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.



<PAGE>



                  (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

<PAGE>



                  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

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