise
    
    
    25,537
    
    
    
    22,958
    
    
    
    21,075KK Supply Chain:Total revenues
    
    
    188,115
    
    
    
    203,283
    
    
    
    219,991Less  intersegment sales elimination
    
    
    (95,558
    )
    
    
    (101,366
    )
    
    
    (106,070
    )External KK Supply Chain revenues
    
    
    92,557
    
    
    
    101,917
    
    
    
    113,921Total revenues
    
    $
    383,984
    
    
    $
    429,319
    
    
    $
    461,195Operating income (loss):Company Stores
    
    $
    (9,813
    )
    
    $
    (6,292
    )
    
    $
    1,721Franchise
    
    
    16,515
    
    
    
    14,317
    
    
    
    16,354KK Supply Chain
    
    
    23,269
    
    
    
    24,083
    
    
    
    32,311Unallocated general and administrative
      expenses
    
    
    (24,662
    )
    
    
    (27,552
    )
    
    
    (50,392
    )Impairment charges and lease termination costs
    
    
    (548
    )
    
    
    (62,073
    )
    
    
    (12,519
    )Settlement of litigation
    
    
    
    
    
    
    14,930
    
    
    
    (15,972
    )Total operating income (loss)
    
    $
    4,761
    
    
    $
    (42,587
    )
    
    $
    (28,497
    )Depreciation and amortization expense:Company Stores
    
    $
    6,402
    
    
    $
    11,558
    
    
    $
    15,979Franchise
    
    
    86
    
    
    
    92
    
    
    
    119KK Supply Chain
    
    
    1,019
    
    
    
    5,586
    
    
    
    3,469Corporate administration
    
    
    1,202
    
    
    
    1,197
    
    
    
    1,479Total depreciation and amortization expense
    
    $
    8,709
    
    
    $
    18,433
    
    
    $
    21,046


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

Revenues for
fiscal 2009, 2008 and 2007 include approximately $52 million, $48 million and
$43 million, respectively, from customers outside the United States.

Note 18  Investments in
Franchisees

As of
February 1, 2009, the Company had investments in four franchisees. These
investments have been made in the form of capital contributions and, in certain
instances, loans evidenced by promissory notes. These investments are reflected
as Investments in Equity Method Franchisees in the consolidated balance
sheet.

92

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

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

|                                              |  |                         |  | Number
      of  |  |            |  |              
|--------------------------------------------- |  | ----------------------- |  | ---------------- |  | ---------- |  | -------------
|                                              |  |                         |  | Stores
      as  |  |            |  |              
|                                              |  |                         |  | of Feb.
      1, |  | Ownership%
|                                              |  | Geographic Market       |  | 2009(1)          |  | Company    |  | Third Parties
|KremeWorks, LLC                               |  | Alaska, Hawaii, Oregon, |  | 11               |  | 25.0%      |  | 75.0%        
|                                              |  | Washington              |  |                  |  |            |  |              
|Kremeworks
      Canada, LP                   |  | Western
      Canada    |  | 1                |  | 24.5%      |  | 75.5%        
|Krispy Kreme of South Florida, LLC            |  | Southern Florida        |  | 3                |  | 35.3%      |  | 64.7%        
|Krispy Kreme
      Mexico, S. de R.L. de C.V. |  | Mexico                  |  | 47               |  | 30.0%      |  | 70.0%        

|____________________
|--------------------
|                    
|(1)                 

The Companys financial
exposures related to franchisees in which the Company has an investment are
summarized in the tables below.

|                                              |  | February 1, 2009
|--------------------------------------------- |  | ----------------
|                                              |  | Investment      
|                                              |  | and             
|                                              |  | **Advances**    
|                                              |  | (In thousands)  
|Kremeworks, LLC                               |  |                 
|Kremeworks
      Canada, LP                   |  |                 
|Krispy Kreme of South Florida, LLC            |  |                 
|Krispy Kreme
      Mexico, S. de R.L. de C.V. |  |                 
|                                              |  |                 
|Less: reserves
      and allowances           |  |                 
|                                              |  |                 

|                                              |  | February 3, 2008
|--------------------------------------------- |  | ----------------
|                                              |  | Investment      
|                                              |  | and             
|                                              |  | **Advances**    
|                                              |  | (In thousands)  
|A-OK, LLC                                     |  |                 
|KK-TX I,
      L.P                            |  |                 
|Kremeworks, LLC                               |  |                 
|Kremeworks
      Canada, LP                   |  |                 
|Krispy Kreme of South Florida, LLC            |  |                 
|Krispy Kreme
      Mexico, S. de R.L. de C.V. |  |                 
|Priz Doughnuts, LP                            |  |                 
|                                              |  |                 
|Less: reserves and allowances                 |  |                 
|                                              |  |                 

93

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

The
aggregate loan and lease guarantees at February 1, 2009 and February 3, 2008
shown in the preceding tables consist of $3.5 million and $6.0 million,
respectively, of loan guarantees and $5.5 million and $11.5 million,
respectively, of lease guarantees. The loan guarantee amounts were determined
based upon the principal amount outstanding under the related loan and the lease
guarantee amounts were determined based upon the gross amount of remaining lease
payments. As described below, subsequent to February 1, 2009, Krispy Kreme of
South Florida, LLC (KKSF) completed transactions which, in the aggregate,
reduced the Companys aggregate guarantee exposure with respect to
KKSF.

KKSF has
incurred defaults with respect to certain credit agreements with its lenders,
including agreements related to KKSF indebtedness guaranteed, in part, by the
Company. During the fourth quarter of fiscal 2008, the Company recorded a
provision of $3.0 million for potential payments related to guarantees of KKSF
loans and leases. In September 2008, the Company, KKSF and one of KKSFs lenders
entered into agreements pursuant to which, among other things, the Company paid
approximately $250,000 to the lender to effect a cure of certain KKSF defaults
with respect to certain of the indebtedness subject to the Companys guarantee.
Such agreements also provided for a reduction in the amount of the Companys
debt guarantee obligations of approximately $125,000, and for the Companys
release from KKSF lease guarantees for which the Companys potential guarantee
obligation was approximately $4.0 million. Subsequent to February 1, 2009, KKSF
completed a transaction which resulted in the Companys release from a lease
guarantee for which the Companys potential obligation was approximately $5.5
million, but which increased the Companys guarantee of KKSF debt obligations by
approximately $1.0 million. After giving effect to these transactions, the
aggregate guarantees of KKSF obligations were approximately $2.8 million (all of
which related to loans), which approximates the amount of accrued liabilities
reflected in the Companys balance sheet for its KKSF guarantee obligations as
of February 1, 2009. After giving effect to these transactions, the aggregate
outstanding guarantee exposure for all Equity Method Franchisees was
approximately $4.6 million, all of which related to loans of which the Company
has recorded a liability of $2.7 million.

The Company
has a $900,000 note receivable from Kremeworks, LLC (Kremeworks) which is
subordinate to certain Kremeworks bank indebtedness guaranteed, in part, by the
Company. The note arose from cash advances made by the Company to Kremeworks in
fiscal 2005 and earlier years. Kremeworks results of operations and operating
cash flow have declined and, although Kremeworks has paid all interest, fees and
scheduled amortization of principal due under its bank indebtedness, it has
failed to comply with certain financial covenants related to such indebtedness,
a portion of which matured, by its terms, in January 2009. Kremeworks has
requested that the lender waive the loan defaults resulting from the covenant
violations and refinance the maturing indebtedness. In the event the lender is
unwilling to do so and declares the entire indebtedness immediately due and
payable, the Company could be required to perform under its guarantee, which
totaled approximately $1.8 million as of February 1, 2009. Kremeworks could have
insufficient cash flows from its business to service the indebtedness even if it
is refinanced, which might require capital contributions to Kremeworks by the
Company and the majority owner of Kremeworks (which has guarantees of the
Kremeworks indebtedness approximately proportionate to those of the Company) in
order for Kremeworks to comply with the terms of the any new loan agreement.
During the fiscal year ended February 1, 2009, the Company established a reserve
equal to the entire $900,000 balance of its note receivable in recognition of
the uncertainty surrounding its ultimate collection, the charge related to which
is included in Other non-operating income and expense, net in the accompanying
consolidated statement of operations.

In June
2008, the Company completed an agreement to dissolve Priz Doughnuts, LP
(Priz). In connection with this transaction, the Company conveyed the assets
of one of the Priz stores to an existing franchisee and conveyed the other store
to the other partner of Priz. In connection with the dissolution of Priz, the
Company paid $400,000 to settle its loan guarantee related to Priz.

94

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

In April
2008, the Company completed an agreement with A-OK, LLC and KK-TX I, L.P. (which
have common ownership and are collectively referred to as the A-OK Parties)
pursuant to which, among other things, the Company conveyed to the owner of the
A-OK Parties the Companys equity interests in the A-OK Parties and compromised
and settled certain disputed and past due amounts owed by the A-OK Parties to
the Company. In connection with this agreement, the Company was released from
its obligations under all of its partial guarantees of certain of the A-OK
Parties indebtedness and lease obligations. The Company recorded a non-cash
gain of $931,000 as a result of this transaction, which is included in Other
non-operating income and expense, net in the accompanying consolidated
statement of operations for the fiscal year ended February 1, 2009.

During
fiscal 2008, the Company reevaluated its investment in Kremeworks Canada, LP
(Kremeworks Canada) and concluded that such investment was not recoverable;
accordingly, the Company recorded an impairment charge of $572,000 to reduce the
carrying value of the Companys investment in Kremeworks Canada to zero. This
charge is included in Other non-operating income and expense, net in the
accompanying consolidated statement of operations for the fiscal year ended
February 3, 2008.

The
following table summarizes the Companys obligations under the loan and lease
guarantees as of February 1, 2009 and the scheduled expiration of these
obligations in each of the next five fiscal years and thereafter. The amounts
shown as the scheduled expiration of the guarantees are based upon the scheduled
maturity of the underlying guaranteed obligation.

|                                               |  |                |  | Total      |   |                                       |  |      |   |       |  |      |     |      |   |            |  |   |     |  |   |     |  | 
|---------------------------------------------- |  | -------------- |  | ---------- | - | ------------------------------------- |  | ---- | - | ----- |  | ---- | --- | ---- | - | ---------- |  | - | --- |  | - | --- |  | 
|                                               |  |                |  | Loan/      |   |                                       |  |      |   |       |  |      |     |      |   |            |  |   |     |  |   |     |  | 
|                                               |  | Guarantee      |  | Lease      |   | Amounts Expiring in Fiscal
      Year
|                                               |  | Percentages    |  | Guarantees |   | 2010                                  |  | 2011 |   | 2012  |  | 2013 |     | 2014 |   | Thereafter
|                                               |  | (In thousands)
|Kremeworks, LLC                                |  | 20%            |  |            | $ | 1,754                                 |  |      | $ | 1,754 |  | $    |    |      | $ |           |  | $ |    |  | $ |    |  | 
|Krispy Kreme of
      South       Florida, LLC |  | 35%-100%       |  |            |   | 7,256                                 |  |      |   | 2,820 |  |      | 522 |      |   | 522        |  |   | 522 |  |   | 522 |  | 
|                                               |  |                |  |            | $ | 9,010                                 |  |      | $ | 4,574 |  | $    | 522 |      | $ | 522        |  | $ | 522 |  | $ | 522 |  | 

Current
liabilities at February 1, 2009 include accruals for potential payments under
the loan and lease guarantees of approximately $2.7 million related to KKSF as
described above. Current liabilities at February 3, 2008 included accruals for
potential payments under loan and lease guarantees of approximately $3.0 million
related to KKSF and $450,000 related to Priz. There is no liability reflected
for other guarantees of Equity Method Franchisee obligations because the Company
does not believe it is probable that the Company will be required to perform
under such other guarantees.

While there
is no current demand on the Company to perform under any of the guarantees,
there can be no assurance that the Company will not be required to perform and,
if circumstances change from those prevailing at February 1, 2009, additional
guarantee payments or provisions for guarantee payments could be required with
respect to any of the guarantees, and such payments or provisions could be
significant.

95

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Information
about the financial position and results of operations of the Equity Method
Franchisees in which the Company had an interest as of February 1, 2009, is set
forth below:

|                                                    |  | Summary Financial Information (1)
|--------------------------------------------------- |  | ---------------------------------
|                                                    |  |                                  
|                                                    |  |                                  
|                                                    |  | Revenues                         
|                                                    |  | **(In
      thousands)**         
|Kremeworks,
      LLC                               |  |                                  
|2009                                                |  | $                                
|2008                                                |  |                                  
|2007                                                |  |                                  
|Kremeworks
      Canada, LP                         |  |                                  
|2009                                                |  |                                  
|2008                                                |  |                                  
|2007                                                |  |                                  
|Krispy Kreme of
      South       Florida, LLC      |  |                                  
|2009                                                |  |                                  
|2008                                                |  |                                  
|2007                                                |  |                                  
|Krispy
      Kreme       Mexico, S. de R.L. de C.V. |  |                                  
|2009                                                |  |                                  
|2008                                                |  |                                  
|2007                                                |  |                                  

|(1) |  | The revenues and net income
      (loss) shown for each of these franchisees represents the amounts reported
      by the franchisee for calendar 2008, 2007 and 2006, and the amounts shown
      as assets and liabilities represent the corresponding amounts reported by
      each of the franchisees on or about December 31, 2008, 2007 and
      2006.          
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                                                                                                                                                                                                         
|(2) |  | The income or loss
      of each of these entities is includable on the income tax returns of their
      owners to the extent required by law. Accordingly, the financial
      statements of these entities do not include a provision for income taxes
      and as a result pretax income or loss for each of these entities is also
      their net income or loss.

Note 19  Related Party
Transactions

All
franchisees are required to purchase doughnut mix and production equipment from
the Company. Revenues include $10.4 million, $14.7 million and $22.9 million in
fiscal 2009, 2008 and 2007, respectively, of sales to franchise stores owned by
franchisees in which the Company had an ownership interest during fiscal 2009.
Revenues also include royalties from these franchisees of $2.3 million, $2.9
million and $4.4 million in fiscal 2009, 2008 and 2007, respectively. Trade
receivables from these franchisees are included in receivables from related
parties as described in Note 3. These transactions were conducted pursuant to
development and franchise agreements, the terms of which are substantially the
same as the agreements with unaffiliated franchisees.

The
Companys franchisee for the Middle East is an affiliate of a shareholder which
is the beneficial owner of approximately 13% of the Companys common stock. The
Company had transactions in the normal course of business with this franchisee
(including sales of doughnut mix and equipment to the franchisee and royalties
payable to the Company by the franchisee based on its sales at Krispy Kreme
franchise stores)

96

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

totaling approximately $10.6 million in fiscal
2009, $8.1 million in fiscal 2008 and $1.5 million in fiscal 2007. Such
transactions were conducted pursuant to development and franchise agreements,
the terms of which are substantially the same as the agreements with other
international franchisees.

Note 20  Employee Benefit
Plans

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

The Company
also has a Nonqualified Deferred Compensation Plan (the 401(k) Mirror Plan)
designed to enable officers of the Company whose contributions to the 401(k)
Plan are limited by certain statutory limitations to have the same opportunity
to defer compensation as is available to other employees of the Company under
the qualified 401(k) savings plan. Participants may defer from 1% to 15% of
their base salary and from 1% to 100% of their bonus (reduced by their
contributions to the 401(k) Plan), subject to statutory limitations, into the
401(k) Mirror Plan and may direct the investment of the amounts they have
deferred. The investments, however, are not a legally separate fund of assets
and are included in other assets in the consolidated balance sheet. The
corresponding liability to participants is included in other long-term
obligations. The balance in the asset and corresponding liability account was
$287,000 and $368,000 at February 1, 2009 and February 3, 2008,
respectively.

The Company
currently matches 50% of the first 6% of compensation contributed by each
employee to these plans. Contributions expense for these plans totaled $754,000
in fiscal 2009, $847,000 in fiscal 2008 and $838,000 in fiscal 2007.

Note 21  Fair Value
Measurements

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

|                                                    |  | Feb. 1, 2009   |        | Feb. 3, 2008
|--------------------------------------------------- |  | -------------- | ------ | ------------
|                                                    |  | Carrying       |        | Fair        
|                                                    |  | value          |        | value       
|                                                    |  | (In thousands)
|Assets                                              |  |                |        |             
|Cash and cash equivalents                           |  | $              | 35,538 |             
|Trade receivables                                   |  |                | 19,229 |             
|Commodity futures contracts                         |  |                |       |             
|                                                    |  |                |        |             
|Liabilities:                                        |  |                |        |             
|Accounts payable                                    |  |                | 8,981  |             
|Interest rate derivative
    instruments            |  |                | 2,348  |             
|Long-term debt (including current
      maturities) |  |                | 74,867 |             

Except as
described in the following paragraph, effective February 4, 2008, the Company
adopted FAS 157, which defines fair value as the price that would be received
for an asset or paid to transfer a liability in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants at the measurement date. FAS 157 is intended to establish a
common definition of fair value to be used throughout GAAP, which is expected to
make the measurement of fair value more consistent and comparable.

FAS 157 was
to be effective for years beginning after November 15, 2007. However, in
February 2008, the FASB deferred the effective date of FAS 157 for nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis until years beginning
after November 15, 2008.

97

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

FAS 157
establishes a three-level fair value hierarchy that prioritizes the inputs used
to measure fair value. This hierarchy requires entities to maximize the use of
observable inputs and minimize the use of unobservable inputs. The three levels
of inputs used to measure fair value are as follows:

- Level 1 - Quoted prices in active markets that are
  accessible at the measurement date for identical assets or liabilities.
- Level 2 - Observable inputs other than quoted
  prices included within Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted
  prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are
  observable or can be corroborated by observable market data.
- Level 3 - Unobservable inputs that are supported
  by little or no market activity and that are significant to the fair value measurement of the assets or liabilities.
  These include certain pricing models, discounted cash flow methodologies and similar techniques that use significant
  unobservable inputs.

Adoption of
FAS 157 had no material effect on the Companys financial position or results of
operations.

The Company has no material
financial assets or liabilities measured at fair value except for interest rate
derivatives liabilities described in Note 10. Such liabilities had a fair value
of approximately $2.3 million at February 1, 2009. The fair value of these
over-the-counter derivatives was determined using a discounted cash flow model
based on the terms of the contracts and considering non performance risk. The
most significant input to this model is implied forward LIBOR rates. These
inputs are classified within Level 2 of the valuation hierarchy.

The
following table presents the Companys assets and liabilities that are measured
at fair value on a recurring basis at February 1, 2009 consistent with the fair
value hierarchy provisions of FAS 157.

Feb. 1, 2009Level 1
    
    Level 2
    
    Level 3(Dollars in thousands)Assets:401(k) mirror plan assets
    
    
    $
    287
    
    
    $
    
    
    
    $
    Liabilities:Interest rate derivatives
    
    
    $
    
    
    
    $
    2,348
    
    
    $
    


98

---

KRISPY KREME DOUGHNUTS,
INC.

NOTES TO FINANCIAL STATEMENTS 
(Continued)

Note 22  Selected Quarterly Financial
Data (Unaudited)

The tables below present selected
quarterly financial data for fiscal 2009 and 2008.

|                                                                                                                  |  | Three Months Ended                   
|----------------------------------------------------------------------------------------------------------------- |  | -------------------------------------
|                                                                                                                  |  | May 4,                               
|                                                                                                                  |  | 2008                                 
|                                                                                                                  |  | (In thousands, except per share data)
|Revenues                                                                                                          |  | $                                    
|Operating
      expenses:                                                                                         |  |                                      
|Direct
      operating expenses (exclusive of
      depreciation             
      and amortization shown below) |  |                                      
|General and administrative expenses                                                                               |  |                                      
|Depreciation and amortization
    expense                                                                         |  |                                      
|Impairment charges and lease termination costs                                                                    |  |                                      
|Other operating (income) and expense,
      net                                                                   |  |                                      
|Operating income
      (loss)                                                                                     |  |                                      
|Interest income                                                                                                   |  |                                      
|Interest
      expense                                                                                            |  |                                      
|Equity in losses of equity method franchisees                                                                     |  |                                      
|Other
      non-operating income and (expense), net                                                               |  |                                      
|Income (loss) before income taxes                                                                                 |  |                                      
|Provision for
      income taxes (benefit)                                                                        |  |                                      
|Net income (loss)                                                                                                 |  | $                                    
|                                                                                                                 
|Income (loss) per common share:                                                                                   |  |                                      
|Basic                                                                                                             |  | $                                    
|Diluted                                                                                                           |  | $                                    

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

99

---

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

None.

Item 9A. CONTROLS AND
PROCEDURES.

Evaluation of Disclosure Controls
and Procedures

As of
February 1, 2009, the end of the period covered by this Annual Report on Form
10-K, management performed, under the supervision and with the participation of
our chief executive officer and chief financial officer, an evaluation of the
effectiveness of our disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed in
the reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and
forms, and that such information is accumulated and communicated to management,
including our chief executive officer and chief financial officer, to allow
timely decisions regarding required disclosures. Based on this evaluation, our
chief executive officer and chief financial officer have concluded that, as of
February 1, 2009, our disclosure controls and procedures were
effective.

Managements Report on Internal
Control over Financial Reporting

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

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

Management
assessed the effectiveness of our internal control over financial reporting as
of February 1, 2009, using the criteria established inInternal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on our assessment, management has concluded
that we maintained effective internal control over financial reporting as of
February 1, 2009, based on the COSO criteria.

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

Changes in Internal Control over
Financial Reporting

During the
quarter ended February 1, 2009, there were no changes in the Companys internal
control over financial reporting that materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial
reporting.

100

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Item 9B. OTHER
INFORMATION.

On April 15, 2009, Krispy Kreme
Doughnut Corporation, a wholly owned subsidiary of Krispy Kreme Doughnuts, Inc.,
entered into Amendment No. 4, dated as of April 15, 2009, to the 2007 Senior
Secured Credit Facility, pursuant to which Krispy Kreme Doughnut Corporation,
Krispy Kreme Doughnuts, Inc., the subsidiary guarantors and the required lenders
under the 2007 Senior Secured Credit Facility agreed to certain amendments to
the 2007 Senior Secured Credit Facility described in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, and
Note 10 to consolidated financial statements appearing elsewhere herein.

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE.

Except as
set forth below, the information required by this item is contained in our proxy
statement for our 2009 Annual Meeting of Shareholders to be held on June 16,
2009, to be filed pursuant to Section 14 of the Exchange Act, and is
incorporated herein by reference.

NYSE and SEC
Certifications

In
accordance with Section 303A.12(a) of the NYSE Listed Company Manual, the Chief
Executive Officer of the Company submits annual certifications to the NYSE
stating that he is not aware of any violations by the Company of the NYSE
corporate governance listing standards, qualifying the certification to the
extent necessary. The last such annual certification was submitted on June 24,
2008 and contained no qualifications.

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

Item 11. EXECUTIVE
COMPENSATION.

The
information required by this item is contained in our proxy statement for our
2009 Annual Meeting of Shareholders to be held on June 16, 2009, to be filed
pursuant to Section 14 of the Exchange Act, and is incorporated herein by
reference.

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

The
information required by this item is contained in our proxy statement for our
2009 Annual Meeting of Shareholders to be held on June 16, 2009, to be filed
pursuant to Section 14 of the Exchange Act, and is incorporated herein by
reference.

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

The
information required by this item is contained in our proxy statement for our
2009 Annual Meeting of Shareholders to be held on June 16, 2009, to be filed
pursuant to Section 14 of the Exchange Act, and is incorporated herein by
reference.

Item 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES

The
information required by this item is contained in our proxy statement for our
2009 Annual Meeting of Shareholders to be held on June 16, 2009, to be filed
pursuant to Section 14 of the Exchange Act, and is incorporated herein by
reference.

101

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PART IV

Item 15. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES

|(a) | Financial Statements
      and Schedules
|--- | ----------------------------------------
|    |                                         
|    | 1.                                      
|    |                                         
|    | 2.                                      

| | Schedule I  Condensed Financial Information of
      Registrant   |  | 106        
| | ------------------------------------------------------------------ |  | -----------
| |                                                                    |  |            
| | Schedule II  Valuation and Qualifying Accounts and
      Reserves |  | 109        
| |                                                                    |  |            
| | 3.                                                                 |  | *Exhibits.*

|**Exhibit** |      |  
|----------- | ---- | -
|**Number**  |      |  
|            | 3.1  |  
|            | 3.2  |  
|            | 4.1  |  
|            | 4.2  |  
|            | 4.3  | *
|            | 4.4  |  
|            | 4.5  |  
|            | 10.1 |  
|            | 10.2 |  
|            | 10.3 |  
|            | 10.4 |  

102

---

|**Exhibit** |       |  
|----------- | ----- | -
|**Number**  |       |  
|            | 10.5  |  
|            | 10.6  |  
|            | 10.7  |  
|            | 10.8  |  
|            | 10.9  |  
|            | 10.10 |  
|            | 10.11 |  
|            | 10.12 |  
|            | 10.13 | *
|            | 10.14 |  
|            | 10.15 | *
|            | 10.16 |  
|            | 10.17 | *
|            | 10.18 |  
|            | 10.19 | *

103

---

|**Exhibit** |       |  
|----------- | ----- | -
|**Number**  |       |  
|            | 10.20 |  
|            | 10.21 |  
|            | 10.22 |  
|            | 10.23 |  
|            | 10.24 |  
|            | 10.25 |  
|            | 10.26 | *
|            | 10.27 |  
|            | 10.28 |  
|            | 10.29 |  
|            | 10.30 | *
|            | 10.31 |  
|            | 10.32 |  
|            | 10.33 | *
|            | 10.34 | *
|            | 10.35 | *
|            | 10.36 |  
|            | 21    | *
|            | 23    | *
|            | 24    | *

104

---

|**Exhibit** |      |  
|----------- | ---- | -
|**Number**  |      |  
|            | 31.1 | *
|            | 31.2 | *
|            | 32.1 | *
|            | 32.2 | *

|*  |  | 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.

105

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SCHEDULE I  CONDENSED FINANCIAL
INFORMATION OF REGISTRANT

KRISPY KREME DOUGHNUTS,
INC.(PARENT COMPANY ONLY)

BALANCE SHEET

|                                              |  | Feb. 1,        |          | Feb. 3,
|--------------------------------------------- |  | -------------- | -------- | -------
|                                              |  | 2009           |          | 2008   
|                                              |  | (In thousands)
|ASSETS                                       
|                                              |  |                |          |        
|Investment in and advances to subsidiaries    |  | $              | 57,755   |        
|                                             
|SHAREHOLDERS EQUITY                         
|                                              |  |                |          |        
|Preferred stock                               |  | $              |         |        
|Common
      stock                            |  |                | 361,801  |        
|Accumulated other comprehensive income (loss) |  |                | (913     | )      
|Accumulated deficit                           |  |                | (303,133 | )      
|Total
      shareholders equity              |  | $              | 57,755   |        

106

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SCHEDULE I  CONDENSED FINANCIAL
INFORMATION OF REGISTRANT

KRISPY KREME DOUGHNUTS,
INC.(PARENT COMPANY ONLY)

STATEMENT OF
OPERATIONS

|                                           |  | Year Ended    
|------------------------------------------ |  | --------------
|                                           |  | Feb. 1,       
|                                           |  | 2009          
|                                           |  | (In thousands)
|Equity
      in losses of subsidiaries     |  | $             
|Miscellaneous
      expenses               |  |               
|Loss
      before income taxes             |  |               
|Provision for income
      taxes (benefit) |  |               
|Net
      loss                             |  | $             
|                                           |  |               
|Loss
      per common share:               |  |               
|Basic                                      |  | $             
|Diluted                                    |  | $             

107

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SCHEDULE I  CONDENSED FINANCIAL
INFORMATION OF REGISTRANT

KRISPY KREME DOUGHNUTS,
INC.(PARENT COMPANY ONLY)

STATEMENT OF CASH
FLOWS

|                                                     |  | Year Ended    
|---------------------------------------------------- |  | --------------
|                                                     |  | Feb. 1,       
|                                                     |  | 2009          
|                                                     |  | (In thousands)
|CASH
      FLOW FROM OPERATING ACTIVITIES:           |  |               
|Net loss                                             |  | $             
|Equity
      in earnings of subsidiaries             |  |               
|Net cash used by
      operating activities          |  |               
|CASH
      FLOW FROM INVESTING ACTIVITIES:           |  |               
|Investments in
      subsidiaries                    |  |               
|Net
      cash used for investing activities         |  |               
|CASH FLOW FROM
      FINANCING ACTIVITIES:           |  |               
|Proceeds from exercise of stock options              |  |               
|Repurchase of common
      shares                    |  |               
|Net
      cash provided by financing activities      |  |               
|Net increase in cash
      and cash equivalents      |  |               
|Cash
      and cash equivalents at beginning of year |  |               
|Cash and cash
      equivalents at end of year       |  | $             

108

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SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS AND RESERVES

KRISPY KREME DOUGHNUTS,
INC.



|                                                        |                 |            |   |                  |   |                | Additions |          |   |          |   |             |   |  |  |  
|------------------------------------------------------- | --------------- | ---------- | - | ---------------- | - | -------------- | --------- | -------- | - | -------- | - | ----------- | - |  |  | -
|                                                        |                 | Balance at |   | Charged
      to |   | Charged        |           |          |   |          |   |             |   |  | 
|                                                        |                 | beginning  |   | costs
      and  |   | to
      other |           |          |   |          |   | Balance at 
|                                                        | **Description** |            |   | of year          |   | expenses       |           | accounts |   | Payments |   | end of year
|Accrual for self-insurance claims,
    principally      |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|**workers
      compensation (current and**            |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|**non-current
      portions)**                         |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|                                                        |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|Year ended January 28, 2007                             |                 |            | $ | 11,548           |   |                | $4,597    |          |  |          | $ | (3,812      | ) |  |  | $
|                                                        |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|Accrual included in:                                    |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|****Other accrued liabilities                           |                 |            | $ | 4,435            |   |                |           |          |   |          |   |             |   |  |  | $
|****Other long-term obligations                         |                 |            |   | 8,872            |   |                |           |          |   |          |   |             |   |  |  |  
|Less:
      Claims receivable under stop-loss insurance |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|policies included in:                                   |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|****Other current assets                                |                 |            |   | (145             | ) |                |           |          |   |          |   |             |   |  |  |  
|****Other assets                                        |                 |            |   | (1,614           | ) |                |           |          |   |          |   |             |   |  |  |  
|                                                        |                 |            | $ | 11,548           |   |                |           |          |   |          |   |             |   |  |  | $
|                                                        |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|Year ended February 3, 2008                             |                 |            | $ | 12,333           |   |                | $3,654    |          |  |          | $ | (3,684      | ) |  |  | $
|                                                        |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|Accrual included in:                                    |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|****Other accrued liabilities (Note 9)                  |                 |            | $ | 5,885            |   |                |           |          |   |          |   |             |   |  |  | $
|****Other long-term obligations (Note 11)               |                 |            |   | 11,389           |   |                |           |          |   |          |   |             |   |  |  |  
|Less:
      Claims receivable under stop-loss insurance |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|policies included in:                                   |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|****Other current assets (Note 5)                       |                 |            |   | (665             | ) |                |           |          |   |          |   |             |   |  |  |  
|****Other assets (Note 8)                               |                 |            |   | (4,276           | ) |                |           |          |   |          |   |             |   |  |  |  
|                                                        |                 |            | $ | 12,333           |   |                |           |          |   |          |   |             |   |  |  | $
|                                                        |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|Year ended February 1, 2009                             |                 |            | $ | 12,303           |   |                | $3,707    |          |  |          | $ | (4,229      | ) |  |  | $
|                                                        |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|Accrual included in:                                    |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|****Other accrued liabilities (Note 9)                  |                 |            | $ | 4,996            |   |                |           |          |   |          |   |             |   |  |  | $
|****Other long-term obligations (Note 11)               |                 |            |   | 11,754           |   |                |           |          |   |          |   |             |   |  |  |  
|Less:
      Claims receivable under stop-loss insurance |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|policies included in:                                   |                 |            |   |                  |   |                |           |          |   |          |   |             |   |  |  |  
|****Other current assets (Note 5)                       |                 |            |   | (609             | ) |                |           |          |   |          |   |             |   |  |  |  
|****Other assets (Note 8)                               |                 |            |   | (3,838           | ) |                |           |          |   |          |   |             |   |  |  |  
|                                                        |                 |            | $ | 12,303           |   |                |           |          |   |          |   |             |   |  |  | $

109

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SIGNATURES

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

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


Date: April 17,
2009

POWER OF ATTORNEY

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

Pursuant to
the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on April 17, 2009.

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

110

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

111

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