##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
    Form 10-K
 (Mark one)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended January 29, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          
    to   Commission file number
    001-16485
  KRISPY KREME DOUGHNUTS,
    INC.
 (Exact name of registrant as
    specified in its charter)
  North Carolina

56-2169715(State or other jurisdiction of
    incorporation or organization)

(I.R.S. Employer Identification
    No.)370 Knollwood Street,

27103Winston-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 ofEach Exchangeon WhichTitle of Each Class

RegisteredCommon Stock, No Par Value

New York Stock ExchangePreferred Share Purchase Rights

New York Stock ExchangeWarrants to Purchase Common Stock

American Stock Exchange   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  o þ
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 Large accelerated
    filer o     Accelerated
    filer þ     Non-accelerated
    filer o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE:




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##### 



TABLE OF
    CONTENTS
  PageEXPLANATORY
    NOTE


1FORWARD-LOOKING
    STATEMENTS


2PART IItem 1.


Business


4Item 1A.


Risk
    Factors


21Item 1B.


Unresolved Staff
    Comments


29Item 2.


Properties


29Item 3.


Legal
    Proceedings


32Item 4.


Submission of
    Matters to a Vote of Security Holders


36PART IIItem 5.


Market for
    Registrants Common Equity and Related Stockholder
    Matters


37Item 6.


Selected Financial
    Data


38Item 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


39Item 7A.


Quantitative and
    Qualitative Disclosures About Market Risks


63Item 8.


Financial
    Statements and Supplementary Data


64Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


120Item 9A.


Controls and
    Procedures


120Item 9B.


Other
    Information


124PART IIIItem 10.


Directors and
    Executive Officers of the Registrant


125Item 11.


Executive
    Compensation


129Item 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


139Item 13.


Certain
    Relationships and Related Transactions


144Item 14.


Principal
    Accountant Fees and Services


145PART IVItem 15.


Exhibits and
    Financial Statement Schedules


146SIGNATURES


153EX-10.47: ADVISORY AGREEMENTEX-21: LIST OF SUBSIDIARIESEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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As used herein, unless the context otherwise requires,
    Krispy Kreme, the Company,
    we, us and our refer to
    Krispy Kreme Doughnuts, Inc. and its subsidiaries. References
    contained herein to fiscal 2002, fiscal 2003, fiscal 2004,
    fiscal 2005, fiscal 2006 and fiscal 2007 mean the fiscal years
    ended February 3, 2002, February 2, 2003,
    February 1, 2004, January 30, 2005, January 29,
    2006 and January 28, 2007, respectively. Please note that
    fiscal 2002 contained 53 weeks. All references to share
    amounts and per share amounts in this Annual Report on
    Form 10-K,
    unless otherwise noted, have been adjusted to reflect stock
    splits.
 EXPLANATORY
    NOTE  Form 10-K Form 10-K) Form 10-K, Form 10-K
  Form 10-K Form 10-Q Form 8-K Form 10-K Form 10-Q
  Form 10-K, Form 10-Q Form 10-Q
  Form 10-K.
  Form 10-K Form 10-Q
  Form 10-K
  Form 10-K Form 12b-25s




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FORWARD-LOOKING
    STATEMENTS  Form 10-K
  
    the outcome of pending governmental investigations, including by
    the Securities and Exchange Commission and the United States
    Attorneys Office for the Southern District of New York,
    and a review by the Department of Labor;
    the outcome of shareholder derivative and class action
    litigation;
    potential indemnification obligations and limitations of our
    director and officer liability insurance;
    material weaknesses in our internal control over financial
    reporting;
    our ability to implement remedial measures necessary to improve
    our processes and procedures;
    continuing negative publicity;
    significant changes in our management;
    the quality of franchise store operations;
    our ability, and our dependence on the ability of our
    franchisees, to execute on our and their business plans;
    disputes with our franchisees;
    our ability to implement our international growth strategy;
    currency, economic, political and other risks associated with
    our international operations;
    the price and availability of raw materials needed to produce
    doughnut mixes and other ingredients;
    compliance with government regulations relating to food products
    and franchising;
    our relationships with wholesale customers;
    our ability to protect our trademarks;
    risks associated with our high levels of indebtedness;
    restrictions on our operations contained in our senior secured
    credit facilities;
    our ability to meet our ongoing liquidity needs;
    changes in customer preferences and perceptions; 2




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
    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.     3




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PART I  Item 1.
    BUSINESS.  Overview
  ® tm
        Significant
    Events
    Governmental
    Investigations/Litigation
  
    On October 7, 2004, the staff of the Securities and
    Exchange Commission (the SEC) advised us that the
    SEC had entered a formal order of investigation concerning the
    Company. The Company is cooperating with this investigation.
    On February 24, 2005, the United States Attorneys
    Office for the Southern District of New York advised us that it
    would seek to conduct interviews of certain current and former
    officers and employees of the Company. The Company is
    cooperating with this investigation.
    On March 9 and March 21, 2005, the United States Department
    of Labor (DOL) informed the Company that it was
    commencing a review of the Krispy Kreme Doughnut
    Corporation Retirement Savings Plan and the Krispy Kreme Profit
    Sharing Stock Ownership Plan, respectively, to determine whether
    any violations of Title I of the Employee Retirement Income
    Security Act of 1974 (ERISA) have occurred. The DOL
    investigation is ongoing and the DOL has not yet indicated
    whether it believes any violations of ERISA have occurred. The
    Company is cooperating with the DOL.    
    We and certain of our former and current executive officers,
    directors and other employees are defendants in several
    lawsuits, including a federal securities class action, several
    shareholder derivative 4




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actions and an ERISA class action. We have reached proposed
    settlements with respect to these matters. For more information
    see Item 3, Legal Proceedings 
    Litigation.  Special
    Committee Investigation
  
    On October 4, 2004, the Company formed a special committee
    (the Special Committee) of newly-appointed
    independent directors, consisting of and co-chaired by Michael
    H. Sutton (former Chief Accountant of the SEC) and Lizanne
    Thomas (a senior corporate partner of the law firm of Jones
    Day), to conduct an independent review and investigation of any
    and all issues raised by: (1) regulatory investigations
    such as those commenced by the SEC and the United States
    Attorneys Office, (2) the Companys independent
    auditors, PricewaterhouseCoopers LLP, (3) shareholder
    demands and shareholder derivative actions and
    (4) whistleblowers. The Special Committees mandate
    also encompassed any other issues it deemed necessary or
    appropriate in furtherance of its investigation. With respect to
    each of these matters, the Special Committee received full and
    complete authority and power to determine the appropriate action
    to be taken by the Company and to initiate, supervise and
    conduct to conclusion any lawful action that the Special
    Committee, in the exercise of its independent judgment, deemed
    to be in the best interests of the Company.
    The Special Committee conducted its investigation from early
    October 2004 through early August 2005.
    To assist in the investigation, the Special Committee retained
    independent legal counsel Weil, Gotshal & Manges LLP
    (Weil Gotshal) and Smith Moore LLP. Weil Gotshal, in
    turn, retained independent forensic accountants, Navigant
    Consulting, Inc., and an independent restaurant industry
    valuation expert, Restaurant Capital Advisory, LLC.
    The Special Committee issued its report to our Board of
    Directors on August 9, 2005. For a summary of the
    conclusions and directives for remedial action set forth in its
    report, see Exhibit 99.1 to our Current Report on
    Form 8-K
    filed with the SEC on August 10, 2005. These directives
    addressed, among other things, restatement of the Companys
    financial statements; the employment status of certain
    personnel, including their stock options and entitlement to
    advancement of legal expenses; shareholder demands and
    derivative litigation; the composition and functioning of the
    Board of Directors; internal resources, controls and compliance;
    public disclosure; and compensation of management and directors.  Restatement
    of Financial Statements
  
    On April 28, 2006, we filed our 2005
    Form 10-K,
    in which we restated our financial statements and other
    financial information for fiscal 2001 through fiscal 2004, each
    quarter of fiscal 2004 and the first three quarters of fiscal
    2005. For a discussion of the significant restatement
    adjustments, see Notes 2 and 25 to the consolidated
    financial statements under Item 8, Financial
    Statements and Supplementary Data in the 2005
    Form 10-K.
    For information on the effects of the restatement adjustments on
    fiscal 2001 and 2002, see Item 6, Selected Financial
    Data in the 2005
    Form 10-K.  Management/Board
    of Directors Changes
  
    Effective August 23, 2004, John W. Tate resigned his
    position of Chief Operating Officer of the Company.
    On October 4, 2004, as described above, the Special
    Committee was formed and Mr. Sutton and Ms. Thomas
    joined the Board of Directors of the Company as independent
    directors and as co-chairs of the Special Committee.
    On January 13, 2005, the Special Committee discussed with
    the Companys other independent directors its preliminary
    conclusions concerning Scott A. Livengoods stewardship of
    the Company. With the Special Committees strong
    encouragement, such other independent directors determined that
    new leadership was required. The decision was communicated to
    Mr. Livengood and, on January 17, 2005, 5




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he retired as Chairman of the Board, President and Chief
    Executive Officer of the Company and resigned as a director of
    the Company. The Company and Mr. Livengood entered into a
    consulting agreement effective January 17, 2005. On
    June 3, 2005, the Company informed Mr. Livengood that
    his failure to cooperate with the Special Committees
    investigation constituted a breach of the consulting agreement,
    that the payment of consulting fees and continued medical
    coverage would therefore cease and that the term of the
    agreement would not be extended past its initial six-month term.  
    On January 18, 2005, the following changes were made with
    respect to our management:  
    We retained Kroll Zolfo Cooper LLC (KZC), a
    corporate recovery and advisory firm, as our financial advisor
    and interim management consultant and, on February 8, 2005,
    entered into a Services Agreement dated as of January 18,
    2005 with KZC, Stephen F. Cooper and Steven G. Panagos. See
    Item 11, Execution Compensation 
    Employment Contracts and Termination of Employment and
    Change-In-Control
    Arrangements  KZC Services Agreement for a
    description of the Services Agreement.
    Stephen F. Cooper, Chairman of KZC, was named the Companys
    Chief Executive Officer, replacing Mr. Livengood.
    Steven G. Panagos, a Managing Director of KZC, was named the
    Companys President and Chief Operating Officer.
    James H. Morgan, who had served as a director of the Company
    since July 2000 and Vice Chairman since March 2004, was
    appointed Chairman of the Board of the Company.
    Robert L. Strickland, who had served as a director of the
    Company since 1998, was appointed Vice Chairman of the Board of
    the Company.  
    On June 15, 2005, the Special Committee informed our senior
    management that the Special Committee had concluded that six of
    our officers should be discharged. These six officers included
    four senior vice presidents and were in the areas of operations,
    finance, business development and manufacturing and
    distribution. Five of these individuals resigned and one retired.
    Effective June 27, 2005, Douglas R. Muir, who had been a
    consultant to the Company since December 2004 and who has over
    30 years of accounting experience, was appointed as the
    Companys Chief Accounting Officer. Michael C. Phalen, the
    Companys Chief Financial Officer, formerly acted as the
    Companys principal accounting officer.
    Effective August 9, 2005, following the directive in the
    Special Committees report that the Board of Directors
    eliminate the position of non-voting emeritus director, Frank E.
    Guthrie, Robert L. McCoy and Steven D. Smith retired as
    non-voting emeritus directors.
    Effective September 30, 2005, John N. (Jack) McAleer
    retired as Executive Vice President, Concept Development and
    resigned as a director of the Company.
    Effective October 26, 2005, Jeffrey L. Jervik joined the
    Company as its Executive Vice President of Operations.
    Mr. Jervik has over 20 years experience in the food
    service industry.
    Effective December 1, 2005, Frank Murphy resigned as
    Executive Vice President, General Counsel, Secretary and Chief
    Governance Officer of the Company.
    Effective December 31, 2005, Dr. Su Hua Newton
    resigned as a director of the Company.
    Effective March 6, 2006, the following changes were made
    with respect to our management:  
    Mr. Cooper resigned as the Companys Chief Executive
    Officer and was appointed as the Companys Chief
    Restructuring Officer.
    Mr. Panagos resigned as the Companys President and
    Chief Operating Officer and was appointed as the Companys
    Director of Restructuring. 6




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
    Daryl G. Brewster joined the Company as its President and Chief
    Executive Officer and a member of the Companys Board of
    Directors. Mr. Brewster had been Group Vice President of
    Kraft Foods and has over 20 years experience in the food
    service industry.  
    Effective June 14, 2006, Mr. Cooper resigned as the
    Companys Chief Restructuring Officer and Mr. Panagos
    resigned as the Companys Director of Restructuring.
    Effective September 11, 2006, Charles A. Blixt (former
    Executive Vice President and General Counsel of Reynolds
    American, Inc.) was appointed General Counsel of the Company on
    an interim basis.
    Effective September 19, 2006, Andrew J. Schindler (former
    Chairman and Chief Executive Officer of R.J. Reynolds Tobacco
    Holdings and Chairman of Reynolds American, Inc.) was appointed
    as a member of the Companys Board of Directors.  Operations
    and Financing
  
    On February 8, 2005, we announced that we were reducing the
    number of employees in our corporate, mix plant, equipment
    manufacturing and distribution facilities by approximately 25%
    and that we had also divested a corporate airplane that was
    subject to an operating lease.
    On April 1, 2005, our wholly-owned subsidiary Krispy Kreme
    Doughnut Corporation (KKDC) entered into new senior
    secured credit facilities aggregating $225 million,
    comprised of a $75 million first lien senior secured
    revolving credit facility, a $120 million second lien
    senior secured term loan and a $30 million second lien
    prefunded revolving loan and letter of credit facility. Proceeds
    of the term loan were used to repay the approximately
    $88 million outstanding under KKDCs previous credit
    facility, pay fees and expenses related to the financing and
    provide cash on the balance sheet. Since entering into the
    credit facilities, the Company has had to obtain a number of
    waivers thereunder and amendments thereof, including waivers of
    covenant defaults.
    During fiscal 2006 and the second half of fiscal 2005,
    approximately 67 company stores were closed, including 36
    owned by consolidated franchisees.
    As a result of the underperformance by many of our area
    developers and disputes between us and some of our area
    developers, we have undertaken an analysis of each area
    developer in order to determine what, if any, restructuring
    initiatives should be taken. See Store
    Ownership  Area Developers  Restructuring
    Initiatives below and Item 3, Legal
    Proceedings  Litigation for a description of
    the significant restructuring actions that have taken place as
    well as recent litigation with franchisees. This
    underperformance, as well as certain of these restructurings,
    have adversely affected our financial condition and results of
    operations and have resulted in substantial charges related
    principally to franchisee receivables, fixed assets and
    investments in franchisees.
    During fiscal 2007, we recommenced our international expansion
    program by awarding development rights in the Middle East, Hong
    Kong, Macau, Tokyo, the Philippines and Indonesia. The
    development and franchise agreements for these territories
    provide for the development of approximately 200 stores over the
    next five years.  Business
    Operations
    Company Stores.
 7




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
    On-premises sales.  On-premises sales
    consist of sales to customers visiting our stores, including the
    drive-through windows, along with discounted sales to community
    organizations that in turn sell doughnuts for fundraising
    purposes. Each of our factory stores offers at least 15 of our
    more than 20 varieties of doughnuts, including our signature Hot
    Original
    Glazedtm.
    We also sell beverages, including drip coffees, espresso-based
    coffees, both coffee-based and noncoffee-based frozen drinks and
    packaged and fountain beverages, as well as collectible
    memorabilia such as tee shirts, sweatshirts and hats. The
    majority of the sales by our international stores are
    on-premises.
    Off-premises sales.  In addition to
    on-premises sales, we have developed multiple channels of sales
    outside our stores, which we refer to as off-premises sales.
    Off-premises sales consist of sales of fresh doughnuts,
    primarily on a branded basis (i.e., bearing the Krispy Kreme
    brand name), to a variety of retail customers, such as
    supermarkets, convenience stores, mass merchants and other food
    service and institutional accounts. Doughnuts are sold to these
    customers on trays for display and sale in glass-enclosed cases
    and in packages for display and sale on both stand-alone display
    units and on our customers shelves. In addition, we have
    recently begun selling branded packaged coffee and other
    products to select supermarkets, convenience stores and mass
    merchants.    Franchise.
  KKM&D.
      
    Mix manufacturing.  We produce all of
    our proprietary doughnut mixes, which our franchisees are
    required to purchase, for use in stores located in the United
    States, Canada and Mexico at our manufacturing facilities in
    Winston-Salem, North Carolina and Effingham, Illinois. For other
    international jurisdictions, we produce a concentrate which is
    shipped internationally where it is then finished pursuant to
    the terms of agreements with contract manufacturers. We control
    production of this critical input in order to ensure that our
    products meet quality expectations. Manufacturing and selling
    our own mixes also allow us to capture the profit that otherwise
    would accrue to an outside supplier. Our mixes are produced
    according to our high-quality standards, which include:  
    Receiving truckloads of our main ingredients regularly; 8




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
    Testing each incoming key ingredient; and
    Testing each batch of mix.  
    Equipment.  We manufacture
    doughnut-making equipment, which our franchisees are required to
    purchase. Our equipment, when combined with our proprietary
    mixes and operated in accordance with our standard procedures,
    produces doughnuts with uniform consistency and quality.
    Manufacturing our equipment results in several advantages,
    including:  
    Flexibility.  We manufacture several models,
    with varying capacities, which are capable of producing multiple
    products and fitting unusual store configurations;
    Cost-effectiveness.  We believe, based on our
    internal studies, that our costs are lower than if we purchased
    our equipment from third parties; and
    Efficiency.  We refine our equipment design to
    improve automation in order to manage labor costs
    and/or
    improve consistency.      
    Beverage program.  We provide many of
    the beverages offered in our stores, most of which (other than
    coffee) are purchased from third parties. One of our focus
    areas, however, has been on improving our beverage program. We
    have implemented in the majority of our stores a complete
    beverage program, including drip coffees, a complete line of
    espresso-based coffees including flavors, both coffee-based and
    noncoffee-based frozen drinks and packaged and fountain
    beverages. See  Products 
    Beverages.
    Distribution centers.  We operate three
    distribution centers (Winston-Salem, North Carolina, Effingham,
    Illinois and greater Los Angeles, California), which are capable
    of supplying our domestic stores and certain of our
    international stores with key supplies, including mixes, icings
    and fillings, other food ingredients, coffee, juices, signage,
    display cases, uniforms and various other items. Most of our
    domestic store operators have agreed contractually through our
    Supply Chain Alliance Program to purchase all of their
    requirements for the critical areas of their business from
    KKM&D. We believe that our ability to distribute supplies to
    our operators produces several advantages, including:  
    Economies of scale.  We are able to purchase
    key supplies at volume discount prices, which we believe are
    typically lower than those that would be available to our
    operators individually. In addition, we are selective in
    choosing our suppliers and require that they meet certain
    standards with regard to quality and reliability. Also,
    inventory is controlled on a systemwide basis rather than at the
    store level; and
    Convenience.  Our distribution centers carry
    the key items necessary for store operation. We believe this
    strategy of having one ordering and delivery system for store
    operations enables the store operators to focus their time and
    energies on running their stores, rather than managing multiple
    supplier and distribution relationships. 9




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Krispy
    Kreme Brand Elements
    
    One-of-a-kind
    taste.  The taste experience of our doughnuts
    is the foundation of our concept and the common thread that
    binds generations of our loyal customers. Our doughnuts are made
    from a secret recipe that has been in our Company since 1937. We
    use premium ingredients, which are blended by our custom
    equipment in accordance with our standard operating procedures,
    to create this unique and very special product.
    Doughnut-making theaters.  Our factory
    stores typically showcase our doughnut-making theaters, which
    are designed to produce a multi-sensory customer experience and
    establish a brand identity. Our goal is to provide our customers
    with an entertainment experience and to reinforce our commitment
    to quality and freshness.
    Hot Doughnuts
    Now®.  The
    Hot Doughnuts
    Now®
    sign, when illuminated, is a signal that our Hot Original
    Glazedtm
    are being made. The Hot Doughnuts
    Now®
    sign is an impulse purchase generator and an integral
    contributor to our brand. Our Hot Original
    Glazedtm
    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.
      Domestic Store Development.
 10




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International Store
    Development.
  Store
    Operations
  General store operations.
  on-site
    Quality standards and customer
    service.
  Management and staffing. e-mail
   11




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Store
    Ownership
    Company stores.
  Franchisee stores. multi-unit
  Associates.
  15-year
  Area developers.
 12




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multi-unit
    15-year
      Restructuring Initiatives.
  
    KremeKo, Inc. (Eastern and Central Canada):  On
    April 15, 2005, an application was filed under the
    Companies Creditors Arrangement Act with the Ontario
    Superior Court of Justice for a restructuring of a consolidated
    franchisee, KremeKo, Inc. (KremeKo), in which KKDC
    had a 40.6% interest. In connection with this application, KKDC,
    the franchisor, agreed to provide
    debtor-in-possession
    financing to provide funds for KremeKos operations during
    the restructuring process. KKDC subsequently reached an
    agreement with KremeKos two secured creditors to settle
    KKDCs obligations with respect to its guarantees of
    certain indebtedness to such lenders and related equipment
    repurchase agreements. Pursuant to the agreement, KKDC paid
    approximately $9.3 million to the lenders in settlement of
    all of KKDCs obligations to them, and the lenders assigned
    to KKDC notes payable by KremeKo to the 13




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lenders. On December 19, 2005, a newly formed subsidiary of
    KKDC acquired from KremeKo all of its operating assets in
    exchange for the KremeKo notes pursuant to a sale authorized by
    the Ontario Court, and thereafter the business has operated as a
    wholly-owned subsidiary of KKDC.  
    Krispy Kreme South Florida, LLC (Broward County,
    Florida):  In June 2005, the Company agreed to
    suspend its right to receive a fixed annual cash distribution of
    approximately $1 million per year from Krispy Kreme South
    Florida, LLC, a franchisee in which the Company has a 35.3%
    ownership interest. There is no assurance as to when or if this
    distribution will be resumed.
    Freedom Rings, LLC (Eastern Pennsylvania, Delaware and
    Southern New Jersey):  On October 17, 2005,
    we announced that Freedom Rings, LLC, at that time our area
    developer in the Philadelphia region, had filed a voluntary
    petition for Chapter 11 bankruptcy with the Delaware
    Bankruptcy Court. Prior to the filing, KKDC, which previously
    owned 70% of Freedom Rings, acquired the 30% minority interest
    for nominal consideration. In connection with this petition,
    KKDC agreed to provide funding to Freedom Rings during the
    restructuring process. On December 27, 2005, we announced
    that Freedom Rings had closed its four remaining stores. The
    Bankruptcy Court confirmed Freedom Rings plan of
    liquidation on April 20, 2006. The operations of Freedom
    Rings have been substantially wound up.
    Krispy Kreme Australia Pty Limited (Australia and New
    Zealand):  On November 30, 2005, Krispy Kreme
    International, Ltd., a wholly-owned subsidiary of KKDC, sold its
    35% equity interest in Krispy Kreme Australia Pty Limited
    (Krispy Kreme Australia) to KKA Holdings Pty Ltd
    (KKA Holdings), the majority owner, for
    approximately $2.5 million. We also sold our existing
    shareholder loans in Krispy Kreme Australia to KKA Holdings on
    May 29, 2006 for approximately $3.7 million. Our
    approximately $4.4 million guarantee of Krispy Kreme
    Australias debt was released in connection with the
    transactions.
    Amazing Glazed LLC (Western Pennsylvania):  On
    December 20, 2005, Amazing Glazed, our area developer for
    western Pennsylvania, entered into an agreement with KKDC and
    the other Amazing Glazed shareholders pursuant to which Amazing
    Glazed redeemed KKDCs 30.3% equity interest in Amazing
    Glazed and the other minority shareholders 3% equity
    interest. As a result of this redemption, Amazing Glazeds
    majority owner, Rocking Ks, became the owner of 100% of
    the equity interest of Amazing Glazed. In connection with this
    transaction, KKDC loaned Amazing Glazed $300,000 pursuant to a
    subordinated promissory note (which was issued in satisfaction
    of an outstanding capital call), consented to the closure of
    certain Amazing Glazed stores and waived its default rights
    under the development agreement with Amazing Glazed. In
    exchange, Amazing Glazed and certain partners of Rocking
    Ks released Krispy Kreme from all claims existing on or
    before the date of the redemption agreement and those partners
    agreed to indemnify Krispy Kreme from all claims asserted by the
    partners of Rocking Ks that did not execute the release.
    In addition, KKDC was released from its guarantee of
    approximately $2.5 million of debt of Amazing Glazed.
    New England Dough, LLC (New England):  On
    December 23, 2005, KKDC entered into an agreement with Jan
    Dough, LLC, KKDCs franchisee partner in New England Dough,
    LLC, a consolidated franchisee and at that time our area
    developer in the New England region, regarding the distribution
    of New England Doughs assets. Prior to this transaction,
    KKDC owned a 60% interest in New England Dough. Pursuant to the
    agreement, New England Dough distributed approximately
    $1.5 million to KKDC, as well as the development rights for
    the New England territory, which includes Massachusetts,
    Connecticut and Rhode Island. New England Dough transferred its
    stores located in Milford, Connecticut; Cranston, Rhode Island;
    and Dedham, Massachusetts to Northeast Doughnuts, LLC, a
    wholly-owned subsidiary of KKDC. Jan Dough received from New
    England Dough all of its interest in the operations located at
    Mohegan Sun in Uncasville, Connecticut. New England Doughs
    three remaining stores were closed, and the affairs of New
    England Dough are being wound down. In addition, as part of the
    New England Dough transaction, all of New England Doughs
    approximately $9.5 million of bank debt was repaid. KKDC
    and Jan Dough had guaranteed that debt approximately in
    proportion to their equity interests. Of the $9.5 million,
    approximately $5.6 million was repaid by KKDC, 14




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##### Table of Contents



approximately $3.8 million was repaid by Jan Dough and the
    balance was repaid by New England Dough itself.  
    Great Circle Family Foods, LLC (Southern
    California):  On January 5, 2006, as a result
    of continuing defaults by Great Circle Family Foods, LLC
    (Great Circle) under its franchise agreements, KKDC
    terminated Great Circles franchise rights. On
    January 6, 2006, following Great Circles agreement to
    remit certain past due royalties and Brand Fund fees, KKDC
    reinstated the franchise rights and resumed product shipments.
    On July 28, 2006, Krispy Kreme Doughnuts, Inc.
    (KKDI) and KKDC announced that they reached
    agreements with Great Circle on an integrated transaction
    involving the settlement of all pending litigation between the
    parties (described below under Item 3, Legal
    Proceedings  Litigation) and the court
    dismissed the case on August 31, 2006. As part of the
    transaction, which closed on August 31, 2006, Southern
    Doughnuts, LLC (Southern Doughnuts), a wholly owned
    subsidiary of KKDC, acquired three of Great Circles stores
    located in Burbank, Ontario and Orange, California, together
    with the related franchise rights. Southern Doughnuts paid Great
    Circle $2.9 million for the acquired stores and related
    assets. Pursuant to the agreements, Great Circle has the right
    to repurchase the three stores and related assets from the
    Company for $2.9 million plus interest at 8% per annum to
    the date of repurchase. Such repurchase right terminates under
    certain conditions, but in no event later than May 29,
    2007. Under the agreements, Krispy Kreme, Great Circle and
    related parties exchanged mutual releases and dismissals
    regarding the pending litigation. In addition, as described
    below under Item 3, Legal Proceedings 
    Litigation, a settlement agreement with respect to a
    related arbitration was reached by Krispy Kreme, Great Circle
    and related parties and on August 31, 2006 the parties
    jointly requested that the arbitrator dismiss the arbitration
    with prejudice.
    Glazed Investments, LLC (Colorado, Minnesota and
    Wisconsin):  On February 2, 2006, Glazed
    Investments, a consolidated franchisee, entered into an
    agreement with Westward Dough, the Krispy Kreme area
    developer for Nevada, Utah, Idaho, Wyoming and Montana, for
    Westward Dough to purchase substantially all of the assets of
    Glazed Investments. Glazed Investments at that time was our area
    developer for Colorado, Minnesota and Wisconsin and operated 15
    Krispy Kreme Stores, three of which it closed subsequent to
    February 3, 2006. The agreement called for Westward Dough
    to purchase 12 Krispy Kreme stores, as well as the franchise
    development rights for Colorado, Minnesota and Wisconsin, for
    approximately $10 million. As a condition of the purchase
    agreement, and at the request of Westward Dough, Glazed
    Investments agreed to conduct the sale under Chapter 11
    Section 363 of the U.S. Bankruptcy Code. The
    Chapter 11 filing, which was made on February 3, 2006,
    facilitated the sale by permitting the assets to be sold free
    and clear of all liens, claims and encumbrances. On
    March 30, 2006 Westward Dough consummated its
    acquisition of Glazed Investments assets. Pursuant to the
    plan of liquidation filed by Glazed Investments in connection
    with the sale under Chapter 11, Glazed Investments will be
    dissolved after distributing the sale proceeds to its creditors,
    and Krispy Kreme will not receive any consideration on
    account of its ownership interest in Glazed Investments. While
    the proceeds of the sale and the proceeds from liquidation of
    Glazed Investments other assets were sufficient to retire
    a substantial majority of Glazed Investments outstanding
    debt, the Company paid approximately $1 million of Glazed
    Investments debt pursuant to the Companys guarantee
    of certain of such indebtedness.
    Lone Star Doughnuts,
    Ltd.  (Houston):  On February 9,
    2006, we reached an agreement with Lone Star Doughnuts, Ltd.
    (Lone Star), our Houston area franchisee, to
    terminate our franchisor-franchisee relationship and to settle
    all outstanding disputes and claims, including the dismissal of
    a lawsuit filed by Lone Star against KKDC. Neither Krispy Kreme
    nor Lone Star paid consideration to the other in connection with
    such termination. We did not collect all of our receivables from
    Lone Star at the date of termination, but previously had
    established reserves for doubtful accounts related to these
    receivables. See Item 3, Legal Proceedings.
    KK Wyotana, LLC (Wyoming and Montana):  In
    March 2006, in connection with Glazed Investments sale of
    certain of its stores as described above, we assigned our
    membership interest in KK Wyotana, LLC to the purchaser of
    Glazed Investments stores. 15




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##### Table of Contents




    KKNY, LLC (Metropolitan New York and Northern New
    Jersey):  On April 27, 2006, KKNY, LLC, our
    Metropolitan New York and Northern New Jersey area developer,
    assigned to KKDC, for a cash payment of $500,000, the leases and
    KKNYs personal property previously used by KKNY in the
    operations of its locations in Penn Station and on Third Avenue
    in New York City. The balance of KKNYs stores were closed
    as KKNY ceased operations in May 2006.
    Krispy Kreme U.K. Limited (United Kingdom):  In
    May 2006, we entered into an agreement to sell our 35% equity
    investment in and notes receivable from Krispy Kreme U.K.
    Limited (KK UK) to KK UKs majority shareholder
    for $5.6 million. On October 20, 2006, we received
    $2.0 million from the purchasers, representing the purchase
    price of the notes. As part of the transaction, all guarantees
    by Krispy Kreme of obligations of KK UK were terminated. We
    expect to receive the $3.6 million balance of the sales
    price in November 2006.
    Amazing Hot Glazers, LLC (Western
    Pennsylvania):  In June 2006, we returned our
    interest in Amazing Hot Glazers, LLC to the franchisee and were
    released from all our obligations under guarantees related to
    the franchisee.
    Caribbean Glaze Corporation (Puerto Rico):  In
    September 2006, the Company sold its investment in Caribbean
    Glaze Corporation to its majority owner in exchange for $150,000.  Products
  Doughnuts and Related Products. tm .
  Beverages.
  Marketing
    Store Experience. tm . ® tm
  Relationship Marketing.
  
    Good neighbor product deliveries to create trial uses;
    Sponsorship of local events and nonprofit organizations;
    Friends of Krispy Kreme eNewsletters sent to those customers
    that have registered to receive monthly updates about new
    products, promotions and store openings; and
    Fundraising programs that assist local charitable organizations
    raise money for their non-profit causes. 16




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##### Table of Contents



Public Relations.
  Advertising and Sales Promotions.
  Brand Fund.
  Management
    Information Systems
  e-mail
          Competition
   17




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##### Table of Contents



Trademarks
    and Trade Names
      Government
    Regulation
  Local regulation.
  Food product regulation.
      Franchise regulation.
 18




---



##### Table of Contents



up-to-date
        Employment regulations.
  Other regulations.
  Employees
        Available
    Information
  Form 10-K, Form 10-Q 1-800-SEC-0330. http://www.sec.gov.
 19




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##### Table of Contents



http://www.krispykreme.com Form 10-K, Form 10-Q, Form 8-K
  http://www.krispykreme.com/gov_charter.pdf http://www.krispykreme.com/comp_charter.pdf http://www.krispykreme.com/audit_charter.pdf http://www.krispykreme.com/corpgovernance.pdf http://www.krispykreme.com/code_of_ethics.pdf http://www.krispykreme.com/board_directors_ethics.pdf http://www.krispykreme.com/officers_ethics.pdf.
   20




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##### Table of Contents



Item 1A.
    RISK
    FACTORS.  Form 10-K.
  RISKS
    RELATING TO MATTERS UNDER INVESTIGATION
  We are
    subject to ongoing governmental investigations which could
    require us to pay substantial fines or other penalties or
    otherwise have a material adverse effect on us.    Pending
    civil litigation could have a material adverse effect on the
    Company.    Our
    potential indemnification obligations and limitations of our
    director and officer liability insurance could have a material
    adverse effect on our business, results of operations and
    financial condition.   21




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##### Table of Contents



We have
    identified numerous material weaknesses in our internal control
    over financial reporting, which could continue to impact our
    ability to report our results of operations and financial
    condition accurately and in a timely manner.  We have
    numerous material weaknesses in our internal control over
    financial reporting.
    We have
    extensive work remaining to remedy the material weaknesses in
    our internal control over financial reporting.
    The
    implementation of certain remedial measures set forth in the
    Special Committees report may take time and be costly to
    implement.    Continuing
    negative publicity may adversely affect our business.   22




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##### Table of Contents



We are
    not in compliance with our periodic reporting obligations under
    the Exchange Act, and until we are, our securities are not able
    to be registered with the SEC.    RISKS
    RELATING TO OUR BUSINESS
  Our
    management team has undergone significant change.    Sales at
    company and franchised stores have been declining and may
    continue to decline.      
    Consumer trends;
    Our ability to execute our business strategy effectively;
    Competition;
    General regional and national economic conditions;
    Adverse weather conditions; and
    Strong initial sales performance by new stores.   23




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##### Table of Contents



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.      Our
    growth strategy depends on opening new Krispy Kreme stores
    internationally. Our ability to expand our store base is
    influenced by factors beyond our and our franchisees
    control, which may slow store development and impair our
    strategy.    Currency,
    economic, political and other risks associated with our
    international operations could adversely affect our operating
    results.     24




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##### Table of Contents



We are
    the exclusive supplier of doughnut mixes, other key ingredients
    and flavors to all domestic Krispy Kreme company stores. If we
    have any problems supplying these ingredients, our stores
    ability to make doughnuts will be negatively affected. In
    addition, changes in vendor credit terms or the failure to
    manage risks associated with ingredient purchases could
    adversely affect our profitability and liquidity.      We are
    the only manufacturer of our doughnut-making equipment. If we
    have any problems producing this equipment, our stores
    ability to make doughnuts will be negatively affected.    We have
    only one supplier of glaze flavoring, and any interruption in
    supply could impair our ability to make our signature Hot
    Original
    Glazedtm.  tm .
  We are
    subject to franchise laws and regulations that govern our status
    as a franchisor and regulate some aspects of our franchise
    relationships. Our ability to develop new franchised stores and
    to enforce contractual rights against franchisees may be
    adversely affected by these laws and regulations, which could
    cause our franchise revenues to decline.  up-to-date
 25




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##### Table of Contents



Off-premises
    sales represent a significant portion of our sales. The
    infrastructure necessary to support off-premises sales results
    in significant fixed and semi-fixed costs. Also, the loss of one
    of our large wholesale customers could adversely affect our
    financial condition and results of operations.      Our
    failure or inability to enforce our trademarks could adversely
    affect the value of our brands.  and/or
  and/or and/or
  We have
    substantial indebtedness under our senior secured credit
    facilities that could adversely impact cash availability for
    growth and operations and may increase our vulnerability to
    general adverse economic and industry conditions.      
    our ability to obtain additional financing for working capital,
    capital expenditures, acquisitions or general corporate purposes
    may be impaired;
    our use of a substantial portion of our cash flow from
    operations to make debt service payments under our senior
    secured credit facilities, which will reduce the funds available
    to us for other purposes such as potential acquisitions and
    capital expenditures; 26




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##### Table of Contents




    our level of indebtedness may put us at a competitive
    disadvantage and reduce our flexibility in planning for, or
    responding to, changing conditions in our business; and
    our increased vulnerability to general economic downturns and
    adverse developments in our industry.    Our
    senior secured credit facilities impose restrictions and
    obligations upon us that significantly limit our ability to
    operate our business, and in the past we have sought and
    received waivers relating to these restrictions and
    obligations.
      We
    currently have substantial ongoing liquidity needs arising from
    expenditures to professional advisors, and we will require a
    significant amount of cash to meet these liquidity needs. If
    these expenditures continue and we cannot generate the required
    cash, we may not be able to continue to obtain necessary
    services from our professional advisors and our ability to fund
    our operations may be significantly impaired.    RISKS
    RELATING TO THE FOOD SERVICE INDUSTRY
  The food
    service industry is affected by consumer preferences and
    perceptions. Changes in these preferences and perceptions may
    lessen the demand for our doughnuts, which would reduce sales
    and harm our business.   27




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##### Table of Contents



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.    Our
    success depends on our ability to compete with many food service
    businesses.  start-up
  RISKS
    RELATING TO OWNERSHIP OF OUR COMMON STOCK
  The
    market price of our common stock has been volatile and may
    continue to be volatile, and the value of any investment may
    decline.    
    The results of the ongoing governmental investigations and civil
    litigation described under Item 3, Legal
    Proceedings;
    Changes in general conditions in the economy or the financial
    markets; 28




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##### Table of Contents




    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.    Item 1B.
    UNRESOLVED
    STAFF COMMENTS.    Item 2.
    PROPERTIES.  Stores.
  
    As of January 29, 2006, the majority of our factory stores
    had on-premises sales, and approximately 212 stores also engaged
    in off-premises sales.
    Of the 113 factory stores we operated ourselves as of
    January 29, 2006, we owned the land and building for 51
    stores. We owned the building and leased the land for 52 stores
    and leased both the land and building for 10 stores.
    Of the 15 factory stores operated by consolidated franchisees as
    of January 29, 2006, we leased both the land and building
    for seven stores and leased the land and owned the building for
    eight stores.   29




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##### Table of Contents



At January 29,


At January 30,


At February 1,2006


2005


2004By Owner:Company StoresCompany


118



131



129Consolidated Franchisees


15



54



24Total Company Stores


133



185



153Franchise StoresAssociates


57



59



62Area Developers


212



189



171Total Franchise Stores


269



248



233Total Systemwide


402



433



386By Type:Factory StoresCompany


113



124



117Consolidated Franchisees


15



51



24Associates


47



54



57Area Developers


148



167



159Total Factory Stores


323



396



357SatellitesCompany


5



7



12Consolidated Franchisees


0



3



0Associates


10



5



5Area Developers


64



22



12Total Satellites


79



37



29Total Systemwide


402



433



386By Location:Domestic StoresCompany


112



131



129Consolidated Franchisees


15



41



24Associates


57



59



62Area Developers


150



165



150Total Domestic Stores


334



396



365International StoresCompany


6



0



0Consolidated Franchisees


0



13



0Associates


0



0



0Area Developers


62



24



21Total International Stores


68



37



21Total Systemwide


402



433



386  30




---



##### Table of Contents



KKM&D facilities.
  Other properties.
 31




---



##### Table of Contents



Item 3.
    LEGAL
    PROCEEDINGS.      Governmental
    Investigations
  SEC Investigation.
  United States Attorney Investigation.
  Department of Labor Review.
  State Franchise/FTC Inquiry.
  Litigation
  Federal Securities Class Actions and Settlement Thereof
    and Federal Court Shareholder Derivative Actions and Partial
    Settlement Thereof. Rule 10b-5
 32




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##### Table of Contents



Wright v. Krispy Kreme Doughnuts, Inc.,
    et al. Blackwell v. Krispy Kreme Doughnuts, Inc.,
    et al. Andrews v.
    Krispy Kreme Doughnuts, Inc., et al.
    Wright
  Wright Blackwell Andrews Wright Blackwell Andrews Wright Blackwell Andrews Wright v. Krispy Kreme Doughnuts, Inc.,
    et al.
    Wright
     33




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##### Table of Contents



10-day Form 10-K.
    State Court Shareholder Derivative
    Actions. Andrews v. Krispy Kreme Doughnuts, Inc.,
    et al. Lockwood v. Krispy Kreme Doughnuts, Inc.,
    et al. Andrews
  State Court Books and Records Action. ,
    Nomm v. Krispy Kreme, Inc.
  ERISA Class Action.
 34




---



##### Table of Contents



Franchisee
    Litigation.
       35




---



##### Table of Contents



Item 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS.   36




---



##### Table of Contents



PART II  Item 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
    MATTERS.  Market
    Information
    High


LowYear Ended January 30,
    2005:First Quarter

$
39.99


$
32.38Second Quarter


32.70



15.08Third Quarter


15.95



10.36Fourth Quarter


12.95



8.51Year Ended January 29,
    2006:First Quarter

$
9.40


$
5.05Second Quarter


8.79



5.77Third Quarter


7.89



3.91Fourth Quarter


6.20



3.35   Holders
    Dividends
    Securities
    Authorized for Issuance Under Equity Compensation
    Plans
  Regulation S-K
  Recent
    Sales of Unregistered Securities
  Change-In-Control
  Purchases
    of Equity Securities
   37




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##### Table of Contents



Item 6.
    SELECTED
    FINANCIAL DATA.    Year EndedJan. 29,


Jan. 30,


Feb. 1,


Feb. 2,


Feb. 3,2006


2005


2004


2003


2002(In thousands, except per share and number of stores data)STATEMENT OF OPERATIONS DATA:Revenues

$
543,361


$
707,766


$
649,345


$
490,728


$
394,241Operating expenses:Direct operating expenses


474,591



598,281



493,650



380,644



317,571General and administrative expenses


67,727



55,301



45,230



30,073



28,330Depreciation and amortization
    expense


28,920



31,934



22,309



14,675



9,646Impairment charges and lease
    termination costs


55,062



161,847











Settlement of litigation


35,833







(525
)


9,075



Operating income (loss)


(118,772
)


(139,597
)


88,681



56,261



38,694Net interest income (expense)


(19,101
)


(6,100
)


(3,603
)


75



2,480Equity in income (losses) of
    equity method franchisees


(4,337
)


(1,622
)


(2,242
)


(2,088
)


(617
)Minority interests in results of
    consolidated franchisees


4,181



6,249



(1,898
)


(2,187
)


(1,004
)Other income (expense), net


1,493



(6,310
)


2,053



(1,284
)


(585
)Income (loss) from continuing
    operations before income taxes


(136,536
)


(147,380
)


82,991



50,777



38,968Provision for income taxes
    (benefit)


(776
)


9,674



33,146



19,719



14,755Income (loss) from continuing
    operations

$
(135,760
)

$
(157,054
)

$
49,845


$
31,058


$
24,213Income (loss) from continuing
    operations per common share:Basic

$
(2.20
)

$
(2.55
)

$
.84


$
.56


$
.45Diluted

$
(2.20
)


(2.55
)


.80



.52



.41BALANCE SHEET DATA (AT END OF
    YEAR):Working capital (deficit)

$
(6,894
) (1)

$
1,728


$
78,821


$
78,318


$
46,847Total assets


410,855



480,278



656,603



413,619



258,341Long-term debt, less current
    maturities


118,241



90,950



137,114



55,564



4,643Total shareholders equity


108,671



240,943



436,409



265,439



182,210Number of factory stores at end of
    year (unaudited):Company


128



175



141



99



75Franchise


195



221



216



177



143Systemwide


323



396



357



276



218     (1)
    
    Reflects a liability, net of anticipated insurance recoveries,
    of approximately $35.8 million related to the settlement of
    certain litigation. This liability is expected to be satisfied
    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. 38




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##### Table of Contents



Item 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS.    Form 10-K.
  Company
    Overview and Industry Outlook
  tm .
  
    On-premises sales.  Sales to customers visiting
    Company and franchise stores, including the drive-through
    windows, along with discounted sales to community organizations
    that in turn sell doughnuts for fundraising purposes.
    Off-premises sales.  Daily sales of fresh
    doughnuts primarily on a branded basis to a variety of retail
    customers, such as supermarkets, convenience stores, mass
    merchants and other food service and institutional accounts.
    Doughnuts are sold to these customers on trays for display and
    sale in glass-enclosed cases and in packages for display and
    sale on both stand-alone display units and on customers
    shelves. In addition, the Company also sells branded packaged
    coffee and other products to select supermarkets, convenience
    stores and mass merchants.     39




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##### Table of Contents



40




---



##### Table of Contents




    Company Stores.  Represents the results of
    stores owned by the Company and by consolidated franchisees.
    These stores make and sell doughnuts and complementary products
    through the sales channels described above under
     Company Overview and Industry Outlook.
    Expenses for this business segment include store level expenses
    along with direct general and administrative expenses. For
    additional information about the consolidated franchisees, see
    Note 18 to the consolidated financial statements appearing
    elsewhere herein.
    Franchise.  Represents the results of the
    Companys franchise programs. The Company has two 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 pay royalties of 3.0% of on-premises sales and 1.0%
    of all other sales. Area Developers pay royalties of 4.5% to
    6.0% of all sales and one-time development and franchise fees
    ranging from $20,000 to $50,000 per store. Domestic Area
    Developers are required to contribute 1.0% of their sales to the
    Brand Fund. International Area Developers generally are required
    to contribute 0.25% of their sales to the Brand Fund. Some
    Associates contribute 1.0% of their sales to the Brand Fund.
    Expenses for this business segment include costs incurred to
    recruit new franchisees, costs to open, monitor and aid in the
    performance of these stores, and direct general and
    administrative expenses.
    KKM&D.  Represents the results of the
    KKM&D business unit, which buys and processes ingredients
    used to produce doughnut mixes and manufactures doughnut-making
    equipment that all factory stores are required to purchase. This
    business unit also includes the Companys coffee roasting
    operation, which supplies drip coffee products to Company and
    franchise stores. The KKM&D business unit also purchases and
    sells key supplies, including icings and fillings, other food
    ingredients, juices, signage, display cases, uniforms and other
    items. All intersegment transactions between KKM&D and
    Company Stores have been eliminated in consolidation. Expenses
    for this business unit include all expenses incurred at the
    manufacturing and distribution level along with direct general
    and administrative expenses.  Results
    of Operations
    Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004Revenues


100.0
%


100.0
%


100.0
%Operating expenses:Direct operating expenses


87.3



84.5



76.0General and administrative expenses


12.5



7.8



7.0Depreciation and amortization
    expenses


5.3



4.5



3.4Impairment charges and lease
    termination costs


10.1



22.9



Settlement of litigation


6.6







(0.1
)Operating income (loss)


(21.9
)


(19.7
)


13.7  41




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##### Table of Contents



NUMBER OF FACTORY STORES(1)COMPANY


FRANCHISE


TOTALFEBRUARY 2, 2003


99



177



276Opened


28



58



86Closed


(2
)


(3
)


(5
)Transferred


16



(16
)


FEBRUARY 1, 2004


141



216



357Opened


24



36



60Closed


(14
)


(7
)


(21
)Transferred


24



(24
)


JANUARY 30, 2005


175



221



396Opened


3



13



16Closed


(47
)


(42
)


(89
)Transferred


(3
)


3



JANUARY 29, 2006


128



195



323     (1)
    
    Excludes satellites.   42




---



##### Table of Contents



Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004(Dollars in thousands)Average weekly sales per factory
    store(1):Company

$
48.5


$
58.2


$
72.5Systemwide

$
46.3


$
54.7


$
63.6Factory store operating weeks:Company


8,112



8,602



6,005Systemwide


19,136



19,415



15,400Average weekly sales per store(1):Company

$
47.7


$
55.1


$
68.7Systemwide

$
41.4


$
50.5


$
59.9Store operating weeks:Company


8,260



9,099



6,337Systemwide


21,383



21,033



16,328     (1)
    
    Excludes intersystem sales between company and franchise stores.  FISCAL
    2006 COMPARED TO FISCAL 2005
  Overview
     43




---



##### Table of Contents



Revenues
    Year EndedJan. 29,


Jan. 30,2006


2005(Dollars in thousands)REVENUES BY BUSINESS SEGMENT:Company Stores

$
398,450


$
508,100Franchise


18,394



24,720KKM&D


126,517



174,946Total revenues

$
543,361


$
707,766PERCENTAGE OF TOTAL REVENUES:Company Stores


73.3
%


71.8
%Franchise


3.4



3.5KKM&D


23.3



24.7Total revenues


100.0
%


100.0
%   Company Stores Revenues.
  Franchise Revenues.
  KKM&D Revenues.
  Direct
    Operating Expenses
    44




---



##### Table of Contents



Year EndedJan. 29,


Jan. 30,2006


2005(Dollars in thousands)DIRECT OPERATING EXPENSES BY
    BUSINESS SEGMENT:Company Stores

$
361,265


$
448,785Franchise


5,017



8,006KKM&D


108,309



141,490Total direct operating expenses

$
474,591


$
598,281DIRECT OPERATING EXPENSES AS A
    PERCENTAGE OF SEGMENT REVENUES:Company Stores


90.7
%


88.3
%Franchise


27.3
%


32.4
%KKM&D


85.6
%


80.9
%Total direct operating expenses


87.3
%


84.5
%   Company Stores Direct Operating
    Expenses.
  Franchise Direct Operating Expenses.
  KKM&D Direct Operating Expenses.
  General
    and Administrative Expenses
  out-of-period stock-based
 45




---



##### Table of Contents



Depreciation
    and Amortization Expense
    Impairment
    Charges and Lease Termination Costs
    Settlement
    of Litigation
    Interest
    Income
    Interest
    Expense
   46




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##### Table of Contents



Equity in
    Losses of Equity Method Franchisees
    Minority
    Interests in Results of Consolidated Franchisees
    Provision
    for Income Taxes
      Income
    (Loss) From Continuing Operations
    FISCAL
    2005 COMPARED TO FISCAL 2004
  Overview
   47




---



##### Table of Contents



Revenues
    Year EndedJan. 30,


Feb. 1,2005


2004(Dollars in thousands)REVENUES BY BUSINESS SEGMENT:Company Stores

$
508,100


$
441,707Franchise


24,720



23,506KKM&D


174,946



184,132Total revenues

$
707,766


$
649,345PERCENTAGE OF TOTAL REVENUES:Company Stores


71.8
%


68.0
%Franchise


3.5



3.6KKM&D


24.7



28.4Total revenues


100.0
%


100.0
%   Company Stores Revenues.
  Franchise Revenues.
 48




---



##### Table of Contents



KKM&D Revenues.
  Direct
    Operating Expenses
    Year EndedJan. 30,


Feb. 1,2005


2004(Dollars in thousands)DIRECT OPERATING EXPENSES BY
    BUSINESS SEGMENT:Company Stores

$
448,785


$
355,777Franchise


8,006



4,631KKM&D


141,490



133,242Total direct operating expenses

$
598,281


$
493,650DIRECT OPERATING EXPENSES AS A
    PERCENTAGE OF SEGMENT REVENUES:Company Stores


88.3
%


80.5
%Franchise


32.4
%


19.7
%KKM&D


80.9
%


72.4
%Total direct operating expenses


84.5
%


76.0
%   Company Stores Direct Operating
    Expenses.
  Franchise Direct Operating Expenses.
  KKM&D Direct Operating Expenses.
 49




---



##### Table of Contents



General
    and Administrative Expenses
    Depreciation
    and Amortization Expense
    Impairment
    Charges and Lease Termination Costs
    Settlement
    of Litigation
    Interest
    Income
    Interest
    Expense
    Equity in
    Losses of Equity Method Franchisees
   50




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##### Table of Contents



Minority
    Interests in Results of Consolidated Franchisees
    Provision
    for Income Taxes
    Income
    (Loss) From Continuing Operations
    Liquidity
    and Capital Resources
    Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004(In thousands)Net cash provided by operating
    activities

$
1,865


$
84,921


$
82,665Net cash (used for) investing
    activities


(11,688
)


(47,607
)


(169,949
)Net cash provided by (used for)
    financing activities


138



(34,214
)


76,110Effect of exchange rate changes on
    cash


(10
)


340



Cash balances of subsidiaries at
    date of consolidation






3,217



Cash balances of subsidiaries at
    date of deconsolidation


(1,011
)






Net increase (decrease) in cash
    and cash equivalents

$
(10,706
)

$
6,657


$
(11,174
)   Cash
    Flows from Operating Activities
     51




---



##### Table of Contents



Cash
    Flows from Investing Activities
          Cash
    Flows from Financing Activities
         52




---



##### Table of Contents



Business
    Conditions, Uncertainties and Liquidity
    Form 8-K
       53




---



##### Table of Contents



Form 10-K, Form 10-Q Form 10-Q
  Capital
    Resources, Contractual Obligations and Off-Balance Sheet
    Arrangements
   54




---



##### Table of Contents



Debt
                 55




---



##### Table of Contents



56




---



##### Table of Contents



Leases
    Off-Balance
    Sheet Arrangements
  Regulation S-K,
  Contractual
    Cash Obligations at January 29, 2006
    Payments Due InLess








MoreThan








ThanTotal


1


1-3


3-5


5Amount


Year


Years


Years


Years(In thousands)Long-term debt (excluding capital
    lease obligations), including current maturities

$
119,400


$
1,200


$
2,400


$
115,800


$
Total interest payment
    obligations(1)(2)


65,856



16,342



27,992



21,522



Capital lease obligations


3,273



3,232



41







Operating leases


231,937



12,428



22,039



20,779



176,691Purchase obligations


14,996



11,925



3,071







Other long-term obligations
    reflected on Krispy Kremes balance sheet including current
    portion:Self-insurance claims


14,942



6,070



3,931



1,463



3,478Lease termination costs


1,981



281



356



312



1,032Mirror 401(k) plan liability


214















214Total

$
452,599


$
51,478


$
59,830


$
159,876


$
181,415     (1)
    
    Represents estimated interest payments to be made on long-term
    debt. All interest payments assume that principal payments are
    made as originally scheduled. Interest rates utilized to
    determine interest payments for variable rate debt are based
    upon the Companys estimate of future interest rates. 57




---



##### Table of Contents



(2)
    
    Represents estimated amounts payable without reduction for any
    amount due to the Company pursuant to an interest rate hedge
    agreement. See Note 10 to the consolidated financial
    statements appearing elsewhere herein.  Capital
    Requirements
    
    Working capital and other corporate purposes
    Investments in systems and personnel
    Restructuring initiatives
    Remodeling and relocation of selected older Company stores
    Opening new Company stores in selected markets    Inflation
    Critical
    Accounting Policies
    Basis of
    Consolidation
   58




---



##### Table of Contents



Allowance
    for Doubtful Accounts
    Goodwill
    and Identifiable Intangible Assets
        Asset
    Impairment
     59




---



##### Table of Contents



Insurance
    Income
    Taxes
    Guarantee
    Liabilities
    Investments
    in Franchisees
   60




---



##### Table of Contents



Recent
    Accounting Pronouncements
          No. 03-13, (EITF 03-13). EITF 03-13
 61




---



##### Table of Contents



62




---



##### Table of Contents



Item 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.            AggregateWeighted


Contract


AggregateAverage Contract


Amount


FairContract Volume


or Strike Price


or Strike Price


Value(Dollars in thousands, except average prices)Futures contracts:Coffee


525,000 lbs.


$
1.06/lb.


$
558


$
79Soybean oil


10,620,000 lbs.


$
0.2147/lb.



2,280



114Options contracts:Call options on coffee futures


750,000 lbs.


$
1.10/lb.



825



81$
274    63




---



##### Table of Contents



Item 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA.  Index to Financial StatementsReport of
    Independent Registered Public Accounting Firm

65Consolidated
    balance sheets as of January 29, 2006 and January 30,
    2005

68Consolidated
    statement of operations for each of the three years in the
    period ended January 29, 2006

69Consolidated
    statement of cash flows for each of the three years in the
    period ended January 29, 2006

70Consolidated
    statement of changes in shareholders equity for each of
    the three years in the period ended January 29,
    2006

71Notes to financial
    statements

72Financial statement schedule:For each of the three years in the
    period ended January 29, 2006:Schedule
    I  Condensed Financial Information of
    Registrant

150  64




---



##### Table of Contents

REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM













Consolidated
    financial statements and financial statement
    schedule












Internal
    control over financial reporting




Internal
    Control  Integrated Framework






65



---



##### Table of Contents




    The Company did not establish a formal enterprise risk
    assessment process.
    The Company did not formalize lines of communication among
    legal, finance and operations personnel. Specifically, there was
    inadequate sharing of financial information within and across
    the Companys corporate and divisional offices and other
    operating facilities to adequately raise issues to the
    appropriate level of accounting and financial reporting
    personnel.
    The Company did not establish an effective program to ensure
    that the Companys code of conduct and ethics guidelines
    are fully communicated and distributed appropriately to its
    employees.
    The Company did not maintain written accounting and procedures
    nor did it maintain adequate controls with respect to the
    review, supervision and monitoring of the Companys
    accounting operations.
    The Company did not have an adequate process for monitoring the
    appropriateness of user access and segregation of duties related
    to financial applications.      
    The Company did not maintain effective controls to ensure that
    journal entries were reviewed and approved. Specifically,
    effective controls were not designed and in place to ensure that
    journal entries, including journal entries related to
    intercompany eliminations, were prepared with sufficient
    supporting documentation and that those entries were reviewed
    and approved to ensure the completeness, accuracy and validity
    of the entries recorded. This material weakness resulted in an
    audit adjustment to accounts receivable and revenue in the
    fiscal 2006 consolidated financial statements.
    The Company did not maintain effective controls to ensure that
    account reconciliations were performed accurately, or that
    reconciliations were reviewed for accuracy and completeness and
    approved.
    The Company did not maintain effective controls over the
    accounting for acquisitions and divestitures. Specifically,
    effective controls were not designed and in place to ensure that
    such transactions were completely and accurately accounted for
    in accordance with GAAP. 66




---



##### Table of Contents




    The Company did not maintain effective controls over its
    accounting for consolidated franchisees and equity method
    franchisees. Specifically, the Company did not maintain
    effective controls to ensure the completeness and accuracy of
    its accounting for its franchisees, either consolidated or
    accounted for under the equity method, in accordance with GAAP.
    The Company did not design and maintain effective controls to
    ensure that accrued expenses, including accruals for vacation
    benefits and legal and professional fees, were complete and
    accurate in accordance with GAAP.
    The Company did not design and maintain effective controls to
    ensure the completeness and accuracy of its translation of
    financial statement accounts denominated in foreign currencies
    and translation of foreign currency transaction gains or losses
    in accordance with GAAP.
    The Company did not design and maintain effective controls to
    ensure that its financial statement accounts related to
    derivative instruments embedded in exchange-traded futures
    contracts for certain raw materials were completely and
    accurately recorded in accordance with GAAP.            Internal
    Control  Integrated Framework Internal Control  Integrated Framework .
       67




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  CONSOLIDATED
    BALANCE SHEET
  Jan. 29,


Jan. 30,2006


2005(In thousands)ASSETSCURRENT ASSETS:Cash and cash equivalents

$
16,980


$
27,686Receivables


26,677



30,198Accounts and notes
    receivable  related parties


12,151



15,510Inventories


23,761



28,591Insurance recovery receivable


34,967



Deferred income taxes


848



3,913Other current assets


31,641



13,465Total current assets


147,025



119,363Property and equipment


205,579



309,214Non-current portion of notes
    receivable  related parties


42



2,120Investments in equity method
    franchisees


8,601



5,973Goodwill and other intangible
    assets


30,291



34,380Other assets


19,317



9,228Total assets

$
410,855


$
480,278LIABILITIES AND
    SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term borrowings

$
54


$
Current maturities of long-term
    debt


4,432



48,097Book overdraft.


60



8,480Accounts payable


8,897



17,436Accrued litigation settlement


70,800



Other accrued liabilities


69,676



43,622Total current liabilities


153,919



117,635Long-term debt, less current
    maturities


118,241



90,950Deferred income taxes


848



3,913Other long-term obligations


29,176



26,447Minority interests in consolidated
    franchisees






390Commitments and contingenciesSHAREHOLDERS EQUITY:Preferred stock, no par value;
    10,000 shares authorized; none issued and outstanding






Common stock, no par value;
    300,000 shares authorized; 61,841 and 61,756 shares
    issued and outstanding


298,255



295,611Unearned compensation






(17
)Notes receivable secured by common
    stock






(197
)Accumulated other comprehensive
    income


1,426



796Accumulated deficit


(191,010
)


(55,250
)Total shareholders equity


108,671



240,943Total liabilities and
    shareholders equity

$
410,855


$
480,278    68




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  CONSOLIDATED
    STATEMENT OF OPERATIONS
  Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004(In thousands, except per share amounts)Revenues

$
543,361


$
707,766


$
649,345Operating expenses:Direct operating expenses


474,591



598,281



493,650General and administrative expenses


67,727



55,301



45,230Depreciation and amortization
    expense


28,920



31,934



22,309Impairment charges and lease
    termination costs


55,062



161,847



Settlement of litigation


35,833







(525
)Operating income (loss)


(118,772
)


(139,597
)


88,681Interest income


1,110



775



906Interest expense


(20,211
)


(6,875
)


(4,509
)Equity in (losses) of equity
    method franchisees


(4,337
)


(1,622
)


(2,242
)Minority interests in results of
    consolidated franchisees


4,181



6,249



(1,898
)Other income and (expense), net


1,493



(6,310
)


2,053Income (loss) from continuing
    operations before income taxes


(136,536
)


(147,380
)


82,991Provision for income taxes
    (benefit)


(776
)


9,674



33,146Income (loss) from continuing
    operations


(135,760
)


(157,054
)


49,845Discontinued operations, including
    income tax effects






(40,054
)


(1,282
)Income (loss) before cumulative
    effect of change in accounting principle


(135,760
)


(197,108
)


48,563Cumulative effect of change in
    accounting principle, net of income taxes






(1,231
)


Net income (loss)

$
(135,760
)

$
(198,339
)

$
48,563Earnings (loss) per common
    share  basic:Income (loss) from continuing
    operations

$
(2.20
)

$
(2.55
)

$
.84Discontinued operations






(.65
)


(.02
)Cumulative effect of change in
    accounting principle






(.02
)


Net income (loss)

$
(2.20
)

$
(3.22
)

$
.82Earnings (loss) per common
    share  diluted:Income (loss) from continuing
    operations

$
(2.20
)

$
(2.55
)

$
.80Discontinued operations






(.65
)


(.02
)Cumulative effect of change in
    accounting principle






(.02
)


Net income (loss)

$
(2.20
)

$
(3.22
)

$
.78    69




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  CONSOLIDATED
    STATEMENT OF CASH FLOWS
  Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004(In thousands)CASH FLOW FROM OPERATING ACTIVITIES:Net income (loss)

$
(135,760
)

$
(198,339
)

$
48,563Items not requiring cash:Depreciation and amortization


28,920



31,982



22,806Deferred income taxes


(1,888
)


10,117



(3,491
)Impairment charges


53,734



194,100



Settlement of litigation


35,833







Cumulative effect of change in
    accounting principle






1,231



Deferred rent expense


374



3,220



849(Gain) loss on disposal of property
    and equipment


(1,807
)


4,439



939Share-based compensation


6,862



4



129Provision for doubtful accounts,
    net of chargeoffs


4,423



11,219



(305
)Amortization of deferred financing
    costs


2,544



252



81Tax benefit from exercise of
    nonqualified stock options










35,771Minority interests in results of
    consolidated franchisees


(4,181
)


(6,249
)


1,898Equity in (earnings) losses of
    equity method franchisees


4,337



1,622



2,242Cash distributions from equity
    method franchisees


453



2,003



1,582Other


295



1,354



(2,868
)Change in assets and liabilities:Receivables


3,862



10,982



(18,729
)Inventories


4,123



2,141



(4,068
)Other current assets


(2,971
)


(4,056
)


(965
)Income taxes refundable






7,973



1,025Accounts payable and other accrued
    liabilities


435



8,278



(7,117
)Other long-term obligations


2,277



2,648



4,323Net cash provided by operating
    activities


1,865



84,921



82,665CASH FLOW FROM INVESTING ACTIVITIES:Purchase of property and equipment


(10,381
)


(74,308
)


(78,316
)Proceeds from sales of assets
    leased back






20,217



Proceeds from other disposals of
    property and equipment


7,330



8,443



456Acquisition of franchisees and
    interests therein, net of cash acquired


428



(3,618
)


(112,450
)Acquisition of Montana Mills, net
    of cash acquired










4,052Investments in and advances to
    equity method franchisees


(12,219
)


(3,471
)


(7,958
)Proceeds from sale of equity method
    franchisee


2,542







Purchases of investments










(6,000
)Proceeds from sales of investments










33,136Issuance of notes receivable






(724
)


(5,974
)Collection of notes receivable






4,139



5,302(Increase) decrease in other assets


612



1,715



(2,197
)Net cash used for investing
    activities


(11,688
)


(47,607
)


(169,949
)CASH FLOW FROM FINANCING ACTIVITIES:Proceeds from exercise of stock
    options and warrants


154



1,175



19,518Issuance of short-term debt


2,274







55,000Repayment of short-term debt


(2,220
)






(66,286
)Issuance of long-term debt


120,000



12,164



44,570Repayment of long-term debt


(108,475
)


(49,332
)


(50,296
)Net borrowings (repayments) under
    revolving credit lines


(1,606
)


1,606



79,712Issuance of short-term
    debt  related party










2,350Repayment of short-term
    debt  related party










(3,250
)Deferred financing costs


(9,472
)


(386
)


(921
)Net change in book overdraft.


(8,420
)


357



(3,252
)Collection of notes receivable
    secured by common stock


197



186



175Cash received from (paid to)
    minority interests


7,706



16



(1,210
)Net cash provided by (used for)
    financing activities


138



(34,214
)


76,110Effect of exchange rate changes on
    cash


(10
)


340



Cash balances of subsidiaries at
    date of consolidation






3,217



Cash balances of subsidiaries at
    date of deconsolidation


(1,011
)






Net increase (decrease) in cash and
    cash equivalents


(10,706
)


6,657



(11,174
)Cash and cash equivalents at
    beginning of year


27,686



21,029



32,203Cash and cash equivalents at end of
    year

$
16,980


$
27,686


$
21,029Supplemental schedule of non-cash
    investing and financing activities:Issuance of stock in conjunction
    with acquisitions

$



$



$
59,031Assets acquired under capital leases






5,979



4,972Receipt of promissory notes in
    connection with sale of assets










3,551Issuance of promissory note in
    connection with acquisition of franchisee










11,286Issuance of restricted common shares










10    70




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  CONSOLIDATED
    STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
   AccumulatedOther


RetainedComprehensive


EarningsCommon


Common


Unearned


Notes


Income


(AccumulatedShares


Stock


Compensation


Receivable


(Loss)


(Deficit)


Total(In thousands)BALANCE AT FEBRUARY 2, 2003


56,295


$
173,112


$
(119
)

$
(558
)

$
(1,522
)

$
94,526


$
265,439Comprehensive income:Net income for the year ended
    February 1, 2004






















48,563



48,563Unrealized holding loss, net of tax
    benefit of $71


















(113
)






(113
)Foreign currency translation
    adjustment, net of income taxes of $15


















682







682Unrealized gain from cash flow
    hedge, net of income taxes of $115


















241







241Total comprehensive income


























49,373Exercise of stock options,
    including tax benefit of $42,806


3,300



62,320



















62,320Exercise of warrants






4



















4Issuance of shares in conjunction
    with acquisition of business


1,247



40,491



















40,491Issuance of shares in conjunction
    with acquisition of franchise market


444



18,540



















18,540Issuance of restricted shares






10



(10
)














Amortization of restricted shares










67















67Collection of notes receivable
    secured by common stock














175











175BALANCE AT FEBRUARY 1, 2004


61,286



294,477



(62
)


(383
)


(712
)


143,089



436,409Comprehensive income (loss):Net (loss) for the year ended
    January 30, 2005






















(198,339
)


(198,339
)Foreign currency translation
    adjustment, net of income taxes of $620


















876







876Unrealized gain from cash flow
    hedge, net of income taxes of $412


















632







632Total comprehensive (loss)


























(196,831
)Exercise of stock options


472



1,175



















1,175Amortization of restricted shares










45















45Cancellation of restricted shares


(2
)


(41
)


















(41
)Collection of notes receivable
    secured by common stock














186











186BALANCE AT JANUARY 30, 2005


61,756



295,611



(17
)


(197
)


796



(55,250
)


240,943Comprehensive income (loss):Net (loss) for the year ended
    January 29, 2006






















(135,760
)


(135,760
)Foreign currency translation
    adjustment, net of income tax benefit of $168


















(183
)






(183
)Unrealized gain from cash flow
    hedge, net of income taxes of $531


















813







813Total comprehensive (loss)


























(135,130
)Correction of errors in accounting
    for stock-based compensation (Note 1)






2,508



















2,508Exercise of stock options


86



154



















154Amortization of restricted shares










5















5Cancellation of restricted shares


(1
)


(18
)


12















(6
)Collection of notes receivable
    secured by common stock














197











197BALANCE AT JANUARY 29, 2006


61,841


$
298,255


$



$



$
1,426


$
(191,010
)

$
108,671    71




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS
  Note 1 
    Nature of Business and Significant Accounting Policies
  NATURE OF BUSINESS.
    BASIS OF CONSOLIDATION AND CUMULATIVE EFFECT OF CHANGE IN
    ACCOUNTING PRINCIPLE.
           72




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##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
                REVENUE RECOGNITION.
  
    Company Stores revenue is derived from the sale of doughnuts and
    related items to on-premises and off-premises customers. Revenue
    is recognized at the time of sale for on-premises sales. For
    off-premises
    sales, revenue is recognized at the time of delivery, net of
    provisions for estimated product returns.
    Franchise revenue is derived from development and initial
    franchise fees relating to new store openings and ongoing
    royalties charged to franchisees based on their sales.
    Development and franchise fees for new stores are deferred until
    the store is opened, which is the time at which the Company has
    performed substantially all of the initial services it is
    required to provide. Royalties are recognized in income as
    underlying franchisee sales occur. 73




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##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   
    KKM&D revenue is derived from the sale of doughnut-making
    equipment, doughnut mix, coffee and supplies needed to operate a
    doughnut store. Revenue for equipment sales and installation
    associated with new store openings is recognized at the store
    opening date. Revenue for equipment sales not associated with
    new store openings is recognized when the equipment is installed
    if the Company is responsible for the installation, and
    otherwise upon shipment of the equipment. Revenues for the sale
    of doughnut mix, coffee and supplies are recognized upon
    delivery to the customer.  FISCAL YEAR. 53-week
  CASH AND CASH EQUIVALENTS.
  INVENTORIES. first-in,
  PROPERTY AND EQUIPMENT.
    GOODWILL AND OTHER INTANGIBLE ASSETS.
    FAIR VALUE OF FINANCIAL INSTRUMENTS.
  ADVERTISING COSTS.
  STORE OPENING COSTS.
  LEGAL COSTS.
  ASSET IMPAIRMENT.
 74




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##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    EARNINGS PER SHARE.
    Year EndedJan. 29,


Jan. 30


Feb. 1,2006


2005


2004(In thousands)Numerator: income (loss) from
    continuing operations

$
(135,760
)

$
(157,054
)

$
49,845Denominator:Basic earnings per share-weighted
    average shares outstanding


61,807



61,626



59,188Effect of dilutive securities:Stock options










3,197Restricted stock










3Diluted earnings per
    share-weighted average shares outstanding


61,807



61,626



62,388    75




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##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  STOCK-BASED COMPENSATION.
  Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005(1)


2004(In thousands, except per share amounts)Net income (loss), as reported

$
(135,760
)

$
(198,339
)

$
48,563Add: Stock-based expense charged
    to earnings, net of related tax effects in fiscal 2004


6,862



4



129Deduct: Stock-based compensation
    expense determined under fair value method for all awards, net
    of related tax effects in fiscal 2004


(15,964
)


(21,718
)


(11,548
)Pro forma net income (loss)

$
(144,862
)

$
(220,053
)

$
37,144Earnings (loss) per share:Reported earnings (loss) per
    share  Basic

$
(2.20
)

$
(3.22
)

$
.82Pro forma earnings (loss) per
    share  Basic

$
(2.34
)

$
(3.57
)

$
.63Reported earnings (loss) per
    share  Diluted

$
(2.20
)

$
(3.22
)

$
.78Pro forma earnings (loss) per
    share  Diluted

$
(2.34
)

$
(3.57
)

$
.60     (1)
    
    The amount shown as pro forma net loss for fiscal 2005 differs
    from that reported in the Companys annual report on
    Form 10-K
    for that year. As originally presented, the pro forma adjustment
    for the application of FAS 123 was reduced by income taxes;
    because the Company reported no income tax benefit on its
    historical loss for fiscal 2005, there should have been no tax
    effect applied to the pro forma FAS 123 adjustment. This
    error has been corrected.   76




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##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004Expected life of option


NA



7 years



7 yearsRisk-free interest rate


NA



3.9
%


3.7
%Expected volatility of stock


NA



45.0
%


41.6
%Expected dividend yield


NA







     Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004Fair value of each option granted


NA


$
7.71


$
19.84Total number of options granted






1,113,500



1,829,200Total fair value of all options
    granted


NA


$
8,585,100


$
36,291,300     CONCENTRATION OF CREDIT RISK.
    SELF-INSURANCE RISKS.
 77




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##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    DERIVATIVE FINANCIAL INSTRUMENTS AND DERIVATIVE COMMODITY
    INSTRUMENTS.
  FOREIGN CURRENCY TRANSLATION.
  COMPREHENSIVE INCOME. mark-to-market
  Jan. 29,


Jan. 30,2006


2005(In thousands)Accumulated other comprehensive
    income (loss):Unrealized gain (loss) on cash
    flow hedges, including amounts related to Consolidated
    Franchisees and Equity Method Franchisees

$
135


$
(1,209
)Cumulative foreign currency
    translation adjustments


2,222



2,5732,357



1,364Less: deferred income taxes


(931
)


(568
)$
1,426


$
796   USE OF ESTIMATES.
 78




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  CORRECTION OF ACCOUNTING ERRORS RELATED TO STOCK-BASED
    COMPENSATION.
            REVISION TO FISCAL 2005 CONSOLIDATED STATEMENT OF
    OPERATIONS. Form 10-K
 79




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  RECENT
    ACCOUNTING PRONOUNCEMENTS
          No. 03-13, (EITF 03-13). EITF 03-13
   80




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Note 2 
    Business Conditions, Uncertainties and Liquidity
    Form 8-K
     81




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##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
              Form 10-K, Form 10-Q Form 10-Q
 82




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Note 3 
    Receivables
    Jan. 29,


Jan. 30,2006


2005(In thousands)Trade receivables:Wholesale doughnut customers

$
17,667


$
21,743Unaffiliated franchisees


21,515



18,897Current portion of notes receivable


1,151



937Less  allowance for
    doubtful accounts


(13,656
)


(11,379
)$
26,677


$
30,198Receivables from related parties:Equity Method Franchisees
    (Notes 1 and 18):Trade

$
10,664


$
12,804Current portion of notes receivable


4,647



2,000Less  allowance for
    doubtful accounts


(3,160
)


(1,105
)12,151



13,699Franchisees owned by Directors
    emeriti (Note 20):Trade






1,669Current portion of notes receivable






142



1,811$
12,151


$
15,510Non-current portion of notes
    receivable from related parties:Equity Method Franchisees
    (Notes 1 and 18)

$
42


$
1,958Franchisees owned by Directors
    emeriti (Note 20)






162$
42


$
2,120    83




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004(In thousands)Allowance for doubtful accounts
    related to trade receivables:Balance at beginning of year

$
11,379


$
1,265


$
1,453Provision for doubtful accounts


3,978



12,696



657Reserves associated with acquired
    businesses


41







117Effects of deconsolidation of
    subsidiaries


(132
)






Chargeoffs


(1,610
)


(2,582
)


(962
)Balance at end of year

$
13,656


$
11,379


$
1,265Allowance for doubtful accounts
    related to Equity Method Franchisees:Balance at beginning of year

$
1,105


$



$
Provision for doubtful accounts


2,055



1,105



Chargeoffs










Balance at end of year

$
3,160


$
1,105


$
   Note 4 
    Inventories
    Jan. 29,


Jan. 30,2006


2005(In thousands)Raw materials

$
7,009


$
8,210Work in progress


18



56Finished goods


4,717



7,225Purchased merchandise


11,853



12,948Manufacturing supplies


164



152$
23,761


$
28,591  84




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Note 5
    
    Other Current Assets    Jan. 29,


Jan. 30,2006


2005(In thousands)Receivables from directors
    and officers insurance carriers

$
7,931


$
3,390Current portion of claims against
    insurance carriers related to self-insurance programs
    (Notes 1, 8, 9 and 11)


145



772Other receivables


972



2,572Assets held for sale, including
    $13,005 related to Glazed Investments at January 29, 2006
    (Note 18)


18,224



1,534Prepaid expenses and other


4,369



5,197$
31,641


$
13,465   Note 6 
    Property and Equipment
    Jan. 29,


Jan. 30,2006


2005(In thousands)Land

$
25,539


$
30,733Buildings


108,485



160,459Machinery and equipment


132,241



175,126Leasehold improvements


20,235



23,640Construction in progress


592



3,853287,092



393,811Less: accumulated depreciation


(81,513
)


(84,597
)$
205,579


$
309,214    85




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Note 7 
    Goodwill and Other Intangible Assets
    Jan. 29,


Jan. 30,2006


2005(In thousands)Indefinite-lived intangible assets:Goodwill (by segment):Company Stores

$
5,472


$
8,983Franchise


23,496



23,496KKM&D


213



21329,181



32,692Reacquired franchise rights
    associated with Company Stores


960



1,52030,141



34,212Definite-lived intangible assets:Recipes


150



168$
30,291


$
34,380     Note 8 
    Other Assets
    Jan. 29,


Jan. 30,2006


2005(In thousands)Computer software, net of
    accumulated amortization

$
1,815


$
2,523Mirror 401(k) plan assets
    (Notes 11 and 21)


214



1,673Non-current portion of notes
    receivable from unaffiliated franchisees


643



1,525Deferred financing costs, net of
    accumulated amortization


7,827



1,146Non-current portion of claims
    against insurance carriers related to self-insurance programs
    (Notes 1, 5, 9 and 11)


1,614



1,067Insurance recovery receivable
    (Notes 11 and 12)


4,750



Deposits


1,355



776Fair value of interest rate hedge


698



Other


401



518$
19,317


$
9,228  86




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Note 9 
    Other Accrued Liabilities
    Jan. 29,


Jan. 30,2006


2005(In thousands)Accrued professional fees

$
17,274


$
9,790Accrued liabilities of Glazed
    Investments (Note 18)


18,513



Current portion of self-insurance
    claims, principally workers compensation
    (Notes 1, 5, 8 and 11)


6,070



7,161Accrued vacation pay


4,015



4,505Accrued taxes, other than income


3,911



4,084Deferred gain on sale of
    investment in Krispy Kreme Australia Pty Limited (Note 18)


3,304



Accrued compensation


2,872



4,607Accrued stock-based compensation


2,838



Accrued charitable contributions


1,757



1,872Current portion of deferred
    franchise fee revenue


367



244Current portion of lease
    termination costs (Notes 11 and 13)


282



921Other


8,473



10,438Total

$
69,676


$
43,622  87




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Note 10 
    Long Term Debt and Lease Commitments
    Jan. 29,


Jan. 30,2006


2005(In thousands)Krispy Kreme Doughnut Corporation:$225 million Secured Credit
    Facilities

$
119,400


$
$119.3 million revolving line
    of credit






59,000$30.7 million term loan






28,600Capital lease obligations


3,273



7,360122,673



94,960Glazed Investments:$12 million credit facility






7,003Real estate and equipment loans






6,347Capital lease obligations






1,370Subordinated notes






136



14,856New England Dough:$14.4 million term loans






13,487$12 million revolving line of
    credit






1,606



15,093KremeKo:Credit facility






11,581Building and equipment loans






2,199Capital lease obligations






358



14,138122,673



139,047Less: current maturities


(4,432
)


(48,097
)$
118,241


$
90,950     Fiscal Year

(In thousands)2007

$
4,4322008


1,2412009


1,2002010


1,2002011


114,600$
122,673  88




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Secured
    Credit Facilities
                 89




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
               90




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        2003
    Credit Facility
         91




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        Consolidated
    Franchisees
           92




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Lease
    Obligations
    Operating


CapitalFiscal Year

Leases


Leases(In thousands)2007

$
12,428


$
3,4452008


11,531



412009


10,508



2010


10,305



2011


10,474



Thereafter


176,691



$
231,937



3,486Less: portion representing
    interest and executory costs






(213
)$
3,273     Cash
    Payments of Interest
    Note 11 
    Other Long-Term Obligations
    Jan. 29,


Jan. 30,2006


2005(In thousands)Non-current portion of
    self-insurance claims, principally workers compensation
    (Notes 1, 5, 8 and 9)

$
8,872


$
5,899Deferred rent expense


6,505



8,845Accrued litigation settlement
    (Notes 8 and 12)


4,750



Non-current portion of lease
    termination costs (Notes 9 and 13)


1,699



1,360Non-current portion of deferred
    franchise fee revenue


1,113



1,359Mirror 401(k) plan liability
    (Notes 8 and 21)


214



1,673Other


6,023



7,311$
29,176


$
26,447   Note 12 
    Commitments and Contingencies
   93




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Litigation
    Settled or Pending Settlement
  Federal
    Securities Class Actions and Settlement Thereof and Federal
    Court Shareholder Derivative Actions and Partial Settlement
    Thereof
  Rule 10b-5
  Wright v. Krispy Kreme Doughnuts, Inc.,
    et al. Blackwell v. Krispy Kreme Doughnuts, Inc.,
    et al. Andrews v.
    Krispy Kreme Doughnuts, Inc., et al.
    Wright
  Wright Blackwell Andrews Wright Blackwell Andrews Wright Blackwell Andrews Wright v. Krispy Kreme Doughnuts, Inc., et al.
   94




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Wright
        10-day Form 10-K.
   95




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  State Court Shareholder Derivative
    Actions. Andrews v. Krispy Kreme Doughnuts, Inc.,
    et al. Lockwood v. Krispy Kreme Doughnuts, Inc.,
    et al. Andrews
  ERISA Class Action.
  Franchisee
    Litigation
  Lone Star.
  Sweet Traditions.
 96




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Great Circle.
    KremeKo.
  Arbitration
    Award
     97




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Pending
    Litigation and Investigations
    SEC
    Investigation
    United
    States Attorney Investigation
    Department of Labor Review.
  State
    Franchise/FTC Inquiry
    State Court Books and Records Action. ,
    Nomm v. Krispy Kreme, Inc.
 98




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Other
    Contingencies and Commitments
           99




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Note 13 
    Impairment Charges and Lease Termination Costs
    Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004(In thousands)Impairment charges:Impairment of goodwill

$
3,511


$
131,609


$
Impairment of long-lived assets


49,663



25,953



Impairment of reacquired franchise
    rights


560



600



Other






825



Total impairment charges


53,734



158,987



Lease termination costs:Provision for termination costs


2,860



3,134



Less  reversal of
    previously recorded deferred rent expense


(1,532
)


(274
)


Net provision


1,328



2,860



$
55,062


$
161,847


$
        100




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004(In thousands)Balance at beginning of year

$
2,281


$



$
Provision for lease termination
    costs:Provisions associated with store
    closings, net of estimated sublease rentals


2,682



3,323



Adjustments to previously recorded
    provisions resulting from settlements with lessors and
    adjustments of previous estimates


77



(237
)


Accretion of discount


101



48



Total provision


2,860



3,134



Accrual related to KremeKo


(862
)






Accrual related to Freedom Rings


(150
)






Payments


(2,148
)


(853
)


Total reductions


(3,160
)


(853
)


Balance at end of year

$
1,981


$
2,281


$
Accrued lease termination costs
    are included in the consolidated balance sheet as follows:Other accrued liabilities

$
282


$
921


$
Other long-term obligations


1,699



1,360



$
1,981


$
2,281


$
   Note 14 
    Other Income and Expense
    Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004(In thousands)Gain (loss) on disposals of
    property and equipment

$
1,807


$
(4,535
)

$
(939
)Foreign currency gains (losses)


(314
)


170



267Gain on sale of stores to
    franchisee (Note 19)










2,725Impairment charge related to
    investment in Equity Method Franchisee (Note 19)






(1,545
)


Adjustment to carrying value of
    written option (Note 18)






(400
)


$
1,493


$
(6,310
)

$
2,053  101




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Note 15 
    Income Taxes
    Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004(In thousands)Current

$
1,112


$
1,764


$
35,947Deferred


(1,888
)


10,117



(3,491
)$
(776
)

$
11,881


$
32,456     Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004(In thousands)Continuing operations

$
(776
)

$
9,674


$
33,146Discontinued operations






2,207



(690
)$
(776
)

$
11,881


$
32,456     Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004(In thousands)Income (loss) from continuing
    operations:Domestic

$
(130,411
)

$
(131,061
)

$
87,107Foreign


(6,125
)


(16,319
)


(4,116
)$
(136,536
)


(147,380
)


82,991Loss from discontinued operations
    (all domestic)






(37,847
)


(1,972
)Total income (loss) before income
    taxes

$
(136,536
)

$
(185,227
)

$
81,019     Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004(In thousands)Income taxes at statutory federal
    rate

$
(47,788
)

$
(64,829
)

$
28,357State income taxes


(3,988
)


(5,811
)


2,613Foreign losses with no tax benefit


291



5,712



1,441Impairment of intangible assets






12,396



Valuation allowance provided on
    deferred income tax assets


50,284



65,160



Other


425



(747
)


45$
(776
)

$
11,881


$
32,456  102




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      Jan. 29,


Jan. 30,2006


2005(In thousands)Net current assets

$
848


$
3,913Net non-current assets
    (liabilities)


(848
)


(3,913
)Net asset

$



$
     Jan. 29,


Jan. 30,2006


2005(In thousands)Deferred income tax assets:Insurance accruals

$
4,942


$
4,431Deferred revenue


1,468



2,041Charitable contributions
    carryforward


3,547



3,322Other current assets


3,778



2,250Goodwill and other intangible
    assets


45,383



45,639Allowance for doubtful accounts


6,642



4,495Accrued litigation settlement


14,154



Other current liabilities


8,152



6,699Other non-current liabilities


4,231



4,853Federal tax credit carryforwards


1,922



1,330Federal net operating loss
    carryforwards


16,518



12,999Other


7,545



7,626Gross deferred income tax assets


118,282



95,685Valuation allowance on deferred
    income tax assets


(116,030
)


(72,428
)Deferred income tax assets, net of
    valuation allowance


2,252



23,257Deferred income tax liabilities:Property and equipment


(1,010
)


(21,117
)Other


(1,242
)


(2,140
)Gross deferred income tax
    liabilities


(2,252
)


(23,257
)Net deferred income tax asset

$



$
    103




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      Note 16 
    Shareholders Equity
  Stock
    Option Plans, Restricted Stock Awards and Warrants
   104




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    SharesShares


Range


Weighted


Subject


WeightedSubject


of


Average


to


Averageto


Exercise


Exercise


Exercisable


ExerciseOption


Prices


Price


Options


PriceOutstanding at February 2,
    2003


9,440,800






$
11.60



4,567,800


$
5.68Granted


1,829,200


$
28.11 - 44.22



37.65Assumed through acquisition


45,100







32.83Exercised


(3,300,000
)






5.91Canceled


(539,700
)






29.63Outstanding at February 1,
    2004


7,475,400






$
19.31



4,281,500


$
8.56Granted


1,113,500


$
14.04 - $38.71



15.00Exercised


(471,000
)






2.48Canceled


(669,400
)






28.63Outstanding at January 30,
    2005


7,448,500






$
18.89



4,918,700


$
14.39Granted










Exercised


(85,700
)






1.79Canceled


(1,284,400
)






30.97Outstanding at January 29,
    2006


6,078,400






$
16.58



5,299,300


$
15.15       Options OutstandingWeightedAverage





Options ExercisableRemaining


Weighted





WeightedContractual


Average





AverageRange of




Life


Exercise





ExerciseExercise Prices

Shares


(Years)


Price


Shares


Price$ 1.30 - $ 6.66


2,562,000



2.5


$
1.46



2,562,000


$
1.46$13.33
    - $19.99


1,216,800



6.3


$
14.60



826,400


$
14.80$20.00 - $26.65


35,000



5.3


$
22.06



35,000


$
22.06$26.66 - $33.32


1,039,300



5.1


$
29.35



995,700


$
29.40$33.33
    - $39.98


721,200



6.5


$
35.63



537,400


$
35.56$39.99 - $46.64


504,100



7.1


$
44.22



342,800


$
44.22   WARRANTS.
   105




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##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Shareholder
    Rights Plan
          Note 17 
    Segment Information
   106




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
       107




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004(In thousands)Revenues:Company Stores

$
398,450


$
508,100


$
441,707Franchise


18,394



24,720



23,506KKM&D


253,367



351,530



350,998Intersegment sales eliminations


(126,850
)


(176,584
)


(166,866
)Total revenues

$
543,361


$
707,766


$
649,345Operating income (loss):Company Stores

$
(3,681
)

$
10,489


$
42,675Franchise


13,232



16,542



18,702KKM&D


32,154



52,558



73,662Unallocated general and
    administrative expenses


(69,582
)


(57,339
)


(46,883
)Impairment charges and lease
    termination costs


(55,062
)


(161,847
)


Settlement of litigation


(35,833
)






525Total operating income (loss)

$
(118,772
)

$
(139,597
)

$
88,681Depreciation and amortization
    expense(1):Company Stores

$
23,416


$
26,405


$
17,390Franchise


145



172



173KKM&D


3,504



3,319



3,093Corporate administration


1,855



2,038



1,653Total depreciation and
    amortization expense

$
28,920


$
31,934


$
22,309     (1)
    Depreciation and amortization expense for the Company Stores,
    KKM&D and corporate administration operations reported for
    fiscal 2005 differs from the amounts previously reported on the
    Companys fiscal 2005 Annual Report on
    Form 10-K,
    although the aggregate amount for all three operations is
    unchanged. The change reflects correction of a classification
    error made in fiscal 2005. The Company concluded this error was
    not material to the fiscal 2005 consolidated financial
    statements and accordingly has not amended the 2005 Form 10-K to
    correct this error.    Note 18 
    Investments in Franchisees
   108




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##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Consolidated
    Franchisees
         109




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      Equity
    Method Franchisees
      Number ofStores asof Jan.


Ownership%Geographic Market

29, 2006(1)


KKD


Third PartiesA-OK, LLC

Arkansas, Oklahoma


6



30.3
%


69.7
%Amazing Hot Glazers, LLC

Pennsylvania (Erie)


2



33.3
%


66.7
%Caribbean Glaze Corporation

Puerto Rico






30.0
%


70.0
%KK-TX I, L.P.

Texas (Amarillo, Lubbock)


1



33.3
%


66.7
%KK Wyotana, LLC

Wyoming, Montana


1



33.3
%


66.7
%KKNY, LLC

New York City,


6



30.3
%


69.7
%Northern New JerseyKremeWorks, LLC

Alaska, Hawaii, Oregon,


12



25.0
%


75.0
%Washington, Western CanadaKrispy Kreme Australia Pty Limited

Australia/New Zealand


15




(2)



(2)Krispy Kreme of South Florida, LLC

Southern Florida


8



35.3
%


64.7
%Krispy Kreme U.K. Limited

United Kingdom,


18



35.1
%


64.9
%Republic of IrelandKrispy Kreme Mexico, S. de R.L. de
    C.V

Mexico


20



30.0
%


70.0
%Priz Doughnuts, LP

Texas (El Paso),


2



33.3
%


66.7
%Mexico (Ciudad Juarez)     (1)
    
    Includes satellite stores.(2)
    
    On November 30, 2005, the Company sold its equity interest in
    Krispy Kreme Australia Pty Limited as described below. 110




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##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Summary Financial Information(1)TotalNet


Net


Total


Total


EquitySales


Income/(Loss)


Assets


Liabilities


(Deficit)(In thousands)A-OK, LLC

$
16,369


$
(75
)

$
8,099


$
8,933


$
(834
)Amazing Hot Glazers, LLC


5,335



(36
)


3,962



3,478



484Caribbean Glaze Corporation






(489
)


123



414



(291
)KK-TX I, L.P.


3,359



(326
)


2,534



2,991



(457
)KK Wyotana, LLC


2,152



(148
)


3,100



3,622



(522
)KKNY, LLC


3,828



(2,866
)


18



10



8KremeWorks, LLC


25,389



(1,705
)


32,808



25,588



7,220Krispy Kreme Australia Pty Limited


23,290



(2,770
)


20,838



22,327



(1,489
)Krispy Kreme of South Florida, LLC


19,529



(90
)


21,147



22,927



(1,780
)Krispy Kreme U.K. Limited


23,219



(1,167
)


19,075



17,359



1,716Krispy Kreme Mexico, S. de R.L. de
    C.V.


15,635



292



11,282



3,905



7,377Priz Doughnuts, LP(2)


4,358



NA



NA



NA



NA     (1)
    
    The net sales and net income (loss) shown for each of these
    franchisees represents the amounts reported by the franchisee
    for calendar 2005, and the amounts shown as total assets and
    total liabilities represent the corresponding amounts reported
    by each of the franchisees on or about December 31, 2005.(2)
    
    Information other than net sales was not available for Priz
    Doughnuts, LP.    January 29, 2006LoanInvestment











andand


Trade


Notes Receivable


LeaseAdvances


Receivables


Current


Long-term


Guarantees(In thousands)A-OK, LLC

$
(96
)

$
1,600


$
55


$



$
2,787Amazing Hot Glazers, LLC


163



164



22







874Caribbean Glaze Corporation


90















Freedom Rings (accounted for using
    the cost method)


2,000



27



500







KK-TX I, L.P.


(152
)


135











1,474KK Wyotana, LLC






33











KKNY, LLC


(7
)


412











Kremeworks, LLC


2,213



463











2,667Krispy Kreme Australia Pty Limited






592



4,050



42



4,714Krispy Kreme of South Florida, LLC






1,417











7,760Krispy Kreme U.K. Limited


2,780



3,285











1,054Krispy Kreme Mexico, S. de R.L. de
    C.V.


1,610



1,548











Priz Doughnuts, LP






988



20







424$
8,601


$
10,664


$
4,647


$
42


$
21,754    111




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  January 30, 2005LoanInvestment











andand


Trade


Notes Receivable


LeaseAdvances


Receivables


Current


Long-term


Guarantees(In thousands)A-OK, LLC

$
(33
)

$
1,222


$
58


$
55


$
3,001Amazing Glazed, LLC


22



443



73



76



2,590Amazing Hot Glazers, LLC


175



122



23



22



951Caribbean Glaze Corporation


90















KK-TX I, L.P.


(44
)


110











1,578KK Wyotana, LLC






51











KKNY, LLC


(7
)


1,199











Kremeworks, LLC


638



3,072



900







2,667Krispy Kreme Australia Pty Limited


385



1,551



922



1,767



4,419Krispy Kreme of South Florida, LLC


413



1,310







20



8,068Krispy Kreme U.K. Limited


3,327



1,456











851Krispy Kreme Mexico, S. de R.L. de
    C.V.


1,007



1,363











Priz Doughnuts, LP






905



24



18



468$
5,973


$
12,804


$
2,000


$
1,958


$
24,593        112




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    TotalLoan/Guarantee

Lease


Amounts Expiring in Fiscal Year EndingPercentages

Guarantees


2007


2008


2009


2010


2011


Thereafter(In thousands)A-OK, LLC

22.3%-33.3%

$
2,787


$
250


$
262


$
276


$
229


$
143


$
1,627Amazing Hot Glazers, LLC

33.3%


874



82



84



87



89



92



440KK-TX I, L.P.

30.0%-33.3%


1,474



144



152



153



147



107



771Kremeworks, LLC

20.0%


2,667



296



304



1,229



838







Krispy Kreme Australia Pty Limited

35.0%


4,714



4,714



















Krispy Kreme of South Florida, LLC

35.0%-35.3%


7,760



939



652



587



628



686



4,268Krispy Kreme U.K. Limited




1,054



145



157



168



180



193



211Priz Doughnuts, LP

33.3%


424



42



45



48



51



54



184Total



$
21,754


$
6,612


$
1,656


$
2,548


$
2,162


$
1,275


$
7,501                113




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Note 19 
    Acquisitions
           114




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
          Year EndedFeb. 1,2004(Unaudited)(In Thousands, Except PerShare Amount)Total revenues

$
661,371Net income

$
51,368Diluted earnings per share

$
.82     Note 20 
    Related Party Transactions
   115




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
          Note 21 
    Employee Benefit Plans
           116




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Note 22 
    Discontinued Operations
        Year EndedJan. 30,


Feb. 1,2005


2004(In thousands)Revenues

$
3,711


$
6,747Loss before income taxes,
    including impairment charges of $35,113 in fiscal 2005

$
(37,847
)

$
(1,972
)Provision for income taxes
    (benefit)


2,207



(690
)Net loss from discontinued
    operations

$
(40,054
)

$
(1,282
)  117




---



##### Table of Contents



KRISPY
    KREME DOUGHNUTS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Note 23 
    Selected Quarterly Financial Data (Unaudited)
    Three Months EndedMay 1,


Jul. 31,


Oct. 30,


Jan. 29,2005


2005


2005


2006(In thousands, except per share data)Revenues

$
152,519


$
139,778


$
128,818


$
122,246Operating expenses:Direct operating expenses


126,260



123,487



115,995



108,849General and administrative expenses


20,096



15,365



15,206



17,060Depreciation and amortization
    expense


8,101



7,384



6,915



6,520Impairment charges and lease
    termination costs


11,067



2,956



15,695



25,344Settlement of litigation


35,833











Operating (loss)


(48,838
)


(9,414
)


(24,993
)


(35,527
)Interest and other income
    (expense), net


(6,107
)


(5,393
)


(4,434
)


(1,830
)(Loss) from continuing operations
    before income taxes


(54,945
)


(14,807
)


(29,427
)


(37,357
)Provision for income taxes
    (benefit)


(1,589
)


135



308



370(Loss) from continuing operations


(53,356
)


(14,942
)


(29,735
)


(37,727
)Discontinued operations














Net (loss)

$
(53,356
)

$
(14,942
)

$
(29,735
)

$
(37,727
)(Loss) per common share:Basic

$
(.86
)

$
(.24
)

$
(.48
)

$
(.61
)Diluted

$
(.86
)

$
(.24
)

$
(.48
)

$
(.61
)  118




---



##### Table of Contents



Three Months EndedMay 2,


Aug. 1,


Oct. 31,


Jan. 30,2004


2004


2004


2005(1)(In thousands, except per share data)Revenues

$
183,437


$
188,230


$
174,393


$
161,706Operating expenses:Direct operating expenses


142,430



155,298



149,194



151,359General and administrative expenses


11,462



11,586



12,518



19,735Depreciation and amortization
    expense


7,040



7,731



8,554



8,609Impairment charges and lease
    termination costs


6,179



1,420



142,657



11,591Operating income (loss)


16,326



12,195



(138,530
)


(29,588
)Interest and other income
    (expense), net


(2,106
)


(355
)


954



(6,276
)Income (loss) from continuing
    operations before income taxes


14,220



11,840



(137,576
)


(35,864
)Provision for income taxes
    (benefit)


5,202



4,605



(133
)


Income (loss) from continuing
    operations


9,018



7,235



(137,443
)


(35,864
)Discontinued operations


(34,277
)


(480
)


(5,076
)


(221
)Income (loss) before cumulative
    effect of change in accounting principle


(25,259
)


6,755



(142,519
)


(36,085
)Cumulative effect of change in
    accounting principle


(1,231
)










Net income (loss)

$
(26,490
)

$
6,755


$
(142,519
)

$
(36,085
)Earnings (loss) per common
    share  basic:Income (loss) from continuing
    operations

$
.15


$
.12


$
(2.23
)

$
(.58
)Discontinued operations


(.56
)


(.01
)


(.08
)


Cumulative effect of change in
    accounting principle


(.02
)










Net income (loss)

$
(.43
)

$
.11


$
(2.31
)

$
(.58
)Earnings (loss) per common
    share  diluted:Income (loss) from continuing
    operations

$
.14


$
.11


$
(2.23
)

$
(.58
)Discontinued operations


(.54
)






(.08
)


Cumulative effect of change in
    accounting principle


(.02
)










Net income (loss)

$
(.42
)

$
.11


$
(2.31
)

$
(.58
)     (1)
    
    The amount of general and administrative expenses reported for
    the quarter ended January 30, 2005 is $1,171,000 less than
    that previously reported for that quarter in the Companys
    fiscal 2005 Annual Report on Form 10-K, and the amount
    currently reported as direct operating expenses is $1,171,000
    greater than that previously reported. The change resulted from
    correction of a classification error. 119




---



##### Table of Contents



Item 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE.    Item 9A.
    CONTROLS
    AND PROCEDURES.  Evaluation
    of Disclosure Controls and Procedures
  Form 10-K, Rules 13a-15(e) 15d-15(e) Form 10-K
  Managements
    Report on Internal Control over Financial
    Reporting
  Rules 13a-15(f) 15d-15(f) and/or
    Internal Control  Integrated Framework
     120




---



##### Table of Contents




    We did not establish a formal enterprise risk assessment process.
    We did not formalize lines of communication among legal, finance
    and operations personnel. Specifically, there was inadequate
    sharing of financial information within and across our corporate
    and divisional offices and other operating facilities to
    adequately raise issues to the appropriate level of accounting
    and financial reporting personnel.
    We did not establish an effective program to ensure that our
    code of conduct and ethics guidelines are fully communicated and
    distributed appropriately to our employees.
    We did not maintain written accounting policies and procedures
    nor did we maintain adequate controls with respect to the
    review, supervision and monitoring of our accounting operations.
    We did not have an adequate process for monitoring the
    appropriateness of user access and segregation of duties related
    to financial applications.      
    We did not maintain effective controls to ensure that journal
    entries were reviewed and approved. Specifically, effective
    controls were not designed and in place to ensure that journal
    entries, including journal entries related to intercompany
    eliminations, were prepared with sufficient supporting
    documentation and that those entries were reviewed and approved
    to ensure the completeness, accuracy and validity of the entries
    recorded. This material weakness resulted in an audit adjustment
    to accounts receivable and revenue in the fiscal 2006
    consolidated financial statements.
    We did not maintain effective controls to ensure that account
    reconciliations were performed accurately, or that
    reconciliations were reviewed for accuracy and completeness and
    approved.
    We did not maintain effective controls over the accounting for
    acquisitions and divestitures. Specifically, effective controls
    were not designed and in place to ensure that such transactions
    were completely and accurately accounted for in accordance with
    GAAP.
    We did not maintain effective controls over our accounting for
    consolidated franchisees and equity method franchisees.
    Specifically, we did not maintain effective controls to ensure
    the completeness and accuracy of our accounting for our
    franchisees either consolidated or accounted for under the
    equity method in accordance with GAAP.
    We did not design and maintain effective controls to ensure that
    accrued expenses, including accruals for vacation benefits and
    legal and professional fees, were complete and accurate in
    accordance with GAAP.
    We did not design and maintain effective controls to ensure the
    completeness and accuracy of our translation of financial
    statement accounts denominated in foreign currencies and
    translation of foreign currency transaction gains or losses
    recorded in accordance with GAAP.
    We did not design and maintain effective controls to ensure that
    our financial statement accounts related to derivative
    instruments embedded in exchange-traded futures contracts for
    certain raw materials were completely and accurately recorded in
    accordance with GAAP.   121




---



##### Table of Contents



Remediation
    of Material Weaknesses
    Form 10-K
   122




---



##### Table of Contents



Subsequent
    Changes in Internal Control over Financial
    Reporting
  Form 10-K,
      
    With the strong encouragement of the Special Committee, the
    Companys independent directors determined that new
    leadership of the Company was required. On January 18,
    2005, the Companys former chief executive officer retired,
    and a turnaround management firm was engaged to manage the
    business on an interim basis. Effective March 6, 2006, the
    board of directors appointed Daryl G. Brewster, a seasoned
    executive with over 20 years experience in the food
    industry, as President and Chief Executive Officer and a member
    of the board.
    We have hired a Vice President of Internal Audit during the
    second quarter of fiscal 2007 and intend to continue to devote
    resources to our internal audit function and our assessment and
    evaluation of our internal control over financial reporting and
    disclosure controls and procedures;
    We have formed a Risk Management Committee comprised of senior
    management from our legal, finance and operations organizations
    during the third quarter of fiscal 2007. This committee will
    oversee implementation of our remediation activities and will be
    responsible for enterprise risk management.
    We are enhancing the education process and redistributing to all
    of our employees our Code of Business Conduct and Ethics which,
    among other things, reiterates to our employees the availability
    of our previously implemented ethics hotline, through which
    employees at all levels can submit anonymously information
    regarding any unethical behavior or other irregularities of
    which they become aware;
    We are implementing enhanced controls to ensure effective
    communication among our legal, finance and operations
    organizations to ensure that important information about our
    business, including the effects, if any, of all material
    agreements, is addressed appropriately and on a timely basis in
    our financial reporting; and,
    We have begun creating policies and procedures manuals,
    including documentation of our accounting policies and methods
    of applying those policies, and intend to continue to increase
    the resources devoted to our accounting and finance function.    Additional
    Control Deficiencies Not Constituting Material
    Weaknesses
   123




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##### Table of Contents



Managements
    Conclusions on the Remediation Plan
  and/or and/or
    Form 10-K
  Changes
    in Internal Control Over Financial Reporting
   Item 9B.
    OTHER INFORMATION.   124




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##### Table of Contents



PART III  Item 10.
    DIRECTORS
    AND EXECUTIVE OFFICERS OF THE REGISTRANT.  Directors
    and Executive Officers
    Name

Age

PositionJames H. Morgan


59


Director, Chairman of Board(2),(3)Daryl G. Brewster


49


Director, President and Chief
    Executive OfficerMary Davis Holt


56


Director(1),(3)William T. Lynch, Jr.


63


Director(1),(3)Robert S. McCoy, Jr.


68


Director, Chairman of Audit
    Committee(1),(3)Andrew J. Schindler


62


DirectorRobert L. Strickland


75


Director, Vice Chairman of Board,
    Chairman of Governance Committee(2),(3)Michael H. Sutton


66


Director, Co-Chair of Special
    Committee(4)Lizanne Thomas


49


Director, Co-Chair of Special
    Committee(4)Togo D. West, Jr.


64


Director, Chairman of Compensation
    Committee(2),(3)Michael C. Phalen


36


Chief Financial OfficerDouglas R. Muir


52


Chief Accounting OfficerJeffrey L. Jervik


50


Executive Vice President of
    OperationsCharles A. Blixt


55


General Counsel     (1)
    
    Member of the Audit Committee.(2)
    
    Member of the Compensation Committee.(3)
    
    Member of the Governance Committee.(4)
    
    Member of the Special Committee.  James H. Morgan
  Daryl G. Brewster
  Mary Davis Holt
 125




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##### Table of Contents



William T. Lynch, Jr.
  Robert S. McCoy, Jr.
  Andrew J. Schindler
  Robert L. Strickland
  Michael H. Sutton
  Lizanne Thomas
  Togo D. West, Jr.
  Michael C. Phalen
 126




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##### Table of Contents



Douglas R. Muir 17-year
  Jeffrey L. Jervik
  Charles A. Blixt
  Emeritus
    Directors
    Determination
    of Independence
    
    If a director is an executive officer of another company which
    does business with Krispy Kreme and the annual revenues derived
    from that business are less than 1% of either companys
    total revenues for the last fiscal year. 127




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##### Table of Contents




    If a director is a director, officer or trustee of a charitable
    organization and Krispy Kremes annual charitable
    contributions to the organization (exclusive of gift-match
    payments) are less than 1% of the organizations total
    annual charitable receipts during the last fiscal year of such
    organization.
    If a director is a partner of or of counsel to a law firm that
    performs legal services for Krispy Kreme and payments made by
    Krispy Kreme to the firm during a fiscal year are not for legal
    services performed by the director or his immediate family and
    do not exceed 1% of the firms gross revenues for the last
    fiscal year.  Non-Management
    Directors
    Communications
    with Directors
      Section 16(a)
    Beneficial Ownership Reporting Compliance
    Audit
    Committee; Audit Committee Financial Expert
    Regulation S-K).
  Code of
    Ethics
  http://www.krispykreme.com/investorrelations.html.
 128




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##### Table of Contents



NYSE and
    SEC Certifications
    Form 10-K.
  Item 11.
    EXECUTIVE
    COMPENSATION.  Executive
    Compensation
    Summary
    Compensation Table
  Long-Term CompensationAnnual Compensation


AwardsOther


Restricted


Securities


Payouts


AllAnnual


Stock


Underlying


LTIP


OtherNamed Officer

Year


Salary


Bonus


Compensation(1)


Awards


Options


Payouts


CompensationStephen F. Cooper(2)


2006


$



$



$















$
Former Chief Executive


2005



























Officer


2004



























Michael C. Phalen(3)


2006



304,167







10,730















Chief Financial Officer


2005



300,000



300,000



97,438







48,000







2004



25,000







3,000







75,000







Douglas R. Muir(4)


2006



179,615























Chief Accounting Officer


2005



























2004



























Jeffrey L. Jervik(5)


2006



86,250



100,000



12,500















Executive Vice President


2005



























of Operations


2004



























John N. McAleer(6)


2006



194,333























Former Director and Executive


2005



290,125







70,146







24,000







Vice President Concept


2004



272,917







151,663







84,500







DevelopmentFrank Murphy(7)


2006



312,500







57,441















Former Executive Vice


2005



371,250







61,866







48,000







President, General Counsel,


2004



327,500







83,243







78,000







Chief Governance Officer andSecretary     (1)
    
    In accordance with SEC regulations, the following discloses
    information concerning each perquisite or other personal benefit
    received by a named officer during each of the last three fiscal
    years where such perquisite or other personal benefit exceeded
    25% of the total perquisites and personal benefits received 129




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##### Table of Contents



by such named officer during such year. Other annual
    compensation for Mr. Phalen consists of: (1) an
    automobile allowance of $36,000 and $3,000 for fiscal 2005 and
    fiscal 2004, respectively, (2) $61,438 in fiscal 2005 for
    reimbursement of relocation expenses, grossed up for certain
    taxes due, and (3) $10,730 in fiscal 2006 for reimbursement
    of club dues, grossed up for Federal Insurance Contributions Act
    (FICA) taxes due. Other annual compensation for
    Mr. Jervik consists of reimbursement of relocation expenses
    of $12,500 in fiscal 2006. Other annual compensation for
    Mr. McAleer includes: (1) $26,394 and $104,247 in
    fiscal 2005 and fiscal 2004, respectively, for use of corporate
    aircraft and (2) an automobile allowance of $38,772 for
    each of fiscal 2005 and fiscal 2004. Other annual compensation
    for Mr. Murphy includes: (1) $42,486 in fiscal 2004
    for use of corporate aircraft, (2) an automobile allowance
    of $27,900, $37,200 and $37,200 for fiscal 2006, fiscal 2005 and
    fiscal 2004, respectively, (3) $14,644 and $20,173 in
    fiscal 2006 and fiscal 2005, respectively, for reimbursement of
    club dues, grossed up for certain taxes due and (4) $14,897
    in fiscal 2006 for reimbursement of professional fees. For
    purposes of the Summary Compensation Table, the
    Company values the personal use of corporate aircraft under the
    incremental cost method. The incremental cost method represents
    the incremental cost to the Company of personal usage of
    corporate aircraft and is calculated based on the direct
    operating costs to the Company, including fuel costs, crew fees
    and travel expenses, trip-related repairs and maintenance,
    landing fees and other direct operating costs.(2)
    
    Mr. Cooper, Chairman of KZC, was named the Companys
    Chief Executive Officer, replacing Mr. Livengood, on
    January 18, 2005. On March 6, 2006, Mr. Cooper
    resigned as the Companys Chief Executive Officer and was
    appointed our Chief Restructuring Officer. On June 14,
    2006, Mr. Cooper resigned as the Companys Chief
    Restructuring Officer. Mr. Cooper did not receive a salary
    or bonus or any other compensation from the Company in his role
    as Chief Executive Officer or Chief Restructuring Officer.
    Mr. Cooper is Chairman of KZC, the entity to which the
    Company paid fees and expenses under a Services Agreement (see
     Employment Contracts and Termination of
    Employment and
    Change-In-Control
    Arrangements below for a description of the Services
    Agreement). However, Mr. Cooper does not own, directly or
    indirectly, any equity interests in KZC, and he is not
    guaranteed any portion of any revenues or earnings generated by
    KZC from Krispy Kreme (including with regard to the warrant
    issued to KZC).(3)
    
    Mr. Phalen commenced his employment with Krispy Kreme in
    January 2004. The compensation package extended to
    Mr. Phalen at the time he commenced employment included
    options for 75,000 shares of Krispy Kremes common
    stock. Mr. Phalens bonus pursuant to his employment
    agreement for fiscal 2005 was paid in August 2005.(4)
    
    Mr. Muir commenced his employment with Krispy Kreme in June
    2005.(5)
    
    Mr. Jervik commenced his employment with Krispy Kreme in
    October 2005.(6)
    
    Mr. McAleer retired as an executive officer and resigned as
    a director of Krispy Kreme effective September 30, 2005.(7)
    
    Mr. Murphy resigned as an executive officer of Krispy Kreme
    effective December 1, 2005, at which time all of his
    unvested options were forfeited.  Option
    Grants in Fiscal 2006
    Aggregated
    Option Exercises in Fiscal 2006 and
    2006 Fiscal Year-End Option Values
  in-the-money
 130




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##### Table of Contents



NumberofSecuritiesUnderlying





Common Shares Underlying Unexercised Options at


Value of Unexercised
    In-the-Money
    Options at FiscalOptions


Value


Fiscal Year-End


Year-EndNamed Officer

Exercised


Received


Exercisable


Unexercisable


Exercisable


UnexercisableStephen F. Cooper(1)






















Michael C. Phalen










49,500



73,500


$



$
Douglas R. Muir(2)






















Jeffrey L. Jervik(3)






















John N. McAleer(4)










696,000







3,712,345



Frank Murphy(5)










237,000











     (1)
    
    Mr. Cooper was named the Companys Chief Executive
    Officer effective January 18, 2005. On March 6, 2006,
    Mr. Cooper resigned as the Companys Chief Executive
    Officer and was appointed our Chief Restructuring Officer. On
    June 14, 2006, Mr. Cooper resigned as the
    Companys Chief Restructuring Officer.(2)
    
    Mr. Muir was named the Companys Chief Accounting
    Officer effective June 27, 2005.(3)
    
    Mr. Jervik was named the Companys Executive Vice
    President of Operations effective October 26, 2005.(4)
    
    Mr. McAleer retired as an executive officer of Krispy Kreme
    effective September 30, 2005.(5)
    
    Mr. Murphy resigned as an executive officer of Krispy Kreme
    effective December 1, 2005. As a result of his resignation,
    Mr. Murphy forfeited options to purchase
    137,000 shares and options that he held to purchase
    237,000 shares expired January 30, 2006.  Directors
    Compensation
   131




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##### Table of Contents



Employment
    Contracts and Termination of Employment and
    Change-In-Control
    Arrangements
  Employment
    Contracts
    Daryl G. Brewster.
        
    An amount equal to his current annual base salary through the
    termination date;
    An amount equal to two times the sum of the base salary and the
    target annual bonus for the year of termination;
    An amount, payable as soon as practicable following the date of
    termination, equal to a bonus for the year of termination
    calculated as a pro-rated target annual bonus for the number of
    months during the bonus year prior to the date of termination;
    Full vesting of all restricted shares and full exercisability of
    all stock options held on the date of termination; and 132




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##### Table of Contents




    Medical benefits for up to eighteen months after the date of
    termination.  and/or and/or
      Michael C. Phalen. out-of-pocket
    
    An amount equal to his current annual base salary and
    non-incentive compensation through the expiration date of the
    agreement, or a lump sum payment equal to his current annual
    base salary and non-incentive compensation due, discounted at
    the rate of 6% per annum; and
    A lump sum payment, payable within 30 days of termination,
    equal to his current monthly base salary multiplied by the
    number of months between the month of discharge and the
    preceding January 6; and
    A lump sum payment, payable within 30 days of termination,
    equal to three times his bonus, calculated at 50% of his
    annualized base salary for the then current fiscal year and
    discounted at the rate of 6% per annum.     133




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##### Table of Contents



Jeffrey L. Jervik.
    
    If the termination occurs within the first twelve months of the
    agreement, Mr. Jervik will receive his then-current base
    salary for six months as severance pay, and up to an additional
    six months, on a
    month-to-month
    basis, if Mr. Jervik remains unemployed despite diligent
    efforts to find employment; or
    If the termination occurs at any time after the first
    anniversary of the agreement, Mr. Jervik will receive his
    base salary, non-incentive compensation, bonuses and benefits
    through the date of termination.  month-to-month
      Charles A. Blixt.
 134




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##### Table of Contents



John N. McAleer.
  Frank Murphy.
  Change
    of Control Arrangements
    KZC
    Services Agreement
    out-of-pocket
 135




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##### Table of Contents



month-to-month
  Compensation
    Committee Interlocks and Insider Participation
    Report of
    the Compensation Committee on Executive Compensation
      Principal
    Executive Compensation Elements for Fiscal 2006
    Base Salary.
 136




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##### Table of Contents



Benefits and Perquisites.
  The Chief
    Executive Officers Compensation for Fiscal 2006
    Compensation
    Deductibility Policy
    Compensation Committee
          (1)
    Dr. Su Hua Newton, who was a member of the Compensation
    Committee for a portion of fiscal 2006, resigned as a director
    effective December 31, 2005. 137




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##### Table of Contents



Stock
    Performance Graph
    
  January


February


January


January


January


January26,


1,


31,


30,


28,


27,2001


2002


2003


2004


2005


2006Krispy Kreme Doughnuts, Inc.


$
100



$
236.48



$
184.30



$
216.00



$
52.48



$
32.30NYSE Composite Index



100




87.83




70.24




94.52




101.45




116.81S&P 500 Restaurants Index



100




105.90




73.33




118.51




155.39




182.37  138




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##### Table of Contents



Item 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS.  Security
    Ownership of Certain Beneficial Owners and Management
  Directors
    and Executive Officers
    Number ofShares Beneficially


Percentage BeneficiallyName of Beneficial Owner

Owned


OwnedDaryl G. Brewster(1)


300,000



Stephen F. Cooper(2)






Mary Davis Holt(3)


78,375



*Jeffrey L. Jervik






William T. Lynch, Jr.(4)


196,875



*John N. McAleer(5)


4,467,276



7.1
%Robert S. McCoy, Jr.(6)


10,081



*James H. Morgan(7)


134,375



*Douglas R. Muir






Frank Murphy(8)


4,000



*Michael C. Phalen(9)


61,500



*Andrew J. Schindler






Robert L. Strickland(10)


272,375



*Michael H. Sutton






Lizanne Thomas






Togo D. West, Jr.(11)


101,287



*All directors and executive
    officers as a group (17 persons)


5,626,194



8.9
%     *
    
    Less than one percent(1)
    
    Represents 300,000 shares of restricted common stock that
    will vest, provided that Mr. Brewsters employment
    continues through the applicable vesting dates, in twelve equal
    installments beginning on June 6, 2006 and continuing for
    each of the ten three-month periods following June 6, 2006,
    with the final installment vesting on February 1, 2009.
    Although these shares were granted to Mr. Brewster pursuant
    to an agreement dated March 6, 2006, share certificates
    representing the 300,000 shares were not issued as of
    September 29, 2006. As a result, those shares are not
    included in the total number of shares outstanding as of
    September 29, 2006. Mr. Brewster was appointed as a
    director and President and Chief Executive Officer effective
    March 6, 2006.(2)
    
    Mr. Cooper was named Chief Executive Officer effective
    January 18, 2005. On March 6, 2006, Mr. Cooper
    resigned as the Companys Chief Executive Officer and was
    appointed our Chief Restructuring Officer. On June 14,
    2006, Mr. Cooper resigned as the Companys Chief
    Restructuring Officer. 139




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##### Table of Contents



(3)
    
    Represents shares issuable upon the exercise of currently
    exercisable stock options.(4)
    
    Includes 142,575 shares issuable upon the exercise of
    currently exercisable stock options.(5)
    
    Includes (a) 3,157,452 shares held by Jubilee
    Investments Limited Partnership described in the table under
     Beneficial Owners of More Than 5% of Common
    Stock below, of which Mr. McAleer is one of six
    general partners; (b) 4,000 shares held by Jennifer A.
    McAleer, Mr. McAleers daughter;
    (c) 4,000 shares held by Lauren E. McAleer,
    Mr. McAleers daughter; (d) 4,000 shares
    held by Alexander B. McAleer, Mr. McAleers son;
    (e) 3,181 shares held by a tax-qualified trust
    pursuant to the Krispy Kreme Profit Sharing Stock Ownership
    Plan; (f) 5,331 shares held under the Krispy Kreme
    Nonqualified Stock Ownership Plan; and
    (g) 696,500 shares issuable upon the exercise of
    currently exercisable stock options.(6)
    
    Consists of (a) 300 shares held by IRA account f/b/o
    Robert S. McCoy, Jr.; (b) 7,771 shares issuable
    upon the exercise of currently exercisable stock options; and
    (c) 2,010 shares issuable upon the exercise of stock
    options that will be exercisable within 60 days of
    September 29, 2006.(7)
    
    Consists of (a) 4,000 shares owned beneficially by
    Margaret O. Morgan, Mr. Morgans spouse; and
    (b) 130,375 shares issuable upon the exercise of
    currently exercisable stock options.(8)
    
    Mr. Murphy resigned as an executive officer of Krispy Kreme
    effective December 1, 2005. As a result of his resignation,
    Mr. Murphy forfeited options to purchase
    137,000 shares and options that he held to purchase
    237,000 shares expired January 30, 2006.(9)
    
    Represents shares issuable upon the exercise of currently
    exercisable stock options.(10)
    
    Consists of (a) 236,000 shares held by the Robert
    Louis Strickland Revocable Living Trust, a trust of which
    Mr. Strickland is the sole trustee;
    (b) 12,000 shares held by Elizabeth Strickland,
    Mr. Stricklands spouse; and
    (c) 24,375 shares issuable upon the exercise of
    currently exercisable stock options.(11)
    
    Includes 93,287 shares issuable upon the exercise of
    currently exercisable stock options. 140




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##### Table of Contents



Beneficial
    Owners of More Than 5% of Common Stock
    Number ofShares Beneficially


Percentage BeneficiallyName and Address of Beneficial Owner

Owned


OwnedCourage Capital Management, LLC


7,201,995
(1)


11.6
%Richard C. Patton 
    Donald Farris 
    4400 Harding Road, Ste 503 
    Nashville, TN 37205Jefferies Asset Management,
    LLC


6,000,000
(2)


9.7
%The Metro Center
    One Station Place
    Three North Stamford, CT 06902Jefferies Paragon Master
    Fund, LtdWalker House, Mary Street 
    George Town, Grand Cayman Islands, British West IndiesMohamed Abdulmohsin Al
    Kharafi & Sons W.L.L.


4,133,000
(3)


6.7
%P.O. Box 886 
    Safat 13009 
    KuwaitGoldman, Sachs & Co.


4,050,125
(4)


6.6
%The Goldman Sachs Group, Inc. 
    85 Broad Street
    New York, NY 10004Jubilee Investments Limited
    Partnership


3,157,452
(5)


5.1
%435 Westover Avenue 
    Winston-Salem, NC 27104     (1)
    
    This information is based on Schedule 13G/A filed with the
    SEC on January 25, 2006 by Courage Capital Management, LLC,
    Richard C. Patton and Donald Ferris and a Form 4 filed with
    the SEC on March 15, 2006 by Courage Special Situations
    Master Fund, L.P. According to the Schedule 13G/A, Courage
    Capital Management, LLC, Richard C. Patton and Donald Farris
    have shared voting power and shared dispositive power with
    respect to 7,417,400 shares, of which 6,347,930 were owned
    directly by Courage Special Situations Master Fund, L.P. as of
    the date of such Schedule. Subsequently, according to the
    Form 4, Courage Special Situation Master Fund, L.P. reduced
    its ownership to 6,132,525 shares. Courage Capital
    Management, LLC is an investment advisor registered pursuant to
    Section 203 of the Investment Advisors Act of 1940, as
    amended, and has the discretion to vote and dispose of all of
    all of the shares reported in the Schedule 13G/A, as
    modified by the Form 4. Richard C. Patton and Donald Farris
    are members and managers of Courage Capital Management, LLC and
    may therefore be deemed to be the beneficial owners of such
    shares.(2)
    
    This information is based on Schedule 13G/A filed jointly
    with the SEC on February 14, 2006 by Jefferies Asset
    Management, LLC and Jefferies Paragon Master Fund, Ltd.
    According to the Schedule 13G/A, Jefferies Asset
    Management, LLC and Jefferies Paragon Master Fund, Ltd.
    have shared voting power and shared dispositive power with
    respect to 6,000,000 shares. Jefferies Asset
    Management, LLC filed the Schedule 13G/A as investment
    manager to Jefferies Paragon Master Fund, Ltd.(3)
    
    This information is based on Schedule 13G filed with the
    SEC on April 12, 2006 by Mohamed Abdulmohsin Al
    Kharafi & Sons W.L.L. According to the
    Schedule 13G, Mohamed Abdulmohsin Al Kharafi &
    Sons W.L.L. has sole voting power and sole dispositive power
    with respect to 4,133,000 shares. Mohamed Abdulmohsin Al
    Kharafi & Sons W.L.L. controls the Americana Group,
    Krispy Kremes franchisee in the Middle East. 141




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##### Table of Contents



(4)
    
    This information is based on Schedule 13G/A filed with the
    SEC on February 3, 2006 by Goldman, Sachs & Co.
    and The Goldman Sachs Group, Inc. According to the
    Schedule 13G/A, Goldman, Sachs & Co. and The
    Goldman Sachs Group, Inc. have shared voting power with respect
    to 4,036,025 shares and shared dispositive power with
    respect to 4,050,125 shares.(5)
    
    Jubilee Investments Limited Partnership, formerly McAleer
    Investments Limited Partnership, is a partnership established by
    members of the McAleer family, including John N. McAleer, one of
    six general partners, as described in the table under
     Directors and Executive Officers above,
    to hold shares of Krispy Kreme common stock.Each general partner may be deemed to have shared dispositive
    and voting power. In addition to the 3,157,452 shares held
    by Jubilee Investments Limited Partnership, Mr. McAleer
    beneficially owns 1,309,824 shares.  Securities
    Authorized for Issuance Under Equity Compensation
    Plans
    Number ofNumber of





Securities RemainingSecurities to





Available ForBe Issued


Weighted Average


Future IssuanceUpon Exercise


Exercise Price


Under Equity Compensationof Outstanding


of Outstanding


Plans (ExcludingOptions, Warrants


Options, Warrants


Securities Reflectedand Rights


and Rights


in Column (a))Plan Category

(a)


(b)


(c)Equity compensation plans approved
    by shareholders


3,489,700
(1)

$
27.70



6,062,600
(2)Equity compensation plans not
    approved by shareholders(3)(4)


2,588,700
(3)


1.58



Total


6,078,400


$
16.58



6,062,600     (1)
    
    Represents shares of common stock issuable pursuant to
    outstanding options under the 2000 Stock Incentive Plan.(2)
    
    Represents shares of common stock which may be issued pursuant
    to awards under the 2000 Stock Incentive Plan and the Employee
    Stock Purchase Plan. Under the Employee Stock Purchase Plan each
    employee of the Company or any participating subsidiary (other
    than those whose customary employment was for not more than five
    months per calendar year) was eligible to participate after the
    employee completed 12 months of employment, and each
    participant could elect to purchase shares of Company common
    stock at the end of quarterly offering periods. The amount of
    shares that could be purchased was based on the amount of
    payroll deductions a participant elected to have withheld and
    applied at the end of the purchase period to the purchase of
    shares (ranging from 1 to 15% of the participants base
    compensation). The purchase price for the shares was the lesser
    of the fair market value of the shares on the first day of the
    purchase period or the last day of the purchase period.
    Effective October 21, 2005, the Company halted purchases
    under the Employee Stock Purchase Plan.(3)
    
    Represents shares of common stock issuable pursuant to
    outstanding options under the 1998 Stock Option Plan. The 1998
    Stock Option Plan was adopted prior to the initial public
    offering of the Companys common stock, and it was not
    submitted for approval by shareholders. The plan provides for
    the grant of stock options to employees, directors and
    consultants, as determined by the Compensation Committee, and it
    is administered by the Compensation Committee. No grants have
    been made under the 1998 Stock Option Plan subsequent to
    April 5, 2000, and the Company will not make any further
    grants under that plan.(4)
    
    The Company maintained a Nonqualified Stock Ownership Plan under
    which management or other highly compensated employees selected
    by the Compensation Committee could participate. The plan was
    designed to provide benefits that could not be provided under
    the Companys tax-qualified Profit Sharing Stock Ownership
    Plan due to Internal Revenue Code limitations. Each year the
    Company credited benefits 142




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##### Table of Contents



under the plan based on a discretionary percentage of the
    employees compensation in excess of Internal Revenue Code
    limits. Amounts credited under the plan were deemed to be
    invested in Company stock, and benefits were payable in the form
    of Company stock or, at the election of the participant, in
    cash. No amounts were credited to participants in the plan in
    fiscal 2005 or fiscal 2006. The Company also maintained a
    Nonqualified Deferred Compensation Plan under which management
    or other highly compensated employees selected by the
    Compensation Committee could participate. The plan was designed
    to allow participants to defer a portion of their compensation.
    Amounts deferred under the plan could, at the election of the
    participant, be deemed to be invested in Company stock, and
    benefits deemed vested in Company stock were payable in the form
    of Company stock or, at the election of the participant, in
    cash. The ability of participants to deem investments to be in
    Company stock was suspended effective November 8, 2005.
    Neither the Nonqualified Stock Ownership Plan nor the
    Nonqualified Deferred Compensation Plan was submitted for
    shareholder approval. 143




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##### Table of Contents



Item 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS.  Associates
    License Agreements with Related Parties
      Fiscal YearEmeritus Director and

Ended JanuaryFranchise Companies

29, 2006(In thousands)Frank E. Guthrie:

$
868Augusta Doughnut CompanyFrank E. Guthrie and Robert L.
    McCoy:

$
2,636Magic City Doughnuts CorporationRobert L. McCoy:

$
4,741Gulf-Fla. Holdings, Inc.Steven D. Smith:

$
2,005Dales Doughnut Corp.Dales Doughnuts of Dothan,
    Inc.Smiths Doughnuts, Inc.     Relationship
    with Kroll Zolfo Cooper
  Change-In-Control
 144




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##### Table of Contents



Item 14.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES  Fees
    Fees Billed in Last Three Fiscal Years2006(1)


2005


2004Audit Fees

$
3,501,500


$
520,967


$
296,900Audit-Related Fees


44,550



213,566



134,250Tax Fees


172,199



295,743



302,099All Other Fees


3,900







42,501Total

$
3,722,149


$
1,030,276


$
775,300     (1)
    
    Includes fees relating to the audit of the fiscal 2005 financial
    statements and the restatement of the prior years
    financial statements.  Audit Fees Forms 10-Q
  Audit-Related Fees
  Tax Fees
  All Other Fees
  Pre-Approval
    of Audit and Non-Audit Services
  case-by-case case-by-case
 145




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##### Table of Contents



PART IV  Item 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES.  (a)
    Financial
    Statements and Schedules  Financial Statements.
  2.
    Financial Statement Schedules.      Exhibits.
   Exhibit



Description ofNumber



Exhibits3
.1



Amended Articles of Incorporation
    of the Registrant (incorporated by reference to Exhibit 3.1
    of the Registrants Registration Statement on
    Form S-8
    (Commission File
    No. 333-97787),
    filed with the Commission on August 7, 2002)3
.2



Amended and Restated Bylaws of the
    Registrant, as amended (incorporated by reference to
    Exhibit 3.1 to the Registrants Current Report on
    Form 8-K
    filed December 22, 2005)4
.1



Form of Certificate for Common
    Stock (incorporated by reference to Exhibit 4.1 to the
    Registrants Amendment No. 4 to Registration Statement
    on
    Form S-1
    (Commission File
    No. 333-92909),
    filed with the Commission on April 3, 2000)4
.2



Rights Agreement between the
    Company and Branch Banking and Trust Company, as Rights Agent,
    dated as of January 18, 2000 (incorporated by reference to
    Exhibit 4.2 to the Registrants Amendment No. 4
    to Registration Statement on
    Form S-1
    (Commission File
    No. 333-92909),
    filed with the Commission on April 3, 2000)4
.3



Warrant to Purchase Common Stock
    issued by Krispy Kreme Doughnuts, Inc. in favor of Kroll Zolfo
    Cooper LLC, dated July 31, 2005 (incorporated by reference
    to Exhibit 4.1 to the Registrants Current Report on
    Form 8-K
    filed October 26, 2005)10
.1



Form of Associates License
    Agreement (incorporated by reference to Exhibit 10.2 to the
    Registrants Registration Statement on
    Form S-1
    (Commission File
    No. 333-92909),
    filed with the Commission on December 16, 1999)10
.2



Form of Development Agreement
    (incorporated by reference to Exhibit 10.3 to the
    Registrants Registration Statement on
    Form S-1
    (Commission File
    No. 333-92909),
    filed with the Commission on December 16, 1999)10
.3



Form of Franchise Agreement
    (incorporated by reference to Exhibit 10.4 to the
    Registrants Registration Statement on
    Form S-1
    (Commission File
    No. 333-92909),
    filed with the Commission on December 16, 1999)10
.4



Form of International Franchise
    Agreement (incorporated by reference to Exhibit 10.4 to the
    Registrants Annual Report on
    Form 10-K
    for fiscal 2005)10
.5



Form of International Development
    Agreement (incorporated by reference to Exhibit 10.5 to the
    Registrants Annual Report on
    Form 10-K
    for fiscal 2005)10
.6



Trademark License Agreement, dated
    May 27, 1996, between HDN Development Corporation and
    Krispy Kreme Doughnut Corporation (incorporated by reference to
    Exhibit 10.22 to the Registrants Amendment No. 1
    to Registration Statement on
    Form S-1
    (Commission File
    No. 333-92909),
    filed with the Commission on February 22, 2000)10
.7



1998 Stock Option Plan dated
    August 6, 1998 (incorporated by reference to
    Exhibit 10.23 to the Registrants Amendment No. 1
    to Registration Statement on
    Form S-1(Commission
    File
    No. 333-92909),
    filed with the Commission on February 22, 2000)**10
.8



Long-Term Incentive Plan dated
    January 30, 1993 (incorporated by reference to
    Exhibit 10.24 to the Registrants Amendment No. 1
    to Registration Statement on
    Form S-1
    (Commission File
    No. 333-92909),
    filed with the Commission on February 22, 2000)** 146




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##### Table of Contents



Exhibit



Description ofNumber



Exhibits10
.9



Form of Promissory Note relating
    to termination of Long-Term Incentive Plan (incorporated by
    reference to Exhibit 10.25 to the Registrants
    Amendment No. 1 to Registration Statement on
    Form S-1
    (Commission File
    No. 333-92909),
    filed with the Commission on February 22, 2000)**10
.10



Form of Restricted Stock Purchase
    Agreement (incorporated by reference to Exhibit 10.26 to
    the Registrants Amendment No. 1 to Registration
    Statement on
    Form S-1
    (Commission File
    No. 333-92909),
    filed with the Commission on February 22, 2000)**10
.11



Form of Promissory Note relating
    to restricted stock purchases (incorporated by reference to
    Exhibit 10.27 to the Registrants Amendment No. 1
    to Registration Statement on
    Form S-1
    (Commission File
    No. 333-92909),
    filed with the Commission on February 22, 2000)**10
.12



Consulting Agreement, effective
    January 17, 2005 by and between Krispy Kreme Doughnuts,
    Inc. and Scott A. Livengood (incorporated by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K
    filed January 18, 2005)10
.13



Employment Agreement dated
    January 6, 2004 between the Registrant and Michael C.
    Phalen (incorporated by reference to Exhibit 10.15 to the
    Registrants Annual Report on
    Form 10-K
    for fiscal 2004)**10
.14



Written Description of Employment
    Arrangements, effective June 27, 2005, between the
    Registrant and Douglas R. Muir (incorporated by reference to
    Item 5.02 of the Registrants Current Report on
    Form 8-K
    filed July 8, 2005)**10
.15



Employment Agreement, dated
    October 26, 2005 between Krispy Kreme Doughnut Corporation
    and Jeffrey L. Jervik (incorporated by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K
    filed November 1, 2005)**10
.16



Employment Agreement, dated as of
    March 6, 2006, between Krispy Kreme Doughnuts, Inc, Krispy
    Kreme Doughnut Corporation and Daryl G. Brewster (incorporated
    by reference to Exhibit 10.1 to the Registrants
    Current Report on
    Form 8-K
    filed March 8, 2006)**10
.17



Contractor Services Agreement
    dated September 11, 2006 by and among Krispy Kreme
    Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Charles
    A. Blixt (incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    filed September 14, 2006)**10
.18



1998 Employee and Non-Employee
    Director Stock Option Plan of Montana Mills (incorporated by
    reference to Exhibit 10.3 to Montana Mills Amendment
    No. 1 to Registration Statement on
    Form SB-2
    (Commission File
    No. 333-86956),
    filed with the Commission on June 7, 2002)10
.19



2000 Stock Incentive Plan
    (incorporated by reference to Exhibit 10.1 to the
    Registrants Registration Statement on
    Form S-8
    (Commission File
    No. 333-47326),
    filed with the Commission on October 4, 2000)**10
.20



Krispy Kreme Doughnut Corporation
    Nonqualified Deferred Compensation Plan, effective
    October 1, 2000 (incorporated by reference to
    Exhibit 10.20 to the Registrants Annual Report on
    Form 10-K
    for fiscal 2005)**10
.21



Krispy Kreme Doughnut Corporation
    Nonqualified Stock Ownership Plan, effective February 1,
    1999 (incorporated by reference to Exhibit 10.21 to the
    Registrants Annual Report on
    Form 10-K
    for fiscal 2005)**10
.22



First Lien Credit Agreement (the
    First Lien Credit Agreement) dated as of
    April 1, 2005, among KKDC, KKDI, the Subsidiary Guarantors
    party thereto, the Lenders party thereto, Credit Suisse First
    Boston, as Administrative Agent and Issuing Lender, and Wells
    Fargo Foothill, Inc., as Collateral Agent (the First Lien
    Collateral Agent), Issuing Lender and Swingline Lender
    (incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    filed April 7, 2005)10
.23



Second Lien Credit Agreement (the
    Second Lien Credit Agreement) dated as of
    April 1, 2005, among KKDC, KKDI, the Subsidiary Guarantors
    party thereto, the Lenders party thereto, Credit Suisse First
    Boston, as Administrative Agent (the Administrative
    Agent), Paying Agent, Fronting Bank and Collateral Agent
    (the Second Lien Collateral Agent) (incorporated by
    reference to Exhibit 10.2 to the Registrants Current
    Report on
    Form 8-K
    filed April 7, 2005) 147




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##### Table of Contents



Exhibit



Description ofNumber



Exhibits10
.24



First Lien Security Agreement
    dated as of April 1, 2005, among KKDC, KKDI, the other
    Obligors named therein and the First Lien Collateral Agent
    (incorporated by reference to Exhibit 10.3 to the
    Registrants Current Report on
    Form 8-K
    filed April 7, 2005)10
.25



Second Lien Security Agreement
    dated as of April 1, 2005, among KKDC, KKDI, the other
    Obligors named therein and the Second Lien Collateral Agent
    (incorporated by reference to Exhibit 10.4 to the
    Registrants Current Report on
    Form 8-K
    filed April 7, 2005)10
.26



Collateral Agency and
    Intercreditor Agreement dated as of April 1, 2005, among
    KKDC, KKDI, the Subsidiary Guarantors party thereto, the First
    Lien Collateral Agent, the Second Lien Collateral Agent and the
    Administrative Agent (incorporated by reference to
    Exhibit 10.5 to the Registrants Current Report on
    Form 8-K
    filed April 7, 2005)10
.27



Waiver and Amendment No. 1,
    dated as of October 14, 2005, to the First Lien Credit
    Agreement (incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    filed October 18, 2005)10
.28



Waiver and Amendment No. 1,
    dated as of October 14, 2005, to the Second Lien Credit
    Agreement (incorporated by reference to Exhibit 10.2 to the
    Registrants Current Report on
    Form 8-K
    filed October 18, 2005)10
.29



Waiver and Amendment No. 2,
    dated as of October 25, 2005, to the First Lien Credit
    Agreement (incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    filed November 3, 2005)10
.30



Waiver and Amendment No. 2,
    dated as of October 25, 2005, to the Second Lien Credit
    Agreement (incorporated by reference to Exhibit 10.2 to the
    Registrants Current Report on
    Form 8-K
    filed November 3, 2005)10
.31



Amendment No. 3, dated as of
    December 12, 2005, to the First Lien Credit Agreement
    (incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    filed December 13, 2005)10
.32



Amendment No. 3, dated as of
    December 12, 2005, to the Second Lien Credit Agreement
    (incorporated by reference to Exhibit 10.2 to the
    Registrants Current Report on
    Form 8-K
    filed December 13, 2005)10
.33



Waiver and Amendment No. 4,
    dated as of March 30, 2006, to the First Lien Credit
    Agreement (incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    filed April 5, 2006)10
.34



Waiver and Amendment No. 4,
    dated as of March 30, 2006, to the Second Lien Credit
    Agreement (incorporated by reference to Exhibit 10.2 to the
    Registrants Current Report on
    Form 8-K
    filed April 5, 2006)10
.35



Amendment No. 5, dated as of
    April 30, 2006, to the First Lien Credit Agreement
    (incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    filed May 1, 2006)10
.36



Amendment No. 5, dated as of
    April 30, 2006, to the Second Lien Credit Agreement
    (incorporated by reference to Exhibit 10.2 to the
    Registrants Current Report on
    Form 8-K
    filed May 1, 2006)10
.37



Amendment No. 6, dated as of
    July 31, 2006, to the First Lien Credit Agreement
    (incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    filed August 3, 2006)10
.38



Amendment No. 6, dated as of
    July 31, 2006, to the Second Lien Credit Agreement
    (incorporated by reference to Exhibit 10.2 to the
    Registrants Current Report on
    Form 8-K
    filed August 3, 2006)10
.39



Amendment No. 7, dated as of
    October 30, 2006, to the First Lien Credit Agreement
    (incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    filed October 31, 2006)10
.40



Amendment No. 7, dated as of
    October 30, 2006, to the Second Lien Credit Agreement
    (incorporated by reference to Exhibit 10.2 to the
    Registrants Current Report on
    Form 8-K
    filed October 31, 2006) 148




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##### Table of Contents



Exhibit



Description ofNumber



Exhibits10
.41



Services Agreement entered into on
    February 8, 2005, by and between Krispy Kreme Doughnuts,
    Inc. and Stephen F. Cooper, Steven G. Panagos and Kroll Zolfo
    Cooper LLC, dated as of January 18, 2005 (incorporated by
    reference to Exhibit 10.1 to the Registrants Current
    Report on
    Form 8-K
    filed February 10, 2005)**10
.42



Letter Agreement dated
    March 10, 2005, by and between Krispy Kreme Doughnuts,
    Inc., Stephen F. Cooper, Steven G. Panagos and Kroll Zolfo
    Cooper LLC (incorporated by reference to Exhibit 10.1 to
    the Registrants Current Report on
    Form 8-K
    filed March 18, 2005)**10
.43



Amendment to Services Agreement
    dated as of March 31, 2005, by and between KKDI, Stephen F.
    Cooper, Steven G. Panagos and KZC (incorporated by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K
    filed April 6, 2005)**10
.44



Letter Agreement dated as of
    April 20, 2005, by and between Krispy Kreme Doughnuts,
    Inc., Stephen F. Cooper, Steven G. Panagos and Kroll Zolfo
    Cooper LLC (incorporated by reference to Exhibit 10.1 to
    the Registrants Current Report on
    Form 8-K
    filed April 26, 2005)**10
.45



Letter Agreement dated as of
    May 24, 2005, by and between Krispy Kreme Doughnuts, Inc.,
    Stephen F. Cooper, Steven G. Panagos and Kroll Zolfo Cooper LLC
    (incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    filed May 27, 2005)**10
.46



Letter Agreement dated
    June 27, 2005, by and between Krispy Kreme Doughnuts, Inc.,
    Stephen F. Cooper, Steven G. Panagos and Kroll Zolfo Cooper LLC
    (incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    filed June 28, 2005)**10
.47*



Advisory Agreement, dated
    June 14, 2006, by and between Krispy Kreme Doughnuts, Inc.
    and Kroll Zolfo Cooper LLC**10
.48



Form of Indemnification Agreement
    entered into between Krispy Kreme Doughnuts, Inc. and Lizanne
    Thomas and Michael Sutton (incorporated by reference to
    Exhibit 99.3 to the Registrants Current Report on
    Form 8-K
    filed October 8, 2004)**10
.49



Form of Indemnification Agreement
    entered into between Krispy Kreme Doughnuts, Inc. and members of
    the Registrants Board of Directors (other than Lizanne
    Thomas and Michael Sutton) (incorporated by reference to
    Exhibit 10.42 to the Registrants Annual Report on
    Form 10-K
    for fiscal 2005)**10
.50



Form of Nonqualified Stock Option
    Agreement (incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    filed October 30, 2006)**21*




List of Subsidiaries24*




Powers of Attorney of certain
    officers and directors of the Company (included on the signature
    page of this Annual Report on
    Form 10-K)31
.1*



Certification of Chief Executive
    Officer pursuant to
    Rule 13a-14(a)
    and
    Rule 15d-14(a)
    of the Securities Exchange Act of 1934, as amended31
.2*



Certification of Chief Financial
    Officer pursuant to
    Rule 13a-14(a)
    and
    Rule 15d-14(a)
    of the Securities Exchange Act of 1934, as amended32
.1*



Certification by Chief Executive
    Officer pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 200232
.2*



Certification by Chief Financial
    Officer pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     *
    Filed herewith.  **
    Identifies management contracts and executive compensation plans
    or arrangements required to be filed as exhibits pursuant to
    Item 15(b), Exhibits and Financial Statement
    Schedules  Exhibits, of this Annual Report on
    Form 10-K. 149




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##### Table of Contents



SCHEDULE
    I  CONDENSED FINANCIAL INFORMATION OF
    REGISTRANT
  KRISPY
    KREME DOUGHNUTS, INC.
    (PARENT COMPANY ONLY)
    BALANCE SHEET
  Jan. 29,


Jan. 30,2006


2005( In thousands)ASSETSInvestment in and advances to
    subsidiaries

$
108,671


$
240,943SHAREHOLDERS
    EQUITYPreferred stock





$
Common stock


298,255



295,611Unearned compensation






(17
)Notes receivable secured by common
    stock






(197
)Accumulated other comprehensive
    income


1,426



796Accumulated deficit


(191,010
)


(55,250
)Total shareholders equity

$
108,671


$
240,943  150




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##### Table of Contents



SCHEDULE
    I  CONDENSED FINANCIAL INFORMATION OF
    REGISTRANT  KRISPY
    KREME DOUGHNUTS, INC.
    (PARENT COMPANY ONLY)
    STATEMENT OF OPERATIONS
  Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004(In thousands)Equity in earnings (losses) of
    subsidiaries

$
(135,760
)

$
(198,335
)

$
48,607Miscellaneous expenses






(4
)


(67
)Income (loss) before income taxes


(135,760
)


(198,339
)


48,540Provision for income taxes
    (benefit)










(23
)Net income (loss)

$
(135,760
)

$
(198,339
)

$
48,563  151




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##### Table of Contents



SCHEDULE
    I  CONDENSED FINANCIAL INFORMATION OF
    REGISTRANT
  KRISPY
    KREME DOUGHNUTS, INC.
    (PARENT COMPANY ONLY)
    STATEMENT OF CASH FLOWS
  Year EndedJan. 29,


Jan. 30,


Feb. 1,2006


2005


2004(In thousands)CASH FLOW FROM OPERATING
    ACTIVITIES:Net income

$
(135,760
)

$
(198,339
)

$
48,563Equity in earnings of subsidiaries


135,760



198,335



(48,630
)Net cash used by operating
    activities






(4
)


(67
)CASH FLOW FROM INVESTING
    ACTIVITIES:Investment in subsidiaries


(351
)


(1,361
)


(19,518
)Net cash used for investing
    activities


(351
)


(1,361
)


19,518CASH FLOW FROM FINANCING
    ACTIVITIES:Net advances from subsidiaries






4



67Proceeds from exercise of stock
    options


154



1,175



19,514Proceeds from exercise of warrants










4Collection of notes receivable
    secured by common stock


197



186



175Net cash provided by financing
    activities


351



1,365



19,760Net increase in cash and cash
    equivalents










Cash and cash equivalents at
    beginning of year










Cash and cash equivalents at end
    of year

$



$



$
Supplement schedule of non-cash
    investing and financing activities:Issuance of stock in conjunction
    with acquisitions

$



$



$
59,031Issuance of restricted common
    shares










10  152




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##### Table of Contents



SIGNATURES      By:
    /s/  Michael
    C. Phalen    Title:
    Chief Financial Officer    POWER OF
    ATTORNEY
  attorney-in-fact Form 10-K attorney-in-fact Form 10-K attorney-in-fact
    Signature

Title/s/  James
    H. MorganJames
    H. Morgan

Chairman of the Board of Directors/s/  Daryl
    G. BrewsterDaryl
    G. Brewster

Director, Chief Executive Officer
    (Principal Executive Officer)/s/  Michael
    C. PhalenMichael
    C. Phalen

Chief Financial Officer (Principal
    Financial Officer)/s/  Douglas
    R. MuirDouglas
    R. Muir

Chief Accounting Officer
    (Principal Accounting Officer)/s/  Mary
    Davis HoltMary
    Davis Holt

Director/s/  William
    T. LynchWilliam
    T. Lynch

Director 153




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##### Table of Contents



Signature

Title/s/  Robert
    S. McCoy, Jr.Robert
    S. McCoy, Jr.

Director/s/  Andrew
    J. SchindlerAndrew
    J. Schindler

Director/s/  Robert
    L. StricklandRobert
    L. Strickland

Director/s/  Michael
    H. SuttonMichael
    H. Sutton

Director/s/  Lizanne
    ThomasLizanne
    Thomas

Director/s/  Togo
    D. West, Jr.Togo
    D. West, Jr.

Director  154