10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 1, 2004

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to

Commission file number 001-16485

KRISPY KREME DOUGHNUTS, INC.

(Exact name of registrant as specified in its charter)

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

Registrant’s telephone number, including area code:
(336) 725-2981

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

Title of each class	Name of each exchange on which registered
Common Stock, No Par Value	New York Stock Exchange
Preferred Share Purchase Rights	New York Stock Exchange
Warrants to Purchase Common Stock	American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

     The aggregate market value of voting and non-voting common equity of the registrant held by nonaffiliates of the registrant as of August 3, 2003 was $2,211.2 million.

     Number of shares of Common Stock, no par value, outstanding as of March 24, 2004: 61,313,996.

DOCUMENTS INCORPORATED BY REFERENCE:

     Portions of the registrant’s Annual Report to Shareholders for the fiscal year ended February 1, 2004 have been incorporated by reference into Parts II and IV of this Form 10-K. Portions of the definitive Proxy Statement for the registrant’s Annual Meeting to be held on May 26, 2004 have been incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

		Page
	PART I
ITEM 1	Business		2
ITEM 2	Properties		15
ITEM 3	Legal Proceedings		16
ITEM 4	Submission of Matters to a Vote of Security Holders		16
	PART II
ITEM 5	Market for Registrant’s Common Equity and Related Stockholder Matters		16
ITEM 6	Selected Financial Data		17
ITEM 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
ITEM 7A	Quantitative and Qualitative Disclosures About Market Risks		17
ITEM 8	Financial Statements and Supplementary Data		17
ITEM 9	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		17
ITEM 9A	Controls and Procedures		18
	PART III
ITEM 10	Directors and Executive Officers of the Registrant		18
ITEM 11	Executive Compensation		18
ITEM 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		18
ITEM 13	Certain Relationships and Related Transactions		19
ITEM 14	Principal Accountant Fees and Services		19
	PART IV
ITEM 15	Exhibits, Financial Statement Schedules and Reports on Form 8-K		19
SIGNATURES

PART I

     As used herein, unless the context otherwise requires, “Krispy Kreme,” the “Company,” “we” or “us” refers to Krispy Kreme Doughnuts, Inc. and its subsidiaries. References contained herein to fiscal 2000, fiscal 2001, fiscal 2002, fiscal 2003 and fiscal 2004 mean the fiscal years ended January 30, 2000, January 28, 2001, February 3, 2002, February 2, 2003 and February 1, 2004, respectively. Please note that our fiscal year ended February 3, 2002 contained 53 weeks. This Annual Report on Form 10-K (“Form 10-K”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). The Company’s actual results may differ materially from the results projected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in “Item 1. Business,” and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is incorporated by reference into this Form 10-K from the Company’s fiscal 2004 Annual Report to Shareholders. All references to share amounts and per share amounts in this Form 10-K, unless otherwise noted, have been adjusted to reflect a two-for-one stock split paid on March 19, 2001 in the form of a dividend to shareholders of record as of March 5, 2001 and a two-for-one stock split paid on June 14, 2001 in the form of a dividend to shareholders of record as of May 29, 2001.

ITEM 1. BUSINESS.

Overview

     Krispy Kreme Doughnuts, Inc. was incorporated in North Carolina on December 2, 1999 as a wholly-owned subsidiary of Krispy Kreme Doughnut Corporation (“KKDC”). Pursuant to a plan of merger approved by shareholders on November 10, 1999, the shareholders of KKDC became shareholders of Krispy Kreme on April 4, 2000 and KKDC became a wholly-owned subsidiary of Krispy Kreme. On April 10, 2000, Krispy Kreme closed a public offering of its common stock.

     Krispy Kreme is a leading branded specialty retailer of premium quality doughnuts. We have established Krispy Kreme as a leading consumer brand with a loyal customer base through our longstanding commitment to quality and consistency. The combination of our well-established brand, our one-of-a-kind doughnuts, a unique retail experience featuring our stores’ fully displayed production process, including our doughnut-making theater, our vertical integration and our strong franchise system creates significant opportunities for continued growth.

     Our principal business, which began in 1937, is owning and franchising Krispy Kreme doughnut stores where we make and sell over 20 varieties of premium quality doughnuts, including our Hot Original Glazed. Each of our traditional stores is a doughnut factory with the capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily. Consequently, each factory store (stores which contain a full doughnut-making production line) has considerable fixed or semi-fixed costs, and margins and profitability are significantly impacted by doughnut production volume and sales. Our doughnut stores are versatile in that most can support multiple sales channels to more fully utilize production capacity. These sales channels are comprised of on-premises sales and off-premises sales as described further under “Business Model-Store Operations.”

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Competitive Strengths

     We believe our success is based on the strengths described below.

     The universal appeal of our product. Our market research indicates that Krispy Kreme’s breadth of appeal extends across major demographic groups, including age and income. In addition to their taste, quality and simplicity, our doughnuts are an affordable indulgence. This has contributed to many of our customers purchasing doughnuts by the dozen for their offices, clubs and families. Demand for our doughnuts occurs throughout the day, with approximately half of our on-premises sales occurring in the morning and half in the afternoon and evening.

     A proven concept. Krispy Kreme is a focused yet versatile concept. Each of our distinctive Krispy Kreme traditional factory stores is a doughnut-making theater with the capacity, depending on equipment size, to produce from 4,000 dozen to over 10,000 dozen doughnuts daily. Our stores serve as our primary retail outlets. They are also designed to create a multi-sensory experience around our unique product and production process, which is important to our brand-building efforts. In addition to on-premises sales, we have developed multiple channels of sales outside our stores, which we refer to as off-premises sales. These sales channels improve the visibility of our brand, increase the convenience of purchase and capture sales from a wide variety of settings and occasions. Additionally, the ability to generate sales outside of our stores, utilizing the stores’ existing production capacity, minimizes the risk of an underperforming on-premises sales location.

     Strong growth potential. We believe that Krispy Kreme has significant opportunities for continued growth. Our revenue growth has been driven by new store openings as well as by increases in systemwide comparable store sales of 12.8% in fiscal 2002, 11.8% in fiscal 2003 and 10.2% in fiscal 2004. We believe the following represent significant growth opportunities for our Company:

• Domestic store development. At February 1, 2004, there were 357 Krispy Kreme factory stores in operation, of which 338 are located in the United States. In fiscal 2004, we opened 86 factory stores including 73 in the United States. Our recent store development efforts have focused on opening Company and franchise factory stores in markets with over 100,000 households. We will continue to expand in these markets because of their dense population characteristics which enable us to achieve economies of scale in local operations’ infrastructure and brand-building efforts. We will further enhance our expansion through the opening of factory stores in small markets, those with less than 100,000 households. We have also begun testing three additional store formats, referred to collectively as satellites, which we believe will facilitate our expansion. See “Satellite store concept” below.

• International store development. We continue to develop the capabilities and infrastructure necessary to support markets outside the United States. Through a joint venture, we currently have twelve stores in Canada and plan to open additional stores in the Canadian market in the future. We have also entered into joint ventures to develop the markets in Australia and New Zealand, the United Kingdom and the Republic of Ireland, and Mexico. Each of these joint ventures opened its first retail store in fiscal 2004. Based upon our continued research and experience with our international stores, we are focusing additional international development efforts primarily on opportunities in Japan, South Korea and other potential markets in Asia and Western Europe. Our ability to expand in these or other international markets, however, will depend on a number of factors, including demand for our product, our ability to supply or obtain the ingredients and equipment necessary to produce our products and local laws or policies of the particular countries. Ultimately, we believe that the opportunity for growth through expansion internationally is at least as great as the domestic opportunity.

• Satellite store concept. We continue testing the satellite store concept, which consists of the doughnut and coffee shop, the fresh shop and the kiosk formats. During fiscal 2002, we introduced the doughnut and coffee shop format. This store uses the new Hot Doughnut Machine technology, which completes the final steps of the production process and requires less space than the full production equipment in our factory store. This technology combines time, temperature and humidity elements to re-heat unglazed doughnuts, provided by a traditional factory store, and prepare them for the glazing process. Once glazed, customers can have the same hot doughnut experience in a doughnut and coffee shop as in a factory store. Additionally, the

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	doughnut and coffee shop offers our complete line of coffee and other beverages. As of February 1, 2004, nine doughnut and coffee shops were open, six of which are owned by the Company. We plan to continue our tests of this concept which we believe will help facilitate our expansion into smaller markets and dense urban areas. Additionally, we are testing both the fresh shop and the kiosk formats. In these formats, we will sell fresh doughnuts, beverages and Krispy Kreme collectibles. The doughnuts will be supplied by a nearby factory store, multiple times per day. Both the fresh shop and the kiosk formats will require less space than our traditional factory store or the doughnut and coffee shop. As the kiosk is a free-standing facility, it will require significantly less space than the fresh shop, expanding the number of potential locations where these facilities may be established. As of February 1, 2004, 20 fresh shops were open. We view the fresh shop and kiosk formats, which we believe will have attractive financial returns, as additional ways to achieve market penetration in a variety of market sizes and settings. We began our tests of the new fresh shop concept during fiscal 2004 and will begin our tests of the kiosk format in fiscal 2005.
•	Increasing on-premises and off-premises sales. In new markets, we typically focus our initial efforts on on-premises sales. We consistently evaluate improvements or additions to our product line to increase same store sales levels and balance seasonality of sales. Once we have established the brand and concept in a market, we then use the factory store platform to secure off-premises opportunities with grocery and convenience stores as well as mass merchants. By offering premium quality products, category management and superior customer service, we intend to expand the number of off-premises customers served as well as increase sales to existing accounts. We also believe that the food service and institutional channel of sales offers Krispy Kreme an opportunity to extend our brand into colleges and universities, business and industry complexes and sports and entertainment venues.
•	Expanded beverage offerings. One of our focus areas has been creating a best-in-class beverage program to complement our doughnut offering. With an acquisition in fiscal 2002, we acquired significant coffee roasting expertise. We have since formulated and are in the process of implementing a complete beverage program, including four drip coffees, a complete line of espresso-based coffees including flavors, and both coffee-based and non coffee-based frozen drinks. These drinks are designed to complement our existing juices, sodas, milks and water. We introduced the first component of this program, the drip coffee offering, to our stores in fiscal 2003, replacing the previous product which was purchased from an unrelated third party. We anticipate introducing the remaining components of the new beverage program, including frozen beverages in the next six months and espresso in most stores over the next twelve to eighteen months. We believe this new beverage program represents an opportunity to increase beverage sales in a meaningful way.
•	Montana Mills Bread Co., Inc. In April 2003, we completed the acquisition, through an exchange of stock, of Montana Mills Bread Co., Inc. (“Montana Mills”), an owner and operator of upscale “village bread stores” in the Northeastern United States. As of February 1, 2004, 21 Montana Mills stores were in operation. Montana Mills’ stores produce and sell a variety of breads and baked goods prepared in an open-view format. We believe that this acquisition will provide an opportunity to leverage our existing capabilities, such as our brand building and operational capabilities including our distribution chain, off-premises sales and coffee-roasting expertise, to expand Montana Mills’ business opportunity. We anticipate spending up to 24 months refining and expanding the Montana Mills concept, retaining its core best-in-class breads, but expanding the offering to include bread-based meals and appropriate accompaniments in an inviting setting.

     The ingredients for market leadership. The doughnut industry is highly fragmented and characterized by low-volume outlets with undifferentiated product quality. We believe that we have the ability to become the recognized leader in every market we enter through our unique combination of:

• A strong brand;

• A highly differentiated product;

• A high-volume production capacity; and

• A market penetration strategy using multiple sales channels.

     A proven franchise system. Krispy Kreme is committed to growth in part through franchising. Our franchisees consist of associates who operate under our original franchising program developed in the 1940s and area developers who operate under our franchising program developed in the mid-1990s. See “Store Ownership.” We intend to continue to strengthen our franchise system by attracting and retaining experienced and well-capitalized area developers who have the management capacity to develop multiple stores. Our development strategy permits us to grow in a controlled manner and enables us to ensure that each area developer strictly adheres to our high standards of quality and service. We prefer that area developers have ownership and successful operating experience in multi-unit food operations within the territory they propose for development. To ensure a consistent high quality product, we require each franchisee to purchase our proprietary mixes and doughnut-making equipment. We devote significant resources to providing our franchisees with assistance in site selection, store design, employee training

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and marketing. Many of our franchisees are also our shareholders, and we believe that common ownership of equity will serve to further strengthen our relationships and align our mutual interests. Additionally, we intend to continue to acquire equity positions in selected franchisee businesses and also intend to continue to periodically repurchase associate or area developer markets to take advantage of opportunities for synergies and market expansion.

     Direct store delivery capabilities. Krispy Kreme has developed a highly effective direct store delivery system, or DSD, for executing off-premises sales. We deliver fresh doughnuts, both packaged and unpackaged, to a variety of retail customers, such as supermarkets, convenience stores and other food service and institutional accounts. Through our company and franchised store operations, our route drivers are capable of taking customer orders and delivering products directly to our customers’ retail locations, where they are typically merchandised from Krispy Kreme branded displays. We have also developed national account relationships and implemented electronic invoicing and payment systems with many large DSD customers. We believe these strengths, coupled with our premium products, will provide us with significant sales opportunities by allowing us to assume the role of category manager for doughnut products in both the in-store bakery and food service distribution channels.

     A controlled process ensuring consistent high quality. Krispy Kreme has a vertically integrated, highly automated system designed to create quality, consistency and efficiency. Our doughnut-making process starts well before the store-level operations with:

• Our owned and operated manufacturing plants, which produce our proprietary mixes;

• Our state-of-the-art laboratories that test all key ingredients and each batch of mix produced; and

• Our self-manufactured, custom stainless steel doughnut-making equipment.

     Additionally, at the store level, we provide a 14-week manager training program covering the critical skills required to operate a Krispy Kreme store and a comprehensive training program for all positions in the store. The manager training program includes classroom instruction, computer-based modules and in-store training. The comprehensive training program for store personnel includes procedures for producing and finishing our doughnuts, as well as customer service.

     A balanced financial model. Krispy Kreme generates sales and income from three distinct sources in our principal business: company stores, which we refer to as Company Store Operations, franchise fees and royalties from our franchise stores, which we refer to as Franchise Operations, and a vertically integrated supply chain, which we refer to as Krispy Kreme Manufacturing and Distribution, or KKM&D. In addition to lowering the cost of goods sold for our stores, KKM&D generates attractive margins on sales of our mixes, equipment and coffee. Our franchising program lowers our capital requirements and provides a highly attractive royalty stream. Our Company Store Operations, Franchise Operations and KKM&D comprise three reportable segments under generally accepted accounting principles. As discussed above, in April 2003, we completed the acquisition of Montana Mills. The operating results of Montana Mills represent a fourth reportable segment. The financial data for these segments can be reviewed in Note 15 - Business Segment Information in the notes to our consolidated financial statements for fiscal 2004.

Business Model

     Krispy Kreme is a vertically integrated company structured primarily to support and profit from the high volume production and sale of high quality doughnut products. “High volume with high quality” has always been the foundation of our business strategy. Our business is driven by two complementary business units: our company and franchised stores, which we refer to collectively as Store Operations, and KKM&D. Independently, each is designed to ensure quality and to benefit from economies of scale. Collectively, both function as an integrated, cost-efficient system.

     Store Operations. The principal source of revenue for stores is the production and distribution of doughnuts. As part of our unique business model, our factory stores are both retail outlets and highly automated, high volume producers of our doughnuts and can sell their products through our multiple channels.

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• On-premises sales. Each of our stores offers at least 15 of our more than 20 varieties of doughnuts, including our signature Hot Original Glazed and nine other prescribed varieties. We also sell beverages, including our four drip coffees, espresso-based coffees including flavors and both our coffee-based and non coffee-based frozen drinks which are designed to complement our other beverages, and collectible memorabilia such as tee shirts, sweatshirts and hats. Fundraising sales, described under “Marketing,” are another component of on-premises sales. In order to establish our brand identity with the total store experience and because of the higher margins associated with on-premises sales, we typically focus our initial sales efforts in new markets on this channel.

• Off-premises sales. We accomplish off-premises sales through our direct store delivery system which is designed to:

- Generate incremental sales;

- Increase market penetration and brand awareness;

- Increase customer convenience;

- Optimize utilization of our stores’ production capacity; and

- Improve our stores’ return on investment.

     Our factory stores that engage in off-premises sales focus primarily on major grocery store chains, including Kroger, Food Lion and Albertsons, to local and national convenience stores and mass merchants.

     KKM&D. The mission of KKM&D is to create competitive advantages for our stores while operating as a profitable business enterprise. We have developed important operating competencies and capabilities, which we use to support our stores, including:

• Strong product knowledge and technical skills;

• Control of all critical production and distribution processes; and

• Collective buying power.

     The primary raw materials used in our products are flour, sugar, shortening and coffee beans. We obtain most of these materials under long-term purchase agreements and in the commodity spot markets. Although we own the recipe to our glaze flavoring - a key ingredient in many of our doughnuts - we are currently dependent on a sole source for our supply. However, we are in the process of establishing an alternative source.

     We implement the mission of KKM&D through four strategic business units:

• Mix manufacturing. We produce all of our proprietary doughnut mixes at our manufacturing facilities in Winston-Salem, NC and Effingham, IL. We control production of this critical input in order to ensure that our products meet quality expectations and to maximize our profit potential. Manufacturing and selling our own mixes allows us to capture the profit that normally would accrue to an outside supplier and is more cost effective than purchasing from third party vendors. Our mixes are produced according to our high quality standards, which include:

- Requiring each carefully selected ingredient supplier to meet or exceed industry standards;

- Receiving truckloads of our main ingredients daily;

- Testing each incoming key ingredient; and

- Testing each batch of mix.

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• Equipment manufacturing. We manufacture proprietary doughnut-making equipment, which our franchisees are required to purchase. Our carefully engineered equipment, when combined with our proprietary mixes, produces doughnuts with uniform consistency and high 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 our costs are lower than if we purchased our equipment from third parties.

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

• Distribution centers. We operate three distribution centers (Winston-Salem, NC, Effingham, IL and greater Los Angeles, CA), which are capable of supplying our stores with all of their key supplies, including all food ingredients, coffee, juices, signage, display cases, uniforms and various other items. Stores must use our doughnut mixes exclusively. In addition, most of our store operators have agreed contractually through our Supply Chain Alliance Program to purchase all of their requirements for the critical areas of their business from KKM&D through fiscal 2005. We believe that our ability to distribute supplies to our operators produces several advantages, including:

- Economies of scale. We are able to purchase at volume discount prices, which we believe are 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.

- Convenience. Our distribution centers offer our store operators the convenience of one-stop shopping. We are able to supply all of the key items needed to operate their stores, which enables them to focus their energies on running their stores, rather than managing supplier relationships.

• Beverage program. We provide many of the beverages offered in our stores, most of which are purchased from third parties. One of our focus areas has been, however, creating a best-in-class beverage program. Through an acquisition in fiscal 2002, we acquired significant coffee roasting expertise. We have since formulated and are in the process of implementing a complete beverage program, including four drip coffees, a complete line of espresso-based coffees including flavors, and both coffee-based and non coffee-based frozen drinks. We introduced the first component of the program, the drip coffee offering, to our stores in fiscal 2003, replacing the previous product which was purchased from an unrelated third party. We believe our new beverage program presents an opportunity to:

- Ensure a high quality product offering;

- Increase beverage sales through an expanded product offering; and

- Enhance overall profitability.

Krispy Kreme Brand Elements

     Krispy Kreme is a blend of several important brand elements which has created a special bond with many of our customers. The key elements are:

• One-of-a-kind taste. The taste experience of our doughnuts is the foundation of our concept and the common thread that binds generations of our loyal customers. Our doughnuts are made from a secret recipe that has been in our Company since 1937. We use only premium ingredients, which are blended by our custom equipment, to create this unique and very special product.

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• Doughnut-making theaters. Each of our traditional factory stores showcases our doughnut-making process. Our goal is to provide our customers with a unique entertainment experience and, in addition, visibly reinforce our commitment to quality and freshness.

• Hot Doughnuts Now. The Hot Doughnuts Now sign, when illuminated, is a signal that our Hot Original Glazed are being made. The Hot Doughnuts Now sign is a strong impulse purchase generator and an integral contributor to our brand’s mystique. Our Hot Original Glazed are made for several hours every morning and evening, and at other times during the day.

• Destination locations. Our full-service factory stores incorporate doughnut-making theaters, which are designed to produce a multi-sensory customer experience and establish a strong brand identity. Our research indicates that many of our stores have the geographic drawing power comparable to a regional shopping mall.

• Affordable indulgences. Our doughnuts are reasonably priced to ensure that they are affordable for the widest audience possible.

• Community relationships. We are a national company, yet we are committed to strong 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 warm memories of selling Krispy Kreme doughnuts to raise money for their schools, clubs and community organizations.

Industry Overview

     The doughnut industry is highly fragmented. We expect doughnut sales to continue to grow due to a variety of factors, including the growth in two-income households and a corresponding shift towards foods consumed away from home. We view the fragmented competition in the doughnut industry as an opportunity for our continued growth. We also believe that the premium quality of our products and the strength of our brand have enhanced, and will continue to enhance, the growth and expansion of the overall doughnut market.

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Store Development and Operations

     Site selection. Our objective is to create highly visible destination locations. Our comprehensive site selection process focuses on:

• High volume traffic;

• High household density;

• Proximity to both daytime employment and residential centers; and

• Proximity to other retail traffic generators.

     We work closely with our franchisees to assist them in selecting sites. A site selection team visits each site and the surrounding area before approving a store location. We believe that this process ensures that each new store will comply with our standards.

     Store operations. Our new factory stores are equipped with automated doughnut-making equipment capable of producing from 4,000 dozen to 10,000 dozen doughnuts daily. This capacity can support sales in excess of $100,000 per week. We outline uniform specifications and designs for each Krispy Kreme store and require compliance with our standards regarding the operation of the store, including, but not limited to:

• Varieties of products;

• Product specifications;

• Sales channels;

• Packaging;

• Sanitation and cleaning;

• Signage;

• Furniture and fixtures;

• Image and use of logos and trademarks;

• Training; and

• Marketing and advertising.

     We also require the use of a computer and cash register system with specified capabilities to ensure the collection of sales information necessary for effective store management. All of our franchisees provide us with weekly sales reports and periodic financial statements.

     We assist our franchisees with issues such as:

• Operating procedures;

• Advertising and marketing programs;

• Administrative, bookkeeping and accounting procedures;

• Public relations; and

• Generation of sales and operating data.

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     We also provide an opening team, which consists of up to nine people, to provide on-site training and assistance both for the week prior to and during the first week of operation for each initial store opened by a new franchisee. The number of opening team members providing this assistance is reduced with each subsequent store opening for an existing franchisee.

     Our stores which engage in off-premises sales typically operate on a 24-hour schedule. Other stores generally operate from 5:30 a.m. to 1:00 a.m., seven days a week, excluding some major holidays. Traditionally, our sales have been slower during the Christmas holiday season and the summer months.

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

     Management and staffing. Our Chief Operating Officer, along with other corporate officers responsible for store operations, are responsible for corporate interaction with our store operations division directors and store management. Through our divisional directors, each of whom is responsible for a specific geographic region, we communicate frequently with all store managers and their staff using store audits, weekly communications by telephone or e-mail and both scheduled and surprise store visits.

     We offer a comprehensive 14-week training program, conducted both at our headquarters and at certified training stores, which provides store managers the critical skills required to operate a Krispy Kreme store. The program includes classroom instruction, computer-based training modules and in-store training.

     Our staffing varies depending on a store’s size, volume of business and number of sales channels. Stores with sales through all sales channels have approximately 35 employees handling on-premises sales, processing, production, bookkeeping and sanitation and between two to 15 delivery personnel. Area developers frequently hire employees from leasing agencies and employ staff based on store volume and size. Hourly employees, along with delivery personnel, are trained by local store management through hands-on experience and training manuals.

     We believe that our success is a natural result of the growth and development of our people. We are developing a career model for both management and non-exempt employees which will focus on personal development and career growth. The program will link an individual’s economic, career and personal goals with our corporate and store-level goals.

Store Ownership

     We divide our stores into three categories of ownership: Company stores, associate stores and area developer stores. We refer to associates and area developers as franchisees, collectively. Store counts include retail factory stores and commissaries and exclude our satellite concept stores.

     Company stores. As of February 1, 2004, Krispy Kreme owned 141 stores, including 24 which are operated by consolidated joint ventures. Many of these stores were developed between 1937 and 1996 and are located predominantly in the Southeastern United States. These stores were designed as wholesale bakeries and generate a majority of their revenues through off-premises sales. Through acquisitions of associate and area developer franchisees’ market rights and related stores in recent years, as well as through new store construction, the number of Company stores located outside the Southeast has increased. Of the 24 company stores owned by area developers in which we have a controlling interest, 7 are owned by Freedom Rings, in which we own a 70% interest, and 17 are owned by Glazed Investments, in which we have an approximate 75% interest. The terms of our arrangements with area developers as described below are applicable to our agreements with these joint ventures as well.

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     Associates. We had 18 associates who operated 57 stores as of February 1, 2004. Associate stores have attributes which are similar to those of company stores located in the Southeast. This group generally concentrates on growing sales within the current base of stores rather than developing new stores or new territories. With two exceptions, associates are not obligated to develop additional stores within their territories. We cannot grant licenses to other franchisees or sell products bearing the Krispy Kreme brand name within an associate’s territory during the term of the license agreement.

     Associates are typically parties to 15-year licensing agreements, which generally permit them to operate stores using the Krispy Kreme system within a specific territory. Associates pay royalties of 3.0% of on-premises sales and 1.0% of all other sales, with the exception of private label sales for which they pay no royalties. Most associates also contribute 1% of all sales to the company-administered public relations and advertising fund. Our associates who were shareholders prior to our initial public offering in April 2000 have franchise agreements which were extended automatically for a period of 20 years following that offering and thereafter are renewed automatically for five-year periods, unless previously terminated by either party. We do not plan to license any new Krispy Kreme franchisees under the terms of the associate license agreement.

     Area developers. Under our area developer franchise program, which we introduced in the mid-1990s to strategically expand nationally into new territories, we license territories, usually defined by metropolitan statistical areas, to area developers who are capable of developing a prescribed number of stores within a specified time period. Area developer stores typically are designed and developed in locations favorable to achieving high volume on-premises sales, although they are also equipped to generate off-premises sales.

     As of February 1, 2004, we had 26 area developers operating 183 stores. These area developers have contractual commitments to open over 250 stores in their territories during their initial development schedule. Of these 26 area developers, we had a controlling interest in two and a minority equity interest in fifteen. Those in which we have a controlling interest operated 24 stores as of February 1, 2004 and those in which we have a minority interest operated 66 stores as of February 1, 2004. We believe equity investments in our area developer territories more closely align our interests with our area developers and also create greater financial opportunity for the Company.

     Many of our area developers are multi-unit food operators with a high level of knowledge about the local territory or territories they will develop and a proven financial capability to fully develop their territories. Our strategy, in part, is to grow through area developers. Our area developer program includes a royalty and fee structure that is more attractive to Krispy Kreme than that of our associate program, as well as territory development requirements.

     Each of our area developers is required to enter into two types of agreements: a development agreement which establishes the number of stores to be developed in an area and a franchise agreement for each store opened. Area developers typically pay development and franchise fees ranging from $20,000 to $50,000 for each store they develop.

     Our current standard franchise agreement provides for a 15-year term. The agreement is renewable subject to our discretion and can be terminated for a number of reasons, including the failure of the franchisee to make timely payments within applicable grace periods, subject to state law. Area developers generally pay a royalty fee of 4.5% to 6.0% on all sales and are required to contribute 1.0% of all sales to a company-administered public relations and advertising fund.

     In addition to a franchise agreement, all area developers have signed development agreements which require them to develop a specified number of stores on or before specific dates. Generally, these agreements have a five-year term. If area developers fail to develop their stores on schedule, we have the right to terminate the agreement and develop company stores or develop stores through new area developers or joint ventures in the territory.

     Generally, we do not provide financing to our franchisees other than in our capacity as an equity investor as described above. When we are an equity investor, we contribute equity or guarantee debt or lease commitments of the joint venture generally proportionate to our ownership interest. See Note 18 - Joint Ventures in the notes to our consolidated financial statements for additional information on our joint venture investments. In addition, for area developers in which we own a majority interest, we have provided loans to fund their operations and store development as we believe we can obtain sources of funding more economically than these joint ventures.

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Marketing

     Krispy Kreme’s approach to marketing is a natural extension of our brand equity, brand attributes, relationship with our customers and our values. We believe we have a responsibility to our customers to engage in marketing activities that are consistent with, and further reinforce, their confidence and strong feelings about Krispy Kreme. Accordingly, we have established certain guiding brand principles, which include:

• We will not attempt to define the Krispy Kreme experience for our customer;

• We prefer to have our customers tell their Krispy Kreme stories and share their experiences with others;

• We will focus on enhancing customer experiences through product-focused, value-added activities; and

• We will develop local, community-based relationships in all Krispy Kreme markets.

     To build our brand and drive our comparable store sales in a manner aligned with our brand principles, we have focused our marketing activities in the following areas:

     Store experience. Our stores are where customers first experience a Hot Original Glazed. Customers know that when our Hot Doughnuts Now sign in the store window is illuminated, they can see our doughnuts being made and enjoy a Hot Original Glazed within seconds after it passes through the glaze waterfall. We believe this begins a lifetime relationship with our customers and forms the foundation of the Krispy Kreme experience.

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

• Product donations to local radio and television stations, government agencies and other community organizations

• Good neighbor product deliveries to create trial uses

• Sponsorship of local events and nonprofit organizations

• Our “Krispy Kreme Ambassador Program,” which enlists our fans as ambassadors in new markets to generate awareness and excitement around a new store opening

• Friends of Krispy Kreme eNewsletter sent to those customers that have registered to receive monthly updates about new products, promotions and store openings.

     Fundraising sales. Fundraising sales are high volume sales to local charitable organizations at discounted prices. Charities in turn resell our products at prices which approximate retail. We believe that providing a fundraising program to local community organizations and local non-profit organizations helps demonstrate our commitment to the local community, enhances brand awareness, increases consumer loyalty and attracts more customers into our stores.

     Product placement. Since fiscal 1997, as we began growing nationally, there has been a significant increase in our product placements and references to our products in selected films and in television programs, including NBC’s Today Show, The Tonight Show with Jay Leno, Sex in the City, NYPD Blue, The Practice and The Simpsons, among others. We have been mentioned in more than 65 movies and television shows during the year ended February 1, 2004 and more than 230 movies and television shows during the prior three years. We have also been featured or mentioned in over 14,500 print publications during fiscal 2004 and 11,000 print publications during fiscal 2003, including The Wall Street Journal, The New York Times, The Washington Post, the Los Angeles Times, Newsweek, Glamour, InStyle and People. We believe the increasing number of placements and references are a reflection of the growing interest in our product and brand.

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     Advertising. Relationship marketing and product placement have been central to building our brand awareness. Although our marketing strategy has not historically employed traditional advertising, we will occasionally utilize live radio and direct mail to generate awareness and trial usage of our products.

Management Information Systems

     Krispy Kreme has a management information system that allows for the rapid communication of extensive information among our corporate office, support operations, company stores, associates and area developers. Our franchisees and other affiliates connect to this system through our intranet and have access to e-mail and the ability to provide financial reporting. Our management information systems strategy centers around our corporate portal, myKrispyKreme.com, which leverages intranet, extranet and Internet environments. We have adopted a balanced scorecard approach for measuring key performance drivers in each of our business units. Scorecard data are generated internally through our management information system.

     An enterprise resource planning system supports all major financial and operating functions within the corporation, including financial reporting, inventory control and human resources. A comprehensive data warehouse system supports the financial and operating needs of our Company Store Operations and KKM&D.

     All company stores have been retrofitted with a Windows NT-based point of sale, or POS, system. This POS system provides each store with the ability to more closely manage on-premises and off-premises sales while providing a kiosk into our intranet. We poll the sales information from each store’s POS system, which gives us the ability to analyze data regularly. Daily two-way electronic communication with our stores permits sales transactions to be uploaded and price changes to be downloaded to in-store POS servers.

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

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

Competition

     Our competitors include retailers of doughnuts and snacks sold through supermarkets, convenience stores, restaurants and retail stores. We compete against Dunkin’ Donuts, which has the largest number of outlets in the doughnut retail industry, as well as against regionally- and locally-owned doughnut shops. We also compete against other retailers who sell sweet treats such as cookie stores and ice cream stores. We compete on elements such as food quality, concept, convenience, location, customer service and value. Customer service, including frequency of deliveries and maintenance of fully stocked shelves, is an important factor in successfully competing for shelf space in grocery stores and convenience stores.

     We believe that our controlled process, which ensures the high volume production of premium quality doughnuts, makes us strong competitors in both food quality and value. Through our comprehensive site selection process and uniform store specifications and designs, we identify premier locations that are highly visible and increase customer convenience.

     We believe that in the in-store bakery market, many operators are looking for cost-effective alternatives to making doughnuts on-site. With a quality product and recognized brand name, Krispy Kreme has been able to provide a turnkey program that is profitable for the grocer. In addition, we also believe that we compete effectively in convenience stores. There is an industry trend moving towards expanded fresh product offerings during morning and evening drive times, and products are either sourced from a central commissary or brought in by local bakeries. Krispy Kreme provides fresh daily delivery, merchandised in an attractive branded display which retailers must use to participate in the program. Through effective signage and merchandising, operators are able to draw customers into the store, thus gaining add-on sales.

     In the packaged doughnut market, we offer a full product line of doughnuts and snacks that are sold on a consignment basis and are typically merchandised on a free-standing branded display. We compete primarily with

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other well-known producers of baked goods, such as Hostess, Dolly Madison and Entenmann’s, and some regional brands.

Trademarks and Trade Names

     Our doughnut shops are operated under the Krispy Kreme name, and we use over 45 federally registered trademarks and service marks, including “Krispy Kreme” and “Hot Doughnuts Now” and the logos associated with these marks. We have also registered some of our trademarks in approximately 30 other countries. We license the use of these trademarks to our franchisees for the operation of their doughnut shops. We also license the use of certain trademarks to convenience stores and grocery stores in connection with the sale of some of our products at those locations.

     Montana Mills stores operate under the Montana Mills name, which was acquired in connection with its acquisition in April 2003. We use a variety of trademarks and services in the operation of the Montana Mills stores, including six federally registered trademarks and service marks, chief among them “Montana Mills Bread” and “MontanaMills.com.”

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

Government Regulation

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

     Food product regulation. Our doughnut mixes are primarily produced at our manufacturing facilities in Winston-Salem, NC and Effingham, IL. The North Carolina Department of Agriculture has regulatory power over food products shipped from our Winston-Salem facility. Additionally, shipments from our Effingham facility are subject to the applicable governmental rules and regulations. Similar state regulations may apply to products shipped from our doughnut stores to grocery or convenience stores. Many of our grocery and convenience store customers require us to guarantee our products’ compliance with applicable food regulations.

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

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

     Franchise regulation. We must comply with regulations adopted by the Federal Trade Commission (“FTC”) and with several state and foreign laws that regulate the offer and sale of franchises. The FTC’s Trade Regulation Rule on Franchising (“FTC Rule”) and certain state and foreign laws require that we furnish prospective franchisees with a franchise offering circular or disclosure document containing information prescribed by the FTC Rule and applicable state and foreign laws and regulations.

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     We also must comply with a number of state and foreign laws that regulate some substantive aspects of the franchisor-franchisee relationship. These laws may limit a franchisor’s ability to: terminate or not renew a franchise without good cause; interfere with the right of free association among franchisees; disapprove the transfer of a franchise; discriminate among franchisees with regard to charges, royalties and other fees; and place new stores near existing franchises. To date, these laws have not precluded us from seeking franchisees in any given area or country and have not had a material adverse effect on our operations.

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

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

     Other regulations. We have several contracts to serve United States military bases, which require compliance with certain applicable regulations. The stores which serve these military bases are subject to health and cleanliness inspections by military authorities. These accounts are not material to our overall business. We are also subject to federal and state environmental regulations, but we currently believe that these will not have a material effect on our operations.

Employees

     As of February 1, 2004, we employed 6,982 people. Of these, 291 were employed in our administrative offices and 263 were employed in our manufacturing and distribution centers. In our Krispy Kreme stores, we had 6,190 employees. Additionally, we had 238 employees in our Montana Mills stores. Of our total workforce, 5,131 were full-time employees, including 595 managers and administrators. These numbers do not include individuals employed by our consolidated joint ventures, Freedom Rings and Glazed Investments.

     None of our employees is a party to a collective bargaining agreement although we have experienced occasional unionization initiatives. We believe our relationships with our employees are good.

Available Information

     Krispy Kreme files annual reports, quarterly reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”) under the Exchange Act. The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549 or obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains a website that contains reports, proxy statements, information statements and other information regarding issuers, including the Company, that file electronically with the SEC at http://www.sec.gov.

     We make available free of charge through our website at http://www.krispykreme.com our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or provide it to, the SEC. The content on our website is available for information purposes only. It should not be relied upon for investment purposes.

ITEM 2. PROPERTIES.

Stores. As of February 1, 2004, there were 357 Krispy Kreme factory stores, of which 141 were company stores (including 24 which are operated by consolidated joint ventures), 159 were owned by area developers (including 66 in which we have a joint venture interest) and 57 were owned by associates. Of the 357 Krispy Kreme factory stores in operation at February 1, 2004, 338 are located in 43 states in the continental United States, twelve are located in Canada, three are located in Australia, two are located in the United Kingdom and two are in Mexico.

• The majority of our factory stores have on-premises sales, and approximately 190 stores also engage in off-premises sales.

• Of the 117 factory stores we operated ourselves as of February 1, 2004, we owned the land and building for 53 stores. We leased both the land and building for 46 stores, leased only the land for 17 stores and leased only the building for 1 store.

• Of the 24 factory stores operated by consolidated joint ventures as of February 1, 2004, we owned the land and building for 8 stores. We leased both the land and building for 5 stores and leased only the land for 11 stores.

     As of February 1, 2004, there were 29 Krispy Kreme satellite concept stores, of which 10 were operated by the Company.

     KKM&D facilities. We own a 137,000 square foot mix manufacturing plant and distribution center in Winston-Salem, NC. Our coffee roasting operation is also located at this facility. We also own a 187,000 square foot mix

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manufacturing and distribution facility in Effingham, IL. We lease a 102,000 square foot facility near Los Angeles, CA, which is used as a distribution center. Additionally, we own a 100,000 square foot facility in Winston-Salem, which we use primarily as our equipment manufacturing facility and training facility.

     Montana Mills. Montana Mills leases 4,000 square feet of a facility for administrative purposes, and 8,000 square feet of a facility for fulfillment and storage purposes, both located in Rochester, NY. These leases expire on June 30, 2005 and January 31, 2005, respectively. Both the land and buildings for the 21 stores operated by Montana Mills at February 1, 2004 are leased. These leases expire between March 31, 2005 and August 30, 2012.

     Other properties. Our corporate headquarters is located in Winston-Salem, NC. We occupy approximately 35,000 square feet of this multi-tenant facility under a lease that expires on January 31, 2010, with one five-year renewal option. We have leased an additional 26,000 square feet in this facility under seven leases which expire between January 31, 2005 and July 31, 2008.

ITEM 3. LEGAL PROCEEDINGS.

     From time to time, we are subject to claims and suits arising in the course of our business, none of which we believe is likely to have a material adverse effect on our financial condition or results of operations.

     We maintain customary insurance policies against claims and suits which arise in the course of our business, including insurance policies for workers’ compensation and personal injury, some of which provide for relatively large deductible amounts.

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

     No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2004.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     Our common stock trades on The New York Stock Exchange under the symbol KKD. The following table sets forth for the periods indicated the high and low sales price of our common stock for the periods indicated.

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	High		Low
Fiscal Year Ended February 1, 2004:
First Quarter	$	35.36	$	26.42
Second Quarter		45.77		30.20
Third Quarter		49.74		37.50
Fourth Quarter		44.54		35.00
Fiscal Year Ended February 2, 2003:
First Quarter	$	44.02	$	33.00
Second Quarter		41.70		29.32
Third Quarter		38.02		27.40
Fourth Quarter		40.00		29.45

     As of March 24, 2004, there were approximately 186,600 shareholders of record.

Dividend Policy

     We did not pay any dividends in fiscal 2004 or fiscal 2003. We intend to retain our earnings to finance the expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Any future determination regarding cash dividend payments will be made by our board of directors and will depend upon the following factors:

• Earnings

• Financial condition

• Capital requirements

• Restrictions in financing agreements

•      Other factors deemed relevant by the board of directors

     Dividend payments are restricted by our bank credit facility to 50% of our net income for the immediately preceding fiscal year.

ITEM 6. SELECTED FINANCIAL DATA.

     The information required by this item is incorporated herein by reference to the section entitled “Selected Financial Data” in the Company’s fiscal 2004 Annual Report to Shareholders.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     The information required by this item is incorporated herein by reference to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s fiscal 2004 Annual Report to Shareholders.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.

     The information required by this item is incorporated herein by reference to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures about Market Risks” in the Company’s fiscal 2004 Annual Report to Shareholders.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The information required by this item is incorporated herein by reference to the Consolidated Financial Statements and the notes thereto in the Company’s fiscal 2004 Annual Report to Shareholders.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

     None.

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ITEM 9A. CONTROLS AND PROCEDURES.

The Company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in alerting them on a timely basis to material information required to be included in our reports filed with the SEC. There has been no change in our internal controls over financial reporting that occurred during the fourth quarter of fiscal 2004 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     Refer to the information in the Company’s definitive Proxy Statement filed with the Securities and Exchange Commission for the Annual Meeting of Shareholders to be held on May 26, 2004 (the “Proxy Statement”), under the caption “Election of Directors,” which information is incorporated herein by reference.

     For information concerning Section 16(a) of the Securities Exchange Act of 1934, refer to the information under the caption “Compliance with Section 16(a) of the Securities Exchange Act of 1934” of the Proxy Statement, which information is incorporated herein by reference.

     The Company has adopted codes of business conduct and ethics applicable to its directors and its officers and other employees, which are available on our website at http://www.krispykreme.com. Any amendment to or waiver of a provision of these codes of ethics that applies to any director or executive officer will also be disclosed on our website.

ITEM 11. EXECUTIVE COMPENSATION.

     Refer to the information under the captions “Executive Compensation” and “Election of Directors — Directors’ Compensation” of the Proxy Statement, which is incorporated herein by reference. See also the information under the caption “Report of the Compensation Committee on Executive Compensation” of the Proxy Statement, which information is not incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

     Refer to the information under the caption “Voting Securities and Principal Shareholders” of the Proxy Statement, which information is incorporated herein by reference.

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Equity Compensation Plan Information

     The following table shows the number of outstanding options and shares available for future issuance of options under all of the Company’s equity compensation plans as of February 1, 2004.

	Number of					Number of Securities
	Securities to be					Remaining Available for
	Issued Upon			Weighted Average		Future Issuance Under
	Exercise of			Exercise Price of		Equity Compensation
	Outstanding			Outstanding		Plans (Excluding
	Options, Warrants			Options, Warrants		Securities Reflected in
	and Rights			and Rights		Column (a))
Plan Category	(a)			(b)		(c)
Equity compensation plans approved by shareholders		7,475,400	(1)	$	19.31		5,222,400	(2)
Equity compensation plans not approved by shareholders		—			—		—
Total		7,475,400		$	19.31		5,222,400

(1)      Represents shares of common stock issuable pursuant to outstanding options under the 1998 Stock Option Plan, the 2000 Stock Incentive Plan and a stock option plan assumed effective April 7, 2003 upon the acquisition of Montana Mills (the “Montana Mills Plan”). At February 1, 2004, approximately 11,500 options with a weighted average exercise price of $34.90 remain outstanding under the Montana Mills Plan. The Company has not made, and will not make, and future grants of options under the Montana Mills Plan.

(2)      Represents shares of common stock which may be issued pursuant to awards under the 2000 Stock Incentive Plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Refer to the information under the caption “Related Party Transactions” of the Proxy Statement, which information is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

     Refer to the information under the caption “Report of the Audit Committee” of the Proxy Statement, which information is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) Financial Statements and Schedules

     1. Financial Statements. The following Consolidated Financial Statements of Krispy Kreme Doughnuts, Inc. and the Report of Independent Auditors are incorporated by reference to the corresponding sections of the Company’s fiscal 2004 Annual Report to Shareholders filed as an exhibit to this Form 10-K.

Description

Report of Independent Auditors

Consolidated Balance Sheets as of February 2, 2003 and February 1, 2004

Consolidated Statements of Operations for the Years Ended February 3, 2002, February 2, 2003 and February 1, 2004

Consolidated Statements of Shareholders’ Equity for the Years Ended February 3, 2002, February 2, 2003 and February 1, 2004

Consolidated Statements of Cash Flows for the Years Ended February 3, 2002, February 2, 2003 and February 1, 2004

Notes to Consolidated Financial Statements

     2. Financial Statement Schedule. The following financial statement schedule is included in this Part IV of this Form 10-K.

Schedule	Page
Schedule II - Consolidated Valuation and Qualifying Accounts and Reserves		23

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Report of Independent Auditors 24

     Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto.

(b) Reports on Form 8-K

     We filed a Current Report on Form 8-K with the Commission on November 21, 2003, reporting on item 12, with respect to our press release announcing our financial results for our third fiscal quarter ended November 2, 2003. We also filed a Current Report on Form 8-K on November 4, 2003, in which we reported the announcement of entering into a $150 million Syndicated Senior Unsecured Credit Facility comprised of a $119.3 million revolving credit facility and a $30.7 million term loan. The facility was arranged by Wachovia Bank, National Association and Branch Banking & Trust Company acting as Administrative Agent and Syndication Agent, respectively. The facility has a maturity date of October 31, 2007.

(c) Exhibits

Exhibit
Number		Description of Exhibits
2.1	—	Agreement and Plan of Merger among the Company, Krispy Kreme Doughnut Corporation and KDC Reorganization Corporation dated December 2, 1999 (incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on December 16, 1999)
3.1	—	Amended Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of Krispy Kreme’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
4.1	—	Form of Certificate for Common Stock (incorporated by reference to Exhibit 4.1 to the Registrant’s Amendment No. 4 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on April 3, 2000)
4.2	—	Rights Agreement between the Company and Branch Banking and Trust Company, as Rights Agent, dated as of January 18, 2000 (incorporated by reference to Exhibit 4.2 to the Registrant’s Amendment No. 4 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on April 3, 2000)
4.3	—	Specimen Montana Mills Redeemable Common Stock Purchase Warrant Certificate (incorporated by reference to Exhibit 4.2 of Montana Mills’ Registration Statement on Form SB-2 (Commission File No. 333-86956) filed with the Commission on April 25, 2002).
4.4	—	Form of Montana Mills Redeemable Common Stock Purchase Warrant Agreement (incorporated by reference to Exhibit 4.4 of Montana Mills’ Registration Statement on Form SB-2 (Commission File No. 333-86956) filed with the Commission on April 25, 2002).
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)

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Exhibit
Number		Description of Exhibits
10.4	—	Letter Agreement, dated April 12, 1994, between Krispy Kreme Doughnut Corporation and Mr. Scott A. Livengood (incorporated by reference to Exhibit 10.5 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)
10.5	—	Letter Agreement, dated February 15, 1994, between Krispy Kreme Doughnut Corporation and Mr. Joseph A. McAleer, Jr. (incorporated by reference to Exhibit 10.6 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)
10.6	—	Trademark License Agreement, dated May 27, 1996, between HDN Development-Corporation and Krispy Kreme 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)**
10.9	—	Form of Promissory Note relating to termination of Long-Term Incentive Plan (incorporated by reference to Exhibit 10.25 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000)**
10.10	—	Form of Restricted Stock Purchase Agreement (incorporated by reference to Exhibit 10.26 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000)**
10.11	—	Form of Promissory Note relating to restricted stock purchases (incorporated by reference to Exhibit 10.27 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000)**
10.12	—	Employment Agreement dated August 10, 1999 between Krispy Kreme Doughnut Corporation and John N. McAleer (incorporated by reference to Exhibit 10.28 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)**

-21-

Exhibit
Number		Description of Exhibits
10.13	—	Employment Agreement dated August 10, 1999 between Krispy Kreme Doughnut Corporation and Scott A. Livengood (incorporated by reference to Exhibit 10.29 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000)**
10.14	—	Employment Agreement dated February 1, 2001 between the Registrant and John W. Tate (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 28, 2001)**
10.15*	—	Employment Agreement dated January 6, 2004 between the Registrant and Michael C. Phalen **
10.16	—	Employment Agreement dated April 22, 2002 between the Registrant and R. Frank Murphy (incorporated by reference to Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended February 2, 2003)**
10.17	—	Kingsmill Plan (incorporated by reference to Exhibit 10.31 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)**
10.18	—	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)**
10.19	—	Loan Agreement dated October 31, 2003 among Krispy Kreme Doughnut Corporation, Wachovia Bank, National Association, Branch Banking and Trust Company, Bank of America, N. A. and Royal Bank of Canada and Wachovia Capital Markets, LLC (incorporated by reference to Exhibit 10.33 to the Registrant’s Current Report on Form 8-K filed with the Commission on November 4, 2003)
13*	—	Portions of the Registrant’s Fiscal 2004 Annual Report to Shareholders
21*	—	List of Subsidiaries
23*	—	Consent of PricewaterhouseCoopers LLP
24*	—	Powers of Attorney of certain officers and directors of the Company (included on the signature page of this Form 10-K)
31.1*	—	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2*	—	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1*	—	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	—	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Filed herewith.
**	Identifies management contracts and executive compensation plans or arrangements required to be filed as exhibits pursuant to Item 15(c) of Form 10-K.

-22-

SCHEDULE II

Consolidated Valuation and Qualifying Accounts and Reserves

					Additions
			Additions		Charged
	Balance at		Charged		to				Balance at
	Beginning		to		Other				End
Reserve for Doubtful Accounts	of Period		Operations		Accounts		Deductions(1)		of Period
For the year ended February 3, 2002	$	1,302,000	$	502,000	$	—	$	622,000	$	1,182,000
For the year ended February 2, 2003	$	1,182,000	$	272,000	$	—	$	1,000	$	1,453,000
For the year ended February 1, 2004	$	1,453,000	$	657,000	$	—	$	845,000	$	1,265,000

(1) Amounts represent net write-off of uncollectible receivable balances.

-23-

Report of Independent Auditors
on Financial Statement Schedule

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

     Our audits of the consolidated financial statements referred to in our report dated March 31, 2004 appearing in the 2004 Annual Report to Shareholders of Krispy Kreme Doughnuts, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

Greensboro, North Carolina
March 31, 2004

-24-

SIGNATURES

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

Krispy Kreme Doughnuts, Inc.
By:	/s/ Michael C. Phalen Name: Michael C. Phalen Title: Chief Financial Officer

Date: April 16, 2004

POWER OF ATTORNEY

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

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on April 16, 2004.

Signature	Title
/s/ Scott A. Livengood Scott A. Livengood	Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer)
/s/ James H. Morgan James H. Morgan	Vice Chairman
/s/ Michael C. Phalen Michael C. Phalen	Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ Mary Davis Holt Mary Davis Holt	Director
/s/ William T. Lynch William T. Lynch	Director
/s/ Robert S. McCoy, Jr. Robert S. McCoy, Jr.	Director
/s/ John N. McAleer John N. McAleer	Executive Vice President of Concept Development and Director
/s/ Dr. Su Hua Newton Dr. Su Hua Newton	Director
/s/ Robert L. Strickland Robert L. Strickland	Director
/s/ Togo D. West, Jr. Togo D. West, Jr.	Director

EX-3.2

                                                                     Exhibit 3.2

                           AMENDED AND RESTATED BYLAWS
                                       OF
                          KRISPY KREME DOUGHNUTS, INC.

                           Effective January 26, 2004

                  * * * * * * * * * * * * * * * * * * * * * * *

                              ARTICLE I. - OFFICES

Section 1.        Registered Office: The registered office of the corporation
                  shall be at 370 Knollwood Street, Winston-Salem, North
                  Carolina 27103.

Section 2.        Principal Office: The principal office of the corporation
                  shall be located at the same address as the registered office
                  or such other place as may be designated by the Board of
                  Directors.

Section 3.        Other Offices: The corporation may have offices at such other
                  places, either within or without the State of North Carolina,
                  as the Board of Directors may from time to time determine, or
                  as the affairs of the corporation may require.

                     ARTICLE II. - MEETINGS OF SHAREHOLDERS

Section 1.        Place of Meetings: All meetings of shareholders shall be held
                  at the registered office of the corporation, or at such other
                  place, either within or without the State of North Carolina,
                  as shall be designated in the notice of the meeting or agreed
                  on by a majority of the shareholders entitled to vote thereat.

Section 2.        Annual Meetings: (a) The annual meeting of shareholders shall
                  be held on a date and at a place at an hour to be fixed by the
                  Chief Executive Officer and affirmed by the Board of Directors
                  from time to time, for the purpose of electing directors of
                  the corporation and for the transaction of such other business
                  as may be properly brought before the meeting.

                  (b) No business shall be transacted at an annual meeting of
                  shareholders, except such business as shall be (i) specified
                  in the notice of meeting given as provided in Article II,
                  Section 5, (ii) otherwise brought before the meeting by or at
                  the direction of the Board of Directors or (iii) otherwise
                  brought before the meeting by a shareholder of record entitled
                  to vote at the meeting, in compliance with the procedures set
                  forth in this Article II, Section 2(b).

                  For business to be brought before an annual meeting by a
                  shareholder pursuant to (iii) above, the shareholder must have
                  given timely notice in writing to the



                  Secretary of the Company. To be timely, a shareholder's notice
                  must be delivered to, or mailed to and received at, the
                  principal office of the corporation not less than forty days
                  nor more than ninety days prior to the meeting. If less than
                  fifty days' notice or prior public disclosure of the date of
                  the meeting is given or made to shareholders, notice by the
                  shareholder will be timely if received by the Secretary of the
                  Company not later than the close of business on the tenth day
                  following the day on which such notice of the date of the
                  meeting or such public disclosure was given or made. Notice of
                  the date of the meeting shall be deemed to have been given by
                  the corporation more than fifty days in advance of the annual
                  meeting if the annual meeting is called on the date prescribed
                  by Article II, Section 2(a), without regard to whether notice
                  or public disclosure thereof is made. Notice of action to be
                  brought before the annual meeting pursuant to (iii) above
                  shall set forth as to each such matter the shareholder
                  proposes to bring before the annual meeting (A) a brief
                  description of the business desired to be brought before the
                  annual meeting and the reasons for bringing such business
                  before the annual meeting, (B) the name and address, as they
                  appear on the corporation's books, of each shareholder
                  proposing such business, (C) the classes and number of shares
                  of the corporation that are owned of record and beneficially
                  by each such shareholder, and (D) any material interest of
                  such shareholders in such business other than any interest as
                  a shareholder of the corporation. Notwithstanding anything in
                  these Bylaws to the contrary, no business shall be conducted
                  at an annual meeting except in accordance with the provisions
                  set forth in this Article II, Section 2(b). If the chairman of
                  the annual meeting determines that any business was not
                  properly brought before the meeting in accordance with the
                  provisions of these Bylaws, he shall so declare to the meeting
                  and, to the extent permitted by law, any such business not
                  properly brought before the meeting shall not be transacted.

Section 3.        Substitute Annual Meeting: If the annual meeting shall not be
                  held on the day designated by these bylaws, a substitute
                  meeting may be called in accordance with the provisions of
                  Section 4 of this Article. A meeting so called shall be
                  designated and treated for all purposes as the annual meeting.

Section 4.        Special Meetings: Special meetings of the shareholders may be
                  called at any time by the President, Secretary or Board of
                  Directors of the corporation.

Section 5.        Notice of Meetings: Written or printed notice stating the time
                  and place of the meeting shall be delivered not less than ten
                  nor more than fifty days before the date thereof, either
                  personally or by mail, by or at the direction of the Chairman,
                  the President, the Secretary, or other person calling the
                  meeting, to each shareholder of record entitled to vote at
                  such meeting.

                  In the case of an annual or substitute annual meeting, the
                  notice of meeting need not specifically state the business to
                  be transacted thereat unless it is a matter, other than
                  election of Directors, on which the vote of shareholders is
                  expressly required by the provisions of the North Carolina
                  Business Corporation Act. In the

                                       2


                  case of a special meeting, the notice of meeting shall
                  specifically state the purpose or purposes for which the
                  meeting is called.

                  When a meeting is adjourned for one hundred twenty days or
                  more, notice of the adjourned meeting shall be given as in the
                  case of an original meeting. When a meeting is adjourned for
                  less than one hundred twenty days in any one adjournment, it
                  is not necessary to give any notice of the adjourned meeting
                  other than by announcement at the meeting at which the
                  adjournment is taken.

Section 6.        Voting Lists: After fixing the record date for a meeting, the
                  Secretary of the corporation shall prepare an alphabetical
                  list of the shareholders entitled to notice of such meeting or
                  any adjournment thereof, arranged by voting group, class and
                  series, with the address of and number of shares held by each.
                  Such list shall be kept on file at the principal office of the
                  corporation, or at a place identified in the meeting notice in
                  the city where the meeting will be held, beginning two
                  business days after notice of such meeting is given and
                  continuing through the meeting, and on written demand shall be
                  subject to inspection or copying by any shareholder, his agent
                  or attorney at any time during regular business hours. This
                  list shall also be produced and kept open at the time and
                  place of the meeting and shall be subject to inspection by any
                  shareholder during the whole time of the meeting.

Section 7.        Quorum: The holders of a majority of the shares entitled to
                  vote, represented in person or by proxy, shall constitute a
                  quorum at meetings of shareholders. If there is no quorum at
                  the opening of a meeting of shareholders, such meeting may be
                  adjourned from time to time by the vote of a majority of the
                  shares voting on the motion to adjourn; and, at any adjourned
                  meeting at which a quorum is present, any business may be
                  transacted which might have been transacted at the original
                  meeting.

                  The shareholders at a meeting at which a quorum is present may
                  continue to do business until adjournment, notwithstanding the
                  withdrawal of enough shareholders to leave less than a quorum.

Section 8.        Voting of Shares: Each outstanding share having voting rights
                  shall be entitled to one vote on each matter submitted to a
                  vote at a meeting of shareholders.

                  Except in the election of Directors the vote of a majority of
                  the shares voted on any matter at a meeting of shareholders at
                  which a quorum is present shall be the act of the shareholders
                  on that matter, unless the vote of a greater number is
                  required by law. In the election of Directors those receiving
                  the greatest number of votes shall be deemed elected even
                  though not receiving a majority.

                  Voting on all matters shall be by voice vote or by a show of
                  hands unless the holders of one tenth of the shares
                  represented at the meeting shall, prior to the voting on any
                  matter, demand a ballot vote on that particular matter. The
                  election of directors is governed by Article III, Section 3.

                                       3


Section 9.        Informal Action by Shareholders: Any action which may be taken
                  at a meeting of the shareholders may be taken without a
                  meeting if a consent in writing, setting forth the action so
                  taken, shall be signed by all of the persons who would be
                  entitled to vote upon such action at a meeting, and filed with
                  the Secretary of the corporation to be kept in the Corporate
                  Minute Book.

Section 10.       Proxies: At all meetings of shareholders, shares may be voted
                  either in person or by one or more agents authorized by a
                  written proxy executed by the shareholder or his duly
                  authorized attorney-in-fact. A telegram, cablegram, wireless
                  message or photogram appearing to have been transmitted by a
                  shareholder, or a photographic, photostatic or equivalent
                  reproduction of a writing appointing one or more agents shall
                  be deemed a written proxy within the meaning of this section.

                            ARTICLE III. - DIRECTORS

Section 1.        General Powers: The business and affairs of the corporation
                  shall be managed by the Board of Directors.

Section 2.        Number, Term and Qualifications: (a) The number of Directors
                  constituting the whole Board shall be not more than fifteen
                  nor less than nine. The authorized number of Directors, within
                  the limits above specified, shall be determined by the
                  affirmative vote of a majority of the whole Board given at a
                  regular or special meeting of the Board of Directors; provided
                  that, if the number so determined is to be increased, or
                  decreased, notice of the proposed increase or decrease shall
                  be included in the notice of such meeting, or all of the
                  Directors at the time in office be present at such meeting, or
                  those not present at any time waive or have waived notice
                  thereof in writing; and provided, further, that the number of
                  Directors which shall constitute the whole Board shall not be
                  less than nine nor shall it be reduced to a number less than
                  the number of Directors then in office unless such reduction
                  shall become effective only at and after the next ensuing
                  meeting of shareholders for the election of Directors.

                  (b) The directors of the corporation shall be divided into the
                  following three classes: Class I, Class II and Class III. The
                  number of directors in each class shall be as nearly equal in
                  number as possible. Each initial director in Class I shall be
                  elected to an initial term of one (1) year, each initial
                  director in Class II shall be elected to an initial term of
                  two (2) years and each initial director in Class III shall be
                  elected to an initial term of three (3) years. Each director
                  shall hold office until the election and qualification of his
                  successor or his earlier death, resignation, retirement or
                  removal from office. Upon the expiration of the initial term
                  for each class of directors, the directors of each class shall
                  be elected for a term of three (3) years. Directors need not
                  be residents of the State of North Carolina or shareholders of
                  the corporation.

                                       4


Section 3.        Nomination and Election of Directors: Except as provided in
                  Section 5 and Section 2 of this Article, the Directors shall
                  be elected at the annual meeting of shareholders. If any
                  shareholder so demands, election of Directors shall be by
                  ballot.

                  Only persons who are nominated in accordance with the
                  provisions set forth in these bylaws shall be eligible to be
                  elected as directors at an annual or special meeting of
                  shareholders. Nomination of election to the Board of Directors
                  shall be made by or at the direction of the Board of Directors
                  or a committee appointed thereby.

                  Nomination for election of any person to the Board of
                  Directors may also be made by a shareholder entitled to vote
                  on such election if written notice of the nomination of such
                  person shall have been delivered to the Secretary of the
                  corporation at the principal office of the corporation not
                  less than forty days nor more than ninety days prior to the
                  meeting. If less than fifty days' notice or prior public
                  disclosure of the date of the meeting is given or made to
                  shareholders, notice by the shareholder will be timely if
                  received by the Secretary of the Company not later than the
                  close of business on the tenth day following the day on which
                  such notice of the date of the meeting or such public
                  disclosure was given or made. Notice of the date of the
                  meeting shall be deemed to have been given by the corporation
                  more than fifty days in advance of the annual meeting if the
                  annual meeting is called on the date prescribed by Article II,
                  Section 2(a), without regard to whether notice or public
                  disclosure thereof is made. Each such notice shall set forth:
                  (i) the name and address of the shareholder who intends to
                  make the nomination; (ii) a representation that such
                  shareholder is a holder of record of shares of the corporation
                  entitled to vote at such meeting and intends to appear in
                  person or by proxy at the meeting to nominate the person or
                  persons specified in the notice; (iii) as to each person to be
                  nominated (A) such person's name and address, employment
                  history for the past five years, affiliations, if any, with
                  the corporation and other corporations, the class and number
                  of shares of the corporation that are owned of record or
                  beneficially by such person and information concerning any
                  transaction in such shares within the prior sixty days,
                  whether such person has been convicted in a criminal
                  proceeding (excluding traffic violations or similar
                  misdemeanors) within the past five years and the details
                  thereof, whether such person has been a party to any
                  proceeding or subject to any judgment, decree or final order
                  with respect to violations of federal or state securities laws
                  within the past five years and the details thereof, and the
                  details of any contract, arrangement, understanding or
                  relationships with any person with respect to any securities
                  of the corporation; (B) such person's written consent to being
                  named as a nominee and to serving as director if elected and
                  (C) a description of all arrangements or understandings
                  between the shareholder and each such nominee and any other
                  person or persons (naming such person or persons) pursuant to
                  which the nomination or nominations are to be made by the
                  shareholder. The chairman of the meeting shall refuse to
                  acknowledge the nomination of any person not made in
                  compliance with the foregoing procedure.

                                       5


Section 4.        Removal: Directors may be removed from office only with cause
                  by a vote of shareholders holding 66 2/3% of the outstanding
                  shares entitled to vote at an election of Directors. If any
                  Directors are so removed, new Directors may be elected at the
                  same meeting.

Section 5.        Vacancies: A vacancy occurring in the Board of Directors may
                  be filled by a majority of the remaining Directors though less
                  than a quorum, or by the sole remaining Director; but a
                  vacancy created by an increase in the authorized number of
                  Directors outside of the range specified in Section 2 of this
                  Article shall be filled by election at an annual meeting or at
                  a special meeting of shareholders called for that purpose. The
                  shareholders may elect a Director at any time to fill any
                  vacancy not filled by the Directors.

Section 6.        Compensation: The Board of Directors may compensate Directors
                  for their services as such and may provide for the payment of
                  all expenses incurred by the Directors in attending regular
                  and special meetings of the Board.

Section 7.        Emeritus Directors: The Board of Directors may, from time to
                  time, by majority vote, elect one or more of its former
                  Directors to serve as Emeritus Directors for one or more
                  consecutive one-year terms or until earlier resignation or
                  removal by a majority of the Board of Directors. Emeritus
                  Directors may be asked to serve as consultants to the Board of
                  Directors and may be appointed by the Board of Directors to
                  serve as consultants to committees of the Board of Directors.
                  Emeritus Directors may be invited to attend meetings of the
                  Board of Directors or any committee of the Board of Directors
                  for which they have been appointed to serve as consultants.
                  Emeritus Directors shall not be permitted to vote on matters
                  brought before the Board of Directors or any committee thereof
                  and shall not be counted for the purpose of determining
                  whether a quorum of the Board or Directors or the committee is
                  present. Emeritus Directors will be entitled to receive fees
                  and reimbursement for expenses of meeting attendance, as
                  recommended by the Chairman of the Board of Directors and
                  approved by the Board of Directors. Emeritus Directors may be
                  removed at any time by the Board of Directors. An Emeritus
                  Director shall not have any of the responsibilities or
                  liabilities of a director, nor any of a director's rights,
                  powers or privileges. Reference in these Bylaws to "Directors"
                  shall not mean or include Emeritus Directors.

Section 8.        Director Retirement: A Director shall retire as of the annual
                  meeting coincident with the end of term in which such Director
                  attains age 70, except that any Director having attained the
                  age of 70 as of the annual meeting of the shareholders held in
                  2003 shall be permitted to complete such Director's present
                  term and stand for reelection for one additional term.

                                       6


                       ARTICLE IV. - MEETINGS OF DIRECTORS

Section 1.        Regular Meetings A regular meeting of the Board of Directors
                  shall be held immediately after, and at the same place as, the
                  annual meeting of the shareholders. In addition, to the annual
                  meeting of the Board of Directors, there shall be three
                  regular meetings of the Board of Directors to be held at the
                  offices of the corporation or at such other place as may be
                  designated by the Chairman of the Board or the President in
                  August and November (on the third Tuesday thereof after the
                  closing of the corporation's previous fiscal month) and on the
                  last Tuesday in January prior to close of each fiscal year.
                  The Chairman of the Board may designate the time of the
                  meetings.

Section 2.        Special Meetings: Special meetings of the Board of Directors
                  may be called by or at the request of the Chairman, President
                  or any two Directors. Such meetings may be held within or
                  without the State of North Carolina.

Section 3.        Notice of Meetings: Regular meetings of the Board of Directors
                  may be held without notice.

                  The person or persons calling a special meeting of the Board
                  of Directors shall, at least two days before the meeting, give
                  notice thereof by any usual means of communication. Such
                  notice need not specify the purpose for which the meeting is
                  called.

                  Attendance by a Director at a meeting shall constitute a
                  waiver of notice of such meeting, except where a Director
                  attends a meeting for the express purpose of objecting to the
                  transaction of any business because the meeting is not
                  lawfully called.

Section 4.        Quorum: A majority of the Directors fixed by these bylaws
                  shall constitute a quorum for the transaction of business at
                  any meeting of the Board of Directors.

Section 5.        Manner of Acting: Except as otherwise provided in this
                  section, the act of the majority of the Directors present at a
                  meeting at which a quorum is present shall be the act of the
                  Board of Directors.

Section 6.        Informal Action by Directors: Action taken by a majority of
                  the Directors without a meeting is nevertheless Board action
                  if written consent to the action in question is signed by all
                  the Directors and filed with the minutes of the proceedings of
                  the Board, whether done before or after the action so taken.

Section 7.        Meeting by Telephone: Any one or more members of any such
                  committee may participate in a meeting of the committee by
                  means of a conference telephone or similar communications
                  device which allows all persons participating in the meeting
                  to hear each other and such participation in a meeting shall
                  be deemed presence in person at such meeting.

                                       7


                   ARTICLE V. - EXECUTIVE AND OTHER COMMITTEES

Section 1.        Appointment: The Board of Directors, by resolution adopted by
                  a majority of the number of Directors then in office, may
                  designate from among its members an Executive Committee or one
                  or more other committees, each consisting of two or more
                  Directors. The designation of any such committee and the
                  delegation thereto of authority shall not operate to relieve
                  the Board of Directors, or any member thereof, of any
                  responsibility or liability imposed upon it or him by law.

Section 2.        Authority: Any such committee shall have and exercise all
                  authority of the Board of Directors in the management of the
                  corporation except to the extent, if any, that such authority
                  shall be limited by the resolution appointing such committee
                  and except also to the extent limited by law.

Section 3.        Tenure and Qualifications: Each member of any such committee
                  shall hold office until the next regular annual meeting of the
                  Board of Directors following his designation and until his
                  successor is designated as a member of any such committee and
                  is elected and qualified.

Section 4.        Meetings: Regular meetings of any such committee may be held
                  without notice at such time and place as such committee may
                  fix from time to time by resolution. Special meetings of any
                  such committee may be called by any member thereof upon not
                  less than one day's notice stating the place, date and hour of
                  such meeting, which notice may be written or oral, and if
                  mailed, shall be deemed to be delivered when deposited in the
                  United States mail addressed to any member of the Executive
                  Committee at his business address. Any member of the Executive
                  Committee may waive notice of any meeting and no notice of any
                  meeting need be given to any member thereof to attend in
                  person. The notice of a meeting of the Executive Committee
                  need not state the business proposed to be transacted at the
                  meeting.

Section 5.        Quorum: A majority of the members of any such committee shall
                  constitute a quorum for the transaction of business at any
                  meeting thereof, and actions of such committee must be
                  authorized by the affirmative vote of a majority of the
                  members present at the meeting at which a quorum is present.

Section 6.        Informal Action: Action taken by a majority of the members of
                  any such committee without meeting is nevertheless action of
                  such committee if written consent to the action in question is
                  signed by all of the members of such committee and filed with
                  the minutes of the proceedings of the committee, whether done
                  before or after the actions so taken.

Section 7.        Removal: Any member of any such committee may be removed at
                  any time with or without cause by resolution adopted by a
                  majority of the Board of Directors.

                                       8


Section 8.        Vacancies: Any vacancy in any such committee may be filled by
                  resolution adopted by a majority of the Board of Directors.

Section 9.        Procedure: Any such committee shall elect a presiding officer
                  from among its members and may fix its own rules of procedure
                  which shall not be inconsistent with these bylaws. It shall
                  keep regular minutes of its proceedings and report the same to
                  the Board of Directors for its information at the meeting
                  thereof held next after the proceedings shall have been taken.

Section 10.       Meeting by Telephone: Any one or more members of any such
                  committee may participate in a meeting of the committee by
                  means of a conference telephone or similar communications
                  device which allows all persons participating in the meeting
                  to hear each other and such participation in a meeting shall
                  be deemed presence in person at such meeting.

                             ARTICLE VI. - OFFICERS

Section 1.        Number: The officers of the corporation shall consist of a
                  President, a Secretary, a Treasurer, and such Executive Vice
                  Presidents, Senior Vice Presidents, Vice Presidents, Assistant
                  Secretaries, Assistant Treasurers and other officers as the
                  Board of Directors may from time to time elect. Any two or
                  more offices may be held by the same person, except the
                  offices of President and Secretary may not be held by the same
                  person.

Section 2.        Election and Term: The officers of the corporation shall be
                  selected by the Board of Directors. Such elections may be held
                  at any regular or special meeting of the Board. Each officer
                  shall hold office for a period of one year or until his death,
                  resignation, retirement, removal, disqualification or his
                  successor is elected and qualifies.

Section 3.        Removal: Any officer or agent elected or appointed by the
                  Board of Directors may be removed by the Board with or without
                  cause; but such removal shall be without prejudice to the
                  contract rights, if any, of the person so removed.

Section 4.        President: The President, subject to the control of the Board
                  of Directors, shall supervise and control the management of
                  the corporation in accordance with these bylaws. He shall
                  preside at all meetings of shareholders and directors. He
                  shall sign, with any other proper officer, certificates for
                  shares of the corporation and any deeds, mortgages, bonds,
                  contracts, or other instruments which may be lawfully executed
                  on behalf of the corporation, except where required or
                  permitted by law to be otherwise signed and executed and
                  except where the signing and execution thereof shall be
                  delegated by the Board of Directors to some other officer or
                  agent; and, in general, he shall perform such other duties as
                  may be prescribed by the Board of Directors from time to time.

                                       9


Section 5.        Vice Presidents: The Executive Vice Presidents, Senior Vice
                  Presidents, and Vice Presidents in the order of their
                  election, unless otherwise determined by the Board of
                  Directors, shall, in the absence or disability of the
                  President, perform the duties and exercise the powers of that
                  office. In addition, they shall perform such other duties and
                  have such other powers as the Board of Directors shall
                  prescribe.

Section 6.        Secretary: The Secretary shall keep a correct record of all
                  the proceedings of the meetings of the shareholders and
                  Directors. He shall attend to the giving of notices, have
                  custody of the corporate seal, and affix it to all instruments
                  required to be executed under seal as authorized by the Board
                  of Directors. He shall perform such other duties as are
                  incident to the office of Secretary, and shall have such other
                  powers and duties as may be conferred upon him by the Board of
                  Directors.

Section 7.        Treasurer: The Treasurer shall have charge of all the moneys
                  and securities belonging to the corporation. He shall deposit
                  said property with such banks as the Board of Directors shall
                  designate and in the name of the corporation. He shall keep a
                  record of all receipts and disbursements, and shall have
                  charge of all records of the corporation relating to its
                  finances. He shall perform such other duties as are incident
                  to the office of Treasurer, and shall have such other powers
                  and duties as may be conferred upon him by the Board of
                  Directors.

Section 8.        Assistant Secretaries and Treasurers: The Assistant
                  Secretaries and Assistant Treasurers shall, in the absence or
                  disability of the Secretary or the Treasurer, respectively,
                  perform the duties and exercise the powers of those offices,
                  and they shall, in general, perform such other duties as shall
                  be assigned to them by the Secretary or the Treasurer,
                  respectively, or by the President or the Board of Directors.

Section 9.        Bonds: The Board of Directors may by resolution require any or
                  all officers, agents and employees of the corporation to give
                  bond to the corporation, with sufficient sureties, conditioned
                  on the faithful performance of the duties of their respective
                  offices or positions, and to comply with such other conditions
                  as may from time to time be required by the Board of
                  Directors.

Section 10.       Vacancies: A vacancy in any office because of death,
                  resignation, removal, disqualification, or other reason, may
                  be filled by the Board of Directors for the unexpired portion
                  of the term.

                         ARTICLE VII. - INDEMNIFICATION

Section 1.        Expenses and Liabilities: (a) Any person who at any time
                  serves or has served (1) as a Director, Emeritus Director,
                  officer, employee or agent of the corporation, (2) at the
                  request of the corporation as a Director, Emeritus Director,
                  officer, partner, trustee, employee or agent of another
                  foreign or domestic corporation, partnership,

                                       10


                  joint venture, trust, or other enterprise, or (3) at the
                  request of the corporation as a trustee or administrator under
                  an employee benefit plan, shall have a right to be indemnified
                  by the corporation to the fullest extent from time to time
                  permitted by law against Liability and Expenses in any
                  Proceeding (including without limitation a Proceeding brought
                  by or on behalf of the corporation itself) arising out of his
                  or her status as such or activities in any of the foregoing
                  capacities or results from him being called as a witness at a
                  time when he has not been made a named defendant or respondent
                  to any Proceeding.

                  (b) The Board of Directors of the corporation shall take all
                  such action as may be necessary and appropriate to authorize
                  the corporation to pay the indemnification required by this
                  provision, including without limitation, to the extent needed,
                  making a good faith evaluation of the manner in which the
                  claimant for indemnity acted and of the reasonable amount of
                  indemnity due him.

                  (c) Any person who at any time serves or has served in any of
                  the aforesaid capacities for or on behalf of the corporation
                  shall be deemed to be doing or to have done so in reliance
                  upon, and as consideration for, the rights provided for
                  herein. Any repeal or modification of these indemnification
                  provisions shall not affect any rights or obligations existing
                  at the time of such repeal or modification. The rights
                  provided for herein shall inure to the benefit of the legal
                  representatives of any such person and shall not be exclusive
                  of any other rights to which such person may be entitled apart
                  from this provision.

                  (d) The rights granted herein shall not be limited by the
                  provisions contained in Sections 55-8-51 through 55-8-56 of
                  the North Carolina General Statutes or any successor to such
                  statute.

Section 2.        Advance Payment of Expenses: The Corporation shall (upon
                  receipt of an undertaking by or on behalf of the Director,
                  Emeritus Director, officer, employee or agent involved to
                  repay the Expenses described herein unless it shall ultimately
                  be determined that he or she is entitled to be indemnified by
                  the corporation against such Expenses) pay Expenses incurred
                  by such Director, Emeritus Director, officer, employee or
                  agent in defending a Proceeding or appearing as a witness at a
                  time when he or she has not been named as a defendant or a
                  respondent with respect thereto in advance of the final
                  disposition of such Proceeding.

Section 3.        Insurance: The corporation shall have the power to purchase
                  and maintain insurance on behalf of any person who is or was a
                  Director, Emeritus Director, officer, employee or agent of the
                  corporation, or is or was serving at the request of the
                  corporation as a Director, Emeritus Director, officer,
                  employee or agent of another domestic or foreign corporation,
                  partnership, joint venture, trust or other enterprise or as a
                  trustee or administrator under an employee benefit plan
                  against any liability asserted against him or her and incurred
                  by him or her in any such

                                       11


                  capacity, or arising out of his or her status as such, whether
                  or not the corporation would have the power to indemnify him
                  or her against such liability.

Section 4.        Definitions: The following terms as used in this Article shall
                  have the following meanings. "Proceeding" means any
                  threatened, pending or completed action, suit, or proceeding
                  and any appeal therein (and any inquiry or investigation that
                  could lead to such action, suit, or proceeding), whether
                  civil, criminal, administrative, investigative or arbitrative
                  and whether formal or informal. "Expenses" means expenses of
                  every kind, including counsel fees. "Liability" means the
                  obligation to pay a judgment, settlement, penalty, fine
                  (including an excise tax assessed with respect to an employee
                  benefit plan), reasonable expenses incurred with respect to a
                  Proceeding, and all reasonable expenses incurred in enforcing
                  the indemnification rights provided herein. "Director" and
                  "Emeritus Director" include the estate or personal
                  representative of such Director or Emeritus Director.
                  "Corporation" shall include any domestic or foreign
                  predecessor of this corporation in a merger or other
                  transaction in which the predecessor's existence ceased upon
                  consummation of the transaction.

                          ARTICLE VIII. - CONTRACTS, CHECKS AND DEPOSITS

Section 1.        Contracts: The Board of Directors may authorize any officer or
                  officers, agent or agents, to enter into any contract or
                  execute and deliver any instrument on behalf of the
                  corporation and such authority may be general or confined to
                  specific instances.

Section 2.        Checks and Drafts: All checks, drafts or other orders for the
                  payment of money issued in the name of the corporation shall
                  be signed by such officer or officers, agent or agents, of the
                  corporation and in such manner as shall from time to time be
                  determined by resolution of the Board of Directors.

Section 3.        Deposits: All funds of the corporation not otherwise employed
                  shall be deposited from time to time to the credit of the
                  corporation in such depositories as the Board of Directors
                  shall direct.

           ARTICLE IX. - CERTIFICATES FOR SHARES AND TRANSFER THEREOF

Section 1.        Certificates for Shares: Certificates representing shares of
                  the corporation shall be issued, in such form as the Board of
                  Directors shall determine, to every shareholder for the fully
                  paid shares owned by him. These certificates shall be signed
                  by the President or any Vice President, and the Secretary,
                  Assistant Secretary, Treasurer or Assistant Treasurer. They
                  shall be consecutively numbered or otherwise identified; and
                  the name and address of the persons to whom they are issued,
                  with the number of shares and date of issue, shall be entered
                  on the stock transfer books of the corporation.

                                       12


Section 2.        Transfer of Shares: Transfer of shares shall be made on the
                  stock transfer books of the corporation only upon surrender of
                  the certificates for the shares sought to be transferred by
                  the record holder thereof or by his duly authorized agent,
                  transferee or legal representative. All certificates
                  surrendered for transfer shall be canceled before new
                  certificates for the transferred shares shall be issued.

Section 3.        Closing Transfer Books and Fixing Record Date: For the purpose
                  of determining shareholders entitled to notice of or to vote
                  at any meeting of shareholders or any adjournment thereof, or
                  entitled to receive payment of any dividend, or in order to
                  make a determination of shareholders for any other proper
                  purpose, the Board of Directors may provide that the stock
                  transfer books shall be closed for a stated period but not to
                  exceed, in any case, seventy days. If the stock transfer books
                  shall be closed for the purpose of determining shareholders
                  entitled to notice or to vote at a meeting of shareholders,
                  such books shall be closed for at least ten days immediately
                  preceding such meeting.

                  In lieu of closing the stock transfer books, the Board of
                  Directors may fix in advance a date as the record date for any
                  such determination of shareholders, such record date in any
                  case to be not more than seventy days and, in case of a
                  meeting of shareholders, not less than ten days immediately
                  preceding the date on which the particular action, requiring
                  such determination of shareholders, is to be taken.

                  If the stock transfer books are not closed and no record date
                  is fixed for the determination of shareholders entitled to
                  notice of or to vote at a meeting of shareholders, or
                  shareholders entitled to receive payment of a dividend, the
                  date on which notice of the meeting is mailed or the date on
                  which the resolution of the Board of Directors declaring such
                  dividend is adopted, as the case may be, shall be the record
                  date for such determination of shareholders.

Section 4.        Lost Certificates: The Board of Directors may authorize the
                  issuance of a new certificate in place of a certificate
                  claimed to have been lost or destroyed, upon receipt of an
                  affidavit of such fact from the person claiming the loss or
                  destruction. When authorizing such issuance of a new
                  certificate, the Board may require the claimant to give the
                  corporation a bond in said sum as it may direct to indemnify
                  the corporation against loss from any claim with respect to
                  the certificate claimed to have been lost or destroyed; or the
                  Board may, by resolution reciting that the circumstances
                  justify such action, authorize the issuance of a new
                  certificate without requiring such a bond.

                         ARTICLE X. - GENERAL PROVISIONS

Section 1.        Dividends: The Board of Directors may from time to time
                  declare, and the corporation may pay, dividends on its
                  outstanding shares in the manner and upon the terms and
                  conditions provided by law and by its charter.

                                       13


Section 2.        Seal: The seal shall be in the form of a circle with the name
                  of the corporation and N.C. on the circumference and the word
                  "SEAL" in the center as shown by the impress of the corporate
                  seal on the margin of this section of the bylaws.

Section 3.        Waiver of Notice: Whenever any notice is required to be given
                  to any shareholder or Director under the provisions of the
                  North Carolina Business Corporation Act or under the
                  provisions of the charter or bylaws of this corporation a
                  waiver thereof in writing signed by the person or persons
                  entitled to such notice, whether before or after the time
                  stated therein, shall be equivalent to the giving of such
                  notice.

Section 4.        Fiscal Year: Unless otherwise ordered by the Board of
                  Directors by action recorded in the minutes, the fiscal year
                  of the corporation shall end on the Sunday in either January
                  or February closest to January 31.

Section 5.        Amendments: Except as otherwise provided herein, these bylaws
                  may be amended or repealed and new bylaws may be adopted by
                  the affirmative vote of a majority of the Directors then
                  holding office at any regular or special meeting of the Board
                  of Directors.

                  The Board of Directors shall have no power to adopt a bylaw:
                  (1) requiring more than a majority of the voting shares for a
                  quorum at a meeting of shareholders or more than a majority of
                  the votes cast to constitute action of the shareholders,
                  except where higher percentages are required by law; or (2)
                  providing for the management of the corporation other than by
                  the Board of Directors or a committee thereof.

                  No bylaw adopted or amended by the shareholders shall be
                  altered or repealed by the Board of Directors. Notwithstanding
                  any provision contained in these Bylaws to the contrary, the
                  affirmative vote of at least 66 2/3% of the outstanding shares
                  of Common Stock of the corporation shall be required to amend
                  or repeal the following provisions of these Bylaws: Article
                  II, Section 2(b) (Annual Meetings); Article II, Section 4
                  (Special Meetings); Article II, Section 5 (Notice of
                  Meetings); Article III, Section 2 (Directors - Number, Term
                  and Qualifications); or Article III, Section 4 (Directors -
                  Removal).

                  No alteration, amendment or rescission of a bylaw shall be
                  voted upon unless notice thereof has been given in the notice
                  of the meeting or unless all of the Directors of the
                  corporation execute a written waiver of notice stating that
                  action upon the bylaws is to be taken at the meeting, and the
                  original of such waiver shall be recorded in the Minute Book.

                                       14

EX-10.15

                                                                   Exhibit 10.15

                              EMPLOYMENT AGREEMENT


         THIS EMPLOYMENT AGREEMENT (THE "AGREEMENT") is made this 6th day of
January, 2004, and is effective the 6th day of January, 2004, by and between
KRISPY KREME DOUGHNUTS, INC., a North Carolina corporation (the "Company"), and
MICHAEL PHALEN (the "Executive").

                                     RECITAL

         The Executive is being hired as Chief Financial Officer, and the
parties have negotiated this Agreement in consideration of the Executive's
valuable services and leadership.

         NOW THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties do hereby agree as follow:

         1. EFFECTIVE DATE. This Agreement shall be effective upon, and from and
after, the date set forth above.

         2. DEFINITIONS. As used herein, the following terms shall have the
following meanings:

                  (a) "Disability" shall mean the Executive becoming disabled
                  and unable to continue his employment with the Company as
                  defined in the Company's then applicable disability policy for
                  the Senior Management of the Company.

                  (b) "Discharge" shall mean the termination by the Company of
                  the Executive's employment during the Period of Employment for
                  any reason other than (i) Good Cause, (ii) death of the
                  Executive, (iii) Disability of the Executive, or (iv)
                  Retirement of the Executive.

                  (c) "Expiration Date" means the date that the Period of
                  Employment (as it may have been extended) expires.

                  (d) "Good Cause" has its meaning as defined in Section 6
                  hereof.

                  (e) "Period of Employment" shall be for a term of three years
                  beginning January 6, 2004 and ending January 6, 2007;
                  provided, however, that commencing January 6, 2005, the
                  Executive's Period of Employment shall automatically be
                  extended for successive one-year periods each year as of
                  January 6, of each year unless the Company gives Executive
                  written notice of nonextension on or before that date.

                  (f) "Retirement" shall mean a time when the sum of the
                  Executive's age and employment with the Company equals or
                  exceeds 65.



                  (g) "Senior Management" shall mean the senior executive
                  management of the Company currently consisting of the chief
                  executive officer, the president, and the executive vice
                  presidents.

                  (h) "Stock Option Plan" shall mean the Krispy Kreme Doughnut
                  Corporation 1998 Stock Option Plan and/or the Krispy Kreme
                  Doughnuts, Inc. 2000 Stock Incentive Plan or any successor
                  plan.

                  (i) "Termination Date" shall mean:

                           (i) If the Executive's employment is terminated by
                           reason of death, the Executive's date of death;

                           (ii) If the Executive's employment is terminated by
                           reason of Retirement, the date of his Retirement;

                           (iii) If the Executive's employment is terminated by
                           reason of Disability, the date of his Disability;

                           (iv) If the Executive's employment is terminated for
                           Good Cause, the date specified in the written notice
                           of termination given by the Company pursuant to
                           Section 6(a);

                           (v) If the Executive's employment is terminated by
                           reason of a Discharge, the effective date of
                           Discharge;

                           (vi) If the Executive's employment is terminated by
                           reason of non-extension of the Period of Employment,
                           the Expiration Date; and

                           (vii) If the Executive voluntarily terminates his
                           employment as permitted by Section 6(b), the
                           effective date of his termination of employment.

         3. EMPLOYMENT; PERIOD OF EMPLOYMENT.

         The Company hereby employs the Executive, and the Executive hereby
accepts employment by the Company, for the Period of Employment, in the position
and with the duties and responsibilities set forth in Section 4, upon the terms
and subject to the conditions of this Agreement.

         4. POSITION, DUTIES AND RESPONSIBILITIES. During the Period of
Employment, the Executive shall

                  (a) serve as Chief Financial Officer, reporting to the CEO, of
                  the Company and its subsidiaries or in such other Senior
                  Management position as may be assigned to him by mutual
                  agreement with the Board of Directors. The Executive shall be
                  employed hereunder in Forsyth County, North Carolina and he
                  shall not be required to relocate


                                       2


                  his residence or principal office to any place outside Forsyth
                  County, North Carolina without his consent; and

                  (b) devote his best efforts to the furtherance of the interest
                  of the Company and the performance of his duties hereunder and
                  agrees not to engage in any competition whatsoever, either
                  directly or indirectly, with the Company or any of its
                  subsidiaries or affiliates. The Executive shall be allowed
                  holiday and vacation periods, leaves for periods of illness or
                  incapacity and personal leaves in accordance with the
                  Company's regular practices for members of Senior Management.

         5. COMPENSATION, COMPENSATION PLANS AND BENEFITS. During the Period of
Employment, the Executive shall be compensated as follows:

                  (a) He shall receive an annual base salary equal to $300,000,
                  with annual increases in accordance with the Company's regular
                  practices for members of Senior Management. In addition, he
                  shall receive certain non-incentive compensation (including a
                  monthly automobile allowance of $3,000). Such compensation
                  shall be paid in accordance with the Company's regular
                  schedule for payment of salaried employees.

                  (b) He shall receive such other bonuses as are afforded the
                  Company's Senior Management and be eligible to participate in
                  all of the Company's executive compensation plans provided to
                  members of Senior Management of the Company from time to time.
                  He shall be eligible for a bonus target of 60%. For FY 2005,
                  he shall have a minimum bonus guarantee of $300,000.

                  (c) He shall be eligible to receive 75,000 options of Krispy
                  Kreme Doughnuts, Inc. common stock on date of hire. These
                  options will vest at 25% per year over a four year period. The
                  strike price will be the closing price of the stock at the end
                  of the normal trading hours on the first day of his
                  employment.

                  (d) He shall be entitled to participate in and receive other
                  employee benefits, which may include, but are not limited to,
                  benefits under any life, health, accident, disability,
                  medical, dental and hospitalization insurance plans, use of a
                  Company automobile or an automobile allowance, and other
                  perquisites and benefits, as are provided to members of Senior
                  Management of the Company from time to time.

                  (e) He shall be entitled to be reimbursed for the reasonable
                  and necessary out-of-pocket expenses, including entertainment,
                  travel and similar items, and all expenses necessary to
                  maintain his CPA license and professional memberships,
                  incurred by him in performing his duties hereunder upon
                  presentation of such documentation thereof as the Company may
                  normally and customarily require of the members of Senior
                  Management.

                  (e) The Company agrees to pay the Executive's dues and
                  assessments for membership in Forsyth Country Club.

                                       3


         6. TERMINATION OF EMPLOYMENT. During the Period of Employment,
Executive's employment may be terminated in the following manner:

                  (a) Termination for Good Cause.

                             (i) The Company may terminate the Executive's
                  employment for Good Cause. Termination of employment shall be
                  deemed to have been for Good Cause if (i) the Executive
                  habitually neglects or refuses to do his duties and fails to
                  cure such neglect after written notice and within a reasonable
                  period of time as established by the CEO in such written
                  notice, or (ii) the Executive commits (a) acts resulting in a
                  conviction of a felony or (b) acts of gross negligence or
                  willful misconduct to the material detriment of the Company.

                           (ii) Termination by the Company for Good Cause may be
                  made only by written notice of termination from the Company to
                  the Executive that has been specifically approved in advance
                  by the Board of Directors. Such notice shall set forth all
                  acts constituting such neglect or refusal to do duties or
                  gross negligence or willful misconduct as is applicable.

                  (b) Voluntary Termination.

                           The Executive may voluntarily terminate his
                  employment with the Company upon 30 days prior written notice.

                  (c) Termination by Reason of Death, Disability, or Retirement.

                           The employment of the Executive shall be terminated
                  by death, Disability or Retirement of the Executive.

         7. EFFECT OF TERMINATION.

                  (a) If the Executive's employment is terminated by reason of
                  death, Retirement or voluntary termination of employment, the
                  Company shall pay the Executive (or his estate in the case of
                  his death) his base salary, non-incentive compensation
                  (including automobile allowance), bonuses and benefits as
                  provided in Section 5 through the Termination Date and (in the
                  case of his death) a death benefit of $5,000. Any payments and
                  benefits due to the Executive under employee benefit plans and
                  programs of the Company, including the Stock Option Plan,
                  shall be determined in accordance with the terms of such
                  benefit plans and programs; provided, however, that all
                  options held by the Executive under the Stock Option Plan
                  shall become 100% vested if the Executive's employment is
                  terminated by reason of death or Retirement.

                  (b) If the Executive's employment is terminated by reason of
                  Disability, the Company shall pay the Executive his base
                  salary, non-incentive compensation, bonuses and benefits for a
                  period of six months following the date of Disability.
                  Thereafter, this Agreement terminates and the Executive shall
                  receive those benefits payable to him under the applicable
                  disability insurance plan provided by the

                                       4


                  Company. Any payments and benefits due to the Executive under
                  employee benefit plans and programs of the Company, including
                  the Stock Option Plan, shall be determined in accordance with
                  the terms of such benefit plans and programs; provided,
                  however, that all options held by the Executive under the
                  Stock Option Plan shall become 100% vested as of the
                  Executive's termination of employment by reason of Disability.

                  (c) In the event of the Executive's Discharge by the Company,

                           (i) the Company shall pay the Executive

                                    A. his then current annual base salary and
                                    non-incentive compensation (including
                                    automobile allowance) and provide the
                                    Executive with his then current benefits (as
                                    provided in Section 5) through the
                                    Expiration Date pursuant to Section 2(e) to
                                    the extent permitted by law and unless
                                    Executive elects a lump sum payment pursuant
                                    to subparagraph (f); and

                                    B. within thirty (30) days from the
                                    Termination Date (1) a lump sum equal to
                                    Executive's then current monthly base salary
                                    amount multiplied by the number of months
                                    that have elapsed between the month of
                                    Discharge and the preceding January 6, and
                                    (2) a lump sum amount equal to three times
                                    the Executive's bonus calculated at 50% of
                                    his annualized base salary for the then
                                    current fiscal year, discounted at the rate
                                    of six percent (6%) per annum. The latter
                                    payment is full and final satisfaction of
                                    all the Company's obligations for bonus
                                    and/or other incentive payments.

                           (ii) Any payments and benefits due to executive under
                           the employee benefit plans and programs of the
                           Company, including the Stock Option Plan, shall be
                           determined in accordance with the terms of such
                           benefit plans and programs; provided, however, that
                           all options held by the Executive under the Stock
                           Option Plan shall become 100% vested as of the
                           Termination Date.

                  (d) In the event of the Company's nonextension of the
                  Employment Period, Executive shall continue to be employed by
                  the Company pursuant to this Agreement through the Expiration
                  Date, and his employment shall be terminated as of the
                  Expiration Date. Then, the following provisions shall apply:

                           (i) within thirty (30) days from the Termination
                           Date, the Company shall pay Executive (1) a lump sum
                           equal to Executive's then current annual base salary,
                           and (2) a lump sum amount equal to three times the
                           Executive's bonus calculated at 50% of his base
                           salary for the then current fiscal year discounted at
                           the rate of six percent (6) per annum. The latter
                           payment is full and final satisfaction of all the
                           company's obligations for bonus and/or other
                           incentive payments.

                                       5


                           (ii) Any payments and benefits due to Executive under
                           employee benefit plans and programs of the Company,
                           including the Stock Option Plan, shall be determined
                           in accordance with the terms of such benefit plans
                           and programs; provided, however, that all options
                           held by the Executive under the Stock Option Plan
                           shall become 100% vested as of the Expiration Date.

                  It is further provided, however, that within sixty (60) days
                  of the date of notification by the Company to the Executive of
                  its intention not to extend the Period of Employment, the
                  Executive may, at his option, elect to have the non-extension
                  treated as a Discharge with an effective date thirty (30) days
                  after the Executive's notification to the Company of his
                  election.

                  (e) In the event of the Executive's Termination For Good Cause
                  by the Company, the Company shall pay the Executive his then
                  current base salary and non-incentive compensation (including
                  automobile allowance) and provide the Executive with his then
                  current benefits (as provided in Section 5) through the
                  Termination Date. Any payments and benefits due the Executive
                  under employee benefit plans and programs of the Company,
                  including the Stock Option Plan, shall be determined in
                  accordance with the terms of such benefit plans and programs.

                  (f) In the event the Executive's employment is terminated by
                  reason of Discharge or nonextension of the Employment Period,
                  the Executive may, at his option, in lieu of amounts otherwise
                  payable pursuant to Section 7(c)(i)(A), elect to receive a
                  lump sum amount equal to the base salary and non-incentive
                  compensation due, discounted at a rate of six percent (6%) per
                  annum.

                  (g) In the event the Executive's employment is terminated by
                  reason of Discharge, the Company shall furnish the Executive,
                  for a period of six (6) months subsequent to the Termination
                  Date, outplacement services, reasonable office space, and
                  secretarial assistance.


                  (h) If any of the payments provided for in this Agreement,
                  together with any other payments which the Executive has the
                  right to receive from the Company or any corporation which is
                  a member of an "affiliated group" as defined in Section
                  1504(a) of the Code (without regard to Section 1504(b) of the
                  Code) of which the Company is a member, would constitute an
                  "excess parachute payment" as defined in Section 280G(b)(1) of
                  the Code as it presently exists, such that any portion of such
                  payments are subject to the excise tax imposed by Section 4999
                  of the Code, or any interest or penalty with respect to such
                  excise tax (such excise tax, together with any such interest
                  or penalty, are collectively referred to as the "Excise Tax"),
                  then the Executive shall be entitled to receive an additional
                  payment (an "Excise Tax Restoration Payment"). The amount of
                  the Excise Tax Restoration Payment shall be the amount
                  necessary to fund the payment by the Executive of any Excise
                  Tax on the total payments, as well as all income taxes imposed
                  on the Excise Tax Restoration Payment, any excise tax imposed
                  on the Excise Tax Restoration Payment, and any interest or
                  penalties imposed with respect to taxes on the Excise Tax
                  Restoration Payment or any Excise Tax.

                                       6


                  (i) Notwithstanding anything in this Agreement to the
                  contrary, to the extent not previously paid, the minimum
                  guaranteed bonus for FY 2005 specified in Section 5(b) of this
                  Agreement shall be paid to the Executive (or his estate, as
                  applicable) in full, without discount, in a lump sum payment
                  within thirty (30) days after the Termination Date, the
                  payment of which shall not reduce or offset any other amount
                  due the Executive pursuant to this Section 7.

         8. Termination For Good Reason. In the event of a "Change in Control"
of the Company (as hereinafter defined), the Executive may terminate his
employment for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean the occurrence of any of the following events during the twelve (12) months
immediately preceding or following the effective date of a Change in Control of
the Company:

                  (a) a material change in the scope of the Executive's assigned
duties and responsibilities from those in effect immediately prior to a Change
in Control of the Company or the assignment of duties or responsibilities that
are inconsistent with the duties and responsibilities of a Chief Financial
Officer of a public company; ;

                  (b) a reduction by the Company in the Executive's base salary
or incentive compensation as in effect on the date of a Change in Control;

                  (c) the Company's requirement that the Executive be based
anywhere other than the Company's office in Forsyth County, North Carolina, at
which he was based prior to the Change in Control of the Company; or

                  (d) the failure by the Company to continue to provide the
Executive with benefits substantially similar to those specified in Section 5 of
this Agreement.

         For purposes of Section 8(c) above, the Company shall be deemed to have
required the Executive to be based somewhere other than the Company's office at
which he was based prior to the Change in Control if the Executive is required
to spend more than two days per week on a regular basis at a business location
not within 50 miles of the Executive's primary business location as of the
effective date of a Change in Control.

         If the Executive terminates his employment for Good Reason, this shall
be treated as the Discharge of the Executive by the Company. Accordingly, the
Company shall pay the amounts and provide the benefits to the Executive
specified in Section 7 above, applicable in the event of Discharge. The
Executive shall not be obligated in any way to mitigate the Company's
obligations to him under this Section 8 or under Section 7 and any amounts
earned by the Executive subsequent to his termination of employment shall not
serve as an offset to the payments due him by the Company under this Section or
under Section 7.

         For purposes of this Agreement, a "Change in Control" means the date on
which the earlier of the following events occur:

                                       7


                  (a) the acquisition by any entity, person or group of
beneficial ownership, as that term is defined in Rule 13d-3 under the Securities
Exchange Act of 1934, of more than 30% of the outstanding capital stock of the
Company entitled to vote for the election of directors ("Voting Stock");

                  (b) the merger or consolidation of the Company with one or
more corporations as a result of which the holders of outstanding Voting Stock
of the Company immediately prior to such a merger or consolidation hold less
than 60% of the Voting Stock of the surviving or resulting corporation;

                  (c) the transfer of substantially all of the property of the
Company other than to an entity of which the Company owns at least 80% of the
Voting Stock; or

                  (d) the election to the Board of Directors of the Company of
three or more directors during any twelve (12) month period without the
recommendation or approval of the incumbent Board of Directors of the Company.

         Upon a Change in Control, as defined above in this Section 8, all
outstanding stock options shall become 100% vested and immediately exercisable,
regardless of whether the Executive terminates employment or not.

         If the Executive terminates employment with Good Reason within twelve
(12) months of a Change in Control, to the extent permitted by law, the Company
shall continue to pay the medical, disability and life insurance benefits which
Executive was receiving at the time of termination for a period of 36 months
after termination of employment or, if earlier, until Executive has commenced
employment elsewhere and becomes eligible for participation in the medical,
disability and life insurance programs, if any, of his successor employer.
Coverage under Employer's medical, disability and life insurance programs shall
cease with respect to each such program as Executive becomes eligible for the
medical, disability and life insurance programs, if any, of his successor
employer.

         9. CONFIDENTIALITY. During the Period of Employment and following
termination for any reason, the Executive covenants and agrees that he will not
divulge any trade secrets or other confidential information pertaining to the
business of the Company. It is understood that the term "trade secrets" as used
in this Agreement is deemed to include any information which gives the Company a
material and substantial advantage over its competitors but that such term does
not include knowledge, skills or information which is otherwise publicly
disclosed.

         10. NON-COMPETITION. In the event of Termination For Good Cause, or
Voluntary Termination of the Executive, the Executive agrees that for a period
of two years following the Termination Date, Executive shall not directly or
indirectly, personally or with other employees, agents or otherwise, or on
behalf of any other person, firm, or corporation, engage in the business of
making and selling doughnuts and complementary products

                  (a) within a 100 mile radius of any place of business of the
                  Company (including franchised operations) or of any place
                  where the Company (or one of its franchised operations) has
                  done business since the Effective Date of this Agreement,

                                       8


                  (b) in any county where the Company is doing business or has
                  done business since the Effective Date, or

                  (c) in any state where the Company is doing business or has
                  done business since the Effective Date.

         Notwithstanding the above, ownership by Executive of an interest in any
licensed franchisee of the Company shall not be deemed to be in violation of
this Section 10. In the event of an actual or threatened breach of this
provision, the Company shall be entitled to an injunction restraining Executive
from such action and the Company shall not be prohibited in obtaining such
equitable relief or from pursuing any other available remedies for such breach
or threatened breach, including recovery of damages from Executive.

         11. SUCCESSORS; BINDING AGREEMENT.

                  (a) This Agreement shall be binding upon, and inure to the
                  benefit of, the parties hereto, their heirs, personal
                  representatives, successors and assigns.

                  (b) The Company shall require any successor (whether direct or
                  indirect and whether by purchase, merger, consolidation or
                  otherwise) to all or substantially all of the business or
                  assets of the Company expressly to assume and agree to perform
                  this Agreement in the same manner and to the same extent that
                  the Company would be required to perform if no such succession
                  had taken place. As used herein, "Company" shall mean the
                  Company as defined in the preamble to this Agreement and any
                  successor to its business or assets which executes and
                  delivers (or is required to execute and deliver) the agreement
                  provided for in this Section 11(b), or which otherwise becomes
                  bound by the terms and provisions of this Agreement or by
                  operation of law.

         12. ARBITRATION. Except as hereinafter provided, any controversy or
claim arising out of or relating to this Agreement of any alleged breach thereof
shall be settled by arbitration in the City of Winston-Salem, North Carolina in
accordance with the rules then obtaining of the American Arbitration Association
and any judgment upon any award, which may include an award of damages, may be
entered in the highest State or Federal court having jurisdiction. Nothing
contained herein shall in any way deprive the Company of its claim to obtain an
injunction or other equitable relief arising out of the Executive's breach of
the provisions of Paragraphs 9 and 10 of this Agreement. In the event of the
termination of Executive's employment, Executive's sole remedy shall be
arbitration as herein provided and any award of damages shall be limited to
recovery of lost compensation and benefits provided for in this Agreement.

         13. NOTICES. For the purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when delivered or mailed by United States registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:


                                       9


         IF TO THE EXECUTIVE:        Michael Phalen
                                     5208 Bordeaux Cove
                                     Ellcott City, MD 21043

         IF TO THE COMPANY:          Krispy Kreme Doughnut Corporation
                                     P.O. Box 83
                                     Winston-Salem, NC  27102-0083
                                     (for mail)

                                     370 Knollwood Street
                                     Suite 500
                                     Winston-Salem, NC  27103
                                     (for delivery)

                                     Attn:  R. Frank Murphy, Corporate Secretary

         14. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
North Carolina.

         15. MISCELLANEOUS. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of other provisions or conditions at the same or
at any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.

         16. SEPARABILITY. The invalidity or lack of enforceability of a
provision of this Agreement shall not affect the validity of any other provision
hereof, which shall remain in full force and effect.

         17. WITHHOLDING OF TAXES. The Company may withhold from any benefits
payable under this Agreement all federal, state and other taxes as shall be
required pursuant to any law or governmental regulation or ruling.

         18. SURVIVAL. The provisions of Sections 9 and 10 of the Agreement
shall survive the termination of this Agreement and shall continue for the terms
set forth in Sections 9 and 10.

         19. CAPTIONS. Captions to the sections of this Agreement are inserted
solely for the convenience of the parties, are not a part of this Agreement, and
in no way define, limit, extend or describe the scope hereof or the intent of
any of the provisions.

         20. NON-ASSIGNABILITY. This Agreement is personal in nature and neither
of the parties hereto shall, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder. Without limiting
the foregoing, the Executive's right to receive payments hereunder shall not be
assignable or transferable, whether by pledge, creation of a security interest
or otherwise, other than a transfer by will or by the laws of descent or
distribution. In the event of any

                                       10


attempted assignment or transfer contrary to this section, the Company shall
have no liability to pay any amount so attempted to be assigned or transferred.

         IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and delivered under its seal pursuant to the specific authorization of
its board of directors and the Executive has hereunto set his hand and seal on
the day and year first above written.

                                        KRISPY KREME DOUGHNUTS, INC.



                                        By:    /s/ Scott A. Livengood
                                           -------------------------------------
                                           Scott A. Livengood, CEO and President


[CORPORATE SEAL]


                                         EXECUTIVE


                                               /s/ Michael Phalen         (Seal)
                                           -------------------------------------
                                               Michael Phalen

                                       11

EX-13

SELECTED FINANCIAL DATA

The following table shows selected financial data for Krispy Kreme. The selected
historical statement of operations data for each of the years ended, and the
selected historical balance sheet data as of January 30, 2000, January 28, 2001,
February 3, 2002, February 2, 2003 and February 1, 2004 have been derived from
our audited consolidated financial statements. Please note that our fiscal year
ended February 3, 2002 contained 53 weeks.

The consolidated financial statements include the accounts of certain joint
ventures in which Krispy Kreme had a controlling interest for the periods
presented: Freedom Rings, LLC, the area developer in Eastern Pennsylvania,
Delaware and Southern New Jersey, Golden Gate Doughnuts, LLC, the area developer
in Northern California, as well as Glazed Investments, LLC, the area developer
in Colorado, Minnesota and Wisconsin, for periods subsequent to August 22, 2002,
the date Krispy Kreme acquired a controlling interest in this area developer.
Effective January 30, 2004, Krispy Kreme acquired the remaining 33% minority
interest in Golden Gate Doughnuts, LLC.

You should read the following selected financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements and accompanying notes and
the other financial data included elsewhere herein. All references to per share
amounts and any other reference to shares in "Selected Financial Data," unless
otherwise noted, have been adjusted to reflect a two-for-one stock split paid on
March 19, 2001 to shareholders of record as of March 5, 2001 and a two-for-one
stock split paid on June 14, 2001 to shareholders of record as of May 29, 2001.
Unless otherwise specified, references in this annual report to "Krispy Kreme,"
the "Company," "we," "us" or "our" refer to Krispy Kreme Doughnuts, Inc. and its
subsidiaries.



                                                             IN THOUSANDS, EXCEPT PER SHARE DATA AND STORE NUMBERS
- ------------------------------------------------------------------------------------------------------------------
                                                                             FEB. 3,       FEB. 2,       FEB. 1,
YEAR ENDED                                 JAN. 30, 2000   JAN. 28, 2001      2002          2003          2004
- ------------------------------------------------------------------------------------------------------------------
                                                                                        
STATEMENT OF OPERATIONS DATA:
Total revenues                              $   220,243     $   300,715    $   394,354   $   491,549   $   665,592
Operating expenses                              190,003         250,690        316,946       381,489       507,396
General and administrative expenses              14,856          20,061         27,562        28,897        36,912
Depreciation and amortization expenses            4,546           6,457          7,959        12,271        19,723
Arbitration award                                    --              --             --         9,075          (525)
                                            ----------------------------------------------------------------------
Income from operations                           10,838          23,507         41,887        59,817       102,086
Interest and other expense (income),
  net                                             1,232          (1,698)        (2,408)          749         3,501
Equity loss in joint ventures                        --             706            602         2,008         1,836
Minority interest                                    --             716          1,147         2,287         2,072
                                            ----------------------------------------------------------------------
Income before income taxes                        9,606          23,783         42,546        54,773        94,677
Provision for income taxes                        3,650           9,058         16,168        21,295        37,590
                                            ----------------------------------------------------------------------
Net income                                  $     5,956     $    14,725    $    26,378   $    33,478   $    57,087
                                            ----------------------------------------------------------------------
Net income per share:
 Basic                                      $       .16     $       .30    $       .49   $       .61   $       .96
 Diluted                                            .15             .27            .45           .56           .92
Shares used in calculation of net
  income per share:
 Basic                                           37,360          49,184         53,703        55,093        59,188
 Diluted                                         39,280          53,656         58,443        59,492        62,388
OPERATING DATA (UNAUDITED):
Number of factory stores at end of
 period:
 Company                                             58              63             75            99           141
 Franchised                                          86             111            143           177           216
                                            ----------------------------------------------------------------------
 Systemwide                                         144             174            218           276           357
                                            ----------------------------------------------------------------------
Average weekly sales per factory store:
 Company                                    $        54     $        69    $        72   $        76   $        73
 Franchised                                          38              43             53            58            56
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital                             $    11,452     $    29,443    $    49,236   $    81,441   $    85,151
Total assets                                    104,958         171,493        255,376       410,487       660,664
Long-term debt, including current
  maturities                                     22,902              --          4,643        60,489       137,917
Total shareholders' equity                       47,755         125,679        187,667       273,352       452,207


                                        19


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion of our financial condition and results of operations
should be read together with the financial statements and the accompanying
notes. This annual report contains statements about future events and
expectations, including anticipated store and market openings, planned capital
expenditures and trends in or expectations regarding the Company's operations
and financing abilities that constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are based on management's beliefs, assumptions, and expectations of
our future economic performance, considering the information currently available
to management. These statements are not statements of historical fact.
Forward-looking statements involve risks and uncertainties that may cause our
actual results, performance or financial condition to differ materially from the
expectations of future results, performance or financial condition we express or
imply in any forward-looking statements. Factors that could contribute to these
differences include, but are not limited to: the Company's ability to continue
and manage growth; delays in store openings; the quality of franchise store,
including joint venture, operations; the price and availability of raw materials
needed to produce doughnut mixes and other ingredients; changes in customer
preferences and perceptions; risks associated with competition; risks associated
with fluctuations in operating and quarterly results; compliance with government
regulations; and other factors discussed in Krispy Kreme's periodic reports,
proxy statement and other information statements filed with the Securities and
Exchange Commission. The words "believe," "may," "will," "should," "anticipate,"
"estimate," "expect," "intend," "objective," "seek," "strive," or similar words,
or the negative of these words, identify forward-looking statements. The Company
qualifies any forward-looking statements entirely by these cautionary factors.

All references to per share amounts and any other reference to shares in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," unless otherwise noted, have been adjusted to reflect a two-for-one
stock split paid on March 19, 2001 to shareholders of record as of March 5, 2001
and a two-for-one stock split paid on June 14, 2001 to shareholders of record as
of May 29, 2001.

COMPANY OVERVIEW AND INDUSTRY OUTLOOK

Our principal business, which began in 1937, is owning and franchising Krispy
Kreme doughnut stores where we make and sell over 20 varieties of premium
quality doughnuts, including our Hot Original Glazed. Each of our traditional
stores is a doughnut factory with the capacity to produce from 4,000 dozen to
over 10,000 dozen doughnuts daily. Consequently, each store has significant
fixed or semi-fixed costs, and margins and profitability are significantly
impacted by doughnut production volume and sales. Our doughnut stores are
versatile in that most can support multiple sales channels to more fully utilize
production capacity. These sales channels are comprised of:

    - ON-PREMISES SALES.  Sales to customers visiting our stores, including the
      drive-through windows, along with discounted sales to community
      organizations that in turn sell our products for fundraising purposes.

    - OFF-PREMISES SALES.  Daily sales of fresh doughnuts on a branded,
      unbranded and private label basis to convenience and grocery stores and
      select co-branding customers. 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. "Branded" refers to products sold bearing the Krispy Kreme brand
      name and is the primary way we are expanding our off-premises sales
      business. "Unbranded" products are sold unpackaged from the retailer's
      display case. "Private label" products carry the retailer's brand name or
      some other non-Krispy Kreme brand. Unbranded and private label products
      are a minor portion of our business.

In addition to our retail stores, we are vertically integrated. We believe our
vertical integration allows us to maintain the consistency and quality of our
products throughout our system. In addition, through vertical integration, we
believe we can utilize volume-buying power, which helps lower the cost of
supplies to each of our stores and enhance our profitability. Our Krispy Kreme
Manufacturing and Distribution business unit, KKM&D, produces doughnut mixes and
coffee and manufactures our doughnut-making equipment, which all of our factory
stores are required to purchase. Additionally, this business unit currently
operates three distribution centers that provide Krispy Kreme stores with
essentially all supplies for the critical areas of their business. In fiscal
2003, we opened our second mix manufacturing and third distribution facility in
Effingham, Illinois. The new facility approximately tripled our mix
manufacturing capacity. The KKM&D business unit is volume-driven, and its
economics are enhanced by the opening of new stores and the growth of
on-premises and off-premises sales channels by existing stores.

One of our focus areas has been on creating a best-in-class beverage program to
complement our doughnut offering. With an acquisition in fiscal 2002, we
acquired significant coffee roasting expertise. We have since formulated and are
in the process of implementing a complete beverage program, including four drip
coffees, a complete line of espresso-based coffees including flavors, and both
coffee-based and noncoffee-based frozen drinks. These drinks are designed to
complement our existing juices, sodas, milks and water. We introduced the first
component of this program, the drip coffee offering, to our stores in fiscal
2003, replacing the previous product sold which was purchased from an unrelated
third party. We anticipate introducing the remaining components of the new
beverage program, including frozen beverages in the next six months and espresso
in most stores over the next twelve to eighteen months. We believe this new
beverage program represents an opportunity to increase beverage sales in a
meaningful way.

                                        20


In our recent store development efforts, we have focused on opening both Company
and franchise factory stores, including commissaries, which are production
facilities used to serve off-premises customers, in major metropolitan markets,
generally markets with greater than 100,000 households. Our objective is to
further enhance our expansion through the opening of factory stores in small
markets, with small markets being defined as those markets having fewer than
100,000 households. Additionally, we have begun testing three additional store
formats, which we refer to broadly as "Satellites." Satellites consist of the
"doughnut and coffee shop" ("DCS"), the fresh shop and the kiosk formats. During
fiscal 2002, we introduced the DCS format. This store uses the new Hot Doughnut
Machine technology, which completes the final steps of the production process
and requires less space than the full production equipment in our traditional
factory store. This technology combines time, temperature and humidity elements
to re-heat unglazed doughnuts, provided by a traditional factory store, and
prepare them for the glazing process. Once glazed, customers can have the same
hot doughnut experience in a DCS as in a factory store. Additionally, the DCS
offers our new full line of coffee and other beverages. As of February 1, 2004,
nine DCS stores were open, six of which are owned by the Company. We plan to
continue our tests of this concept. We believe this technology and future
evolutions of this technology will facilitate our expansion into smaller markets
and densely populated urban areas.

In addition to the DCS format, we are testing both the fresh shop and the kiosk
formats. In these formats, we will sell fresh doughnuts, beverages and Krispy
Kreme collectibles. The doughnuts will be supplied by a nearby factory store,
multiple times per day. Both the fresh shop and the kiosk formats will require
less space than our traditional factory store or the DCS. As the kiosk is a
free-standing facility, it will require significantly less space than the fresh
shop, expanding the number of potential locations where these facilities may be
established. As of February 1, 2004, 20 fresh shops were open. We view the fresh
shop and kiosk formats, which we believe will have attractive financial returns,
as additional ways to achieve market penetration in a variety of market sizes
and settings. We began our tests of the new fresh shop concept during fiscal
2004 and will begin our tests of the kiosk format in fiscal 2005.

As stated above, we intend to expand our concept primarily through opening both
Company-owned and franchise stores in territories across the United States and
Canada, as well as in select other international markets as discussed below. We
also have entered and intend to enter into joint ventures with some of our
franchisees. As of February 1, 2004, there were 357 Krispy Kreme factory stores
consisting of 141 Company-owned stores (including 24 which are consolidated
joint venture stores), 159 Area Developer franchise stores (including 66 in
which we have a joint venture interest) and 57 Associate franchise stores. For
fiscal 2005, we anticipate opening approximately 120 new stores, of which
approximately 20 to 25 will be Satellites. The store format will be determined
by the site opportunities, primarily the space available. The majority of these
new stores are expected to be franchise stores.

In connection with our international expansion plans, we are developing the
capabilities and infrastructure necessary to support our expansion outside the
United States. We currently have twelve stores in Canada, one of which is a
commissary, and will open additional stores in the Canadian market in the coming
years. These stores are owned and operated by a joint venture. We have also
entered into joint ventures to develop the markets in Australia and New Zealand,
the United Kingdom and the Republic of Ireland, and Mexico. Each of these joint
ventures opened its first retail store in fiscal 2004. We also continue to focus
on additional markets outside the United States, including Japan, South Korea
and other potential markets in Asia and Western Europe. Our initial research
indicates that these will be viable markets for the Krispy Kreme concept;
however, further market research and evaluation are ongoing.

In April 2003, we completed the acquisition, through an exchange of stock, of
Montana Mills Bread Co., Inc. ("Montana Mills"), an owner and operator of
upscale "village bread stores" in the Northeastern United States. As of February
1, 2004, 21 Montana Mills stores were in operation. Montana Mills' stores
produce and sell a variety of breads and baked goods prepared in an open-view
format. We believe that this acquisition will provide an opportunity to leverage
our existing capabilities, such as our brand building and operational
capabilities including our distribution chain, off-premises sales and
coffee-roasting expertise, to expand Montana Mills' business. We anticipate
spending up to 24 months refining and expanding the Montana Mills concept,
retaining its core best-in-class breads, but expanding the offering to include
bread-based meals and appropriate accompaniments in an inviting setting.

As we expand our business, we will incur infrastructure costs in the form of
additional personnel to support the expansion and additional facilities costs to
provide mixes, equipment and other items necessary to operate the various new
stores. In the course of building this infrastructure, we may incur unplanned
costs which could negatively impact our operating results.

We expect doughnut sales to grow due to a variety of factors, including the
growth in two-income households and corresponding shift to foods consumed away
from home. We view the fragmented competition in the doughnut industry as an
opportunity for our continued growth. We also believe that the premium quality
of our products and the strength of our brand has enhanced, and will continue to
enhance, the growth and expansion of the overall doughnut market.

                                        21


RESULTS OF OPERATIONS

To facilitate an understanding of the results of operations for each period
presented, we have included a general overview along with an analysis of
business segment activities. In addition to this analysis and the discussion
under Critical Accounting Policies, refer to Note 2 -- Nature of Business and
Significant Accounting Policies in the notes to our consolidated financial
statements. A guide to the discussion for each period is presented below.

OVERVIEW.  The discussion of our operating results below includes a discussion
of our consolidated operating results, as well as a discussion of our systemwide
sales and comparable store sales. Our consolidated financial statements
appearing elsewhere in this report include sales of our company stores,
including the sales of consolidated joint venture stores, outside sales of our
KKM&D business segment, royalties and fees received from our franchisees and
sales of our Montana Mills business segment, but exclude the sales of our
franchised stores. Systemwide sales include the sales of both our company and
franchised stores, including Montana Mills stores, and exclude the sales and
revenues of our KKM&D and Franchise Operations business segments. We believe
systemwide sales data is significant because it shows the overall penetration of
the Krispy Kreme brand, consumer demand for our products and the correlation
between systemwide sales and our total revenues. Comparable store sales is a
measure of sales growth. Generally, we add a traditional factory store to our
comparable store base in the store's nineteenth month of operation. In addition,
we utilize a market penetration strategy that often results in transferring the
production opportunity for off-premises sales to a different factory store in
order to enhance operating efficiencies in the market. Off-premises sales at
these stores are included in comparable store sales if there is an existing
factory store in the market that is in the comparable store base.

SEGMENT RESULTS.  In accordance with SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," we have four reportable segments. A
description of each of the segments follows.

    - COMPANY STORE OPERATIONS.  Represents the results of our company stores
      and consolidated joint venture stores. These stores make and sell
      doughnuts and complementary products through the sales channels discussed
      above. Expenses for this business segment include store level expenses
      along with direct general and administrative expenses. Consolidated joint
      ventures include Freedom Rings, LLC ("Freedom Rings"), the joint venture
      with rights to develop stores in Eastern Pennsylvania, Delaware and
      Southern New Jersey, and Glazed Investments, LLC ("Glazed Investments"),
      the joint venture with rights to develop stores in Colorado, Minnesota and
      Wisconsin. Prior to January 30, 2004, consolidated joint ventures also
      included Golden Gate Doughnuts, LLC ("Golden Gate"), the joint venture
      with rights to develop stores in Northern California. As discussed in Note
      20 -- Acquisitions in the notes to our consolidated financial statements,
      effective January 30, 2004, the Company acquired the remaining minority
      interest in Golden Gate.

    - FRANCHISE OPERATIONS.  Represents the results of our franchise programs.
      We have two franchise programs: (1) the associate program, which is our
      original franchising program developed in the 1940s, and (2) 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, with
      the exception of private label sales, for which they pay no royalties.
      Area developers pay royalties of 4.5% to 6.0% of all sales and development
      and franchise fees ranging from $20,000 to $50,000 per store. Most
      associates and area developers also contribute 1.0% of all sales to our
      national advertising and brand development fund. Expenses for this
      business segment include costs incurred to recruit new franchisees, costs
      to open, monitor and aid in the performance of these stores and direct
      general and administrative expenses.

    - KKM&D.  Represents the results of our KKM&D business unit. This business
      unit buys and processes ingredients used to produce doughnut mixes and
      manufactures doughnut-making equipment that all of our factory stores are
      required to purchase. This business unit also includes our coffee roasting
      operation, which supplies our drip coffee product to all of our stores.
      Production in this facility is expected to increase in fiscal 2005 with
      the growth in stores and as the other components of our expanded beverage
      program are introduced in our existing and new stores. The KKM&D business
      unit also purchases and sells essentially all supplies necessary to
      operate a Krispy Kreme store, including all food ingredients, juices,
      signage, display cases, uniforms and other items. Generally, shipments are
      made to each of our stores on a weekly basis by common carrier. All
      intersegment transactions between KKM&D and Company Store Operations 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.

    - MONTANA MILLS.  Represents the results of operations of the recently
      acquired Montana Mills, which operates upscale "village bread stores" in
      the Northeastern United States. These stores produce and sell a variety of
      breads and baked goods prepared in an open-view format. Expenses for this
      business unit include store level expenses along with direct general and
      administrative expenses.

OTHER.  Includes a discussion of significant line items not discussed in the
overview or segment discussions, including general and administrative expenses,
depreciation and amortization expenses, the arbitration award, interest income,
interest expense, equity loss in joint ventures, minority interest in
consolidated joint ventures and the provision for income taxes.

                                        22


OUR FISCAL YEAR IS BASED ON A 52- OR 53-WEEK YEAR. THE FISCAL YEAR ENDS ON THE
SUNDAY CLOSEST TO THE LAST DAY IN JANUARY. THE TABLE BELOW SHOWS OUR OPERATING
RESULTS FOR FISCAL 2002 (53 WEEKS ENDED FEBRUARY 3, 2002), FISCAL 2003 (52 WEEKS
ENDED FEBRUARY 2, 2003) AND FISCAL 2004 (52 WEEKS ENDED FEBRUARY 1, 2004)
EXPRESSED AS A PERCENTAGE OF TOTAL REVENUES. CERTAIN OPERATING DATA ARE ALSO
SHOWN FOR THE SAME PERIODS.



- ------------------------------------------------------------------------------------------------------------
                                                           FEB. 3,             FEB. 2,             FEB. 1,
YEAR ENDED                                                  2002                2003                2004
- ------------------------------------------------------------------------------------------------------------
                                                                                        
STATEMENT OF OPERATIONS DATA:
Total revenues                                                 100.0%              100.0%              100.0%
Operating expenses                                              80.4                77.6                76.2
General and administrative expenses                              7.0                 5.9                 5.6
Depreciation and amortization expenses                           2.0                 2.5                 3.0
Arbitration award                                                 --                 1.8                (0.1)
                                                            ------------------------------------------------
Income from operations                                          10.6                12.2                15.3
Interest and other expense (income), net                        (0.2)                1.1                 1.1
                                                            ------------------------------------------------
Income before income taxes                                      10.8                11.1                14.2
Provision for income taxes                                       4.1                 4.3                 5.6
                                                            ------------------------------------------------
Net income                                                       6.7%                6.8%                8.6%
                                                            ------------------------------------------------
OPERATING DATA:
Increase in comparable store sales:
  Company                                                       11.7%               12.8%               13.6%
  Systemwide                                                    12.8%               11.8%               10.2%


THE TABLE BELOW SHOWS BUSINESS SEGMENT REVENUES AND OPERATING EXPENSES EXPRESSED
IN DOLLARS. KKM&D REVENUES ARE SHOWN NET OF INTERSEGMENT SALES ELIMINATIONS. SEE
NOTE 15 -- BUSINESS SEGMENT INFORMATION IN THE NOTES TO OUR CONSOLIDATED
FINANCIAL STATEMENTS FOR ADDITIONAL DISCUSSION OF OUR REPORTABLE SEGMENTS.
OPERATING EXPENSES EXCLUDE DEPRECIATION AND AMORTIZATION EXPENSES, INDIRECT
(UNALLOCATED) GENERAL AND ADMINISTRATIVE EXPENSES AND THE ARBITRATION AWARD.
DIRECT GENERAL AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN OPERATING EXPENSES.



                                                                                                IN THOUSANDS
- ------------------------------------------------------------------------------------------------------------
                                                           FEB. 3,             FEB. 2,             FEB. 1,
YEAR ENDED                                                  2002                2003                2004
- ------------------------------------------------------------------------------------------------------------
                                                                                        
REVENUES BY BUSINESS SEGMENT:
Company Store Operations                                 $   266,209         $   319,592         $   441,868
Franchise Operations                                          14,008              19,304              23,848
KKM&D                                                        114,137             152,653             193,129
Montana Mills                                                     --                  --               6,747
                                                          --------------------------------------------------
  Total revenues                                         $   394,354         $   491,549         $   665,592
                                                          --------------------------------------------------
OPERATING EXPENSES BY BUSINESS SEGMENT:
Company Store Operations                                 $   217,419         $   252,524         $   343,752
Franchise Operations                                           4,896               4,877               4,631
KKM&D                                                         94,631             124,088             150,778
Montana Mills                                                     --                  --               8,235
                                                          --------------------------------------------------
  Total operating expenses                               $   316,946         $   381,489         $   507,396
                                                          --------------------------------------------------



                                        23


THE FOLLOWING TABLE SHOWS BUSINESS SEGMENT REVENUES EXPRESSED AS A PERCENTAGE OF
TOTAL REVENUES AND BUSINESS SEGMENT OPERATING EXPENSES EXPRESSED AS A PERCENTAGE
OF APPLICABLE BUSINESS SEGMENT REVENUES. OPERATING EXPENSES EXCLUDE DEPRECIATION
AND AMORTIZATION EXPENSES, INDIRECT (UNALLOCATED) GENERAL AND ADMINISTRATIVE
EXPENSES AND THE ARBITRATION AWARD. DIRECT GENERAL AND ADMINISTRATIVE EXPENSES
ARE INCLUDED IN OPERATING EXPENSES.




- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED                                               FEB. 3, 2002         FEB. 2, 2003         FEB. 1, 2004
- ---------------------------------------------------------------------------------------------------------------
                                                                                          
REVENUES BY BUSINESS SEGMENT:
Company Store Operations                                        67.5%                65.0%                66.4%
Franchise Operations                                             3.6                  3.9                  3.6
KKM&D                                                           28.9                 31.1                 29.0
Montana Mills                                                     --                   --                  1.0
                                                            --------------------------------------------------
 Total revenues                                                100.0%               100.0%               100.0%
                                                            --------------------------------------------------
OPERATING EXPENSES BY BUSINESS SEGMENT:
Company Store Operations                                        81.7%                79.0%                77.8%
Franchise Operations                                            35.0%                25.3%                19.4%
KKM&D                                                           82.9%                81.3%                78.1%
Montana Mills                                                     --                   --                122.1%
                                                            --------------------------------------------------
 Total operating expenses                                       80.4%                77.6%                76.2%
                                                            --------------------------------------------------



TO FURTHER FACILITATE AN UNDERSTANDING OF OUR OPERATING RESULTS, DATA ON FACTORY
STORE OPENING ACTIVITY ARE SHOWN BELOW. FACTORY STORE COUNTS INCLUDE RETAIL
STORES AND COMMISSARIES AND EXCLUDE SATELLITES. TRANSFERRED STORES REPRESENT
STORES SOLD BETWEEN THE COMPANY AND FRANCHISEES.



- ----------------------------------------------------------------------------------------------------------------
                                                               COMPANY            FRANCHISE             TOTAL
- ----------------------------------------------------------------------------------------------------------------
                                                                                            
YEAR ENDED FEBRUARY 3, 2002
Beginning count                                                       63                 111                 174
Opened                                                                 7                  41                  48
Closed                                                                (2)                 (2)                 (4)
Transferred                                                            7                  (7)                 --
                                                                ------------------------------------------------
 Ending count                                                         75                 143                 218
                                                                ------------------------------------------------
YEAR ENDED FEBRUARY 2, 2003
Opened                                                                14                  49                  63
Closed                                                                (3)                 (2)                 (5)
Transferred                                                           13                 (13)                 --
                                                                ------------------------------------------------
 Ending count                                                         99                 177                 276
                                                                ------------------------------------------------
YEAR ENDED FEBRUARY 1, 2004
Opened                                                                28                  58                  86
Closed                                                                (2)                 (3)                 (5)
Transferred                                                           16                 (16)                 --
                                                                ------------------------------------------------
 Ending count                                                        141                 216                 357
                                                                ------------------------------------------------


Company factory stores as of February 1, 2004 included 24 stores operated by
area developer joint ventures in which Krispy Kreme has a majority ownership
interest.

YEAR ENDED FEBRUARY 1, 2004 COMPARED WITH YEAR ENDED FEBRUARY 2, 2003

OVERVIEW

As noted above, we operate on a 52- or 53-week fiscal year. Our operations for
both fiscal 2004 and fiscal 2003 contained 52 weeks.

Systemwide sales for fiscal 2004 increased 27.4% compared to the prior year.
Excluding the sales of Montana Mills, systemwide sales increased 26.5%. This
increase is primarily the result of an increase in Company store sales of 38.3%,
from $319.6 million to $441.9 million, resulting primarily from sales from new
stores opened during the fiscal year, sales of stores in acquired markets and an
increase in Company store comparable sales of 13.6%. During fiscal 2004, 28 new
Company factory stores and 58 new franchise factory stores were opened and two
Company factory stores and three franchise factory stores were closed, for a net
increase of 81 factory stores. Additionally, eleven Area Developer and six
Associate franchise stores became Company stores as a result of the Company's
acquisition of certain franchise markets in Kansas; Missouri; Dallas, Texas;
Shreveport, Louisiana; Charlottesville, Virginia and Michigan, and one Company
and two Associate franchise stores became Area Developer franchise

                                        24


stores as a result of the acquisition of these stores by an Area Developer
franchisee. As a result, the total number of factory stores at the end of fiscal
2004 was 357, consisting of 141 Company stores (including 24 which are
consolidated joint venture stores), 159 Area Developer franchise stores
(including 66 in which we have a joint venture interest) and 57 Associate
franchise stores. We believe continued increased brand awareness and increased
off-premises sales, as well as selected price increases, contributed to the
10.2% increase in systemwide comparable store sales.

Total Company revenues increased 35.4% to $665.6 million in fiscal 2004 compared
with $491.5 million in the prior fiscal year. This increase was comprised of
increases in Company Store Operations revenues of 38.3% to $441.9 million,
Franchise Operations revenues of 23.5% to $23.8 million and KKM&D revenues,
excluding intersegment sales, of 26.5% to $193.1 million.

Net income for fiscal 2004 was $57.1 million compared to $33.5 million in the
prior year, an increase of 70.5%. Diluted earnings per share was $0.92, an
increase of 62.6% over the prior year. Fiscal 2003 results include a pre-tax
charge of $9.1 million related to an arbitration award against the Company, more
fully discussed in Note 19 -- Legal Contingencies in the notes to our
consolidated financial statements. In fiscal 2004, the Company paid $8.6 million
to settle the award and reversed the remaining accrual of $525,000. Excluding
the effects of the arbitration award, net income for fiscal 2003 and fiscal 2004
would have been $39.1 million and $56.8 million, respectively, diluted earnings
per share for fiscal 2003 would have been $0.10 more than the reported $0.56 and
diluted earnings per share for fiscal 2004 would have been $0.01 less than the
reported $0.92.

COMPANY STORE OPERATIONS

COMPANY STORE OPERATIONS REVENUES.  Company Store Operations revenues increased
to $441.9 million in fiscal 2004 from $319.6 million in fiscal 2003, an increase
of 38.3%. Comparable store sales increased by 13.6%. The revenue growth was
primarily due to strong growth in sales from both our on-premises and
off-premises sales channels. On-premises sales grew principally as a result of
the opening of 28 new Company stores during fiscal 2004, as well as due to the
introduction of new products (including featured doughnut varieties) and our
continued increase in brand awareness due in part to the expansion of our
off-premises sales programs. Retail price increases implemented in the fall of
fiscal 2003 and early in fiscal 2004 also increased on-premises sales.
Off-premises sales grew primarily as a result of the addition of several new
convenience and grocery store customers as well as the expansion of the number
of locations served in our existing customer base. Both on-premises and
off-premises sales were positively impacted by the sales of the franchise stores
acquired from the Area Developer and Associate franchisees in the Kansas;
Missouri; Dallas, Texas; Shreveport, Louisiana and Michigan markets, as well as
by the sales of the stores operated by Glazed Investments. In August 2002, the
Company acquired a controlling interest in this franchisee and, as a result, the
revenues of this franchisee are consolidated with the Company Store Operations
revenues for periods subsequent to the acquisition.

COMPANY STORE OPERATIONS OPERATING EXPENSES.  Company Store Operations operating
expenses, excluding depreciation and amortization expenses, increased 36.1% to
$343.8 million in fiscal 2004 from $252.5 million in fiscal 2003. Company Store
Operations operating expenses as a percentage of Company Store Operations
revenues were 77.8% in fiscal 2004 compared with 79.0% in the prior year. The
decrease in Company Store Operations operating expenses as a percentage of
revenues was due to increased operating efficiencies generated by growth in
store revenues, selected price increases, improved profitability of our
off-premises sales and a focus on gross margin improvement, particularly labor
utilization, negotiated reductions in packaging costs and a reduction in shrink,
primarily as a result of technology improvements in the production process. The
decrease in operating expenses as a percentage of revenues was offset somewhat
by the impact of increased expenses associated with the opening of new Company
stores, primarily additional labor costs incurred to support the store opening.
During fiscal 2003 and fiscal 2004, the Company opened 14 and 28 new Company
factory stores, respectively. As we expect to open an increasing number of
Company stores in fiscal 2005, we anticipate that operating expenses will
continue to be negatively impacted by costs associated with new store openings.

We constantly evaluate our store base, not only with respect to our stores'
financial and operational performance, but also with respect to alignment with
our brand image and how well each store meets our customers' needs. As a result
of this review, we make provisions to cover closing or impairment costs for
underperforming stores, and for older stores that need to be closed and
relocated. No such provisions were made during fiscal 2004 or fiscal 2003.

FRANCHISE OPERATIONS

FRANCHISE OPERATIONS REVENUES.  Franchise Operations revenues, consisting of
franchise fees and royalties, increased 23.5%, to $23.8 million in fiscal 2004
from $19.3 million in the prior year. The growth in revenue was primarily due to
the franchise fees and additional royalties associated with 58 new franchise
factory stores opened in fiscal 2004, net of the impact of three store closings
and the net transfer of 16 stores from Franchise to Company as a result of
acquisitions. The increase in Franchise Operations revenues was also impacted by
the opening of 49 new franchise factory stores, net of the impact of two store
closings and the transfer of 13 stores from Franchise to Company as a result of
acquisitions, during fiscal 2003. A majority of the new franchise stores in
fiscal 2003 were opened in the second half of the fiscal year. Also contributing
to the growth in Franchise Operations revenues was comparable store sales
increases. Sales of franchised stores, as reported by our franchisees, were
$459.0 million in fiscal 2003 and $543.3 million in fiscal 2004.

                                        25


FRANCHISE OPERATIONS OPERATING EXPENSES.  Franchise Operations operating
expenses, excluding depreciation and amortization expenses, decreased 5.0% from
$4.9 million in fiscal 2003 to $4.6 million in fiscal 2004. Franchise Operations
operating expenses include costs to recruit new franchisees, costs to open,
monitor and aid in the performance of franchise stores and direct general and
administrative expenses. As a percentage of Franchise Operations revenues,
Franchise Operations operating expenses were 19.4% in the current year compared
with 25.3% in the prior year. The decrease in Franchise Operations operating
expenses as a percentage of revenues is primarily the result of the Company
leveraging the infrastructure put in place to oversee the expansion of our
franchise program. In addition, Franchise Operations operating expenses as a
percentage of Franchise Operations revenues will vary depending on the number of
store openings and the level of opening team support needed to assist with the
openings. The amount of support that we provide for each Area Developer group's
store openings declines with each successive opening. As some of our individual
Area Developer groups are now operating multiple stores, our costs associated
with their additional store openings have declined.

KKM&D

KKM&D REVENUES.  KKM&D sales to franchise stores increased 26.5%, to $193.1
million, in fiscal 2004 from $152.7 million in fiscal 2003. The primary reason
for the increase in revenues was the opening of 58 new franchise factory stores,
net of the impact of three store closings and the net transfer of 16 stores from
Franchise to Company as a result of acquisitions, in fiscal 2004; the opening of
49 new franchise factory stores, net of the impact of two store closings and the
transfer of 13 stores from Franchise to Company, as a result of acquisitions,
during fiscal 2003; and comparable store sales increases. Increased doughnut
sales through both the on-premises and off-premises sales channels by franchise
stores translated into increased revenues for KKM&D from sales of mixes, sugar,
shortening, coffee and other supplies. Also, each new store is required to
purchase doughnut-making equipment and other peripheral equipment from KKM&D,
thereby enhancing KKM&D sales. KKM&D sales were also positively impacted by the
mix price increase implemented at the beginning of fiscal 2004, which covered
increased flour and shortening costs.

KKM&D OPERATING EXPENSES.  KKM&D operating expenses, excluding depreciation and
amortization expenses, increased 21.5%, to $150.8 million, in fiscal 2004 from
$124.1 million in fiscal 2003. KKM&D operating expenses as a percentage of KKM&D
revenues were 78.1% in the current year compared with 81.3% in the prior year.
The decrease in KKM&D operating expenses as a percentage of revenues was due to
increased capacity utilization, particularly in our mix and distribution
facility in Effingham, Illinois which became operational in the second quarter
of fiscal 2003, and resulting economies of scale of the mix and equipment
manufacturing operations attributable to the increased volume in the facilities.
Start-up costs associated with the facility in Effingham and with our coffee
roasting operation in Winston-Salem, which became operational in the third
quarter of fiscal 2003, had a negative impact on KKM&D operating expenses as a
percentage of KKM&D revenues in fiscal 2003. Also positively affecting KKM&D
operating expenses as a percentage of KKM&D revenues in fiscal 2004 was the
impact of sales to franchisees of certain recently-developed peripheral
equipment designed to enhance the performance of the doughnut-making equipment
used by all our traditional factory stores. While this product is a standard
component for all doughnut-making equipment sold currently, to the extent
franchisees who have not yet acquired this product for existing stores do so,
KKM&D operating expenses as a percentage of operating revenues may be positively
impacted in the future.

MONTANA MILLS

For fiscal 2004, Montana Mills revenues were $6.7 million and its operating
expenses were $8.2 million. These amounts reflect operating results since April
7, 2003, the effective date of the Company's acquisition of Montana Mills. In
addition to store operating costs, the operating expenses reflect administrative
costs associated with the consolidation of operations and the initiation of
concept development work. Operating results were also negatively impacted by
costs associated with Montana Mills off-premises sales program, which was
discontinued in January 2004.

OTHER

GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses
increased 27.7%, to $36.9 million, in fiscal 2004 from $28.9 million in fiscal
2003. General and administrative expenses as a percentage of total revenues were
5.6% in fiscal 2004 compared with 5.9% in fiscal 2003. The dollar growth in
general and administrative expenses is primarily due to increased personnel and
salary and related benefit costs to support our expansion and other cost
increases necessitated by the growth of the Company, partially offset by lower
provisions for employee benefit costs, primarily incentive provisions determined
under the terms of the plans. General and administrative expenses as a
percentage of total revenues declined during fiscal 2004 primarily as a result
of our 35.4% growth in revenues during the period. In particular, acquisitions
of Associate and Area Developer franchise markets in fiscal 2004 resulted in
revenue gains with minimal incremental general and administrative expenses, as
we were able to leverage our existing infrastructure in many functional areas to
support these acquired operations. In fiscal 2004, we acquired a net 16 stores
from franchisees. In fiscal 2003, we acquired a net 13 stores from franchisees,
the majority of which were acquired in the second half of the fiscal year. In
addition, as a percentage of total revenues, general and administrative expenses
will vary in part depending upon the number of new store openings in a period.
During fiscal 2004, 58 new franchise factory stores were opened, as compared to
49 new franchise factory stores opened in fiscal 2003. As each new store is
required to purchase doughnut-making equipment and other peripheral equipment
from KKM&D, the increased number of store openings generally results in
increased revenues. These increased revenues further leverages the existing
general

                                        26


and administrative expense structure as there is minimal incremental general and
administrative expenses associated with a store opening.

DEPRECIATION AND AMORTIZATION EXPENSES.  Depreciation and amortization expenses
increased 60.7%, to $19.7 million, in fiscal 2004 from $12.3 million in the
prior year. Depreciation and amortization expenses as a percentage of total
revenues were 3.0% in fiscal 2004 compared with 2.5% in fiscal 2003. The dollar
growth in depreciation and amortization expenses is due primarily to
depreciation expense associated with increased capital asset additions,
primarily related to the opening of new Company stores, including those opened
by our consolidated joint ventures, and the addition of stores acquired from
Area Developer and Associate franchisees. The dollar growth was also impacted by
depreciation related to our new mix and distribution facility, which became
operational in the second quarter of fiscal 2003. See Liquidity and Capital
Resources for additional discussion.

ARBITRATION AWARD.  As discussed further in Note 19 -- Legal Contingencies in
the notes to our consolidated financial statements, in fiscal 2003 the Company
recorded a charge of $9.1 million as a result of an arbitration panel's ruling
against the Company in a lawsuit. The Company settled the award for $8.6
million, which was paid in the first quarter of fiscal 2004, and reversed the
remaining $525,000 accrual.

INTEREST INCOME.  Interest income decreased from $2.0 million in fiscal 2003 to
$921,000 in fiscal 2004. This decrease results from generally lower average
invested balances and a reduction in rates of interest earned on excess cash
invested during the current fiscal year.

INTEREST EXPENSE.  Interest expense was $4.4 million in fiscal 2004 compared
with $1.8 million in fiscal 2003. Interest expense in fiscal 2003 consisted
principally of interest on the Term Loan used to finance the Company's new mix
and distribution facility in Effingham, Illinois. Prior to completion of the
distribution facility during the second quarter of fiscal 2003, interest on the
borrowings used to finance the facility was capitalized. Interest expense in
fiscal 2003 also includes interest on debt of our consolidated joint ventures,
including debt of Glazed Investments, the joint venture in which we acquired a
controlling interest during the third quarter of fiscal 2003. Interest expense
in fiscal 2004 increased as a result of borrowings to finance the acquisition of
selected franchise markets (see Note 20 -- Acquisitions in the notes to our
consolidated financial statements for further information) and increased
borrowings by our consolidated joint ventures, primarily to fund store
development. On October 31, 2003, the Company entered into a credit facility to
refinance the Term Loan, certain debt of our consolidated joint ventures and the
short-term acquisition financing and to provide additional borrowing
availability. See Note 8 -- Debt in the notes to our consolidated financial
statements for additional information on the Company's outstanding debt.

EQUITY LOSS IN JOINT VENTURES.  Equity loss in joint ventures decreased from
$2.0 million in fiscal 2003 to $1.8 million in fiscal 2004. This item represents
the Company's share of operating results associated with our investments in
unconsolidated joint ventures to develop and operate Krispy Kreme stores. These
joint ventures are in various stages of their development of Krispy Kreme
stores. For example, some ventures have multiple stores in operation while
others have none. Each joint venture has varying levels of infrastructure,
primarily human resources, in place to open stores. As a result, the joint
ventures are leveraging their infrastructure to varying degrees, which greatly
impacts the profitability of a joint venture. Losses in both fiscal 2004 and
fiscal 2003 were impacted by our share of the initial start-up expenses of
several joint ventures in markets outside the United States, the joint ventures
with rights to develop stores in Australia and New Zealand, the United Kingdom
and the Republic of Ireland, Mexico and Canada. Note 18 -- Joint Ventures in the
notes to our consolidated financial statements contains further information
about each of our joint ventures. At February 1, 2004, there were 66 factory
stores open by unconsolidated joint ventures compared to 30 factory stores at
February 2, 2003.

MINORITY INTEREST.  Minority interest decreased from $2.3 million in fiscal 2003
to $2.1 million in fiscal 2004. This expense represents the net elimination of
the minority partners' share of income or losses from consolidated joint
ventures to develop and operate Krispy Kreme stores. For fiscal 2003 and fiscal
2004, this expense includes the minority partners' share of the results of
operations of Freedom Rings and Golden Gate. In addition, as a result of the
Company's acquisition in the third quarter of fiscal 2003 of a controlling
interest in Glazed Investments, this expense also includes the minority
partners' share of the results of operations of Glazed Investments for periods
subsequent to the effective date of the acquisition. Increases in the minority
interest expense in fiscal 2004, resulting from improved profitability of
Freedom Rings and inclusion of the minority partners' share of operating results
of Glazed Investments for the full fiscal year, were offset by the impact of
decreased profitability of Golden Gate. Golden Gate's operating results were
impacted during the fourth quarter of fiscal 2004 by certain charges incurred by
Golden Gate in connection with the Company's acquisition of the remaining
minority interest in Golden Gate, principally severance costs and other costs
associated with the consolidation of operations with those of the Company. As
the Company acquired the remaining minority interest in Golden Gate effective
January 30, 2004 (see Note 20 -- Acquisitions in the notes to our consolidated
financial statements for further information), minority interest will no longer
include amounts related to Golden Gate.

PROVISION FOR INCOME TAXES.  The provision for income taxes is based on the
effective tax rate applied to the respective period's pre-tax income. The
provision for income taxes was $37.6 million in fiscal 2004, representing a
39.7% effective rate, compared to $21.3 million, or a 38.9% effective rate, in
the prior year. Excluding the effect of the arbitration award, which reduced the
provision for income taxes as a result of the tax benefits anticipated from the
award, the provision for income taxes

                                        27


in fiscal 2003 would have been $24.7 million, or a 38.7% effective rate. The
increase in the effective rate is primarily the result of increased state income
taxes, due to expansion into higher taxing states as well as increases in
statutory rates in several jurisdictions. The rate was also impacted by the
Company's share of losses, which are not currently deductible, associated with
our investments in unconsolidated international joint ventures. The Company
expects the effective tax rate for fiscal 2005 to be approximately 39.5% to
40.0%.

NET INCOME AND DILUTED EARNINGS PER SHARE.  Net income for fiscal 2004 was $57.1
million compared to $33.5 million in the prior year, an increase of 70.5%.
Diluted earnings per share in fiscal 2004 was $0.92, an increase of 62.6% over
the prior year. Fiscal 2003 results include a pre-tax charge of $9.1 million
related to an arbitration award against the Company, more fully discussed in
Note 19 -- Legal Contingencies in the notes to our consolidated financial
statements. In fiscal 2004, the Company paid $8.6 million to settle the award
and reversed the remaining accrual of $525,000. Excluding the effects of the
arbitration award, net income for fiscal 2003 and fiscal 2004 would have been
$39.1 million and $56.8 million, respectively, diluted earnings per share for
fiscal 2003 would have been $0.10 more than the reported $0.56 and diluted
earnings per share for fiscal 2004 would have been $0.01 less than the reported
$0.92.

YEAR ENDED FEBRUARY 2, 2003 COMPARED WITH YEAR ENDED FEBRUARY 3, 2002

OVERVIEW

As noted above, we operate on a 52- or 53-week fiscal year. Our operations for
fiscal 2003 contained 52 weeks while fiscal 2002 contained 53 weeks. This event
generally occurs every fifth year. When we make reference to fiscal 2002
adjusted for the number of weeks, we have adjusted fiscal 2002 results to
approximate a 52-week year. All references to comparable store sales are on the
basis of comparing the 52 weeks in fiscal 2003 with the comparable 52 weeks in
fiscal 2002.

THE FOLLOWING TABLE PRESENTS A RECONCILIATION OF REVENUE AND NET INCOME FOR
FISCAL 2002 TO MANAGEMENT'S ESTIMATE OF THE AMOUNTS THAT WOULD HAVE BEEN
REPORTED HAD FISCAL 2002 BEEN A 52-WEEK YEAR:



                                                                                                   IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------------
                                                                                ADJUSTMENT            FISCAL
                                                           FISCAL 2002,          FOR EXTRA             2002,
                                                            AS REPORTED            WEEK              PRO FORMA
- ---------------------------------------------------------------------------------------------------------------
                                                                                           
REVENUES:
Company Store Operations                                   $   266,209          $   (5,315)            $260,894
Franchise Operations                                            14,008                (288)              13,720
KKM&D                                                          114,137              (2,291)             111,846
                                                           ----------------------------------------------------
Total revenues                                             $   394,354          $   (7,894)            $386,460
                                                           ----------------------------------------------------
NET INCOME                                                 $    26,378          $     (558)            $ 25,820
                                                           ----------------------------------------------------


The Company estimates that the 53rd week impacted diluted earnings per share by
approximately $0.01.

Systemwide sales for fiscal 2003 increased 25.2% compared to fiscal 2002. The
increase included an increase of 20.1% in Company store sales, to $319.6
million. The increase was the result of sales from new stores opened during the
fiscal year and an increase of 12.8% in Company store comparable sales. During
fiscal 2003, 14 new Company stores and 49 new franchise stores were opened and
three Company stores and two franchise stores were closed, for a net increase of
58 stores. Additionally, during fiscal 2003, four Associate franchise stores and
one Area Developer franchise store became Company stores via the acquisition of
franchise markets in Akron, OH, Destin, FL, Pensacola, FL and Toledo, OH, and
nine Area Developer franchise stores became Company stores via the acquisition
of a controlling interest in Glazed Investments. We also sold one Company store
to an Associate franchisee in fiscal 2003. As a result, the total number of
factory stores at the end of fiscal 2003 was 276, consisting of 99 Company
stores (including 29 which are consolidated joint venture stores), 120 Area
Developer franchise stores (including 30 in which we have a joint venture
interest) and 57 Associate franchise stores. We believe continued increased
brand awareness and growth in off-premises sales contributed significantly to
the 11.8% increase in our systemwide comparable store sales. Adjusting for the
number of weeks in fiscal 2002, the increase in systemwide sales was 28.0%.

Total Company revenues increased 24.6% to $491.5 million in fiscal 2003 compared
with $394.4 million in the prior fiscal year. This increase was comprised of
increases in Company Store Operations revenues of 20.1% to $319.6 million,
Franchise Operations revenues of 37.8%, to $19.3 million, and KKM&D revenues,
excluding intersegment sales, of 33.7%, to $152.7 million. Adjusting for the
number of weeks in fiscal 2002, the increase in Company revenues was 27.2%.

Net income for fiscal 2003 was $33.5 million compared to $26.4 million in the
prior year, an increase of 26.9%. Diluted earnings per share was $0.56, an
increase of 24.8% over the prior year. Fiscal 2003 results include a pre-tax
charge of $9.1 million related to an arbitration award against the Company, more
fully discussed in Note 19 -- Legal Contingencies in the notes to our
consolidated financial statements. Excluding the effect of the arbitration
award, net income for fiscal 2003 would have been $39.1 million, an increase of
51.6% over fiscal 2002, as adjusted to approximate a 52-week year. The
arbitration award reduced diluted earnings per share by approximately $0.10.

                                        28


COMPANY STORE OPERATIONS

COMPANY STORE OPERATIONS REVENUES.  Company Store Operations revenues increased
to $319.6 million in fiscal 2003 from $266.2 million in fiscal 2002, an increase
of 20.1%. Comparable store sales increased by 12.8%. The revenue growth was
primarily due to strong growth in sales from both our on-premises and
off-premises sales channels. On-premises sales grew principally as a result of
the opening of 14 new Company stores during fiscal 2003, increased customer
visits, the introduction of new products (including featured doughnut varieties)
and our continued increase in brand awareness due in part to the expansion of
our off-premises sales programs. Additionally, a retail price increase was
implemented in the fall of fiscal 2003. Company store on-premises sales were
also positively impacted by the inclusion of the sales of the stores operated by
Glazed Investments for periods subsequent to the Company's acquisition of a
controlling interest in this franchisee in August 2002. Off-premises sales grew
primarily as a result of the addition of several new convenience and grocery
store customers as well as the expansion of the number of locations served in
our existing customer base. We believe excessive summer heat as well as extreme
weather patterns in the winter months, including record levels of rain, ice and
snow in many parts of the United States, put pressure on both on- and
off-premises sales in fiscal 2003. In particular, weather conditions impacted
construction of several stores in the fourth quarter and delayed their openings.
This resulted in fewer operating weeks from these stores and therefore lower
than expected sales. Adjusting for the number of weeks in fiscal 2002, the
increase in Company Store Operations revenues was 22.5%.

COMPANY STORE OPERATIONS OPERATING EXPENSES.  Company Store Operations operating
expenses increased 16.1% to $252.5 million in fiscal 2003 from $217.4 million in
fiscal 2002. Company Store Operations operating expenses as a percentage of
Company Store Operations revenues were 79.0% in fiscal 2003 compared with 81.7%
in fiscal 2002. The decrease in Company Store Operations operating expenses as a
percentage of revenues was primarily due to increased operating efficiencies
generated by growth in store sales volumes as demonstrated by the 12.8% increase
in comparable store sales discussed above, selected price increases, improved
profitability of our off-premises sales and a focus on gross margin improvement.

FRANCHISE OPERATIONS

FRANCHISE OPERATIONS REVENUES.  Franchise Operations revenues, consisting of
franchise fees and royalties, increased 37.8%, to $19.3 million, in fiscal 2003
from $14.0 million in fiscal 2002. The growth in revenue was primarily due to
the franchise fees and additional royalties associated with 49 new franchise
stores opened in fiscal 2003, net of the impact of two store closings and the
net transfer of 13 stores from Franchise to Company as a result of acquisitions,
as well as the impact of opening 41 new franchise stores, net of the impact of
two store closings and the transfer of seven stores from Franchise to Company,
as a result of acquisitions, during fiscal 2002. Also contributing to the growth
in revenue was comparable store sales increases. Sales of franchised stores, as
reported by our franchisees, were $355.5 million in fiscal 2002 and $459.0
million in fiscal 2003. Adjusting for the number of weeks in fiscal 2002, the
increase in Franchise Operations revenues was 40.7%.

FRANCHISE OPERATIONS OPERATING EXPENSES.  Franchise Operations operating
expenses were $4.9 million in fiscal 2003 and fiscal 2002. As a percentage of
Franchise Operations revenues, Franchise Operations operating expenses were
25.3% in fiscal 2003 compared with 35.0% in fiscal 2002. The decrease in
operating expenses as a percentage of Franchise Operations revenues is primarily
the result of the Company leveraging the infrastructure it has put in place to
oversee the expansion of our franchise concept.

KKM&D

KKM&D REVENUES.  KKM&D sales to franchise stores increased 33.7%, to $152.7
million, in fiscal 2003 from $114.1 million in fiscal 2002. The primary reason
for the increase in revenues was the opening of 49 new franchise stores, net of
the impact of two store closings and the net transfer of 13 stores from
Franchise to Company, in fiscal 2003; the opening of 41 new franchise stores,
net of the impact of two store closings and the transfer of seven franchise
stores to Company, in fiscal 2002; and comparable store sales increases.
Increased doughnut sales through both the on-premises and off-premises sales
channels by franchise stores translated into increased revenues for KKM&D from
sales of mixes, sugar, shortening and other supplies. Also, each new store is
required to purchase doughnut-making equipment and other peripheral equipment
from KKM&D, thereby enhancing KKM&D sales. Adjusting for the number of weeks in
fiscal 2002, the increase in KKM&D revenues was 36.5%.

KKM&D OPERATING EXPENSES.  KKM&D operating expenses increased 31.1%, to $124.1
million, in fiscal 2003 from $94.6 million in fiscal 2002. KKM&D operating
expenses as a percentage of KKM&D revenues were 81.3% in the current year
compared with 82.9% in the prior year. The decrease in KKM&D operating expenses
as a percentage of revenues was due to improved efficiencies in our
Winston-Salem mix and equipment manufacturing facilities. With the opening of
the new mix manufacturing facility in Effingham, Illinois in the second quarter
of fiscal 2003, our Winston-Salem mix manufacturing facility was able to scale
back its mix production levels, improving its efficiency as it had been running
at excessive levels in fiscal 2002 and early fiscal 2003. Additionally, the
relocation of our equipment manufacturing facility during the third quarter of
fiscal 2002 to a facility better designed to facilitate our manufacturing
process resulted in improved manufacturing efficiencies as compared to the prior
year. Start-up costs associated with the new mix and distribution facility in
Effingham, as well as those associated with our coffee roasting operation in
Winston-Salem, which continued to expand operations to support

                                        29


the rollout of our new beverage program, had a negative impact on KKM&D
operating expenses as a percentage of KKM&D revenues.

OTHER

GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses
increased 4.8%, to $28.9 million, in fiscal 2003 from $27.6 million in fiscal
2002. General and administrative expenses as a percentage of total revenues were
5.9% in fiscal 2003 compared with 7.0% in fiscal 2002. The dollar growth in
general and administrative expenses is primarily due to increased personnel and
salary and related benefit costs to support our expansion and other cost
increases necessitated by the growth of the Company, partially offset by lower
provisions for employee benefit costs, primarily incentive provisions determined
under the terms of the plans. The dollar growth in general and administrative
expenses in fiscal 2003 would have been higher; however, during the second and
part of the third quarter, we implemented strict controls on various general and
administrative expenses as we were concerned about a slow-down in the momentum
of the business, which we believe was caused primarily by the excessive summer
heat and drought in many of our market areas. We imposed controls on salary
expenses, travel expenses and professional fees, among others. General and
administrative expenses as a percentage of total revenues declined during fiscal
2003 primarily as a result of our 24.6% growth in revenues during the period. In
particular, acquisitions of Associate and Area Developer franchise markets in
fiscal 2003, including the acquisition of a controlling interest in Glazed
Investments, resulted in revenue gains with minimal incremental general and
administrative expenses as we were able to leverage our existing infrastructure
in many functional areas to support these acquired operations. In addition, as a
percentage of total revenues, general and administrative expenses will vary in
part depending upon the number of new store openings in a period. During fiscal
2003, 49 new franchise stores were opened, as compared to 41 new franchise
stores opened in the comparable period of the prior year. As each new store is
required to purchase doughnut-making equipment and other peripheral equipment
from KKM&D, the increased number of store openings generally results in
increased revenues. These increased revenues further leverages the existing
general and administrative expense structure as there is minimal incremental
general and administrative expenses associated with a store opening.

DEPRECIATION AND AMORTIZATION EXPENSES.  Depreciation and amortization expenses
increased 54.2%, to $12.3 million, in fiscal 2003 from $8.0 million in fiscal
2002. Depreciation and amortization expenses as a percentage of total revenues
were 2.5% in fiscal 2003 compared with 2.0% in fiscal 2002. The dollar growth in
depreciation and amortization expenses is due to increased capital asset
additions, including additions related to the new mix and distribution facility,
which became operational in fiscal 2003, and additions related to new stores,
including new stores opened by our consolidated joint ventures.

ARBITRATION AWARD.  In fiscal 2003 we recorded a charge of $9.1 million as a
result of an arbitration panel's ruling against the Company in a lawsuit. The
charge included the arbitration panel's award of approximately $7.9 million and
management's estimate at the time of additional costs to be awarded in
connection with the action, including plaintiff's legal fees, of approximately
$1.2 million. Subsequent to fiscal 2003, the award was paid. See further
discussion of the lawsuit and subsequent settlement in Note 19 -- Legal
Contingencies in the notes to our consolidated financial statements.

INTEREST INCOME.  Interest income in fiscal 2003 decreased 34.0% over fiscal
2002 primarily as a result of lower rates of interest earned in fiscal 2003 on
excess cash invested.

INTEREST EXPENSE.  Interest expense was $1.8 million in fiscal 2003 compared
with $337,000 in fiscal 2002. This increase is primarily the result of interest
on the Term Loan used to finance the new mix manufacturing and distribution
facility in Effingham, Illinois. Prior to completion of the facility during the
second quarter of fiscal 2003, interest on borrowings used to finance the
facility was capitalized. Additionally, interest expense in fiscal 2003 included
interest on borrowings by Glazed Investments for periods subsequent to our
acquisition of a controlling interest in this joint venture, and interest on
increased borrowings of Golden Gate, as both consolidated joint ventures
financed their expansion, in part, through bank or other third party debt.

EQUITY LOSS IN JOINT VENTURES.  This item represents the Company's share of
operating results associated with our investments in unconsolidated joint
ventures to develop and operate Krispy Kreme stores. These joint ventures are in
various stages of their development of Krispy Kreme stores. For example, some
ventures have multiple stores in operation while others have none. Each joint
venture has varying levels of infrastructure, primarily human resources, in
place to open stores. As a result, the joint ventures are leveraging their
infrastructure to varying degrees, which greatly impacts the profitability of a
joint venture. In particular, the increase in the loss in fiscal 2003 was
impacted by the Company's share of the initial start-up expenses of the
Company's first joint ventures in markets outside North America, the joint
venture with rights to develop stores in Australia and New Zealand and the joint
venture with rights to develop stores in the United Kingdom and Ireland. At
February 2, 2003, there were 30 stores open by unconsolidated joint ventures
compared to 18 stores at February 3, 2002.

MINORITY INTEREST.  This expense represents the net elimination of the minority
partners' share of income or losses from consolidated joint ventures to develop
and operate Krispy Kreme stores. The increase in this expense is primarily a
result of increased profitability of Golden Gate, which opened four additional
stores in fiscal 2003, and the inclusion of the minority partners' share of the
results of operations of Glazed Investments, subsequent to our acquisition of a
controlling interest in this franchisee in fiscal 2003.

                                        30


PROVISION FOR INCOME TAXES.  The provision for income taxes is based on the
effective tax rate applied to the respective period's pre-tax income. The
provision for income taxes was $21.3 million in fiscal 2003, representing a
38.9% effective rate, compared to $16.2 million, or a 38.0% effective rate, in
the prior year. Excluding the effect of the arbitration award, which reduced the
provision for income taxes as a result of the tax benefits anticipated from the
award, the provision for income taxes would have been $24.7 million, or a 38.7%
effective rate. The increase in the effective rate is primarily the result of
increased state income taxes, due to expansion into higher taxing states as well
as increases in statutory rates in several jurisdictions. The rate was also
impacted by the Company's share of losses, which are not currently deductible,
associated with our investments in international joint ventures.

NET INCOME AND DILUTED EARNINGS PER SHARE.  Net income for fiscal 2003 was $33.5
million compared to $26.4 million in fiscal 2002, an increase of 26.9%. Diluted
earnings per share was $0.56, an increase of 24.8% over the prior year. Fiscal
2003 results include a pre-tax charge of $9.1 million related to an arbitration
award against the Company, more fully discussed in Note 19 -- Legal
Contingencies in the notes to our consolidated financial statements. Excluding
the effect of the arbitration award, net income for fiscal 2003 would have been
$39.1 million, an increase of 51.6% over fiscal 2002, as adjusted to approximate
a 52-week year. The arbitration award reduced diluted earnings per share by
approximately $0.10.

                                        31


QUARTERLY RESULTS

The following tables set forth unaudited quarterly information for each of the
eight fiscal quarters in the two year period ended February 1, 2004. This
quarterly information has been prepared on a basis consistent with our audited
financial statements and, in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the periods presented. Our quarterly
operating results may fluctuate significantly as a result of a variety of
factors, and operating results for any quarter are not necessarily indicative of
results for a full fiscal year. In particular, the operating results for the
quarter ended February 2, 2003, the fourth quarter of fiscal 2003, include a
pre-tax charge of $9.1 million as a result of an arbitration panel's ruling
against the Company in a lawsuit. The operating results for the quarter ended
May 4, 2003 include the reversal of the $525,000 accrual remaining after
settlement of this award during this quarter. See Note 19 -- Legal Contingencies
in the notes to our consolidated financial statements for further discussion. In
addition, we have historically experienced seasonal variability in our quarterly
operating results, with higher profits per store in the first and third quarters
than in the second and fourth quarters.



                                                                            IN THOUSANDS, EXCEPT PER SHARE DATA
- ---------------------------------------------------------------------------------------------------------------
                           MAY 5,    AUG. 4,    NOV. 3,    FEB. 2,     MAY 4,    AUG. 3,    NOV. 2,    FEB. 1,
THREE MONTHS ENDED          2002       2002       2002       2003       2003       2003       2003       2004
- ---------------------------------------------------------------------------------------------------------------
                                                                               
Total revenues            $111,059   $114,626   $129,130   $136,734   $148,660   $161,790   $169,629   $185,513
Operating expenses          86,362     90,487    100,295    104,345    112,480    123,705    129,229    141,982
General and
  administrative
  expenses                   7,623      6,589      7,429      7,256      8,902      9,060      9,400      9,550
Depreciation and
  amortization expenses      2,546      2,612      3,403      3,710      4,101      4,703      4,964      5,955
Arbitration award               --         --         --      9,075       (525)        --         --         --
                          -------------------------------------------------------------------------------------
Income from operations      14,528     14,938     18,003     12,348     23,702     24,322     26,036     28,026
Interest and other
  expenses, net                236        535      1,531      2,742      1,974      2,543      1,880      1,012
                          -------------------------------------------------------------------------------------
Income before income
  taxes                     14,292     14,403     16,472      9,606     21,728     21,779     24,156     27,014
Provision for income
  taxes                      5,431      5,545      6,347      3,972      8,588      8,778      9,634     10,590
                          -------------------------------------------------------------------------------------
 Net income               $  8,861   $  8,858   $ 10,125   $  5,634   $ 13,140   $ 13,001   $ 14,522   $ 16,424
                          -------------------------------------------------------------------------------------
Net income per share:
 Basic                    $    .16   $    .16   $    .18   $    .10   $    .23   $    .22   $    .24   $    .27
 Diluted                       .15        .15        .17        .09        .22        .21        .23        .26


OUR OPERATING RESULTS FOR THESE EIGHT QUARTERS EXPRESSED AS PERCENTAGES OF
APPLICABLE REVENUES WERE AS FOLLOWS:



- -------------------------------------------------------------------------------------------------------------------
                          MAY 5,     AUG. 4,     NOV. 3,     FEB. 2,     MAY 4,     AUG. 3,     NOV. 2,     FEB. 1,
THREE MONTHS ENDED         2002       2002        2002        2003        2003       2003        2003        2004
- -------------------------------------------------------------------------------------------------------------------
                                                                                    
Total revenues            100.0%      100.0%      100.0%      100.0%     100.0%      100.0%      100.0%      100.0%
Operating expenses         77.7        79.0        77.7        76.3       75.7        76.5        76.2        76.5
General and
  administrative
  expenses                  6.9         5.7         5.8         5.3        6.0         5.6         5.5         5.2
Depreciation and
  amortization expenses     2.3         2.3         2.6         2.7        2.8         2.9         2.9         3.2
Arbitration award            --          --          --         6.7       (0.4)         --          --          --
                          ----------------------------------------------------------------------------------------
Income from operations     13.1        13.0        13.9         9.0       15.9        15.0        15.4        15.1
Interest and other
  expenses, net             0.2         0.5         1.2         2.0        1.3         1.6         1.2         0.5
                          ----------------------------------------------------------------------------------------
Income before income
  taxes                    12.9        12.5        12.7         7.0       14.6        13.4        14.2        14.6
Provision for income
  taxes                     4.9         4.8         4.9         2.9        5.8         5.4         5.7         5.7
                          ----------------------------------------------------------------------------------------
 Net income                 8.0%        7.7%        7.8%        4.1%       8.8%        8.0%        8.5%        8.9%
                          ----------------------------------------------------------------------------------------


                                        32


LIQUIDITY AND CAPITAL RESOURCES

Because management generally does not monitor liquidity and capital resources on
a segment basis, this discussion is presented on a consolidated basis.

We funded our capital requirements for fiscal 2004 primarily through cash flow
generated from operations and the use of existing cash and investment balances,
with the exception of the purchase of the rights as well as the related assets,
which included six stores, to the Dallas, Texas and Shreveport, Louisiana
markets, which was funded, in part, with short-term debt, and the purchase of
the remaining 33% minority interest in Golden Gate, which was funded, in part,
with borrowings under our Credit Facility. The acquisition of Montana Mills and
the rights to the Michigan market were funded primarily through the issuance of
shares of common stock and, with respect to the acquisition of the rights to the
Michigan market, the issuance of a promissory note. Capital requirements for
fiscal 2003 were funded primarily through cash flow generated from operations,
with the exception of the purchase of the new mix and distribution facility in
Effingham, Illinois. The purchase of this facility was funded from borrowings
under a credit agreement with a bank. As discussed below, our consolidated joint
ventures funded their capital requirements through cash flows from operations
and borrowings under various financing arrangements, including revolving lines
of credit, term loans and short-term debt, as well as, in fiscal 2004, from
loans provided by the Company.

CASH FLOW FROM OPERATIONS

OVERVIEW.  Net cash flow from operations was $36.2 million in fiscal 2002, $51.0
million in fiscal 2003 and $95.6 million in fiscal 2004. Operating cash flow in
each year has benefited from increased net income, offset by additional
investments in working capital, primarily receivables and inventories, as
discussed in more detail below. In fiscal 2004, net income increased $30.7
million, or 116.4%, compared with fiscal 2002, and it increased $23.6 million,
or 70.5%, compared with fiscal 2003. Net working capital was $49.2 million at
February 3, 2002, $81.4 million at February 2, 2003 and $85.2 million at
February 1, 2004. Accrued expenses in fiscal 2003 decreased primarily as a
result of net lower accruals for employee benefit plans, primarily incentive
plans, as determined under the terms of the plans, at February 2, 2003 as
compared to February 3, 2002. The accrual of $9.1 million for the arbitration
award (see Note 19 -- Legal Contingencies in the notes to our consolidated
financial statements) reduced working capital in fiscal 2003.

Operating cash flows were also favorably impacted by the tax benefit from the
exercise of nonqualified stock options of $42.8 million in fiscal 2004 and $13.8
million in fiscal 2003. The Company's operating cash flows may continue to be
favorably impacted by similar tax benefits in the future; however, the exercise
of stock options is outside of the Company's control.

DETAILED ANALYSIS

ACCOUNTS RECEIVABLE.  Our investment in receivables, net of increases resulting
from acquisitions, increased $13.3 million in fiscal 2002, $7.4 million in
fiscal 2003 and $17.6 million in fiscal 2004. Accounts receivable have been
increasing for the following reasons:

    1) The expansion of our off-premises sales programs and the corresponding
       receivables from grocery and convenience stores and other off-premises
       customers. Payment terms for off-premises customers vary depending on
       their credit worthiness and the type of off-premises program we offer
       them. Sometimes customers do not pay within their credit terms or there
       are disputes over amounts owed to us. We use our judgment in deciding
       whether to grant additional payment days, intensify collection efforts,
       suspend service, write the account off as uncollectible or a combination
       of the above. Write-offs of accounts receivable due to uncollectibility
       have had a minimal impact on operating cash flow in recent years. As we
       expect our off-premises business to continue to grow, accounts receivable
       balances from off-premises customers are also expected to grow.

    2) An increase in the number of franchise factory stores that are operating:
       143 at February 3, 2002; 177 at February 2, 2003; and 216 at February 1,
       2004. We generate accounts receivable from franchisees as a result of
       royalties earned on their sales as well as our weekly shipments of mix,
       other ingredients, coffee and supplies to each store. Therefore, as the
       number of franchise stores has grown, so have the corresponding accounts
       receivable balances. Accounts receivable balances from franchisees are
       shown under the captions accounts receivable and accounts receivable,
       affiliates on the consolidated balance sheets. Receivables from
       franchisees in which we own no interest are included in the accounts
       receivable caption, while receivables from franchisees in which we own a
       minority interest or receivables from stores owned by emeritus members of
       our Board of Directors, or other related parties, are shown under the
       caption accounts receivable, affiliates. Payment terms on these
       receivables are 30 or 35 days from the date of invoice, depending on the
       franchisee's payment method (traditional check versus electronic payment
       arrangements). We also generate accounts receivable from franchise stores
       whenever they build a new store, as we supply the doughnut-making
       equipment and other capital expenditure items necessary to operate a
       store. Payment terms on these items are 54 days from the date of
       installation of the doughnut-making equipment. Accounts receivable
       generated from a new store opening are typically in excess of $550,000
       per store. If franchise store openings are heavily concentrated in a
       particular quarter, and depending on when the stores opened in the
       quarter, the sales of the doughnut-making equipment and other capital
       expenditure items we sell to franchisees can cause an increase in our
       accounts receivable balances. We have had minimal

                                        33


       experience with uncollectible accounts receivable from our franchisees.
       We expect accounts receivable from franchisees will continue to grow over
       time as we open new stores and sell to an increasing base of franchise
       stores.

INVENTORIES.  Our investment in inventories, net of increases resulting from
acquisitions, increased $4.0 million in fiscal 2002, $7.9 million in fiscal 2003
and $3.8 million in fiscal 2004. Inventories have increased primarily as a
result of:

    1) An increase in the number of Company-owned factory stores: 75 at February
       3, 2002, 99 at February 2, 2003 and 141 at February 1, 2004. Each store
       carries an inventory consisting of mix, other ingredients, coffee and
       supplies necessary to operate the store. As we add more Company stores in
       the future, we anticipate that inventory levels will grow accordingly.

    2) An increase in inventory levels at KKM&D -- raw materials,
       work-in-progress, finished goods and service parts -- to support the
       increased number of stores in the system, as well as anticipated new
       store openings. The total number of factory stores in operation at
       February 3, 2002, February 2, 2003 and February 1, 2004 was 218, 276 and
       357, respectively.

INCOME TAXES.  During fiscal 2004, we made $335,000 in estimated state income
tax payments and no estimated Federal income tax payments. Stock option
exercises during the fiscal year resulted in tax deductions for the Company
which offset any current Federal income tax liability for fiscal 2004 from
normal operations and created a net operating loss for income tax purposes. A
portion of the net operating loss is available for carryback to previous tax
years, resulting in an income tax refundable amount of $8.0 million at February
1, 2004. The remaining net operating loss will be carried forward and will
positively impact cash flow in fiscal 2005 by reducing required Federal and
state estimated tax payments for this fiscal year. In addition, during fiscal
2004, cash flow was positively impacted by $3.3 million in tax refunds related
to overpayments of estimated income tax made in fiscal 2003. While we try to
anticipate events which will impact the amount and timing of income tax
payments, it is difficult to anticipate the impact stock option exercises will
have on our overall tax position as stock option exercise decisions are at the
discretion of the option holder. See Note 10 -- Income Taxes in the notes to our
consolidated financial statements for further information.

CASH FLOW FROM INVESTING ACTIVITIES

Net cash used for investing activities was $52.3 million in fiscal 2002, $93.0
million in fiscal 2003 and $186.2 million in fiscal 2004. Investing activities
in each fiscal year primarily consisted of expenditures for property and
equipment, additional investments in joint ventures and the acquisition of
franchise markets, net of cash acquired. In addition to capital expenditures,
investing activities in each fiscal year consisted of the purchases and sales of
investments in marketable securities.

In fiscal 2004, our capital expenditures for property and equipment were $79.6
million, a decrease of $3.5 million, or 4.3%, compared with fiscal 2003 and an
increase of $42.3 million, or 113.5%, compared with fiscal 2002. Capital
expenditures in each fiscal year were primarily related to new store
construction, including stores opened by our consolidated joint ventures, store
remodels, additions or improvements to existing Company stores and expenditures
to support our off-premises sales programs. During fiscal 2004, an increased
amount of capital expenditures related to new store construction, as the
Company, including consolidated joint ventures, opened 28 new factory stores in
the current year as compared to 14 new factory stores opened in fiscal 2003 and
seven in fiscal 2002. Capital expenditures in fiscal 2003 included expenditures
for the new mix manufacturing and distribution facility in Effingham, Illinois
and for the installation of a coffee roasting operation at our Ivy Avenue
facility in Winston-Salem. These expenditures were necessary to support our
efforts of increasing sales of our products throughout North America and for
expansion internationally. Capital expenditures for property and equipment in
fiscal 2005 are expected to be approximately $110.0 million, consisting
principally of expenditures for new stores, including stores to be opened by our
consolidated joint ventures, store remodels, technology and infrastructure in
our KKM&D operations. This amount, however, could be higher or lower depending
on needs and situations that arise during the year.

In fiscal 2004, we also spent $118.3 million, net of cash acquired, and issued
approximately 1.7 million shares of common stock for the acquisition of
Associate and Area Developer franchise markets in Kansas and Missouri; Michigan;
Dallas, TX and Shreveport, LA; the acquisition of the remaining minority
interest in Golden Gate, the joint venture franchisee which had the rights to
develop stores in Northern California, and Montana Mills. See Note
20 -- Acquisitions in the notes to our consolidated financial statements for
more information on these transactions. In fiscal 2003, we spent $5.0 million in
cash, net of cash acquired, and issued approximately 837,000 shares of common
stock for the acquisition of Associate and Area Developer franchise markets and
to acquire a controlling interest in a joint venture. The Associate and Area
Developer franchisee markets we acquired were in Akron, OH, Destin, FL,
Pensacola, FL and Toledo, OH. Primarily through the issuance of common stock, we
acquired a controlling interest in Glazed Investments, our area developer joint
venture with rights to develop stores in the Colorado, Minnesota and Wisconsin
markets. In fiscal 2002, we spent $20.6 million, net of cash acquired, and
issued approximately 115,000 shares of common stock to acquire the Baltimore,
MD, Charleston, SC and Savannah, GA markets from franchisees. We will acquire
markets, in whole or in part under joint venture agreements, from franchisees if
they are willing to sell to us and if there are sound business reasons for us to
make the acquisition. These reasons may include a franchise market being
contiguous to a Company store market where an acquisition would provide
operational synergies; upside opportunity in the market because the franchisee
has not fully developed on-premises or off-premises sales; or if we believe our
acquiring the

                                        34


market would improve the brand image in the market. We will be opportunistic
about the acquisition of additional franchise markets and may acquire, in whole
or in part under joint venture agreements, other markets in fiscal 2005.

Investing activities in fiscal 2002, fiscal 2003 and fiscal 2004 also included
additional investments in area developer joint ventures totaling $1.2 million,
$7.9 million and $7.4 million, respectively, including initial investments in
joint ventures with Area Developers in markets outside North America. The
investment in fiscal 2003 included $1.6 million spent to acquire ownership
interests from the Krispy Kreme Equity Group, a pooled investment fund whose
members were officers of the Company, and from two executive officers of the
Company in certain franchise markets where we already had an interest ranging
from approximately 3% to 59%. We believe acquiring an ownership interest in
franchise markets helps align interests between the Company and the franchisee
and should provide returns for shareholders as the operators of these franchise
markets achieve scale in their operations and become profitable.

CASH FLOW FROM FINANCING ACTIVITIES

Net cash provided by financing activities was $30.9 million in fiscal 2002,
$52.2 million in fiscal 2003 and $79.5 million in fiscal 2004.

Financing activities in fiscal 2004 consisted primarily of borrowings and
repayment of debt and the proceeds from stock option exercises. On October 31,
2003, we entered into a $150.0 million unsecured bank credit facility ("Credit
Facility"). The Credit Facility is comprised of a $119.3 million revolving
credit facility ("Revolver") and a $30.7 million term loan ("Term Loan"). We
borrowed $87.0 million on the Revolver and used the proceeds to pay the
outstanding amounts due under a $55.0 million short-term promissory note we
entered into to partially finance the acquisition of the Dallas, TX and
Shreveport, LA markets from an Associate franchisee, to repay outstanding bank
borrowings of two of our consolidated joint ventures, Golden Gate and Freedom
Rings, and to partially fund the acquisition of the remaining minority interest
in Golden Gate. The proceeds of the Term Loan were used to repay an existing
term loan with similar terms. See Note 8 -- Debt in the notes to our
consolidated financial statements for additional information on the terms of the
Credit Facility. Proceeds from the exercise of stock options in fiscal 2004 were
$19.5 million.

Financing activities in fiscal 2003 consisted primarily of the borrowing of
$33.0 million to finance the Effingham, Illinois mix and distribution facility,
borrowings of long-term debt by consolidated joint ventures to finance store
development of $11.2 million and proceeds from the exercise of stock options of
$7.1 million. In addition, cash flows benefited from the repayment by members of
the Company's management and Board of Directors of loans extended to them in
1998 in connection with the change in terms of an employee benefit plan. These
loans were repaid in full, including accrued interest, in the third quarter of
fiscal 2003.

Financing activities in fiscal 2002 consisted primarily of the completion of our
follow-on public offering which raised $17.2 million of capital, the exercise of
stock options which provided cash of $3.9 million and cash of $4.0 million
provided by outstanding checks which had not yet cleared the bank (book
overdraft). The follow-on public offering was for 10,400,000 shares of common
stock, of which 9,313,300 were sold by selling shareholders and 1,086,700 were
sold by the Company, with net proceeds to the Company of $17.2 million.

CAPITAL RESOURCES, CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

In addition to cash flow generated from operations, the Company utilizes other
capital resources and financing arrangements to fund the expansion of the Krispy
Kreme concept. A discussion of these capital resources and financing techniques
is included below.

DEBT.  The Company continuously monitors its funding requirements for general
working capital purposes and other financing and investing activities. We also
monitor the funding requirements of our consolidated joint ventures and have
provided financing to them since we believe, given our significant ownership
interest in these operations, we can do so through our sources of funding more
economically than these joint ventures could obtain independently through third
parties and this process is administratively more efficient.

As discussed under "Cash Flow From Financing Activities" above, on October 31,
2003, we entered into a $150.0 million Credit Facility to refinance certain
existing debt and increase borrowing availability. The Credit Facility consists
of a $119.3 million Revolver, which replaced an existing $40.0 million revolving
line of credit, and a $30.7 million Term Loan. Borrowings under the Revolver,
totaling $87.0 million, were used to repay amounts outstanding, including
interest, under a $55.0 million short-term promissory note entered into in June
2003 to partially finance an acquisition, to partially finance the acquisition
of the remaining minority interest in Golden Gate and to repay bank debt of
certain of the Company's consolidated joint ventures. From the proceeds of the
Revolver borrowings, the Company provided loans to these consolidated joint
ventures to enable them to repay this debt. The Company will continue to make
financing available to its consolidated joint ventures to fund their capital
needs. Borrowings under the Term Loan were used to refinance an existing term
loan entered into in fiscal 2003 to fund the initial purchase and completion of
the Company's mix and distribution facility in Effingham, Illinois.

                                        35


The amount available under the Revolver is reduced by outstanding letters of
credit and was $24.9 million at February 1, 2004. The Company may request, on a
one-time basis, an increase in the availability under the Revolver of up to
$50.0 million, which would increase total capacity under the Revolver to $169.3
million.

Under the Credit Facility, the Company may prepay amounts outstanding without
penalty. Amounts outstanding under the Revolver are due in full on October 31,
2007, when the Credit Facility terminates. The Term Loan requires monthly
payments of principal of $137,500 through October 31, 2007, at which time a
final payment of all outstanding principal and accrued interest will be due.
Interest on amounts outstanding under the Revolver is generally payable
quarterly and interest on the Term Loan is payable monthly and is charged, at
the Company's option, at either the Base Rate, as defined within the Credit
Facility, plus an Applicable Margin, as defined, or Adjusted LIBOR, as defined,
plus an Applicable Margin. The Applicable Margin ranges from 0.0% to 0.75% for
Base Rate borrowings and from 1.0% to 2.0% for Adjusted LIBOR borrowings and is
determined based upon the Company's performance under certain financial
covenants contained in the Credit Facility. The interest rate applicable at
February 1, 2004 was 2.57% on the Revolver and 2.38% on the Term Loan. A fee on
the unused portion of the Revolver is payable quarterly and ranges from 0.20% to
0.375%, which is also determined based upon the Company's performance under
certain financial covenants contained in the Credit Facility.

The Company is counterparty to an interest rate swap agreement with a bank which
was entered into to convert variable rate payments due under certain existing
debt to fixed amounts, thereby hedging against the impact of interest rate
changes on future interest expense (forecasted cash flow). The Company formally
documents all hedging instruments and assesses, both at inception of the
contract and on an ongoing basis, whether they are effective in offsetting
changes in cash flows of the hedged transaction. The swap had a notional amount
of $30.1 million at February 1, 2004 and was designated as a hedge against the
variable rate interest payments due under the Term Loan. The notional amount
declines by $137,500 each month, which corresponds with the reduction in
principal of the Term Loan. Under the terms of the swap, the Company makes fixed
rate payments to the counterparty of 5.09% and in return receives payments at
LIBOR. Monthly payments continue until the swap terminates May 1, 2007. The
Company is exposed to credit loss in the event of nonperformance by the
counterparty to the swap agreement; however, the Company does not anticipate
nonperformance. At February 1, 2004, the fair value carrying amount of the swap
was a liability of $2.2 million. Accumulated other comprehensive loss for the
fiscal year ended February 1, 2004 includes a loss, net of related tax benefits,
of $1.3 million related to the swap.

The Credit Facility contains provisions that, among other requirements, restrict
the payment of dividends and require the Company to maintain compliance with
certain covenants, including maintenance of certain financial ratios. At
February 1, 2004, the Company was in compliance with each of these covenants.

In December 2003, Glazed Investments entered into a $12.0 million credit
facility (the "Glazed Credit Facility") to provide working capital and funding
for the construction of stores and the purchase of related equipment. The Glazed
Credit Facility provides a $500,000 working capital line of credit, up to $8.0
million to fund the construction of stores and up to $3.5 million to fund the
purchase of related equipment. Amounts outstanding under the Glazed Credit
Facility bear interest at one-month LIBOR plus 1.50% (2.59% at February 1,
2004), which is payable monthly. Upon completion of a store, amounts advanced to
fund construction are converted to construction term loans ("Construction
Notes") and amounts advanced to fund the related equipment purchase are
converted to equipment term loans ("Equipment Notes"). The Construction Notes
require fixed monthly principal payments, based upon a term of ten years, plus
interest, with a final payment of all outstanding amounts due on the earlier of
June 30, 2010; two months prior to the final maturity of the subordinated debt
discussed below; or five years after commencement of monthly payments of
principal and interest. The Equipment Notes require monthly payments of
principal and interest for a term of five years, with a final payment of all
outstanding amounts due on the earlier of June 30, 2009; two months prior to the
final maturity of the subordinated debt discussed below; or five years after
commencement of monthly payments of principal and interest. The amounts
outstanding under the working capital line of credit are payable in full on June
30, 2004. The loans are secured by the related property and equipment. The
Company has also guaranteed approximately 75% of the amounts outstanding under
the Glazed Credit Facility. At February 1, 2004, $6.3 million had been advanced
under the Glazed Credit Facility, principally to fund store construction.

Prior to entering into the Glazed Credit Facility discussed above, Glazed
Investments typically entered into arrangements with a non-bank financing
institution to provide funding for the construction of stores and the purchase
of the related equipment. While individual promissory notes exist for the
financing of each store and equipment purchase for which funding was provided
through the issuance of debt, the terms of each are substantially the same.
During the construction period, interest on amounts outstanding is payable
monthly, generally at one-month LIBOR plus 4.25%. Upon completion of the store,
the amount advanced for construction funding is converted to a real estate term
loan ("Real Estate Loans") and amounts advanced for equipment purchases are
converted to equipment term loans ("Equipment Loans"). Generally, Real Estate
Loans require monthly payments of principal and interest for a fixed term of
fifteen years and Equipment Loans require monthly payments of principal and
interest for a fixed term of seven years. Interest is payable at rates based on
either a fixed rate, which ranges from 7% to 8.65%, or a variable rate based on
the one-month LIBOR rate or a commercial paper rate, plus a premium. The premium
charged on variable rate loans ranges from 3.05% to 3.6%. At February 1, 2004,
interest rates applicable to the debt range from 4.06% to 8.65%. The loans are
secured by the related property and equipment. The Company has also guaranteed
approximately 75% of the amounts outstanding under the loans. Amounts
outstanding under Real Estate Loans and Equipment Loans totaled $14.3 million at
February 1, 2004.

                                        36


The Glazed Credit Facility and non-bank financing discussed above contain
provisions requiring Glazed Investments to maintain compliance with certain
financial and non-financial covenants, including maintenance of certain
financial ratios. At February 1, 2004, Glazed Investments was in compliance with
these covenants.

In July 2000, Glazed Investments issued $4.5 million in senior subordinated
notes ("Notes") to fund, in part, expenses associated with the start-up of its
operations. The Company purchased $1.0 million of the Notes at the time of the
initial offering. In connection with the Company's acquisition of additional
interests in Glazed Investments in fiscal 2003 (see Note 18 -- Joint Ventures in
the notes to our consolidated financial statements), the Company acquired an
additional $3.4 million in Notes. As a result, approximately $4.4 million of the
Notes issued by Glazed Investments are payable to the Company. Prior to the
acquisition by the Company of a controlling interest in Glazed Investments in
August 2002, the Notes held by the Company were included in investments in
unconsolidated joint ventures. Effective with the consolidation of Glazed
Investments with the accounts of the Company in August 2002, the Notes held by
the Company were eliminated against the amount reflected in Glazed Investments
balance sheet as payable to the Company. Accordingly, the Notes outstanding at
February 1, 2004 as reflected in the consolidated balance sheet totaling
$136,000 represent the total amount of the original $4.5 million issued that
remains payable to a third party. The Notes bear interest at 12.0% payable
semi-annually each April 30 and October 31 through April 30, 2010, at which time
a final payment of outstanding principal and accrued interest is due.

Based on current expansion plans, our consolidated joint ventures will most
likely seek additional borrowing capacity to support planned store openings and
sales growth. The Company may provide loans to fund these needs. If additional
third party financing is obtained, the Company will most likely be required to
guarantee a portion of this additional credit equal to its ownership percentage
of the joint venture.

The Company will continue to consider opportunities to acquire partial or entire
interests in some of our franchise markets as the opportunity arises and there
are sound business reasons to make the acquisition. Depending on the size and
number of these acquisitions, it is likely that we will use, in addition to
excess cash, additional debt and/or equity to accomplish these acquisitions. See
Capital Requirements below for further discussion.

OPERATING LEASES.  The Company conducts some of its operations from leased
facilities and, additionally, leases certain equipment under operating leases.
Generally, these leases have initial terms of three to twenty years and contain
provisions for renewal options of five to ten years. In determining whether to
enter into an operating lease for an asset, we evaluate the nature of the asset
and the associated operating lease terms to determine if operating leases are an
effective financing tool. We anticipate that we will continue to use operating
leases as a financing tool as appropriate.

SUMMARIES OF OUR CONTRACTUAL CASH OBLIGATIONS AS OF FEBRUARY 1, 2004 ARE AS
FOLLOWS:

                CONTRACTUAL CASH OBLIGATIONS AT FEBRUARY 1, 2004



                                                                                               IN THOUSANDS
- -----------------------------------------------------------------------------------------------------------
                                                                         PAYMENTS DUE IN
                                                       ----------------------------------------------------
                                             TOTAL                                                MORE THAN
                                             AMOUNT    LESS THAN 1 YEAR   2-3 YEARS   4-5 YEARS    5 YEARS
- -----------------------------------------------------------------------------------------------------------
                                                                                   
Long-term debt                              $137,917       $ 2,861         $ 8,314    $116,760     $ 9,982
Operating leases                             155,726        21,119          34,217      24,791      75,599
Long-term commodity purchase commitments     114,254        50,862          38,323      25,069          --
- -----------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations          $407,897       $74,842         $80,854    $166,620     $85,581
- -----------------------------------------------------------------------------------------------------------


OFF-BALANCE SHEET ARRANGEMENTS.  The Company, in the ordinary course of
business, enters into off-balance sheet arrangements as defined by the SEC's
Final Rule 67, "Disclosure in Management's Discussion and Analysis about
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations," including
guarantees and indemnifications as discussed below and in Note 17 -- Commitments
and Contingencies in the notes to our consolidated financial statements. None of
these off-balance sheet arrangements either has, or is reasonably likely to
have, a material current or future effect on financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.

In order to open stores and expand off-premises sales programs, our franchisees
incur debt and enter into operating lease agreements. Primarily for those
franchisees in which we have an ownership interest, we will guarantee an amount
of the debt or leases generally equal to our ownership percentage. Because these
are relatively new entities without a long track record of operations, these
guarantees are necessary for our joint venture partners to get financing for the
growth of their businesses. These guarantees are not recorded as liabilities in
our consolidated balance sheet based on our assessment that the fair value of
these guarantees, if any, was not material to the Company's financial position
or results of operations. As of February 1, 2004, we had lease guarantee
commitments totaling $104,000 and loan guarantees totaling $15.3 million. These
amounts do not include guarantees of debt of our consolidated joint ventures, as
the entire amount of the debt of these joint ventures is shown as a liability in
our consolidated balance sheet, nor does it include guarantees of leases of our
consolidated joint ventures, as the gross amount of lease commitments for these
joint ventures is included in the amounts reported above and in Note 9 -- Lease
Commitments in the notes to our consolidated financial statements. Of the total
guaranteed amount of $15.4 million,

                                        37


$14.8 million are for franchisees in which we have an ownership interest and
$541,000 are for franchisees in which we have no ownership interest. The amount
of debt and lease guarantees related to franchisees in which we have an
ownership interest will continue to grow as these joint ventures open more
stores while the amount of debt and lease guarantees related to franchisees in
which we do not have an interest is expected to decrease. To date the Company
has not experienced any losses in connection with these guarantees, and we
consider it unlikely that we will have to satisfy any of these guarantees.

In addition, at February 1, 2004, the Company had outstanding letters of credit
totaling $7.5 million. Letters of credit have terms of one year or less and are
generally renewed on an annual basis.

CAPITAL REQUIREMENTS.  In the next five years, we plan to use cash primarily for
the following activities:

    - Opening new Company stores in selected markets

    - Remodeling and relocation of selected older Company stores

    - Adding mix production and distribution capacity to support expansion

    - Expanding our equipment manufacturing and operations training facilities

    - Investing in all or part of franchisees' operations, both domestically and
      internationally

    - Working capital and other corporate purposes.

Our capital requirements for the items outlined above may be significant. These
capital requirements will depend on many factors including our overall
performance, the pace of store expansion and Company store remodels, the
requirements for joint venture arrangements and infrastructure needs for both
personnel and facilities. Prior to fiscal 2004, we primarily relied on cash flow
generated from the Company's initial public offering completed in April 2000 and
follow-on offering completed in February 2001, cash flow generated from
operations and borrowing capacity under our lines of credit to fund our capital
needs. In addition, in May 2002 we used term debt to finance our new mix
manufacturing and distribution facility in Effingham, Illinois. In June 2003, we
used short-term debt to partially finance an acquisition. In October 2003, we
entered into a Credit Facility to refinance certain existing debt, including the
term debt entered into in fiscal 2003 and the short-term debt incurred in June
2003, and to provide increased borrowing availability. We believe that cash flow
from operations and, if necessary, the Credit Facility will provide the required
capital to fund operations and store development for the Company in fiscal 2005.
We make borrowings under our Revolver available to our consolidated joint
ventures to provide funding for their operating and store development needs,
although Glazed Investments continues to use external debt for its financing
needs. If additional capital is needed, we may exercise our option to increase
borrowing availability under the Revolver or raise such capital through public
or private equity or debt financing or other financing arrangements. Future
capital funding transactions may result in dilution to shareholders. There can
be no assurance, however, that additional capital will be available or be
available on satisfactory terms. Our failure to raise additional capital could
have one or more of the following effects on our operations and growth plans
over the next five years:

    - Slowing our plans to open new Company stores and remodel and relocate
      older Company-owned stores

    - Reducing the number and amount of joint venture investments in area
      developers or acquisitions of franchise markets

    - Slowing the building of our infrastructure in both personnel and
      facilities.

INFLATION

We do not believe that inflation has had a material impact on our results of
operations in recent years. We cannot predict, however, what effect inflation
may have on our results of operations in the future.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We are exposed to market risk from changes in interest rates on our outstanding
debt. Our $150.0 million Credit Facility bears interest, at the Company's
option, at either the Base Rate, as defined within the Credit Facility
agreement, plus an Applicable Margin, as defined, or Adjusted LIBOR, as defined,
plus an Applicable Margin. The Applicable Margin ranges from 0.0% to 0.75% for
Base Rate borrowings and 1.0% to 2.0% for Adjusted LIBOR borrowings. The Credit
Facility consists of a $119.3 million Revolver and a $30.7 million Term Loan. We
entered into an interest rate swap that converts the variable rate interest
payments due under the Term Loan to a fixed rate of 5.09% (plus the Applicable
Margin) through May 1, 2007. The notional amount of the swap declines by
$137,500 per month, to correspond with the reduction in principal of the Term
Loan. Glazed Investments, a consolidated joint venture, is also party to various
debt agreements used to finance store development. These agreements bear
interest at varying rates, based upon LIBOR or commercial paper rates plus a
premium. We guarantee approximately 75% of amounts outstanding under these
agreements. The interest cost of our debt is affected by changes in either the
prime rate or LIBOR. Such changes could adversely impact our operating results.

Because the majority of our revenue, expense and capital purchasing activities
are currently transacted in United States dollars, the exposure to foreign
currency exchange risk historically has been minimal. As our international
operations grow, however,

                                        38


our foreign currency exchange risks will increase. We invest in most
international joint ventures through a non-U.S. based holding company. Funding
this holding company, as well as its operations, in addition to our investments
in international joint ventures, exposes the Company to foreign currency
exchange risk. We monitor the Company's exposure to foreign currency risk and
will consider strategies to minimize this risk as appropriate.

In the normal course of business, we are exposed to the impact of commodity
price fluctuations affecting the cost of flour, sugar, soybean oil, coffee beans
and other ingredients. In order to secure adequate supplies of product and bring
greater stability to the cost of ingredients, we routinely enter into long-term
purchase agreements and other purchase arrangements with suppliers. We are
subject to market risk in that the current market price of any commodity item
may be below our contractual price. We do not use financial instruments to hedge
commodity prices.

CRITICAL ACCOUNTING POLICIES

The Company's analysis and discussion of its financial condition and results of
operations are based upon its consolidated financial statements that have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). The preparation of financial statements in
accordance with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses,
and the disclosure of contingent assets and liabilities. US GAAP provides the
framework from which to make these estimates, assumptions and disclosures. The
Company chooses accounting policies within US GAAP that management believes are
appropriate to accurately and fairly report the Company's operating results and
financial position in a consistent manner. Management regularly assesses these
policies in light of current and forecasted economic conditions and has
discussed the development and selection of critical accounting policies with its
audit committee of the Board of Directors. The Company believes the following
accounting policies are critical to understanding the results of operations and
affect the more significant judgments and estimates used in the preparation of
the consolidated financial statements:

BASIS OF CONSOLIDATION.  Our consolidated financial statements include the
accounts of Krispy Kreme Doughnuts, Inc. and all subsidiaries where control
rests with the Company. Investments in affiliates in which the Company has the
ability to exercise significant influence over operating and financial policies
(generally less than 50-percent ownership), all of which are investments in
joint ventures with certain of our franchisees, are accounted for by the equity
method of accounting. Our judgments regarding the level of influence or control
in each equity method investment include considering key factors such as our
ownership interest, representation on the management committee, participation in
policy making decisions and material intercompany transactions. All significant
intercompany accounts and transactions, including transactions with equity
method investees, are eliminated in consolidation.

ALLOWANCE FOR DOUBTFUL ACCOUNTS.  Accounts receivable arise primarily from
royalties earned on sales of our franchisees, sales by KKM&D of equipment, mix,
coffee and other supplies necessary to operate a Krispy Kreme store to our
franchisees, as well as from off-premises sales by Company-owned stores to
convenience and grocery stores and other customers. Payment terms generally
range from 30 to 54 days. The Company has experienced minimal uncollectible
accounts receivable from franchisees. The majority of the allowance for doubtful
accounts relates to receivables from convenience and grocery stores and other
customers for off-premises sales in our Company stores. Although collection
efforts continue, the Company establishes an allowance for these accounts
generally when they become past due and are deemed uncollectible.

GOODWILL AND INTANGIBLE ASSETS.  Effective fiscal 2003, the Company adopted SFAS
No. 142, "Goodwill and Other Intangible Assets," which addresses the accounting
and reporting of goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 requires intangible assets with definite lives to be
amortized over their estimated useful lives, while those with indefinite lives
and goodwill are no longer subject to amortization, but must be tested annually
for impairment, or more frequently if events and circumstances indicate
potential impairment.

Goodwill represents primarily goodwill recorded in connection with the
acquisition of Montana Mills in fiscal 2004 (see Note 20 -- Acquisitions in the
notes to our consolidated financial statements). Intangible assets include the
value assigned to recipes, trademarks and trade names and reacquired franchise
rights recorded in connection with acquisitions. Recipes are generally amortized
over their expected useful lives, which was determined based upon management's
plans as well as general industry experience. Trademarks and trade names were
determined to have indefinite lives based principally upon a history of revenue
and cash flow performance that is expected to continue for the foreseeable
future. Reacquired franchise rights represent the value assigned to certain
franchise markets acquired by Krispy Kreme. Reacquired franchise rights were
determined to have indefinite lives based upon the significant market share of
the Company's core product, a history of strong revenue and cash flow from
franchise markets that is expected to continue for the foreseeable future, and
our ability to refranchise these markets. For intangible assets with indefinite
lives, we perform a test for impairment at least annually as of December 31.

The impairment test involves determining the fair value of the trademarks and
trade names or reporting unit to which the intangible asset or goodwill is
assigned and comparing that fair value to the book value of the trademarks and
trade names or the reporting unit's carrying value, including the intangible
asset or goodwill. To determine fair value for trademarks and trade names, we
estimate the future revenue and cash flows to be derived from the trademarks and
trade names. To determine fair value for goodwill and reacquired franchise
rights, we use a combination of the fair value of the cash flows that the
reporting unit can be expected to generate in the future and the fair value of
the business in comparison to similar publicly traded

                                        39


businesses. These valuation methods require management to make projections of
revenues, operating expenses, working capital investment, capital spending and
cash flows for the respective reporting unit over a multi-year period, as well
as the weighted average cost of capital to be used as a discount rate. The
Company must also identify publicly traded companies in similar lines of
business. Significant management judgment is involved in preparing these
estimates. Changes in projections or estimates could significantly change the
estimated fair value of intangible assets and reporting units and impact the
recorded balances for these intangible assets and goodwill. In addition, if
management uses different assumptions or estimates in the future or if different
conditions occur in future periods, future operating results and the balances of
intangible assets and goodwill in the future could be materially impacted. We
performed impairment analyses in fiscal 2004 and fiscal 2003 and did not
recognize any impairment charges.

ASSET IMPAIRMENT.  When a store is identified as underperforming or when a
decision is made to close a store, the Company makes an assessment of the
potential impairment of the related assets. The assessment is based upon a
comparison of the carrying amount of the assets, primarily property and
equipment, to the estimated undiscounted cash flows expected to be generated
from those assets. To estimate cash flows, management projects the net cash
flows anticipated from continuing operation of the store until its closing, as
well as cash flows anticipated from disposal of the related assets, if any. If
the carrying amount of the assets exceeds the sum of the undiscounted cash
flows, the Company records an impairment charge measured as the excess of the
carrying value over the fair value of the assets. The resulting net book value
of the assets, less estimated net realizable value at disposition, is
depreciated over the remaining term that the store will continue in operation.
Disposition efforts on assets held for sale begin immediately following the
store closing.

Determining undiscounted cash flows and the fair value of store assets involves
estimating future cash flows, revenues, operating expenses and disposal values.
The projections of these amounts represent management's best estimates as of the
time of the review. If different cash flows had been estimated, property and
equipment balances could be impacted. Further, if management uses different
assumptions or estimates in the future or if different conditions occur in
future periods, future operating results could be impacted. The Company did not
incur any impairment charges in fiscal 2004 or fiscal 2003.

INSURANCE.  The Company is generally self-insured for most employee health care,
workers' compensation, automobile liability and product and general liability
claims and losses. Insurance liabilities are accrued based upon historical and
industry trends and are adjusted when necessary due to changing circumstances.
Outside actuaries are used to assist in estimating insurance obligations.
Because there are many estimates and assumptions involved in recording these
liabilities, differences between actual future events and prior estimates and
assumptions could impact future operating results and result in adjustments to
these liabilities.

INCOME TAXES.  The Company recognizes deferred tax assets and liabilities based
upon management's expectation of the future tax consequences of temporary
differences between tax bases for assets and liabilities. Deferred tax assets
generally represent items to be used as a tax deduction or credit in future tax
returns for which we have already recorded the tax benefit in our consolidated
financial statements. We establish valuation allowances for deferred tax assets
when we believe that future taxable income will not likely support realization
of the deduction or credit. Deferred tax liabilities generally represent tax
expense recognized for which payment has been deferred or expense for which we
have already taken a deduction in our tax return but have not yet recognized as
expense in our consolidated financial statements.

The determination of income tax expense and the related balance sheet accounts
requires management to make estimates and assumptions regarding the realization
of deferred tax assets and the outcome of tax-related contingencies. Tax
assessments may arise several years after tax returns have been filed.
Predicting the likelihood, outcome and timing of such assessments involves
uncertainty; however, we believe that liabilities recorded adequately reflect
the most probable outcome of known contingencies.

For further information concerning accounting policies, refer to Note
2 -- Nature of Business and Significant Accounting Policies in our notes to the
consolidated financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which addresses the consolidation
of business enterprises (variable interest entities), to which the usual
condition of consolidation, a controlling financial interest, does not apply.
FIN 46 requires an entity to assess its equity investments to determine if they
are variable interest entities. As defined in FIN 46, variable interests are
contractual, ownership or other interests in an entity that change with changes
in the entity's net asset value. Variable interests in an entity may arise from
financial instruments, service contracts, guarantees, leases or other
arrangements with the variable interest entity. An entity that will absorb a
majority of the variable interest entity's expected losses or expected residual
returns, as defined in FIN 46, is considered the primary beneficiary of the
variable interest entity. The primary beneficiary must include the variable
interest entity's assets, liabilities and results of operations in its
consolidated financial statements. FIN 46 was immediately effective for all
variable interest entities created after January 31, 2003. Since the release of
FIN 46, the FASB has issued several staff positions ("FSP") regarding FIN 46,
which clarified and modified many provisions of FIN 46. In December 2003, the
FASB issued FIN 46-R, which replaced FIN 46. While retaining many of the basic
concepts of FIN 46, FIN 46-R provided new guidance for determining variable
interests, revised the method of calculating expected losses and residual
returns for determination of the primary beneficiary and introduced new scope
exceptions for certain entities that qualify as a business under FIN 46. FIN
46-R is effective for all non-

                                        40


special purpose variable interest entities for the first interim or annual
period ending after March 15, 2004, including those entities to which FIN 46 was
previously applied.

We currently have equity interests in joint ventures with other entities to
develop and operate Krispy Kreme stores. For those joint ventures where the
Company does not have the ability to control the joint venture's management
committee, we account for our investment under the equity method of accounting.
For certain of these joint ventures, we hold variable interests, such as
providing guarantees of the joint venture's debt or leases. Based on our
analysis of FIN 46-R, we have determined that the Company will be required to
begin consolidating the accounts of New England Dough, LLC ("New England
Dough"), the joint venture with rights to develop Krispy Kreme stores in certain
markets in the Northeastern United States in which the Company holds a 57%
interest, effective in the first quarter of fiscal 2005. Historically, we have
accounted for our investment in New England Dough using the equity method.
Consolidation of New England Dough is not expected to have a material impact on
our net operating results, although it will result in increases in individual
line items in the Company's financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for classification and measurement of certain financial
instruments with characteristics of both liabilities and equity, requiring a
financial instrument within its scope be classified as a liability. SFAS No. 150
was effective for financial instruments entered into or modified after May 31,
2003, and otherwise was effective at the beginning of the Company's third
quarter of fiscal 2004. The adoption of this statement did not have a
significant impact on the Company's consolidated financial statements.

In December 2003, the Securities and Exchange Commission staff ("SEC") issued
Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition," which
supercedes Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition
in Financial Statements." The primary purpose of SAB 104 is to rescind
accounting guidance contained in SAB 101 related to multiple element revenue
arrangements and to reflect the accounting guidance issued in Emerging Issues
Task Force 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." Additionally, SAB 104 rescinds the SEC's "Revenue Recognition in
Financial Statements Frequently Asked Questions and Answers" ("the FAQ") issued
with SAB 101. Selected portions of the FAQ have been incorporated into SAB 104.
The adoption of SAB 104 in fiscal 2004 did not have an effect on our revenue
recognition policy or revenues recorded.

                                        41


KRISPY KREME DOUGHNUTS, INC.
CONSOLIDATED BALANCE SHEETS



                                                                                  IN THOUSANDS
- ----------------------------------------------------------------------------------------------
                                                             FEB. 2, 2003         FEB. 1, 2004
- ----------------------------------------------------------------------------------------------
                                                                            
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                                    $    32,203          $    21,029
Short-term investments                                            22,976                   --
Accounts receivable, less allowance for doubtful accounts of
  $1,453 (2003) and $1,265 (2004)                                 34,373               45,363
Accounts receivable, affiliates                                   11,062               20,482
Other receivables                                                    884                2,363
Notes receivable, affiliates                                          --                  458
Inventories                                                       24,365               28,864
Prepaid expenses                                                   3,478                5,659
Income taxes refundable                                            1,963                7,973
Deferred income taxes                                              9,824                6,453
                                                              -------------------------------
        Total current assets                                     141,128              138,644
Property and equipment, net                                      202,558              284,716
Long-term investments                                              4,344                   --
Long-term notes receivable, affiliates                             1,000                7,609
Investments in unconsolidated joint ventures                       6,871               12,426
Goodwill                                                             201               19,865
Reacquired franchise rights                                       48,502              174,537
Other intangible assets, net                                         651               13,322
Other assets                                                       5,232                9,545
                                                              -------------------------------
        Total assets                                         $   410,487          $   660,664
                                                              -------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable                                             $    14,055          $    19,107
Book overdraft                                                    11,375                8,123
Accrued expenses                                                  20,981               23,402
Arbitration award                                                  9,075                   --
Current maturities of long-term debt                               3,301                2,861
Short-term debt -- related party                                     900                   --
                                                              -------------------------------
        Total current liabilities                                 59,687               53,493
                                                              -------------------------------
Deferred income taxes                                              9,849                6,417
Revolving lines of credit                                          7,288               87,000
Long-term debt, net of current portion                            49,900               48,056
Other long-term obligations                                        5,218               11,168
                                                              -------------------------------
        Total long-term liabilities                               72,255              152,641
Commitments and contingencies (Note 17)
Minority interest                                                  5,193                2,323
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 10,000 shares authorized;
  none issued and outstanding                                         --                   --
Common stock, no par value, 300,000 shares authorized;
  issued and outstanding -- 56,295 (2003) and 61,286 (2004)      173,112              294,477
Unearned compensation                                               (119)                 (62)
Notes receivable, employees                                         (558)                (383)
Nonqualified employee benefit plan assets                           (339)                (369)
Nonqualified employee benefit plan liability                         339                  369
Accumulated other comprehensive loss                              (1,486)              (1,315)
Retained earnings                                                102,403              159,490
                                                              -------------------------------
        Total shareholders' equity                               273,352              452,207
                                                              -------------------------------
        Total liabilities and shareholders' equity           $   410,487          $   660,664
                                                              -------------------------------


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

                                        42


KRISPY KREME DOUGHNUTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                      IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
- ------------------------------------------------------------------------------------------------------------
                                                           FEB. 3,             FEB. 2,             FEB. 1,
YEAR ENDED                                                  2002                2003                2004
- ------------------------------------------------------------------------------------------------------------
                                                                                        
Total revenues                                           $   394,354         $   491,549         $   665,592
Operating expenses                                           316,946             381,489             507,396
General and administrative expenses                           27,562              28,897              36,912
Depreciation and amortization expenses                         7,959              12,271              19,723
Arbitration award (Note 19)                                       --               9,075                (525)
                                                          --------------------------------------------------
Income from operations                                        41,887              59,817             102,086
Interest income                                                2,980               1,966                 921
Interest expense                                                (337)             (1,781)             (4,409)
Equity loss in joint ventures                                   (602)             (2,008)             (1,836)
Minority interest                                             (1,147)             (2,287)             (2,072)
Other expense, net                                              (235)               (934)                (13)
                                                          --------------------------------------------------
Income before income taxes                                    42,546              54,773              94,677
Provision for income taxes                                    16,168              21,295              37,590
                                                          --------------------------------------------------
Net income                                               $    26,378         $    33,478         $    57,087
                                                          --------------------------------------------------
Basic earnings per share                                 $      0.49         $      0.61         $      0.96
                                                          --------------------------------------------------
Diluted earnings per share                               $      0.45         $      0.56         $      0.92
                                                          --------------------------------------------------


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


                                        43



KRISPY KREME DOUGHNUTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



- ---------------------------------------------------------------------------------------------------------
                                                      PREFERRED      PREFERRED      COMMON        COMMON
                                                       SHARES          STOCK        SHARES        STOCK
- ---------------------------------------------------------------------------------------------------------
                                                                                     
BALANCE AT JANUARY 28, 2001                               --           $ --          51,832      $ 85,060
Comprehensive income:
  Net income for the year ended February 3, 2002
  Unrealized holding loss, net
  Foreign currency translation adjustment, net
  Total comprehensive income
Proceeds from public offering                                                         1,086        17,202
Exercise of stock options, including tax benefit
  of $9,772                                                                           1,183        13,678
Issuance of shares in conjunction with
  acquisition of franchise market                                                       115         4,183
Adjustment of nonqualified employee benefit plan
  investments
Issuance of restricted common shares                                                      1            50
Amortization of restricted common shares
Issuance of stock for notes receivable                                                   54           879
Collection of notes receivable
                                                      ---------------------------------------------------
BALANCE AT FEBRUARY 3, 2002                               --           $ --          54,271      $121,052
Comprehensive income:
  Net income for the year ended February 2, 2003
  Unrealized holding loss, net of tax benefit of
    $241
  Foreign currency translation adjustment, net
    of tax expense of $7
  Unrealized loss from cash flow hedge, net of
    tax benefit of $982
  Total comprehensive income
Exercise of stock options, including tax benefit
  of $13,795                                                                          1,187        20,935
Issuance of shares in conjunction with
  acquisition of franchise markets                                                      837        30,975
Adjustment of nonqualified employee benefit plan
  investments
Amortization of restricted common shares
Issuance of stock options in exchange for
  services                                                                                            150
Collection of notes receivable
                                                      ---------------------------------------------------
BALANCE AT FEBRUARY 2, 2003                               --           $ --          56,295      $173,112
Comprehensive income:
  Net income for the year ended February 1, 2004
  Unrealized holding loss, net of tax benefit of
    $71
  Foreign currency translation adjustment, net
    of tax expense of $15
  Unrealized gain from cash flow hedge, net of
    tax expense of $129
  Total comprehensive income
Exercise of stock options, including tax benefit
  of $42,806                                                                          3,300        62,320
Exercise of warrants                                                                                    4
Issuance of shares in conjunction with
  acquisition of business (Note 20)                                                   1,247        40,491
Issuance of shares in conjunction with
  acquisition of franchise market (Note 20)                                             444        18,540
Adjustment of nonqualified employee benefit plan
  investments
Issuance of restricted common shares                                                                   10
Amortization of restricted common shares
Collection of notes receivable
                                                      ---------------------------------------------------
BALANCE AT FEBRUARY 1, 2004                               --           $ --          61,286      $294,477
                                                      ---------------------------------------------------


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

                                        44


                                                                    IN THOUSANDS



- ----------------------------------------------------------------------------------------------------------
                  NOTES        NONQUALIFIED       NONQUALIFIED     ACCUMULATED OTHER
  UNEARNED     RECEIVABLE,   EMPLOYEE BENEFIT   EMPLOYEE BENEFIT     COMPREHENSIVE     RETAINED
COMPENSATION    EMPLOYEES      PLAN ASSETS       PLAN LIABILITY      INCOME (LOSS)     EARNINGS    TOTAL
- ----------------------------------------------------------------------------------------------------------
                                                                                
   $(188)        $(2,349)         $(126)              $126              $   609        $ 42,547   $125,679
                                                                                         26,378     26,378
                                                                           (111)                      (111)
                                                                            (42)                       (42)
                                                                                                   -------
                                                                                                    26,225
                                                                                                    17,202
                                                                                                    13,678
                                                                                                     4,183
                                    (12)                12                                              --
     (50)                                                                                               --
      52                                                                                                52
                    (879)                                                                               --
                     648                                                                               648
- ----------------------------------------------------------------------------------------------------------
   $(186)        $(2,580)         $(138)              $138              $   456        $ 68,925   $187,667
                                                                                         33,478     33,478
                                                                           (385)                      (385)
                                                                             11                         11
                                                                         (1,568)                    (1,568)
                                                                                                   -------
                                                                                                    31,536
                                                                                                    20,935
                                                                                                    30,975
                                   (201)               201                                              --
      67                                                                                                67
                                                                                                       150
                   2,022                                                                             2,022
- ----------------------------------------------------------------------------------------------------------
   $(119)        $  (558)         $(339)              $339              $(1,486)       $102,403   $273,352
                                                                                         57,087     57,087
                                                                           (113)                      (113)
                                                                             23                         23
                                                                            261                        261
                                                                                                   -------
                                                                                                    57,258
                                                                                                    62,320
                                                                                                         4
                                                                                                    40,491
                                                                                                    18,540
                                    (30)                30                                              --
     (10)                                                                                               --
      67                                                                                                67
                     175                                                                               175
- ----------------------------------------------------------------------------------------------------------
   $ (62)        $  (383)         $(369)              $369              $(1,315)       $159,490   $452,207
- ----------------------------------------------------------------------------------------------------------


                                        45


KRISPY KREME DOUGHNUTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                                                   IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED                                               FEB. 3, 2002         FEB. 2, 2003         FEB. 1, 2004
- ---------------------------------------------------------------------------------------------------------------
                                                                                          
CASH FLOW FROM OPERATING ACTIVITIES:
Net income                                               $    26,378          $    33,478          $    57,087
Items not requiring cash:
  Depreciation and amortization                                7,959               12,271               19,723
  Deferred income taxes                                        2,553                1,632                1,643
  Loss on disposal of property and equipment, net                235                  934                  939
  Compensation expense related to restricted stock
    awards                                                        52                   67                   67
  Tax benefit from exercise of nonqualified stock
    options                                                    9,772               13,795               42,806
  Minority interest                                            1,147                2,287                2,072
  Equity loss in joint ventures                                  602                2,008                1,836
Change in assets and liabilities:
  Receivables                                                (13,317)              (7,390)             (17,629)
  Inventories                                                 (3,977)              (7,866)              (3,804)
  Prepaid expenses                                              (682)                (331)              (1,047)
  Income taxes, net                                           (2,575)                 571               (6,010)
  Accounts payable                                             3,884                  (33)               4,068
  Accrued expenses                                             4,096               (9,296)                (766)
  Arbitration award                                               --                9,075               (9,075)
  Other long-term obligations                                     83                 (166)               3,643
                                                          ----------------------------------------------------
        Net cash provided by operating activities             36,210               51,036               95,553
                                                          ----------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment                           (37,310)             (83,196)             (79,649)
Proceeds from disposal of property and equipment               3,196                  701                   --
Proceeds from disposal of assets held for sale                    --                1,435                   --
Acquisition of franchise markets, net of cash acquired       (20,571)              (4,965)            (122,352)
Acquisition of business, net of cash acquired                     --                   --                4,052
Investments in unconsolidated joint ventures                  (1,218)              (7,869)              (7,377)
Purchases of investments                                     (10,128)             (32,739)              (6,000)
Proceeds from investments                                     18,005               33,097               33,136
Issuance of notes receivable                                      --                   --               (6,613)
Collection of notes receivable                                    --                1,590                1,147
Increase in other assets                                      (4,237)              (1,038)              (2,585)
                                                          ----------------------------------------------------
        Net cash used for investing activities               (52,263)             (92,984)            (186,241)
                                                          ----------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options                        3,906                7,140               19,514
Proceeds from exercise of warrants                                --                   --                    4
Issuance of short-term debt                                       --                   --               55,000
Issuance of long-term debt                                     4,643               44,234               44,570
Repayment of short-term debt                                      --                   --              (66,286)
Repayment of long-term debt                                       --               (2,170)             (46,892)
Net (repayments) borrowings from revolving lines of
  credit                                                         345                 (121)              79,712
Issuance of short-term debt -- related party                      --                   --                2,350
Repayment of short-term debt -- related party                     --                 (500)              (3,250)
Debt issue costs                                                  --                 (194)                (921)
Proceeds from stock offering                                  17,202                   --                   --
Book overdraft                                                 3,960                2,268               (3,252)
Collection of notes receivable                                   648                2,022                  175
Minority interest                                                227                 (432)              (1,210)
                                                          ----------------------------------------------------
        Net cash provided by financing activities             30,931               52,247               79,514
                                                          ----------------------------------------------------
Net (decrease) increase in cash and cash equivalents          14,878               10,299              (11,174)
Cash and cash equivalents at beginning of year                 7,026               21,904               32,203
                                                          ----------------------------------------------------
Cash and cash equivalents at end of year                 $    21,904          $    32,203          $    21,029
                                                          ----------------------------------------------------
Supplemental schedule of non-cash investing and
  financing activities:
  Issuance of stock in conjunction with acquisition of
    franchise markets                                    $     4,183          $     8,727          $    18,540
  Issuance of stock in conjunction with acquisition of
    additional interest in area developer franchisee              --               22,248                   --
  Issuance of stock in conjunction with acquisition of
    business                                                      --                   --               40,491
  Receipt of promissory notes in connection with sale of
    assets                                                        --                   --                3,551
  Issuance of promissory note in connection with
    acquisition of franchise market                               --                   --               11,286
  Issuance of stock options in exchange for services              --                  150                   --
  Issuance of restricted common shares                            50                   --                   10
  Issuance of stock in exchange for employee notes
    receivable                                                   879                   --                   --


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

                                        46


KRISPY KREME DOUGHNUTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND PURPOSE

Krispy Kreme Doughnuts, Inc. was incorporated in North Carolina on December 2,
1999 as a wholly-owned subsidiary of Krispy Kreme Doughnut Corporation ("KKDC").
Pursuant to a plan of merger approved by shareholders on November 10, 1999, the
shareholders of KKDC became shareholders of Krispy Kreme Doughnuts, Inc. on
April 4, 2000. Each shareholder received 80 shares of Krispy Kreme Doughnuts,
Inc. common stock and $15 in cash for each share of KKDC common stock they held.
As a result of the merger, KKDC became a wholly-owned subsidiary of Krispy Kreme
Doughnuts, Inc. Krispy Kreme Doughnuts, Inc. closed a public offering of its
common stock on April 10, 2000.

2. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

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

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

BASIS OF CONSOLIDATION.  The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
Generally, investments greater than 50 percent in affiliates for which the
Company maintains control are also consolidated and the portion not owned by the
Company is shown as minority interest. As of February 1, 2004, the Company
consolidated the accounts of two joint ventures which the Company controlled:
Freedom Rings, LLC ("Freedom Rings"), the joint venture with the rights to
develop stores in the Eastern Pennsylvania, Delaware and Southern New Jersey
markets; and Glazed Investments, LLC ("Glazed Investments"), the joint venture
with the rights to develop stores in Colorado, Minnesota and Wisconsin. The
accompanying financial statements also include the accounts of Golden Gate
Doughnuts, LLC ("Golden Gate"), which owned the rights to develop stores in
Northern California. The Company acquired the remaining 33% minority interest in
this joint venture effective January 30, 2004. Generally, investments in 20- to
50-percent owned affiliates for which the Company has the ability to exercise
significant influence over operating and financial policies are accounted for by
the equity method of accounting, whereby the investment is carried at the cost
of acquisition, plus the Company's equity in undistributed earnings or losses
since acquisition, less any distributions received by the Company. Accordingly,
the Company's share of the net earnings of these companies is included in
consolidated net income. Investments in less than 20-percent owned affiliates
are accounted for by the cost method of accounting. In January 2003, the FASB
issued Interpretation No. 46, which addresses the consolidation of business
enterprises. See further discussion under "Recent Accounting Pronouncements"
below.

FISCAL YEAR.  The Company's fiscal year is based on a fifty-two/fifty-three week
year. The fiscal year ends on the Sunday closest to the last day in January. The
years ended February 3, 2002, February 2, 2003 and February 1, 2004 contained
53, 52 and 52 weeks, respectively.

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

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

INVENTORIES.  Inventories are recorded at the lower of average cost (first-in,
first-out) or net realizable value.

INVESTMENTS.  Investments consist of United States Treasury notes,
mortgage-backed government securities, corporate debt securities, municipal
securities and certificates of deposit and are included in short-term and
long-term investments in the accompanying consolidated balance sheets.
Certificates of deposit are carried at cost which approximates fair value. All
other marketable securities are stated at market value as determined by the most
recently traded price of each security at the balance sheet date.

Management determines the appropriate classification of investments in
marketable securities at the time of purchase and reevaluates such determination
at each balance sheet date. At February 2, 2003, all marketable securities were
classified as available-for-sale. The Company did not hold any investments at
February 1, 2004. Available-for-sale securities are carried at fair value with
unrealized gains and losses reported as a separate component of shareholders'
equity in accumulated other comprehensive loss. The cost of investments sold is
determined on the specific identification or the first-in, first-out method.

PROPERTY AND EQUIPMENT.  Property and equipment are stated at cost less
accumulated depreciation. Major renewals and betterments are charged to the
property accounts while replacements, maintenance and repairs which do not
improve or extend

                                        47


the lives of the respective assets are expensed currently. Interest is
capitalized on major capital expenditures during the period of construction.

Depreciation of property and equipment is provided on the straight-line method.
The estimated useful lives of depreciable property are generally as follows:
Buildings -- 15 to 35 years; Machinery and equipment -- 3 to 15 years; Leasehold
improvements -- lesser of useful lives of assets or lease term.

GOODWILL, REACQUIRED FRANCHISE RIGHTS AND OTHER INTANGIBLE ASSETS.  Effective
fiscal 2003, the Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," which addresses the accounting and reporting of goodwill and other
intangible assets subsequent to their acquisition.

Goodwill represents the excess of the purchase price over the net assets
acquired in connection with business acquisitions. In accordance with SFAS No.
142, goodwill has an indefinite life and is no longer amortized but is reviewed
at least annually for impairment or whenever events or circumstances indicate
the carrying amount of the asset may be impaired.

Reacquired franchise rights result from the acquisition of franchise markets
from existing franchisees. The excess of the net amount assigned to identifiable
assets and liabilities recorded upon the acquisition of franchise markets is
assigned to the value of the asset representing the franchise right to the
market acquired. Reacquired franchise rights have an indefinite life and are
reviewed at least annually for impairment or whenever events or circumstances
indicate the carrying amount of the asset may be impaired in accordance with
SFAS No. 142.

Other intangible assets consist primarily of trademarks and trade names and
recipes acquired in business acquisitions. The Company has evaluated and
determined that trademarks and trade names and certain recipes have indefinite
lives and, in accordance with SFAS No. 142, are not subject to amortization.
Recipes represent primarily the value assigned to the recipes acquired in the
Montana Mills acquisition (see Note 20 -- Acquisitions). Recipes have a definite
life and will be amortized on a straight-line basis over an estimated useful
life of 10 years. Trademarks and trade names are reviewed at least annually for
impairment or whenever events or circumstances indicate the carrying amount of
the assets may be impaired. Recipes are tested for impairment whenever events or
circumstances indicate the carrying amount of the assets may be impaired.

The Company performs its annual test of impairment as of December 31. The
Company completed its impairment test of goodwill, reacquired franchise rights
and indefinite-lived other intangible assets in fiscal 2003 and fiscal 2004 and
found no instances of impairment. Additionally, no events or circumstances
indicated impairment of our definite-lived intangible assets.

REVENUE RECOGNITION.  A summary of the revenue recognition policies for each
segment of the Company (see Note 15) is as follows:

    - Company Store Operations revenue is derived from the sale of doughnuts and
      related items to on-premises and off-premises customers. Revenue is
      recognized at the time of sale for on-premises sales. For off-premises
      sales, revenue is recognized at the time of delivery.

    - Franchise Operations revenue is derived from: (1) development and
      franchise fees from the opening of new stores; and (2) royalties charged
      to franchisees based on sales. Development and franchise fees are charged
      for certain new stores and are deferred until the store is opened and the
      Company has performed substantially all of the initial services it is
      required to provide. The royalties recognized in each period are based on
      the sales in that period.

    - KKM&D revenue is derived from the sale of doughnut-making equipment, mix,
      coffee and other supplies needed to operate a doughnut store to
      Company-owned and franchised stores. Revenue is recognized at the time the
      title and the risk of loss pass to the customer, generally upon delivery
      of the goods. Revenue from Company-owned stores and consolidated joint
      venture stores is eliminated in consolidation.

    - Montana Mills revenue is derived from the sale of breads, baked goods 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.

INCOME TAXES.  The Company uses the asset and liability method to account for
income taxes, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between tax bases and financial reporting bases for assets and liabilities.
Valuation allowances are recognized to reduce deferred tax assets to amounts
more likely than not to be realized, based on management's estimates of future
taxable income.

FAIR VALUE OF FINANCIAL INSTRUMENTS.  Cash, accounts receivable, accounts
payable, accrued liabilities and debt are reflected in the financial statements
at carrying amounts which approximate fair value.

ADVERTISING COSTS.  All costs associated with advertising and promoting products
are expensed in the period incurred.

STORE OPENING COSTS.  All costs, both direct and indirect, incurred to open
either Company or franchise stores are expensed in the period incurred. Direct
costs to open stores were $1,194,000, $2,062,000 and $4,634,000 in fiscal 2002,
fiscal 2003 and fiscal 2004, respectively.

                                        48


OTHER EXPENSE, NET.  Other expense, net includes primarily realized gains and
losses from disposals of property and equipment and foreign currency transaction
gains and losses.

ASSET IMPAIRMENT.  When a store is identified as underperforming or when a
decision is made to close a store, the Company makes an assessment of the
potential impairment of the related assets. The assessment is based upon a
comparison of the carrying amount of the assets, primarily property and
equipment, to the estimated undiscounted cash flows expected to be generated
from those assets. To estimate cash flows, management projects the net cash
flows anticipated from continuing operation of the store until its closing as
well as cash flows anticipated from disposal of the related assets, if any. If
the carrying amount of the assets exceeds the sum of the undiscounted cash
flows, the Company records an impairment charge measured as the excess of the
carrying value over the fair value of the assets. The resulting net book value
of the assets, less estimated net realizable value at disposition, is
depreciated over the remaining term that the store will continue in operation.

STOCK-BASED COMPENSATION.  The Company accounts for employee stock options in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Under APB Opinion No. 25, the Company recognizes
no compensation expense related to employee stock options, as no options are
granted below the market price on the grant date. SFAS No. 123, "Accounting for
Stock-Based Compensation," requires the recognition of compensation expense
based on the fair value of options on the grant date, but allows companies to
continue applying APB Opinion No. 25 if certain pro forma disclosures are made
assuming hypothetical fair value method application.

HAD COMPENSATION EXPENSE FOR THE COMPANY'S STOCK OPTIONS BEEN BASED ON THE FAIR
VALUE AT THE GRANT DATE UNDER THE METHODOLOGY PRESCRIBED BY SFAS NO. 123, THE
COMPANY'S INCOME FROM CONTINUING OPERATIONS AND EARNINGS PER SHARE FOR THE THREE
YEARS ENDED FEBRUARY 1, 2004 WOULD HAVE BEEN IMPACTED AS FOLLOWS:



                                                                    IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
- ----------------------------------------------------------------------------------------------------------
                                                    FEB. 3, 2002         FEB. 2, 2003         FEB. 1, 2004
- ----------------------------------------------------------------------------------------------------------
                                                                                     
Net income, as reported                             $    26,378          $    33,478          $    57,087
Add: Stock-based expense reported in net income,
     net of related tax effects                              --                   31                   62
Deduct: Total stock-based compensation expense
        determined under fair value method for all
        awards, net of related tax effects               (4,751)              (8,653)             (11,481)
                                                    -----------------------------------------------------
Pro forma net income                                $    21,627          $    24,856          $    45,668
                                                    -----------------------------------------------------
Earnings per share:
Reported earnings per share -- Basic                $      0.49          $      0.61          $      0.96
Pro forma earnings per share -- Basic                      0.40                 0.45                 0.77
Reported earnings per share -- Diluted                     0.45                 0.56                 0.92
Pro forma earnings per share -- Diluted                    0.37                 0.42                 0.73


THE FAIR VALUE OF OPTIONS GRANTED, WHICH IS AMORTIZED TO EXPENSE OVER THE OPTION
VESTING PERIOD IN DETERMINING THE PRO FORMA IMPACT, IS ESTIMATED AT THE DATE OF
GRANT USING THE BLACK-SCHOLES OPTION-PRICING MODEL WITH THE FOLLOWING WEIGHTED
AVERAGE ASSUMPTIONS:



- ----------------------------------------------------------------------------------------------------------
                                                    FEB. 3, 2002         FEB. 2, 2003         FEB. 1, 2004
- ----------------------------------------------------------------------------------------------------------
                                                                                     
Expected life of option                                 7 years              7 years              7 years
Risk-free interest rate                                     5.0%                 4.4%                 3.7%
Expected volatility of stock                               52.6%                45.9%                41.6%
Expected dividend yield                                      --                   --                   --


THE WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED DURING FISCAL 2002, FISCAL
2003 AND FISCAL 2004 IS AS FOLLOWS:



- ----------------------------------------------------------------------------------------------------------
                                                    FEB. 3, 2002         FEB. 2, 2003         FEB. 1, 2004
- ----------------------------------------------------------------------------------------------------------
                                                                                     
Fair value of each option granted                   $     14.92          $     18.91          $     19.84
Total number of options granted                       2,169,600            1,186,200            1,829,200
Total fair value of all options granted             $32,370,400          $22,431,000          $36,291,300


CONCENTRATION OF CREDIT RISK.  Financial instruments that potentially subject
the Company to credit risk consist principally of accounts receivable. Accounts
receivable are primarily from grocery and convenience stores. The Company
performs ongoing credit evaluations of its customers' financial condition. The
Company had no single customer that accounted for more than 10% of total
revenues in fiscal 2002, fiscal 2003 or fiscal 2004. The Company's two largest
customers accounted for 12.5%, 11.4% and 8.1% of total revenues for fiscal 2002,
fiscal 2003 and fiscal 2004, respectively. Accounts receivable for these two
customers accounted for approximately 13.4% and 10.4% of net accounts receivable
at February 2, 2003 and February 1, 2004, respectively.

                                        49


COMPREHENSIVE INCOME.  SFAS No. 130, "Reporting Comprehensive Income," requires
that certain items such as foreign currency translation adjustments and
unrealized gains and losses on certain investments in debt and equity securities
be presented as separate components of shareholders' equity. SFAS No. 130
defines these as items of other comprehensive income which must be reported in a
financial statement displayed with the same prominence as other financial
statements. Accumulated other comprehensive loss, as reflected in the
consolidated statements of shareholders' equity, included a net unrealized
holding loss on marketable securities of $113,000 at February 2, 2003. At
February 2, 2003 and February 1, 2004, accumulated other comprehensive loss also
included foreign currency translation adjustments, net, of $31,000 and $8,000,
respectively and the unrealized loss from a cash flow hedge, net of related tax
benefits, of $1,568,000 and $1,307,000, respectively. Total comprehensive income
for fiscal 2002, fiscal 2003 and fiscal 2004 was $26,225,000, $31,536,000 and
$57,258,000, respectively.

FOREIGN CURRENCY TRANSLATION.  For all non-U.S. subsidiaries and joint ventures,
the functional currency is the local currency. Assets and liabilities of those
operations are translated into U.S. dollars using exchange rates at the balance
sheet date. Revenue and expenses are translated using the average exchange rates
for the reporting period. Translation adjustments are reported in accumulated
other comprehensive income (loss), a separate component of shareholders' equity.
Transaction gains and losses resulting from remeasuring transactions denominated
in currencies other than the functional currency are included in other expense,
net.

RECENT ACCOUNTING PRONOUNCEMENTS.  In January 2003, the FASB issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities,"
which addresses the consolidation of business enterprises (variable interest
entities), to which the usual condition of consolidation, a controlling
financial interest, does not apply. FIN 46 requires an entity to assess its
equity investments to determine if they are variable interest entities. As
defined in FIN 46, variable interests are contractual, ownership or other
interests in an entity that change with changes in the entity's net asset value.
Variable interests in an entity may arise from financial instruments, service
contracts, guarantees, leases or other arrangements with the variable interest
entity. An entity that will absorb a majority of the variable interest entity's
expected losses or expected residual returns, as defined in FIN 46, is
considered the primary beneficiary of the variable interest entity. The primary
beneficiary must include the variable interest entity's assets, liabilities and
results of operations in its consolidated financial statements. FIN 46 was
immediately effective for all variable interest entities created after January
31, 2003. Since the release of FIN 46, the FASB has issued several staff
positions ("FSP") regarding FIN 46, which clarified and modified many provisions
of FIN 46. In December 2003, the FASB issued FIN 46-R, which replaced FIN 46.
While retaining many of the basic concepts of FIN 46, FIN 46-R provided new
guidance for determining variable interests, revised the method of calculating
expected losses and residual returns for determination of the primary
beneficiary and introduced new scope exceptions for certain entities that
qualify as a business under FIN 46. FIN 46-R is effective for all non-special
purpose variable interest entities for the first interim or annual period ending
after March 15, 2004, including those entities to which FIN 46 was previously
applied.

The Company currently has equity interests in joint ventures with other entities
to develop and operate Krispy Kreme stores. For those joint ventures where the
Company does not have the ability to control the joint venture's management
committee, the Company accounts for its investment under the equity method of
accounting. For certain of these joint ventures, the Company holds variable
interests, such as providing guarantees of the joint venture's debt or leases.
Based on the analysis of FIN 46-R, the Company will be required to begin
consolidating the accounts of New England Dough, LLC ("New England Dough"), the
joint venture with rights to develop Krispy Kreme stores in certain markets in
the Northeastern United States in which the Company holds a 57% interest,
effective in the first quarter of fiscal 2005. Historically, the Company has
accounted for its investment in New England Dough using the equity method.
Consolidation of New England Dough is not expected to have a material impact on
the net operating results of the Company, although it will result in increases
in individual line items in the Company's financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for classification and measurement of certain financial
instruments with characteristics of both liabilities and equity, requiring a
financial instrument within its scope be classified as a liability. SFAS No. 150
was effective for financial instruments entered into or modified after May 31,
2003, and otherwise was effective at the beginning of the Company's third
quarter of fiscal 2004. The adoption of this statement did not have a
significant impact on the Company's consolidated financial statements.

In December 2003, the Securities and Exchange Commission staff ("SEC") issued
Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition," which
supercedes Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition
in Financial Statements." The primary purpose of SAB 104 is to rescind
accounting guidance contained in SAB 101 related to multiple element revenue
arrangements and to reflect the accounting guidance issued in Emerging Issues
Task Force 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." Additionally, SAB 104 rescinds the SEC's "Revenue Recognition in
Financial Statements Frequently Asked Questions and Answers" ("the FAQ") issued
with SAB 101. Selected portions of the FAQ have been incorporated into SAB 104.
The Company's adoption of SAB 104 in fiscal 2004 did not have an effect on our
revenue recognition policy or revenues recorded.

RECLASSIFICATIONS.  Certain reclassifications of amounts in the fiscal 2002 and
fiscal 2003 consolidated financial statements and related notes have been made
to conform with the fiscal 2004 presentation.

                                        50


3. INVESTMENTS

THE FOLLOWING TABLE PROVIDES CERTAIN INFORMATION ABOUT INVESTMENTS AT FEBRUARY
2, 2003. THE COMPANY DID NOT HOLD ANY INVESTMENTS AT FEBRUARY 1, 2004.



                                                                                                      IN THOUSANDS
- ------------------------------------------------------------------------------------------------------------------
                                          AMORTIZED          GROSS UNREALIZED       GROSS UNREALIZED        FAIR
                                             COST             HOLDING GAINS          HOLDING LOSSES         VALUE
- ------------------------------------------------------------------------------------------------------------------
                                                                                               
FEBRUARY 2, 2003
U.S. government notes                      $16,657                 $152                  $ (97)            $16,712
Federal government agencies                  7,485                  289                   (197)              7,577
Corporate debt securities                    1,000                   76                    (45)              1,031
Certificate of deposit                       2,000                   --                     --               2,000
                                         -------------------------------------------------------------------------
        Total                              $27,142                 $517                  $(339)            $27,320
                                         -------------------------------------------------------------------------


4. INVENTORIES

THE COMPONENTS OF INVENTORIES ARE AS FOLLOWS:



                                                                                                   IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------------
                       DISTRIBUTION       EQUIPMENT           MIX           COMPANY       MONTANA
                          CENTER          DEPARTMENT       DEPARTMENT       STORES         MILLS         TOTAL
- ---------------------------------------------------------------------------------------------------------------
                                                                                      
FEBRUARY 2, 2003
Raw materials            $    --            $3,828           $1,069         $1,922         $ --         $ 6,819
Work in progress              --               234               --             --           --             234
Finished goods             2,222             3,616              172             --           --           6,010
Purchased merchandise     10,191                --               --            966           --          11,157
Manufacturing supplies        --                --              145             --           --             145
                        ---------------------------------------------------------------------------------------
        Totals           $12,413            $7,678           $1,386         $2,888         $ --         $24,365
                        ---------------------------------------------------------------------------------------
FEBRUARY 1, 2004
Raw materials            $    --            $3,653           $1,716         $3,263         $ 99         $ 8,731
Work in progress              --                84               --             --           --              84
Finished goods             2,603             3,918              120             --          101           6,742
Purchased merchandise     11,957                --               --          1,142           91          13,190
Manufacturing supplies        --                --              117             --           --             117
                        ---------------------------------------------------------------------------------------
        Totals           $14,560            $7,655           $1,953         $4,405         $291         $28,864
                        ---------------------------------------------------------------------------------------


5. PROPERTY AND EQUIPMENT

PROPERTY AND EQUIPMENT CONSISTS OF THE FOLLOWING:



                                                                              IN THOUSANDS
- ------------------------------------------------------------------------------------------
                                                               FEB. 2,           FEB. 1,
                                                                2003              2004
- ------------------------------------------------------------------------------------------
                                                                         
Land                                                         $    24,741       $    33,801
Buildings                                                         88,641           131,727
Machinery and equipment                                          118,332           153,965
Leasehold improvements                                            19,522            25,254
Construction in progress                                           1,534             6,550
                                                              ----------------------------
                                                                 252,770           351,297
Less: accumulated depreciation                                    50,212            66,581
                                                              ----------------------------
        Property and equipment, net                          $   202,558       $   284,716
                                                              ----------------------------


Depreciation expense was $7,398,000, $11,570,000 and $18,797,000 for fiscal
2002, fiscal 2003 and fiscal 2004, respectively.

                                        51


6. GOODWILL, REACQUIRED FRANCHISE RIGHTS AND OTHER INTANGIBLE ASSETS

GOODWILL AND INTANGIBLE ASSETS CONSIST OF THE FOLLOWING:



                                                                                IN THOUSANDS
- --------------------------------------------------------------------------------------------
                                                             FEB. 2, 2003       FEB. 1, 2004
- --------------------------------------------------------------------------------------------
                                                                          
Net carrying amount of indefinite-lived intangible assets:
Goodwill                                                     $       201        $    19,865
                                                               ----------------------------
Reacquired franchise rights                                  $    48,502        $   174,537
                                                               ----------------------------
Trademarks and trade names                                   $       651        $    12,339
                                                               ----------------------------
Net carrying amount of definite-lived intangible assets:
Recipes                                                      $        --        $       983
                                                               ----------------------------


During fiscal 2004, the carrying amount of goodwill increased $19,664,000
primarily as a result of the acquisition of Montana Mills in April 2003. The
carrying amount of reacquired franchise rights increased $126,035,000 as a
result of the acquisition from existing franchisees of rights to certain markets
in Kansas, Missouri, Michigan, Dallas, Texas and Shreveport, Louisiana, as well
as from the acquisition of the remaining minority interest in Golden Gate, the
franchisee with rights to develop stores in Northern California (see Note
20 -- Acquisitions). Trademarks and trade names recorded during fiscal 2004,
primarily associated with the Montana Mills acquisition, were determined to have
an indefinite life.

The carrying amount of recipes represents primarily the recipes acquired in the
Montana Mills acquisition in April 2003. Recipes were determined to have a
definite life and are amortized on a straight-line basis over an estimated
useful life of 10 years. Amortization expense associated with recipes was
$73,000 in fiscal 2004. The estimated annual amortization expense for each of
the next five years following fiscal 2004 is $88,000.

7. ACCRUED EXPENSES

ACCRUED EXPENSES CONSIST OF THE FOLLOWING:



                                                                              IN THOUSANDS
- ------------------------------------------------------------------------------------------
                                                               FEB. 2,           FEB. 1,
                                                                2003              2004
- ------------------------------------------------------------------------------------------
                                                                         
Insurance                                                    $     6,150       $     8,050
Salaries, wages and incentive compensation                         6,034             4,041
Deferred revenue                                                   1,485             1,353
Taxes, other than income                                           1,865             3,267
Other                                                              5,447             6,691
                                                              ----------------------------
        Total                                                $    20,981       $    23,402
                                                              ----------------------------

                                        52


8. DEBT

THE COMPANY'S DEBT, INCLUDING DEBT OF CONSOLIDATED JOINT VENTURES, CONSISTS OF
THE FOLLOWING:



                                                                              IN THOUSANDS
- ------------------------------------------------------------------------------------------
                                                               FEB. 2,           FEB. 1,
                                                                2003              2004
- ------------------------------------------------------------------------------------------
                                                                         
Krispy Kreme Doughnut Corporation:
  $119.3 million revolving line of credit                    $        --       $    87,000
  $40 million revolving line of credit                                --                --
Golden Gate:
  $6.75 million revolving line of credit                           4,750                --
Freedom Rings:
  $5 million revolving line of credit                              2,538                --
                                                              ----------------------------
Revolving lines of credit                                    $     7,288       $    87,000
                                                              ----------------------------
Glazed Investments:
  Short-term debt -- related party                           $       900       $        --
                                                              ----------------------------
Krispy Kreme Doughnut Corporation:
  $30.7 million term loan                                    $        --       $    30,113
  $33 million term loan                                           31,763                --
Golden Gate:
  $4.5 million term loan                                           3,926                --
  $3 million term loan                                             2,976                --
Glazed Investments:
  $12 million credit facility                                         --             6,330
  Real Estate and Equipment loans                                 14,400            14,319
  Subordinated notes                                                 136               136
Montana Mills:
  Other debt                                                          --                19
                                                              ----------------------------
                                                                  53,201            50,917
Current maturities of long-term debt                              (3,301)           (2,861)
                                                              ----------------------------
Long-term debt, net of current portion                       $    49,900       $    48,056
                                                              ----------------------------


$150 MILLION CREDIT AGREEMENT

On October 31, 2003, the Company entered into a $150,000,000 unsecured bank
credit facility ("Credit Facility") to refinance certain existing debt and
increase borrowing availability for general working capital purposes and other
financing and investing activities. The Credit Facility consists of a
$119,338,000 revolving credit facility ("Revolver") and a $30,662,000 term loan
("Term Loan"). Borrowings under the Revolver, totaling $87,000,000, were used to
repay amounts outstanding, including interest, under a $55,000,000 short-term
promissory note entered into during June 2003 to partially finance an
acquisition, to partially finance the acquisition of the remaining minority
interest in Golden Gate (see Note 20 -- Acquisitions) and to repay bank debt of
Freedom Rings and Golden Gate (see below). From the proceeds of the Revolver
borrowings, the Company provided loans to these consolidated joint ventures to
enable them to repay this debt. Given its significant ownership interest, the
Company will continue to make financing available to its consolidated joint
ventures to fund their capital needs as this process provides a lower cost of
capital and administrative efficiencies. Borrowings under the Term Loan were
used to refinance an existing term loan ("$33 Million Term Loan") entered into
to fund the initial purchase and completion of the Company's mix and
distribution facility in Effingham, Illinois (see below).

The amount available under the Revolver is reduced by letters of credit and was
$24,892,000 at February 1, 2004. Outstanding letters of credit, primarily for
insurance purposes, totaled $7,446,000 at February 1, 2004. The Company may
request, on a one-time basis, an increase in the availability under the Revolver
of up to $50,000,000, which would increase total availability under the Revolver
to $169,338,000.

Under the Credit Facility, the Company may prepay amounts outstanding without
penalty. Amounts outstanding under the Revolver are due in full on October 31,
2007, when the Credit Facility terminates. The Term Loan requires monthly
payments of principal of $137,500 through October 31, 2007, at which time a
final payment of all outstanding principal and accrued interest will be due.
Interest on amounts outstanding under the Revolver is generally payable
quarterly and interest on the Term Loan is payable monthly and is charged, at
the Company's option, at either the Base Rate, as defined within the Credit
Facility agreement, plus an Applicable Margin, as defined, or Adjusted LIBOR, as
defined, plus an Applicable Margin. The Applicable Margin ranges from 0.0% to
0.75% for Base Rate borrowings and from 1.0% to 2.0% for Adjusted LIBOR
borrowings and is determined based upon the Company's performance under certain
financial covenants contained in the Credit Facility. The interest rate
applicable at February 1, 2004 was 2.57% on the Revolver and 2.38% on the Term
Loan. A fee on


                                        53


the unused portion of the Revolver is payable quarterly and ranges from 0.20% to
0.375%, which is also determined based upon the Company's performance under
certain financial covenants contained in the Credit Facility.

The Company is counterparty to an interest rate swap agreement with a bank,
which was initially entered into in May 2002 to convert variable rate payments
due under the $33 Million Term Loan to fixed amounts, thereby hedging against
the impact of interest rate changes on future interest expense (forecasted cash
flow). The Company formally documents all hedging instruments and assesses, both
at inception of the contract and on an ongoing basis, whether they are effective
in offsetting changes in cash flows of the hedged transaction. The swap had an
initial notional amount of $33,000,000. The notional amount declines by $137,500
each month, originally to correspond with the reduction in principal of the $33
Million Term Loan and which now corresponds with the reduction in principal of
the Term Loan. The notional amount of the swap at February 1, 2004 was
$30,113,000. Under the terms of the swap, the Company makes fixed rate payments
to the counterparty of 5.09% and in return receives payments at LIBOR. Monthly
payments continue until the swap terminates May 1, 2007. The Company is exposed
to credit loss in the event of nonperformance by the counterparty to the swap
agreement; however, the Company does not anticipate nonperformance. At February
2, 2003 and February 1, 2004, the fair value carrying amount of the swap was a
liability of $2,550,000 and $2,160,000, respectively. Accumulated other
comprehensive loss for the year ended February 2, 2003 and February 1, 2004
includes, net of related tax benefits, a loss of $1,568,000 and $1,307,000,
respectively, related to the swap.

The Credit Facility contains provisions that, among other requirements, restrict
the payment of dividends and require the Company to maintain compliance with
certain covenants, including the maintenance of certain financial ratios. At
February 1, 2004, the Company was in compliance with each of these covenants.

$40 MILLION REVOLVING LINE OF CREDIT

In December 1999, the Company entered into an unsecured Loan Agreement (the
"Agreement") with a bank to increase borrowing availability and extend the
maturity of an existing revolving line of credit. The Agreement provided a $40
million revolving line of credit that was scheduled to expire on June 30, 2004.
Under the terms of the Agreement, interest on amounts advanced was charged, at
the Company's option, at either the lender's prime rate less 110 basis points or
at the one-month LIBOR plus 100 basis points and a fee of 0.10% was payable on
the unused portion. On October 31, 2003, upon entering into the Credit Facility,
this Agreement was canceled.

$33 MILLION TERM LOAN

In March 2002, the Company entered into a credit agreement with a bank ("Credit
Agreement") to provide funding of up to $35,000,000 for the initial purchase and
completion of the Company's mix and distribution facility in Effingham, Illinois
(the "Facility"). Construction of the Facility began in May 2001 and was
originally funded through a synthetic lease agreement with a bank. The Company
terminated the synthetic lease and purchased the Facility from the bank with the
proceeds from the initial borrowing under the Credit Agreement, $31,710,000.

On May 1, 2002, the outstanding borrowings under the Credit Agreement, totaling
$33,000,000, were converted to a $33 Million Term Loan. The $33 Million Term
Loan required monthly payments of principal of $137,500 and interest through
September 21, 2007, at which time a final payment of all outstanding principal
and accrued interest would be due. Interest was payable at Adjusted LIBOR, as
defined within the Credit Agreement, plus an Applicable Margin, as defined. The
Applicable Margin ranged from .75% to 1.75% and was determined based upon the
Company's performance under certain financial covenants contained in the Credit
Agreement. On October 31, 2003, amounts outstanding under the $33 Million Term
Loan were repaid in full with the proceeds from the Credit Facility Term Loan
and the $33 Million Term Loan was canceled.

CONSOLIDATED JOINT VENTURES -- GOLDEN GATE

In October 2001, Golden Gate entered into a $6,750,000 revolving line of credit
agreement with a bank to provide funding to support store construction, the
growth of off-premises sales and general working capital needs. The line of
credit was scheduled to mature October 12, 2004. In addition, Golden Gate had
entered into term loan agreements with a bank to provide funding for the
construction of stores and the purchase of equipment. Interest on borrowings
under the line of credit and the term loans was charged at one-month LIBOR plus
1.25%. The term loans required monthly payments of principal plus interest
determined based upon fixed terms ranging from seven to ten years, with a final
payment of all remaining outstanding amounts due after five years. The term
loans were scheduled to mature beginning in 2006. On October 31, 2003, amounts
outstanding under the revolving line of credit and the term loans were repaid in
full with proceeds from borrowings under the Credit Facility Revolver and the
agreements were canceled.

CONSOLIDATED JOINT VENTURES -- FREEDOM RINGS

In June 2002, Freedom Rings entered into an unsecured loan agreement with a bank
to provide initial funding of $1,500,000 for construction of a retail store. In
November 2002, Freedom Rings entered into a $5,000,000 revolving line of credit
with the bank to provide funding for the construction of additional retail
stores and general working capital purposes. The line of credit replaced the
$1,500,000 loan, which was repaid in full and canceled. Interest on borrowings
under the line of credit was

                                        54


charged at one-month LIBOR plus 1.25%. The line of credit was scheduled to
mature on August 15, 2004. On October 31, 2003, the amounts outstanding under
the line of credit were repaid in full with proceeds from the Credit Facility
Revolver and the line of credit was canceled.

CONSOLIDATED JOINT VENTURES -- GLAZED INVESTMENTS

In December 2003, Glazed Investments entered into a $12 million credit facility
("Glazed Credit Facility") to provide working capital and funding for the
construction of stores and the purchase of related equipment. The Glazed Credit
Facility provides a $500,000 working capital line of credit, up to $8,000,000
for the funding of the construction of stores and up to $3,500,000 for the
purchase of related equipment. Amounts outstanding under the Glazed Credit
Facility bear interest at one-month LIBOR plus 1.50% (2.59% at February 1,
2004), which is payable monthly. Upon completion of a store, amounts advanced to
fund construction are converted to construction term loans ("Construction
Notes") and amounts advanced to fund the related equipment purchased are
converted to equipment term loans ("Equipment Notes"). The Construction Notes
require fixed monthly principal payments, based upon a term of ten years, plus
interest, with a final payment of all outstanding amounts due on the earlier of
June 30, 2010; two months prior to the final maturity of the subordinated debt
discussed below; or five years after commencement of monthly payments of
principal and interest. The Equipment Notes require monthly payments of
principal and interest for a term of five years, with a final payment of all
outstanding amounts on the earlier of June 30, 2009; two months prior to the
final maturity of the subordinated debt discussed below; or five years after
commencement of monthly payments of principal and interest. Amounts outstanding
under the working capital line of credit are payable in full on June 30, 2004.
The loans are secured by the related property and equipment. The Company has
also guaranteed approximately 75% of the amounts outstanding under the Glazed
Credit Facility.

Prior to entering into the Glazed Credit Facility discussed above, Glazed
Investments entered into arrangements with a non-bank financing institution that
provided funding for the construction of stores and the purchase of the related
equipment. While individual promissory notes exist for the financing of each
store and equipment purchase for which funding was provided through the issuance
of debt, the terms of each are substantially the same. During the construction
period, interest on amounts outstanding is payable monthly, generally at
one-month LIBOR plus 4.25%. Upon completion of the store, the amount advanced
for construction funding is converted to a real estate term loan ("Real Estate
Loans") and amounts advanced for equipment purchases are converted to equipment
term loans ("Equipment Loans"). Generally, Real Estate Loans require monthly
payments of principal and interest for a fixed term of fifteen years and
Equipment Loans require monthly payments of principal and interest for a fixed
term of seven years. Interest is payable at rates based on either a fixed rate,
which ranges from 7% to 8.65%, or a variable rate based on the one-month LIBOR
rate or a commercial paper rate, plus a premium. The premium charged on variable
rate loans ranges from 3.05% to 3.6%. At February 1, 2004, interest rates
applicable to the Real Estate Loans and Equipment Loans range from 4.06% to
8.65%. The loans are secured by the related property and equipment. The Company
has also guaranteed approximately 75% of the amounts outstanding under the
loans.

The Glazed Credit Facility and non-bank financing discussed above contain
provisions requiring Glazed Investments to maintain compliance with certain
financial and non-financial covenants, including maintenance of certain
financial ratios. At February 1, 2004, Glazed Investments was in compliance with
these covenants.

Glazed Investments has also entered into promissory notes with Lawrence E. Jaro,
chief executive officer of Glazed Investments, who holds an approximate 18%
interest in the joint venture, whereby Mr. Jaro provided funding to the joint
venture for general working capital purposes. Borrowings under the promissory
notes were also used to fund store development costs prior to establishment of
permanent financing. Amounts outstanding were unsecured. Interest at 10% was
payable at maturity. The notes generally had terms of less than six months and
were repaid from operating cash flows of the joint venture or proceeds from
permanent financing. During fiscal 2004, all of these notes were repaid and
canceled.

In July 2000, Glazed Investments issued $4,520,000 in senior subordinated notes
("Notes") to fund, in part, expenses associated with the start-up of its
operations. The Company purchased $1,007,000 of the Notes at the time of the
initial offering. In connection with the Company's acquisition of additional
interests in Glazed Investments in fiscal 2003, the Company acquired an
additional $3,377,000 in Notes. As a result, approximately $4,384,000 of the
Notes are payable to the Company. Prior to the acquisition by the Company of a
controlling interest in Glazed Investments in August 2002, the Notes held by the
Company were included in investments in unconsolidated joint ventures. Effective
with the consolidation of Glazed Investments with the accounts of the Company in
August 2002, the Notes held by the Company were eliminated against the amount
reflected in Glazed Investments balance sheet as payable to the Company.
Accordingly, the Notes outstanding at February 1, 2004 as reflected in the
accompanying consolidated balance sheet totaling $136,000 represent the total
amount of the original $4,520,000 issued that remains payable to a third party.
The Notes bear interest at 12.0% payable semi-annually each April 30 and October
31 through April 30, 2010, at which time a final payment of outstanding
principal and accrued interest is due.

For franchisees in which we have an ownership interest, the Company will
sometimes guarantee an amount of the debt or leases, generally equal to the
Company's ownership percentage. The amounts guaranteed by the Company are
disclosed in Note 18 -- Joint Ventures.

                                        55


The aggregate maturities for long-term debt for the five fiscal years ending
after February 1, 2004 are $2,861,000, $4,488,000, $3,826,000, $114,443,000 and
$2,317,000, respectively.

Interest paid was $337,000 in fiscal 2002, $1,855,000 (including $74,000 that
was capitalized) in fiscal 2003 and $4,454,000 (including $45,000 that was
capitalized) in fiscal 2004.

9. LEASE COMMITMENTS

The Company conducts some of its operations from leased facilities and,
additionally, leases certain equipment under operating leases. Generally, these
leases have initial terms of three to twenty years and contain provisions for
renewal options of five to ten years.

AT FEBRUARY 1, 2004, FUTURE MINIMUM ANNUAL RENTAL COMMITMENTS, GROSS, UNDER
NONCANCELABLE OPERATING LEASES, INCLUDING LEASE COMMITMENTS OF CONSOLIDATED
JOINT VENTURES, ARE AS FOLLOWS:



                                                             IN THOUSANDS
- -------------------------------------------------------------------------
FISCAL YEAR ENDING IN                                              AMOUNT
- -------------------------------------------------------------------------
                                                          
2005                                                         $    21,119
2006                                                              18,560
2007                                                              15,657
2008                                                              13,099
2009                                                              11,692
Thereafter                                                        75,599
                                                             ------------
                                                             $   155,726
                                                             ------------


Rental expense, net of rental income, totaled $10,576,000 in fiscal 2002,
$13,169,000 in fiscal 2003 and $19,574,000 in fiscal 2004.

10. INCOME TAXES

THE COMPONENTS OF THE PROVISION FOR FEDERAL AND STATE INCOME TAXES ARE
SUMMARIZED AS FOLLOWS:



                                                                                                   IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------------
                                                         FEB. 3, 2002         FEB. 2, 2003         FEB. 1, 2004
- ---------------------------------------------------------------------------------------------------------------
                                                                                          
Currently payable                                        $    13,615          $    19,663          $    35,947
Deferred                                                       2,553                1,632                1,643
                                                         -------------------------------------------------------
                                                         $    16,168          $    21,295          $    37,590
                                                         ------------------------------------------------------


A RECONCILIATION OF THE STATUTORY FEDERAL INCOME TAX RATE WITH THE COMPANY'S
EFFECTIVE RATE IS AS FOLLOWS:



                                                                                                   IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------------
                                                         FEB. 3, 2002         FEB. 2, 2003         FEB. 1, 2004
- ---------------------------------------------------------------------------------------------------------------
                                                                                          
Federal taxes at statutory rate                          $    14,891          $    19,170          $    33,137
State taxes, net of federal benefit                            1,158                1,405                3,198
Foreign operating losses with no tax benefit                      --                  714                1,251
Other                                                            119                    6                    4
                                                         ------------------------------------------------------
                                                         $    16,168          $    21,295          $    37,590
                                                         ------------------------------------------------------



Income tax payments, net of refunds, were $6,616,000 in fiscal 2002 and
$5,298,000 in fiscal 2003. In fiscal 2004, the Company received a refund, net of
income tax payments, of $2,763,000. The income tax payments in fiscal 2002,
fiscal 2003 and fiscal 2004 were lower than the current provision due to the
income tax benefit of stock option exercises of $9,772,000, $13,795,000 and
$42,806,000 during fiscal 2002, fiscal 2003 and fiscal 2004, respectively.

THE NET CURRENT AND NON-CURRENT COMPONENTS OF DEFERRED INCOME TAXES RECOGNIZED
IN THE BALANCE SHEET ARE AS FOLLOWS:



                                                                                  IN THOUSANDS
- ----------------------------------------------------------------------------------------------
                                                             FEB. 2, 2003         FEB. 1, 2004
- ----------------------------------------------------------------------------------------------
                                                                            
Net current assets                                           $     9,824          $     6,453
Net non-current liabilities                                       (9,849)              (6,417)
                                                             ---------------------------------
    Net asset/(liability)                                    $       (25)         $        36
                                                             ---------------------------------


                                        56


THE TAX EFFECTS OF THE SIGNIFICANT TEMPORARY DIFFERENCES WHICH COMPRISE THE
DEFERRED TAX ASSETS AND LIABILITIES ARE AS FOLLOWS:



                                                                                  IN THOUSANDS
- ----------------------------------------------------------------------------------------------
                                                             FEB. 2, 2003         FEB. 1, 2004
- ----------------------------------------------------------------------------------------------
                                                                            
ASSETS
Compensation deferred (unpaid)                               $       756          $       491
Insurance                                                          2,368                3,180
Deferred revenue                                                   1,165                2,093
Charitable contributions carryforward                                714                1,393
Gain/loss on hedging transactions                                    982                  853
Accrued litigation                                                 3,494                   --
Other current assets                                                 834                  867
Other current liabilities                                          2,166                1,344
Other non-current assets                                             323                  104
Federal tax credit carryforwards                                      --                  701
Federal net operating loss carryforwards                              --                9,241
State tax credit carryforwards                                       179                  539
State net operating loss carryforwards                             2,463                5,880
                                                              --------------------------------
  Gross deferred tax assets                                       15,444               26,686
                                                              --------------------------------

LIABILITIES
Cumulative translation adjustment                                    (19)                 426
Property and equipment                                            11,628               16,361
Intangible assets                                                  1,037                4,064
Other                                                                360                  559
                                                              --------------------------------

  Gross deferred tax liabilities                                  13,006               21,410
                                                              --------------------------------

Valuation allowance -- State net operating loss
  carryforwards                                                   (2,463)              (5,240)
                                                              --------------------------------

  Net asset/(liability)                                      $       (25)         $        36
                                                              --------------------------------



At February 1, 2004, the Company has recorded a valuation allowance against the
state net operating loss carryforwards of $5,240,000. If these carryforwards are
realized in the future, $5,003,000 of the tax benefit would be recorded as an
addition to common stock, as this portion of the carryforwards was a result of
the tax benefits of stock option exercises in fiscal 2002, fiscal 2003 and
fiscal 2004.

The Company records deferred tax assets reflecting the benefit of future
deductible amounts. Realization of these assets is dependent on generating
sufficient future taxable income and the ability to carryback losses to previous
years in which there was taxable income. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
assets, for which a valuation allowance has not been established, will be
realized. The amount of the deferred tax assets considered realizable, however,
could be reduced in the near term if estimates of future taxable income are
reduced.

11. EARNINGS PER SHARE

The computation of basic earnings per share is based on the weighted average
number of common shares outstanding during the period. The computation of
diluted earnings per share reflects the potential dilution that would occur if
stock options were exercised and the dilution from the issuance of restricted
shares. The treasury stock method is used to calculate dilutive shares. This
reduces the gross number of dilutive shares by the number of shares purchasable
from the proceeds of the options assumed to be exercised, the proceeds of the
tax benefits recognized by the Company in conjunction with nonqualified stock
plans and from the amounts of unearned compensation associated with the
restricted shares.

                                        57


THE FOLLOWING TABLE SETS FORTH THE COMPUTATION OF BASIC AND DILUTED EARNINGS PER
SHARE:



                                                                                                   IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED                                               FEB. 3, 2002         FEB. 2, 2003         FEB. 1, 2004
- ---------------------------------------------------------------------------------------------------------------
                                                                                          
Numerator:
Net income                                               $     26,378         $     33,478         $     57,087
                                                         ------------------------------------------------------

Denominator:
Basic earnings per share -- weighted average shares            53,703               55,093               59,188
Effect of dilutive securities:
Stock options                                                   4,734                4,395                3,197
Restricted stock                                                    6                    4                    3
                                                         ------------------------------------------------------

Diluted earnings per share -- adjusted weighted average
  shares                                                       58,443               59,492               62,388
                                                         ------------------------------------------------------



Stock options in the amount of 215,000 shares in fiscal 2002 and 350,000 shares
in fiscal 2003 and stock options and warrants totaling 1,363,000 shares in
fiscal 2004 have been excluded from the diluted shares calculation as the
inclusion of these stock options and warrants would be antidilutive.

12. EMPLOYEE BENEFIT PLANS

The Company has a 401(k) savings plan, which provides that employees may
contribute from 1% to 100% of their base salary to the plan on a tax deferred
basis up to the Internal Revenue Service limitations. The Company ceased making
matching contributions to the plan in fiscal 2001.

Effective October 1, 2000, KKDC established an unfunded Nonqualified Deferred
Compensation Plan (the "401(k) Mirror Plan"). The 401(k) Mirror Plan is designed
to enable the Company's executives to have the same opportunity to defer
compensation as is available to other employees of the Company under the
qualified 401(k) savings plan. Participants may defer from 1% to 15% of their
base salary, on a tax deferred basis up to the Internal Revenue Service
limitations, into the 401(k) Mirror Plan, may direct the investment of the
amounts they have deferred and are always 100% vested with respect to the
deferred amounts. The investments, however, are not a separate fund of assets
and are included in other assets in the consolidated balance sheet. The
corresponding liability to participants is included in other long-term
obligations. The balance in the asset and corresponding liability account was
$617,000 and $1,388,000 at February 2, 2003 and February 1, 2004, respectively.

Effective February 1, 1999, KKDC established the Krispy Kreme Profit-Sharing
Stock Ownership Plan ("KSOP"). Under the terms of this qualified plan, the
Company contributes a discretionary percentage of each employee's compensation,
subject to Internal Revenue Service limits, to each eligible employee's account
under the plan. The expense associated with the KSOP was $3,255,000 and $400,000
in fiscal 2002 and fiscal 2003, respectively, based on a contribution of 7% of
eligible compensation for fiscal 2002 and 1% of eligible compensation for fiscal
2003. The Company made no contribution to this plan in fiscal 2004. Under the
terms of the KSOP, the contribution can be made in the form of cash or newly
issued shares of common stock. Forfeitures of previously allocated shares may
also be used to fund the contribution. If cash is contributed, the KSOP acquires
Krispy Kreme stock on the open market. With the exception of the initial year of
the plan, contributions made are funded annually in April. For fiscal 2002 and
fiscal 2003, contributions to the KSOP were made in cash. Employees become
eligible for participation in the plan upon the completion of one year of
service and vest ratably over five years. Credit for past service was granted to
employees at the inception of the plan.

KKDC established a nonqualified "mirror" plan, comparable to the KSOP, effective
February 1, 1999. Contributions to this nonqualified plan will be made under the
same terms and conditions as the KSOP, with respect to compensation earned by
participants in excess of the maximum amount of compensation that may be taken
into account under the qualified plan. The Company recorded compensation expense
of $201,000 in fiscal 2002 and $30,000 in fiscal 2003 for amounts credited to
certain employees under the nonqualified plan. No amounts were credited to
employees under the nonqualified plan in fiscal 2004.

Effective February 1, 2002, the Company established the Krispy Kreme Doughnuts,
Inc. Employee Stock Purchase Plan ("ESPP") to provide eligible employees of the
Company an opportunity to purchase Company common stock. Under the terms of the
plan, participants may defer between 1% and 15% of their base compensation.
Amounts withheld are accumulated and, at the end of each quarter, used to
purchase shares of common stock of the Company. The purchase price will be the
fair market value on either the first or last day of the quarter, whichever is
lower. If the actual market price of the stock on the date purchased exceeds the
price at which shares can be acquired under the terms of the ESPP, the Company
will make a contribution to fund the shortfall, resulting in a charge to
operations in the period paid. The Company recorded compensation expense of
$2,000 in fiscal 2003 and $54,000 in fiscal 2004 in connection with the ESPP.
Shares may be purchased by the ESPP directly from the Company or in the open
market. There were no shares issued under the ESPP in fiscal 2002 and all shares
purchased by the ESPP in fiscal 2003 and fiscal 2004 were acquired in the open
market. As of February 1, 2004, there were 2,000,000 shares reserved for
issuance under the ESPP.

                                        58


Effective May 1, 1994, KKDC established the Retirement Income Plan for Key
Employees of Krispy Kreme Doughnut Corporation (the "Plan"), an unfunded
nonqualified noncontributory defined benefit pension plan. Benefits were based
on years of service and average final compensation during the employees' career.
The Plan at all times was unfunded as such term is defined for purposes of the
Employee Retirement Income Security Act (ERISA). The actuarial cost method used
in determining the net periodic pension cost was the projected unit credit
method. In fiscal 2001, the Plan was frozen and no additional employees were
covered under the Plan. Effective February 2, 2003, the Company elected to
terminate the Plan. As a result, vested accrued benefits totaling $829,000 were
paid to Plan participants in fiscal 2004. The expense associated with the Plan
in fiscal 2003 was a credit of $669,000.

13. INCENTIVE COMPENSATION

The Company has an incentive compensation plan for certain management and
non-management level employees. Incentive awards are paid based upon the
attainment of certain criteria, financial and non-financial, as outlined in the
plan. Incentive compensation was $6,543,000 in fiscal 2002 and $2,472,000 in
fiscal 2003. Under the terms of the plan, the Company paid no incentive
compensation in fiscal 2004.

Prior to fiscal 1999, the Company had a Long-Term Incentive Plan (the "Plan").
Under the provisions of the Plan, a participant could elect to defer, for a
period of not less than five years, up to 100% of the bonus earned under the
provisions of the incentive compensation plan described above. The deferred
amount was converted to performance units based on the appropriate value (book
value) of the Company's common stock as defined in the Plan. Upon completion of
the deferral period, each participant's account would be distributed in
accordance with the participant's election. The performance units granted under
the Plan were credited with dividends in a manner identical to the common stock
of the Company. The amount payable to a participant at the time benefit payments
were due was equal in amount to the number of performance units credited to a
participant's account multiplied by the current book value of the Company's
common stock as defined in the Plan. Effective with fiscal year-end 1997, the
right to defer additional incentive compensation under the provisions of the
plan was suspended.

In fiscal 1999, participants still employed by the Company were given the option
to convert their performance units earned under the Plan to common shares of the
Company's common stock, subject to certain restrictions. These shares had no
voting rights prior to the initial public offering of the Company's common
stock. The number of performance units converted was 4,717,800 at a conversion
rate of $1.30 per performance unit for a total of approximately $6,112,000 in
common stock issued in connection with the conversion. Due to the Federal and
State income tax consequences of the conversion incurred by each participant,
the Company loaned to participants amounts equal to their tax liability. The
loans were executed via a 10-year promissory note (collateralized by the shares
of common stock issued) with a fixed interest rate of 6%. In fiscal 2003, the
outstanding amounts due under the loans of $1,926,000, including accrued
interest, was paid in full and the loans were canceled.

During fiscal 2002, as part of a compensation arrangement with a former employee
of Digital Java, Inc., a Chicago-based coffee company which the Company acquired
in fiscal 2002, the Company issued 54,000 shares of common stock in exchange for
a note receivable in the amount of $879,000. The note receivable bears interest
at 6%, requires annual payments of principal and interest for its five-year term
and is collateralized by the shares of common stock. Under the terms of the
note, as long as certain employment and performance criteria are met, the
employee will receive a bonus in the amount of the annual payment due. At
February 2, 2003 and February 1, 2004 the balance of this note was $558,000 and
$383,000, respectively, which is recorded in the consolidated balance sheet as a
reduction of shareholders' equity.

14. SHAREHOLDERS' EQUITY

STOCK OPTION PLANS, RESTRICTED STOCK AWARDS AND WARRANTS

STOCK OPTION PLANS.  During fiscal 1999, KKDC established the Krispy Kreme
Doughnut Corporation 1998 Stock Option Plan (the "1998 Plan"). Under the terms
of the 1998 Plan, 8,900,000 shares of common stock of the Company were reserved
for issuance to employees and Directors of the Company. Nonqualified stock
options granted under the 1998 Plan were granted at prices equal to the fair
market value on the date of grant.

In July 2000, the Company's shareholders approved the 2000 Stock Incentive Plan
(the "2000 Plan") which was adopted by the Board of Directors on June 6, 2000.
Awards under the 2000 Plan may be incentive stock options, nonqualified stock
options, stock appreciation rights, performance units, restricted stock (or
units) and share awards. The maximum number of shares of common stock with
respect to which awards may be granted under the 2000 Plan is 9,996,000 shares,
including 496,000 shares that were available for grant, but not granted, under
the 1998 Plan. The 2000 Plan provides aggregate limits on grants of the various
types of awards in the amount of 3,000,000 shares for incentive stock options
and 1,200,000 shares, in the aggregate, for stock appreciation rights,
performance units, restricted stock and stock awards. During fiscal 2002,
2,169,600 stock options were issued under the 2000 Plan at exercise prices
ranging from $15.13 to $42.11. During fiscal 2003, 1,186,200 stock options were
issued under the 2000 Plan at exercise prices ranging from $30.98 to $37.25.
During fiscal 2004, 1,829,200 stock options were issued under the 2000 Plan at
exercise prices ranging from $28.11 to $44.22. Stock options were granted at
prices equal to the fair market value on the date of grant. Options under both
plans vest and expire according to terms established at the grant date.

                                        59


THE FOLLOWING TABLE SUMMARIZES ALL STOCK OPTION TRANSACTIONS FROM JANUARY 28,
2001 TO FEBRUARY 1, 2004:



- ---------------------------------------------------------------------------------------------------------------------------------
                                       SHARES SUBJECT       WEIGHTED AVERAGE        SHARES SUBJECT TO        WEIGHTED AVERAGE
                                         TO OPTIONS     EXERCISE PRICE PER SHARE   EXERCISABLE OPTIONS   EXERCISE PRICE PER SHARE
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                             
OUTSTANDING, JANUARY 28, 2001            9,016,800               $ 3.04                   936,000                 $2.57
Granted                                  2,169,600                25.06
Exercised                                1,182,800                 3.30
Canceled                                   375,300                 4.97
                                       ------------------------------------------------------------------------------------------

OUTSTANDING, FEBRUARY 3, 2002            9,628,300               $ 7.90                 2,976,200                 $4.06
Granted                                  1,186,200                35.11
Exercised                                1,187,300                 6.01
Canceled                                   186,400                 4.84
                                       ------------------------------------------------------------------------------------------

OUTSTANDING, FEBRUARY 2, 2003            9,440,800               $11.60                 4,567,800                 $5.68
Granted                                  1,829,200                37.65
Assumed through acquisition                 45,100                32.83
Exercised                                3,300,000                 5.91
Canceled                                   539,700                29.63
                                       ------------------------------------------------------------------------------------------

OUTSTANDING, FEBRUARY 1, 2004            7,475,400               $19.31                 4,281,500                 $8.56
                                       ------------------------------------------------------------------------------------------



At February 1, 2004, there were approximately 5,222,400 shares of common stock
available for issuance pursuant to future stock option grants.

ADDITIONAL INFORMATION REGARDING OPTIONS OUTSTANDING AS OF FEBRUARY 1, 2004 IS
AS FOLLOWS:



                        -----------------------------------------------------------    -----------------------------
                                            OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------------------------------------------
RANGE OF                             WEIGHTED AVERAGE REMAINING    WEIGHTED AVERAGE                 WEIGHTED AVERAGE
EXERCISE PRICES          SHARES       CONTRACTUAL LIFE (YEARS)      EXERCISE PRICE      SHARES       EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------------------
                                                                                     
$ 1.30 -- $ 6.66        3,107,100               4.6                     $ 1.48         3,000,500         $ 1.35
$13.33 -- $19.99          626,500               6.0                     $15.37           480,000         $15.08
$20.00 -- $26.65          110,000               6.9                     $21.09            47,500         $20.93
$26.66 -- $33.32        1,340,200               7.6                     $29.10           479,800         $30.37
$33.33 -- $39.98        1,401,500               8.6                     $35.28           261,200         $35.48
$39.99 -- $46.64          889,600               9.5                     $44.18            12,000         $43.34
$59.97 -- $66.63              500               8.1                     $66.63               500         $66.63


RESTRICTED STOCK AWARDS.  In fiscal 2002 and fiscal 2004, the Company granted
1,187 and 300, respectively, restricted stock awards in the form of the
Company's common stock under the 2000 Plan to certain employees to provide
incentive compensation. The weighted average grant-date fair value of the shares
issued was $40.50. These shares vest ratably over a four-year period from the
date of grant.

WARRANTS.  In connection with the Company's acquisition of Montana Mills in
fiscal 2004 (see Note 20 -- Acquisitions), the Company assumed warrants
previously issued by Montana Mills. As of February 1, 2004, these warrants are
exercisable for 422,900 shares of the Company's common stock at exercise prices
ranging from $49.97 to $99.94 per share and generally expire in fiscal 2008.

SHAREHOLDER RIGHTS PLAN

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

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

                                        60


person, which will thereafter be void -- will have the right to receive upon
exercise, and without paying the exercise price, the number of shares of Krispy
Kreme common stock with a market value equal to the share purchase right
exercise price.

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

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

15. BUSINESS SEGMENT INFORMATION

The Company's reportable segments are Company Store Operations, Franchise
Operations, KKM&D and Montana Mills. The Company Store Operations segment is
comprised of the operating activities of the stores owned by the Company and
those in consolidated joint ventures. These stores sell doughnuts and
complementary products through both on-premises and off-premises sales channels.
The majority of the ingredients and materials used by Company Store Operations
is purchased from the KKM&D business segment and Company Store operating income
reflects the benefit of the Company's vertical integration. The Franchise
Operations segment represents the results of the Company's franchise program.
Under the terms of the franchise agreements, the licensed operators pay
royalties and fees to the Company in return for the use of the Krispy Kreme name
and ongoing brand and operational support. Expenses for this business segment
include costs incurred to recruit new franchisees and to open, monitor and aid
in the performance of these stores and direct general and administrative
expenses. The KKM&D segment supplies mix, equipment, coffee and other items to
both Company and franchisee-owned stores. All intercompany transactions between
the KKM&D business segment and the Company Stores Operations segment are at
prices intended to reflect an arms-length transfer price and are eliminated in
consolidation. Profit from KKM&D's sales to Company Store Operations is
classified as a reduction of Company Store operating expenses, generally based
on the proportion of sales to Company Stores relative to total KKM&D sales. The
Montana Mills segment represents the operating activities of the Montana Mills
stores, which produce and sell a variety of breads and baked goods prepared in
an open-view format through both on-premises and off-premises sales channels.

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

                                        61


THE FOLLOWING TABLE PRESENTS THE RESULTS OF THE COMPANY'S OPERATING SEGMENTS FOR
FISCAL 2002, FISCAL 2003 AND FISCAL 2004. SEGMENT OPERATING INCOME IS INCOME
BEFORE GENERAL CORPORATE EXPENSES AND INCOME TAXES.



                                                                                                   IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------------
                                                         FEB. 3, 2002         FEB. 2, 2003         FEB. 1, 2004
- ---------------------------------------------------------------------------------------------------------------
                                                                                          
Revenues:
Company Store Operations                                 $   266,209          $   319,592          $   441,868
Franchise Operations                                          14,008               19,304               23,848
KKM&D                                                        212,876              276,152              359,995
Montana Mills                                                     --                   --                6,747
Intersegment sales eliminations                              (98,739)            (123,499)            (166,866)
                                                         ------------------------------------------------------

        Total revenues                                   $   394,354          $   491,549          $   665,592
                                                         ------------------------------------------------------

Operating Income:
Company Store Operations                                 $    42,932          $    58,214          $    83,724
Franchise Operations                                           9,040               14,319               19,043
KKM&D                                                         18,999               26,843               39,345
Montana Mills                                                     --                   --               (1,987)
Unallocated general and administrative expenses              (29,084)             (30,484)             (38,564)
Arbitration award                                                 --               (9,075)                 525
                                                         ------------------------------------------------------

        Total operating income                           $    41,887          $    59,817          $   102,086
                                                         ------------------------------------------------------

Depreciation and Amortization Expenses:
Company Store Operations                                 $     5,859          $     8,854          $    14,392
Franchise Operations                                              72                  108                  173
KKM&D                                                            507                1,723                3,006
Montana Mills                                                     --                   --                  499
Corporate administration                                       1,521                1,586                1,653
                                                         ------------------------------------------------------

        Total depreciation and amortization expenses     $     7,959          $    12,271          $    19,723
                                                         ------------------------------------------------------



16. RELATED PARTY TRANSACTIONS

As of February 1, 2004, emeritus members of the Company's Board of Directors own
21 stores and, under the respective franchise agreement, one emeritus member is
committed to open an additional store.

Prior to March 5, 2002 (see Note 18 -- Joint Ventures), several officers were
investors in the Krispy Kreme Equity Group, LLC ("KKEG"), a pooled investment
fund, which held interests in six joint ventures developing Krispy Kreme stores
in new markets. In addition, certain officers of the Company, including Scott
Livengood, Chairman, President and CEO, and John N. McAleer, Vice Chairman, were
individual investors in groups that owned stores and were developing new
markets. Certain of the investments held by these officers were in the same
entities as those invested in by the KKEG. Effective March 5, 2002, the Company
acquired from the members of the KKEG their proportionate shares, which
increased the Company's ownership in six joint ventures. On March 5, 2002, the
Company also acquired the ownership interest in six joint ventures from Mr.
Livengood as well as the ownership interest held by Mr. McAleer in a joint
venture. The acquisition of the interests held by the KKEG, as approved by the
Company's Board of Directors, was in an amount equal to the members' original
investment. Mr. Livengood and Mr. McAleer sold their interests to the Company at
their original cost, as approved by the Company's Board of Directors.

All franchisees are required to purchase mix and equipment from the Company.
Total revenues included $44,870,000 in fiscal 2002, $69,539,000 in fiscal 2003
and $86,718,000 in fiscal 2004 of sales to franchise stores owned, in whole or
in part, by emeritus members of the Board of Directors, employees of the Company
and Company joint venture investments. Total revenues also include royalties
from these stores of $3,646,000 in fiscal 2002, $7,013,000 in fiscal 2003 and
$8,636,000 in fiscal 2004. Trade accounts receivable from these stores, shown as
accounts receivable, affiliates on the consolidated balance sheet, totaled
$11,062,000 and $20,482,000 at February 2, 2003 and February 1, 2004,
respectively.

In fiscal 2004, in connection with a program made available to all franchisees,
the Company extended credit to certain franchisees, in the form of promissory
notes, to provide financing for the purchase from the Company of certain
supplemental equipment to be used in the franchise stores. Notes receivable from
certain franchisees who are emeritus members of the Company's Board of
Directors, as well as franchisees in which we have a minority interest, are
included in notes receivable, affiliates and long-term notes receivable,
affiliates in the accompanying consolidated balance sheet and in total were
$1,323,000 at February 1, 2004. These notes have terms ranging from two to three
years.

As discussed in Note 20 -- Acquisitions, the Company received promissory notes
totaling $3,551,000 from Krispy Kreme of South Florida, LLC, an Area Developer
franchisee in which the Company has a 35.3% ownership interest, in exchange for
the rights to certain franchise markets and the related assets. These promissory
notes are included in long-term notes receivable, affiliates in the accompanying
consolidated balance sheet.

                                        62


In June 2003, the Company extended an interest-bearing loan to Krispy Kreme
Australia Pty Limited, an Area Developer franchisee in which the Company has a
35.0% ownership interest, to provide working capital and funding of store
development. The outstanding balance of the promissory note, included in
long-term notes receivable, affiliates in the accompanying consolidated balance
sheet, totaled $1,599,000 at February 1, 2004 and is due in fiscal 2007.

Effective June 30, 2003, the Company acquired the rights to certain franchise
markets in Dallas, Texas and Shreveport, Louisiana, as well as the related
assets from Associate franchisees, including Joseph A. McAleer, a former officer
and director of the Company, and Steven D. Smith, an emeritus director. See Note
20 -- Acquisitions for further information.

17. COMMITMENTS AND CONTINGENCIES

The Company has guaranteed certain leases and loans from third-party financial
institutions on behalf of franchisees, primarily to assist the franchisees in
obtaining third-party financing. The loans are also collateralized by certain
assets of the franchisee, generally the Krispy Kreme store and related
equipment. The terms of the guarantees range from 2 to 20 years. The Company's
contingent liability related to these guarantees was approximately $7,652,000 at
February 2, 2003 and $15,351,000 at February 1, 2004. For leases, the guaranteed
amount was determined based upon the gross amount of remaining lease payments
due and for debt the guaranteed amount was determined based upon the principal
amount outstanding under the respective agreement. Of the total guaranteed
amount at February 1, 2004, $14,810,000 is for franchisees in which we have less
than a controlling ownership interest and is summarized in Note 18 -- Joint
Ventures. The percentage guaranteed is generally equivalent to the Company's
ownership percentage in the joint venture. The guarantees expire between fiscal
2005 and fiscal 2023. The remaining guarantees of $541,000 are for franchisees
in which we have no ownership interest and expire between fiscal 2007 and fiscal
2014. The expirations of these guarantees for the five fiscal years ending after
February 1, 2004 are $4,791,000, $1,905,000, $1,802,000, $1,814,000 and
$1,591,000, respectively. These guarantees require payment from the Company in
the event of default on payment by the respective debtor. If the debtor
defaults, the Company may be required to pay a proportionate share of other
amounts outstanding under the respective agreements, such as accrued interest
and related fees. The Company cannot estimate the amount of any such additional
payments that could be required. The Company has not experienced any losses in
connection with these guarantees, and management believes the likelihood that
material payments will be required under these guarantees is remote. With
respect to guarantees that the Company issued during fiscal 2004, the Company
assessed the fair value of its obligation to perform under these guarantees if
required to do so by considering the likelihood of certain triggering events or
other conditions requiring performance. The Company determined that the fair
value of these guarantees was not material to the Company's financial position
or results of operations.

The Company also guarantees leases and debt owed to financial institutions for
consolidated joint ventures. The maximum amount guaranteed for these joint
ventures is $16,406,000 at February 1, 2004 and is summarized in Note
18 -- Joint Ventures. At February 1, 2004, the outstanding debt under the loans
guaranteed, which is included in long-term debt and current maturities of
long-term debt in the accompanying consolidated financial statements, is
$20,649,000. The expirations of these guarantees for the five fiscal years
ending after February 1, 2004 are $1,377,000, $3,023,000, $2,251,000, $2,355,000
and $2,361,000, respectively. The individual guarantees expire in fiscal 2009
through fiscal 2019, upon termination of the underlying leases and debt
guaranteed.

The Company issues indemnifications in certain instances when it sells assets or
real estate and in the ordinary course of business with customers, suppliers and
service providers. The Company also indemnifies its directors and officers in
accordance with the terms of its bylaws. The Company cannot predict the maximum
potential amount of future payments, if any, that may be required under these or
similar indemnifications, due to the conditional nature of the Company's
obligations and the unique facts and circumstances involved.

At February 1, 2004, the Company had outstanding letters of credit totaling
$7,471,000. Of this amount, $7,151,000 represents letters of credit issued
primarily to ensure payment by the Company of possible casualty and workers'
compensation claims. The remaining $320,000 represents primarily letters of
credit provided in lieu of security deposits for leases on certain stores
operated by a joint venture. Letters of credit have terms of one year or less.

In connection with the Company's acquisition of an additional interest in Glazed
Investments in fiscal 2003, the Company entered into a put option agreement with
certain members of management of Glazed Investments who collectively own an
approximate 22% interest in the joint venture. The agreement gives each of these
members of management the option to sell to the Company ultimately up to 100% of
their respective interest in Glazed Investments during certain defined exercise
periods, subject to certain limitations. The purchase price for the individual's
respective interest is determined based upon a formula defined in the agreement,
which is generally based upon earnings growth and cash flows of Glazed
Investments' operations. The options become exercisable, in part, beginning in
April 2004. If exercised, the Company has the option to pay the purchase price
in cash or shares of the Company's common stock. The Company cannot estimate the
likelihood of any of the options being exercised or the maximum amount the
Company would be required to pay upon exercise.

In the normal course of business, the Company is exposed to the impact of
commodity price fluctuations affecting the cost of flour, sugar, soybean oil,
coffee beans and other ingredients. In order to secure adequate supplies of
product and bring greater stability to the cost of ingredients, the Company
routinely enters into long-term purchase agreements and other purchase
arrangements with its suppliers. These commitments generally range from one to
three years. As of February 1, 2004, the Company had approximately $114,254,000
in such long-term purchase commitments. Because the Company enters into these
long-term contracts with its suppliers, in the event that any of these
relationships terminate unexpectedly, even where it has

                                        63


multiple suppliers for the same ingredient, the Company's ability to obtain
adequate quantities of the same high quality ingredient at the same competitive
price could be negatively impacted.

18. JOINT VENTURES

From time to time, the Company enters into joint venture agreements with
partners to develop and operate Krispy Kreme stores. Each party's investment is
determined based on their proportionate share of equity obtained. The Company's
ability to control the management committee of the joint venture is the primary
determining factor as to whether or not the joint venture results are
consolidated with the Company. See "Basis of Consolidation" under Note
2 -- Nature of Business and Significant Accounting Policies.

At February 1, 2004, the Company had invested in 17 area developer joint
ventures and held interests ranging from 25.0% to 74.7%. The Company will
continue to seek opportunities to develop markets through joint ventures or to
increase its ownership in existing joint ventures when there are sound business
reasons to do so.

CONSOLIDATED JOINT VENTURES

On March 22, 2000, the Company entered into a joint venture, Golden Gate, to
develop the Northern California market. The Company invested $2,060,000 for a
59% interest and held two of the joint venture's three management committee
seats. Effective March 5, 2002, the Company increased its ownership interest in
Golden Gate to 67% by acquiring the ownership interests of 5% and 3% held by the
KKEG and Mr. Livengood, respectively (see Note 16 -- Related Party
Transactions). Effective January 30, 2004, the Company acquired the remaining
33% minority interest in Golden Gate (see Note 20 -- Acquisitions). Prior to
acquiring the remaining minority interest effective January 30, 2004, the
financial statements of Golden Gate were consolidated with the results of the
Company, with the 33% not owned by the Company included in minority interest.
The Company also guaranteed payments on several of Golden Gate's real estate
leases and provided guarantees of 67% of Golden Gate's outstanding bank debt. As
discussed in Note 8 -- Debt, this bank debt was repaid in full on October 31,
2003 through borrowings under the Company's Revolver.

On February 27, 2000, the Company entered into a joint venture, Glazed
Investments, to develop the Colorado, Minnesota and Wisconsin markets. The
Company invested $500,000 for a 22.3% interest and held two of the joint
venture's six management committee seats. Effective March 5, 2002, the Company
increased its ownership interest in Glazed Investments by acquiring the
ownership interests of 5% and 3% held by the KKEG and Mr. Livengood,
respectively (see Note 16 -- Related Party Transactions). Effective August 22,
2002, the Company acquired an additional 44.4% interest in Glazed Investments,
increasing its total investment in this joint venture to 74.7%. Effective with
the acquisition in August 2002, the Company gained the right to designate four
of the six management committee seats. As a result, the Company gained the
ability to control the operations of the joint venture and, therefore, began
consolidating the financial statements of Glazed Investments with those of the
Company effective August 22, 2002. As a result of the Company's acquisitions of
additional interests in Glazed Investments in fiscal 2003, the interest in the
joint venture not owned by the Company, included in minority interest in the
consolidated balance sheet, was reduced to 25.3%. The Company has guaranteed
74.7% of the amounts outstanding on certain bank and non-bank debt of Glazed
Investments (see Note 8 -- Debt).

On March 6, 2001, the Company entered into a joint venture, Freedom Rings, to
develop the Eastern Pennsylvania, Delaware and Southern New Jersey markets. The
Company invested $1,167,000 for a 70% interest and holds three of four
management committee seats. The financial statements of this joint venture are
consolidated with those of the Company and the 30% not owned by the Company is
included in minority interest. The Company has guaranteed 70% of the payments on
certain real estate leases of Freedom Rings. The original terms of the
guarantees range from seven to ten years. The Company also previously provided
guarantees of 70% of Freedom Rings' outstanding bank debt. As discussed in Note
8 -- Debt, this bank debt was repaid in full on October 31, 2003 through
borrowings under the Company's Revolver.

SUMMARIZED INFORMATION FOR THE COMPANY'S INVESTMENTS IN CONSOLIDATED JOINT
VENTURES AS OF FEBRUARY 1, 2004, INCLUDING OUTSTANDING LOAN AND LEASE
GUARANTEES, IS AS FOLLOWS:



- ----------------------------------------------------------------------------------------------------------------------------
                                                              NUMBER OF                                 IN THOUSANDS
                                                             STORES AS OF       OWNERSHIP %     ----------------------------
                                                          FEBRUARY 1, 2004/   ---------------       LOAN/
                              GENERAL GEOGRAPHICAL        TOTAL STORES TO BE           THIRD        LEASE        FISCAL 2004
                                     MARKET                 DEVELOPED (1)     KKDC    PARTIES   GUARANTEES (2)    REVENUES
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                               
Freedom Rings, LLC       Eastern Pennsylvania, Delaware,         7/28          70.0%   30.0%       $ 1,049         $19,742
                               Southern New Jersey        Manager Allocation      3       1

Glazed Investments, LLC       Colorado, Minnesota,              17/46          74.7%   25.3%       $15,357         $39,637
                                    Wisconsin             Manager Allocation      4       2


(1) The amount shown as "Total Stores to be Developed" represents the number of
    stores in the initial development agreement with the joint venture, as
    amended, as well as commissary locations which have been opened. The number
    of stores in the initial development agreement will be re-evaluated as the
    market is developed and the number of stores to be opened may change.

(2) Outstanding debt amounts are reflected in Note 8 -- Debt. The gross amount
    of commitments under leases is included in the future minimum annual rental
    commitments disclosed in Note 9 -- Lease Commitments.

                                        64


EQUITY METHOD JOINT VENTURES

As of February 1, 2004, the Company had invested in 15 joint ventures as a
minority interest party. Investments in these joint ventures have been made in
the form of capital contributions and/or notes receivable. Notes receivable bear
interest, payable semi-annually, at rates ranging from 5.5% to 10.0% per annum,
and have maturity dates ranging from October 2010 to the dissolution of the
joint venture. These investments and notes receivable are recorded in
investments in unconsolidated joint ventures in the consolidated balance sheets.

INFORMATION RELATED TO THE MARKETS, OWNERSHIP INTERESTS AND MANAGER ALLOCATIONS
FOR JOINT VENTURES WHICH ARE ACCOUNTED FOR BY THE EQUITY METHOD IS SUMMARIZED AS
FOLLOWS:



- ----------------------------------------------------------------------------------------------------------
                                                                        NUMBER OF
                                                                       STORES AS OF         OWNERSHIP %
                                                                    FEBRUARY 1, 2004/     ----------------
                                         GENERAL GEOGRAPHICAL       TOTAL STORES TO BE              THIRD
                                                MARKET                DEVELOPED (1)       KKDC     PARTIES
- ----------------------------------------------------------------------------------------------------------
                                                                                       
A-OK, LLC                                 Arkansas, Oklahoma               4/10           30.3%    69.7%
                                                                    Manager Allocation      2        4
Amazing Glazed, LLC                   Pennsylvania (Pittsburgh)            8/9            30.3%    69.7%
                                                                    Manager Allocation      2        4
Amazing Hot Glazers, LLC                 Pennsylvania (Erie)               2/5            33.3%    66.7%
                                                                    Manager Allocation      2        4
Entrepreneurship and Economic               North Carolina                 1/1            49.0%    51.0%
  Development Investment, LLC                (Greensboro)           Manager Allocation      1        1

KK-TX I, L.P.                         Texas (Amarillo, Lubbock)            2/2            33.3%    66.7%
                                                                    Manager Allocation    --(2)    --(2)
KK Wyotana, LLC                            Wyoming, Montana                0/4            33.3%    66.7%
                                                                    Manager Allocation     --        1
KKNY, LLC                                   New York City,                 7/25           30.3%    69.7%
                                         Northern New Jersey        Manager Allocation      2        4
KremeKo, Inc.                         Central and Eastern Canada          12/33           40.6%    59.4%
                                                                    Manager Allocation    2(3)      9(3)
KremeWorks, LLC                        Alaska, Hawaii, Oregon,            11/31           25.0%    75.0%
                                      Washington, Western Canada    Manager Allocation      1        3
Krispy Kreme Australia Pty Limited            Australia/                   3/31           35.0%    65.0%
                                             New Zealand            Manager Allocation      2        3
Krispy Kreme of South Florida, LLC         Southern Florida                5/11           35.3%    64.7%
                                                                    Manager Allocation      2        3
Krispy Kreme U.K. Limited                  United Kingdom,                 2/26           35.1%    64.9%
                                         Republic of Ireland        Manager Allocation      3        3
Krispy Kreme Mexico, S. de R.L. de              Mexico                     2/21           30.0%    70.0%
  C.V.                                                              Manager Allocation      2        3

New England Dough, LLC                   Connecticut, Maine,               6/23           57.0%(4) 43.0%
                                         Massachusetts, Rhode       Manager Allocation      2        2
                                               Island,
                                        New Hampshire, Vermont
PRIZ Doughnuts, LP                         Texas (El Paso)                 1/3            33.3%    66.7%
                                        Mexico (Ciudad Juarez)      Manager Allocation    --(2)    --(2)


(1) The amount shown as "Total Stores to be Developed" represents the number of
    stores in the initial development agreement with the joint venture as well
    as commissary locations which have been opened. The number of stores in the
    initial development agreement, as amended, will be re-evaluated as the
    market is developed and the number of stores to be opened may change.
    Additionally, the Company is in the process of entering into development
    agreements for smaller markets with certain of these joint ventures.

(2) KK-TX I, L.P. and PRIZ Doughnuts, LP are limited partnerships. The Company
    holds a 33.3% interest in each of these joint ventures as a limited partner.
    Under the terms of the partnership agreements, the general partner has full
    responsibility for managing the business of the partnership.

(3) KremeKo's shareholders' agreement requires that its board consist of eleven
    directors. The Company has the right to designate two of the directors and
    three other shareholders each have the right to designate one director. The
    remaining six directors are nominated by the board and elected by the
    shareholders.

(4) Although the Company's ownership interest in New England Dough exceeds 50%,
    the Company has historically accounted for this interest under the equity
    method as the Company does not have the ability to designate a majority of
    the members of the joint venture's management committee. As discussed in
    "Recent Accounting Pronouncements" under Note 2 -- Nature of Business and
    Significant Accounting Policies, the Company has determined that the
    provisions of FIN 46-R require the Company to begin consolidating the
    accounts of New England Dough with those of the Company effective in the
    first quarter of fiscal 2005.

                                        65


INFORMATION RELATED TO THE COMPANY'S INVESTMENT, AS WELL AS SUMMARIZED FINANCIAL
INFORMATION AS OF FEBRUARY 1, 2004, FOR EACH JOINT VENTURE ACCOUNTED FOR BY THE
EQUITY METHOD IS AS FOLLOWS:



                                                                                                   In Thousands
- ---------------------------------------------------------------------------------------------------------------
                                       SUMMARY FINANCIAL INFORMATION (1)
- ---------------------------------------------------------------------------------------------------------------
                                                                    NET                              INVESTMENT
                                                         NET      INCOME/    TOTAL        TOTAL      AND NOTES
                                                        SALES     (LOSS)     ASSETS    LIABILITIES   IN JV (2)
- ---------------------------------------------------------------------------------------------------------------
                                                                                      
A-OK, LLC                                              $ 13,668   $ 1,466   $  7,398    $  7,275      $   294
Amazing Glazed, LLC                                      16,076       666     13,732      12,917          326
Amazing Hot Glazers, LLC                                  2,209       (13)     4,690       4,503          162
Entrepreneurship and Economic Development Investment,
  LLC                                                       911      (269)     1,336         224          544
KK-TX I, L.P.                                             3,357       (66)     3,284       3,512         (156)
KK Wyotana, LLC (3)                                          --        --         --          --           --
KKNY, LLC                                                25,853    (2,688)    18,545      14,330          238
KremeKo, Inc.                                            20,926    (2,070)    25,835      12,539        6,599
KremeWorks, LLC                                          28,326       669     28,165      22,373          338
Krispy Kreme Australia Pty Limited                        6,849    (2,692)    12,683       9,467        1,074
Krispy Kreme of South Florida, LLC                       12,414       624      9,600       9,753           --
Krispy Kreme U.K. Limited                                   928    (3,260)     5,834       1,003        1,685
Krispy Kreme Mexico, S. de R.L. de C.V.                      --      (647)     4,716       1,785          681
New England Dough, LLC                                   13,832       467     13,418      12,316          641
Priz Doughnuts, LP                                          306        29      2,298       2,190           --
                                                       ------------------------------------------------------
        Total                                          $145,655   $(7,784)  $151,534    $114,187      $12,426
                                                       ------------------------------------------------------


(1) The net sales and net income (loss) shown for each of these joint ventures
    represents the amounts reported by the joint ventures for the period
    corresponding with the Company's fiscal year end, February 1, 2004, and the
    amounts shown as total assets and total liabilities represent the
    corresponding amounts reported by each of the joint ventures at February 1,
    2004.

(2) This amount represents the Company's investment in the joint venture plus
    the Company's portion of the joint venture's income or loss to date, net of
    distributions received. For KK-TX I, L.P., the Company's share of the
    cumulative net loss of this joint venture exceeds its capital contribution.
    The Company has recorded the full loss attributable to its interest in the
    joint venture as it believes operations will become profitable in the
    short-term and the investments will be recovered.

(3) Operating activities for KK Wyotana, LLC have not yet commenced.

The Company is a guarantor of debt and lease obligations for various joint
ventures accounted for under the equity method. The debt is also collateralized
by the assets of the joint venture. These guarantees are not recorded as
liabilities in the consolidated balance sheet based on the Company's assessment
that the fair value of these guarantees, if any, was not material to the
Company's financial position or results of operations. To date the Company has
not experienced any losses in connection with these guarantees. The terms of the
guarantees range from four to 20 years.

THE FOLLOWING TABLE SUMMARIZES THE COMPANY'S OBLIGATIONS UNDER THESE GUARANTEES
AS OF FEBRUARY 1, 2004 AND THE AGGREGATE MATURITIES FOR THE FIVE FISCAL YEARS
ENDING AFTER FEBRUARY 1, 2004:


                                                              In Thousands, Except Percentages
- ----------------------------------------------------------------------------------------------
                                         TOTAL LOAN/             AMOUNTS EXPIRING IN
                            GUARANTEE       LEASE      ---------------------------------------
                           PERCENTAGES   GUARANTEES    FISCAL 2005   FISCAL 2006   FISCAL 2007
- ----------------------------------------------------------------------------------------------
                                                                    
A-OK, LLC                     22.3%        $ 1,320       $  160        $   94        $  102
Amazing Hot Glazers, LLC      33.3%            948           54            82            87
KK-TX I, L.P.                 33.3%            612           38            41            44
KremeKo, Inc.             34.0% - 36.2%      2,036          374           427           341
Krispy Kreme Australia
  Pty Limited                 35.0%          1,994          158           332           333
Krispy Kreme of South
  Florida, LLC                35.3%          1,694          148           155           164
New England Dough, LLC    54.0% - 60.0%      6,206        3,755           669           648
                          --------------------------------------------------------------------
        Total                              $14,810       $4,687        $1,800        $1,719
                          --------------------------------------------------------------------


                                In Thousands, Except Percentages
                          --------------------------------------
                                   AMOUNTS EXPIRING IN
                          --------------------------------------
                          FISCAL 2008   FISCAL 2009   THEREAFTER
                          --------------------------------------
                                             
A-OK, LLC                   $  112        $  105        $  747
Amazing Hot Glazers, LLC        90            93           542
KK-TX I, L.P.                   48            52           389
KremeKo, Inc.                  348           217           329
Krispy Kreme Australia
  Pty Limited                  332           332           507
Krispy Kreme of South
  Florida, LLC                 175           118           934
New England Dough, LLC         648           486            --
                          --------------------------------------------------------------------

        Total               $1,753        $1,403        $3,448
                          --------------------------------------------------------------------



                                        66


19. LEGAL CONTINGENCIES

On March 9, 2000, a lawsuit was filed against the Company, management and Golden
Gate in Superior Court in the State of California. The lawsuit was filed as a
result of joint venture discussions between the Company and the plaintiffs to
develop the Northern California market. The plaintiffs were offered to
participate in the Northern California joint venture but declined. They instead
brought suit contending that they had a right to a larger percent of the joint
venture and on different terms. The plaintiffs alleged, among other things,
breach of contract and sought compensation for damages and punitive damages. In
September 2000, after the case was transferred to Sacramento Superior Court,
that court granted the motion to compel arbitration of the action and stay the
lawsuit pending the outcome of arbitration. In October 2001, after an appeal to
the California appellate courts, plaintiffs filed a demand for arbitration with
the American Arbitration Association against KKDC, Golden Gate and others. In
February 2003, after an extended series of arbitration hearings, the Arbitration
Panel dismissed all claims against all parties, except the claim for breach of
contract against KKDC and Golden Gate. The Arbitration Panel entered a
preliminary award of $7,925,000 against KKDC and Golden Gate, which was
substantially less than the damages claimed. The Company accrued a provision of
$9,075,000 in fiscal 2003, which consisted of the preliminary award and an
estimate of the anticipated award of legal fees and other costs. After further
negotiations, all claims were settled for $8,550,000, and the settlement was
completed in May 2003. The accompanying statement of operations for fiscal 2004
reflects the $525,000 reversal of the accrual in conjunction with the
settlement. While the Company continues to discuss potential joint ventures with
others to develop markets, the Company does not expect to have exposure from
similar situations.

The Company is engaged in various legal proceedings incidental to its normal
business activities. In the opinion of management, the outcome of these matters
is not expected to have a material effect on the Company's consolidated
financial statements.

20. ACQUISITIONS

The Company from time to time acquires market rights from either Associate or
Area Developer franchisees if they are willing to sell to the Company and if
there are sound business reasons for the Company to make the acquisition. These
reasons may include a franchise market being contiguous to a Company store
market where an acquisition would provide operational synergies; upside
opportunity in the market because the franchisee has not fully developed
on-premises or off-premises sales; or if the Company believes an acquisition of
the market would improve the brand image in the market. The purchase price for
each acquisition is based upon an analysis of historical performance as well as
estimates of future revenues and earnings in the respective markets acquired.

Effective February 3, 2003, the Company acquired the market rights to Broward
County, Florida, as well as the related assets, from an Associate franchisee in
exchange for cash of $1,532,000. The Company simultaneously sold these rights
and related assets, as well as the assets associated with another Company store
in Miami, to Krispy Kreme of South Florida, LLC, an Area Developer franchisee in
which the Company has a 35.3% ownership interest. This joint venture has the
market rights for various counties in Southern Florida and the franchise rights
and related assets are in contiguous markets. In exchange for the market rights
and assets sold, the Company received promissory notes totaling $3,551,000. The
notes require monthly payments of interest only until maturity, May 2, 2005, at
which time all outstanding principal and interest is due. The purchase price was
based upon the book value of the market rights and assets sold, which
approximated fair value.

Effective March 10, 2003, the Company acquired the rights to certain franchise
markets in Kansas and Missouri, as well as the related assets, which included
five stores, from an Area Developer franchisee in exchange for cash of
$32,992,000. At the time of the acquisition, this Area Developer franchisee was
owned, in part, by an officer of the Company. The purchase price was allocated
to accounts receivable -- $301,000, inventories -- $128,000, property and
equipment -- $5,068,000, other assets -- $11,000, accrued expenses -- $59,000
and reacquired franchise rights, an intangible asset not subject to
amortization -- $27,543,000.

Effective June 30, 2003, the Company acquired the rights to certain franchise
markets in Dallas, Texas and Shreveport, Louisiana, as well as the related
assets, which included six stores, from Associate franchisees, including Joseph
A. McAleer, a former officer and director of the Company, and Steven D. Smith,
an emeritus director. The total purchase price for this acquisition was
$67,466,000, which was funded through a combination of cash and the proceeds
from a $55,000,000 short-term promissory note with a bank, which has since been
replaced with long-term financing (see Note 8 -- Debt). The purchase price was
allocated to accounts receivable -- $1,526,000, inventory -- $187,000, property
and equipment -- $12,053,000, accrued expenses -- $300,000 and reacquired
franchise rights -- $54,000,000.

Effective October 27, 2003, the Company acquired the rights to certain franchise
markets in Michigan, as well as the related assets, which included five stores,
from an Area Developer franchisee in exchange for 443,917 shares of common
stock, valued at approximately $18,540,000, a promissory note in the amount of
$11,286,000 and cash of $2,280,000. The promissory note was paid in full and
canceled in January 2004. The purchase price was preliminarily allocated to
accounts receivable -- $642,000, inventory -- $144,000, prepaid
expenses -- $157,000, property and equipment -- $2,808,000, accrued
expenses -- $1,131,000 and reacquired franchise rights -- $29,486,000.

Effective January 30, 2004, the Company acquired the remaining 33% minority
interest in Golden Gate, the Area Developer franchisee for Northern California,
for $16,840,000. Prior to the acquisition, the Company consolidated the assets,
liabilities

                                        67


and operating results of Golden Gate with those of the Company, as it owned a
controlling interest in Golden Gate, with the 33% interest that the Company did
not own included in minority interest. As a result of the acquisition, the
Company now owns 100% of the rights to this market. The Company determined that
the fair value of the net assets of Golden Gate as of the effective date of the
acquisition approximated book value. Accordingly, the purchase price was
preliminarily allocated primarily to minority interest, eliminating this
liability related to the Company's investment in Golden Gate prior to the
acquisition, and reacquired franchise rights, which approximated $13,177,000.

On April 7, 2003, the Company completed the acquisition of Montana Mills Bread
Co., Inc. ("Montana Mills"), an owner and operator of upscale "village bread
stores" in the Northeastern United States. Montana Mills' stores produce and
sell a variety of breads and baked goods prepared in an open-view format. In
addition to providing operating synergies, the acquisition of Montana Mills is
expected to provide the Company with the ability to leverage its existing
capabilities, such as its distribution chain, off-premises sales and
coffee-roasting expertise, in order to expand Montana Mills' business.

Under the terms of the Merger Agreement, the Company issued approximately
1,224,400 shares of common stock in exchange for all outstanding shares of
Montana Mills' common stock. The Company also issued approximately 22,500 shares
of common stock to holders of convertible debt previously issued by Montana
Mills. Although Montana Mills had redeemed the convertible debt prior to the
acquisition, the Company agreed to issue the shares that would have been
issuable upon conversion of a portion of the convertible debt in exchange for a
cash payment equal to the principal amount of the debt being converted,
including the prepayment premium, totaling $773,000. The shares issued in
exchange for Montana Mills' outstanding shares were valued at approximately
$37,800,000, based on the closing price of the Company's common stock for a
range of trading days around the announcement date, January 24, 2003. The
Company also assumed options and warrants to purchase approximately 460,500
shares of common stock which were valued at approximately $2,000,000.

The purchase price of Montana Mills was allocated to the assets acquired and
liabilities assumed based upon an independent valuation, as follows: cash and
cash equivalents -- $3,303,000; accounts receivable -- $74,000; inventories --
$294,000; prepaid expenses -- $277,000; income taxes refundable -- $41,000;
current deferred income taxes -- $2,250,000; property and equipment --
$4,207,000; other assets -- $104,000; accounts payable -- $984,000; accrued
expenses -- $1,509,000; current maturities of long-term debt -- $29,000;
long-term debt -- $9,000; other long-term obligations -- $118,000; trademarks
and trade names -- $11,300,000; recipes -- $876,000 and goodwill -- $19,664,000.

The following unaudited pro forma financial information presents the combined
results of Krispy Kreme Doughnuts, Inc., the franchise markets acquired and
Montana Mills as if these acquisitions discussed above had occurred as of the
beginning of the periods presented. The unaudited pro forma financial
information is not intended to represent or be indicative of the consolidated
results of operations of the Company that would have been reported had the
acquisitions been completed as of the dates presented, and should not be taken
as representative of the future consolidated results of operations of the
Company.



                                                        In Thousands, Except Per Share Amounts
- ----------------------------------------------------------------------------------------------
                                                              FEB. 2, 2003        FEB. 1, 2004
- ----------------------------------------------------------------------------------------------
                                                                        (Unaudited)
                                                                            
Total revenues                                                  $535,442            $679,345
Net income                                                      $ 37,486            $ 57,001
Diluted earnings per share                                      $   0.61            $   0.91


The unaudited pro forma financial information presented above includes the
revenues and net income or loss of franchise markets acquired and Montana Mills.
Adjustments to the combined amounts were made to eliminate franchise fees and
royalties previously earned by the Company from the acquired franchise
operations for the periods presented, as well as to eliminate KKM&D revenues and
corresponding expenses resulting from sales to these operations. The results of
operations for Montana Mills for fiscal 2004 includes a charge related to
Montana Mills' decision to close eight stores which were either underperforming
or located in markets where Montana Mills' penetration was generally weaker. The
charge included lease termination costs, provisions to reduce the carrying
amount of leasehold improvements and related store furnishings and equipment to
estimated net realizable values and various other expenses associated with the
closing of the stores. All stores were closed prior to April 7, 2003, the
effective date of the Company's acquisition.

                                        68


KRISPY KREME DOUGHNUTS, INC.
REPORT OF INDEPENDENT AUDITORS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KRISPY KREME DOUGHNUTS, INC.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Krispy Kreme
Doughnuts, Inc. and its subsidiaries (the Company) at February 2, 2003 and
February 1, 2004, and the results of their operations and their cash flows for
each of the three years in the period ended February 1, 2004, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, effective
February 4, 2002, the Company changed its method of accounting for goodwill and
other intangible assets to conform to Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."

Greensboro, North Carolina
March 31, 2004

                                        69

EX-21

                                                                    EXHIBIT 21.1

                              LIST OF SUBSIDIARIES

                                                          STATE OF INCORPORATION
SUBSIDIARY                                                OR ORGANIZATION

Krispy Kreme Doughnut Corporation                         North Carolina
Krispy Kreme Distributing Company, Inc.                   North Carolina
Krispy Kreme Coffee Company, LLC                          North Carolina
Krispy Kreme Mobile Store Company                         North Carolina
Golden Gate Doughnuts, LLC                                North Carolina
North Texas Doughnuts, L.P.                               Texas
HD Capital Corporation                                    Delaware
HDN Development Corporation                               Kentucky
Panhandle Doughnuts, LLC                                  North Carolina
Krispy Kreme International Ltd.                           Switzerland
Hot Doughnuts Now International Ltd.                      Switzerland
Krispy Kreme Canada, Inc.                                 North Carolina
Montana Mills Bread Co., Inc.                             Delaware
Montana Mills Bread Co. of Syracuse, Inc.                 New York
Montana Mills Bread Co. of Canandaigua, Inc.              New York
Western Bakeries, Inc.                                    Delaware
Montana Mills Bread Co. of Liverpool, Inc.                New York
Montana Mills Bread Co. of Albany, Inc.                   New York
Montana Mills Bread Co. of Park Avenue, Inc.              New York
Montana Mills Bread Co. of Fairmont, Inc.                 New York
Montana Mills Bread Co. of Webster, Inc.                  New York
Montana Mills Bread Co. of Brighton, Inc.                 New York
Montana Mills Bread Co. of Corning, Inc.                  New York
Montana Mills Bread Co. of Greece, Inc.                   New York
Montana Mills Bread Co. of North Buffalo, Inc.            New York
Montana Mills Bread Co. of Latham, Inc.                   New York
Montana Mills Bread Co. of East Aurora, Inc.              New York
Montana Mills Bread Co. of Horseheads, Inc.               New York
Montana Mills Bread Co. of Brockport, Inc.                New York
Montana Mills Bread Co. of Pittsford, Inc.                New York
Montana Mills Bread Co. of Vestal, Inc.                   New York
Montana Mills Bread Co. of Monroeville, Inc.              New York
Montana Mills Bread Co. of Peninsula Plaza, Inc.          Pennsylvania
Montana Mills Bread Co. of Rochester, Inc.                New York
Montana Mills Bread Co. of Schenectady, Inc.              New York
Montana Mills Bread Co. of Scranton, Inc.                 Pennsylvania
Montana Mills Bread Co. of Erie, PA, Inc.                 Pennsylvania
Montana Mills Bread Co. of Ohio, Inc.                     Ohio
Montana Mills Bread Co. of Worthington, Inc.              Ohio
Montana Mills Bread Co. of Bexley, Inc.                   Ohio
Montana Mills Bread Co. of Connecticut, Inc.              Connecticut
Montana Mills Bread Co. of West Hartford, Inc.            Connecticut
Montana Mills Bread Co. of Fairfield, Inc.                Connecticut
Montana Mills Bread Co., Inc.                             New York
Java Joes Public Market Roastery, Inc.                    New York
Montana Mills Bread Co. of Buffalo, Inc.                  New York
Freedom Rings, LLC (1)                                    Delaware
Glazed Investments, LLC (1)                               Delaware
New England Dough, LLC (1)                                Rhode Island

- -----------------

(1) Franchisees in which the registrant held a majority equity interest as of
    February 1, 2004.

EX-23

                                                                      Exhibit 23

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 333-38236, 333-38250, 333-47326, 333-87092,
333-97787, 333-106933), S-4 (No. 333-103434) and all post-effective amendments
thereto and S-3 (Nos. 333-70336, 333-101365, 333-99211, 333-88758, 333-105173,
333-110034) of Krispy Kreme Doughnuts, Inc. of our report dated March 31, 2004
relating to the financial statements, which appears in the Annual Report to
Shareholders, which is incorporated in this Annual Report on Form 10-K. We also
consent to the incorporation by reference of our report dated March 31, 2004
relating to the financial statement schedule, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

Greensboro, North Carolina
April 16, 2004

EX-31.1

                                                                    Exhibit 31.1

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER

   I, Scott A. Livengood, President and Chief Executive Officer of Krispy Kreme
Doughnuts, Inc., certify that:

     1.   I have reviewed this annual report on Form 10-K of Krispy Kreme
Doughnuts, Inc.;

     2.   Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;

     3.   Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

     4.   The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

          a)   designed such disclosure controls and procedures, or caused such
               disclosure controls and procedures to be designed under our
               supervision, to ensure that material information relating to the
               registrant, including its consolidated subsidiaries, is made
               known to us by others within those entities, particularly during
               the period in which this report is being prepared;

          b)   evaluated the effectiveness of the registrant's disclosure
               controls and procedures and presented in this report our
               conclusions about the effectiveness of the disclosure controls
               and procedures, as of the end of the period covered by this
               report based on such evaluation; and

          c)   disclosed in this report any change in the registrant's internal
               control over financial reporting that occurred during the
               registrant's most recent fiscal quarter (the registrant's fourth
               fiscal quarter in the case of an annual report) that has
               materially affected, or is reasonable likely to materially
               affect, the registrant's internal control over financial
               reporting; and

     5.   The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):

          a)   All significant deficiencies and material weaknesses in the
               design or operation of internal control over financial reporting
               which are reasonably likely to adversely affect the registrant's
               ability to record, process, summarize and report financial
               information; and

          b)   Any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal control over financial reporting.

                                           Date: April 16, 2004

                                           /s/ Scott A. Livengood
                                           -------------------------------------
                                           Scott A. Livengood
                                           President and Chief Executive Officer

EX-31.2

                                                                    Exhibit 31.2

                    CERTIFICATION OF CHIEF FINANCIAL OFFICER

    I, Michael C. Phalen, Chief Financial Officer of Krispy Kreme Doughnuts,
Inc., certify that:

     1.   I have reviewed this annual report on Form 10-K of Krispy Kreme
Doughnuts, Inc.;

     2.   Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;

     3.   Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

     4.   The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

          a)   designed such disclosure controls and procedures, or caused such
               disclosure controls and procedures to be designed under our
               supervision, to ensure that material information relating to the
               registrant, including its consolidated subsidiaries, is made
               known to us by others within those entities, particularly during
               the period in which this report is being prepared;

          b)   evaluated the effectiveness of the registrant's disclosure
               controls and procedures and presented in this report our
               conclusions about the effectiveness of the disclosure controls
               and procedures, as of the end of the period covered by this
               report based on such evaluation; and

          c)   disclosed in this report any change in the registrant's internal
               control over financial reporting that occurred during the
               registrant's most recent fiscal quarter (the registrant's fourth
               fiscal quarter in the case of an annual report) that has
               materially affected, or is reasonable likely to materially
               affect, the registrant's internal control over financial
               reporting; and

     5.   The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):

          a)   All significant deficiencies and material weaknesses in the
               design or operation of internal control over financial reporting
               which are reasonably likely to adversely affect the registrant's
               ability to record, process, summarize and report financial
               information; and

          b)   Any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal control over financial reporting.

                                                       Date: April 16, 2004

                                                       /s/ Michael C. Phalen
                                                       -------------------------
                                                       Michael C. Phalen
                                                       Chief Financial Officer

EX-32.1

                                                                    EXHIBIT 32.1

                                  CERTIFICATION
                       PURSUANT TO 18 U.S.C Section 1350,
                    AS ADOPTED PURSUANT TO SECTION 906 OF THE
                           SARBANES-OXLEY ACT OF 2002


     I, Scott A. Livengood, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
accompanying Annual Report on Form 10-K of Krispy Kreme Doughnuts, Inc. (the
"Company") for the fiscal year ended February 1, 2004 fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and the
information contained in such report fairly presents, in all material respects,
the financial condition and results of operations of the Company.

                                           Date: April 16, 2004

                                           /s/ Scott A. Livengood
                                           -------------------------------------
                                           Scott A. Livengood
                                           President and Chief Executive Officer

This certification shall not be deemed to be "filed" for the purpose of Section
18 of the Securities Exchange Act of 1934, as amended, and will not be
incorporated by reference into any registration statement filed under the
Securities Act of 1933, as amended, unless specifically identified therein as
being incorporated therein by reference.

A signed original of this written statement required by Section 906 has been
provided to Krispy Kreme Doughnuts, Inc. and will be retained by Krispy Kreme
Doughnuts, Inc. and furnished to the Securities and Exchange Commission or its
staff upon request.

EX-32.2

                                                                    EXHIBIT 32.2

                                  CERTIFICATION
                       PURSUANT TO 18 U.S.C Section 1350,
                    AS ADOPTED PURSUANT TO SECTION 906 OF THE
                           SARBANES-OXLEY ACT OF 2002


     I, Michael C. Phalen, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
accompanying Annual Report on Form 10-K of Krispy Kreme Doughnuts, Inc. (the
"Company") for the fiscal year ended February 1, 2004 fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and the
information contained in such report fairly presents, in all material respects,
the financial condition and results of operations of the Company.

                                                       Date: April 16, 2004

                                                       /s/ Michael C. Phalen
                                                       -------------------------
                                                       Michael C. Phalen
                                                       Chief Financial Officer

This certification shall not be deemed to be "filed" for the purpose of Section
18 of the Securities Exchange Act of 1934, as amended, and will not be
incorporated by reference into any registration statement filed under the
Securities Act of 1933, as amended, unless specifically identified therein as
being incorporated therein by reference.

A signed original of this written statement required by Section 906 has been
provided to Krispy Kreme Doughnuts, Inc. and will be retained by Krispy Kreme
Doughnuts, Inc. and furnished to the Securities and Exchange Commission or its
staff upon request.