The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the 2008 Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 28, 2008 ("2008 Form 10-K"), filed with the Securities and Exchange Commission ("SEC") on February 26, 2009. The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). All amounts are expressed in Canadian dollars unless otherwise noted. The following discussion includes forward-looking statements that are not historical facts but reflect our current expectation regarding future results. Actual results may differ materially from the results discussed in the forward-looking statements because of a number of risks and uncertainties, including the matters discussed below. Please refer to "Risk Factors" included in our 2008 Form 10-K and as set forth in our Safe Harbor statement attached hereto as Exhibit 99, as well as our other descriptions of risks and updated Risk Factors set forth in this Form 10-Q, for a further description of risks and uncertainties affecting our business and financial results. Historical trends should not be taken as indicative of future operations and financial results.

Our financial results are driven largely by changes in systemwide sales, which include restaurant-level sales at both franchised and Company-operated restaurants. As of September 27, 2009, 3,504 or 99.3% of our restaurants were franchised, representing 99.4% in Canada and 99.1% in the U.S. The amount of systemwide sales affects our franchise royalties and rental revenue, as well as our distribution sales. Changes in systemwide sales are driven by changes in average same-store sales and changes in the number of restaurants. Average same-store sales, one of the key metrics we use to assess our performance, provides information on total retail sales at restaurants operating systemwide throughout the relevant period and provides a useful comparison between periods. We believe systemwide sales and average same-store sales provide meaningful information to investors concerning the size of our system, the overall health of the system, and the strength of our brand and franchisee base, which ultimately impacts our consolidated and segment financial performance. Franchise restaurant sales generally are not included in our Condensed Consolidated Financial Statements (except for restaurants consolidated in accordance with ASC 810-Consolidation ("ASC 810") (formerly Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 46R-Consolidation of Variable Interest Entities-an interpretation of ARB No. 51 (revised December 2003) ("FIN 46R")); however, franchise restaurant sales result in royalties and rental revenue, which are included in our franchise revenues, and also impacts distribution sales.

This Management's Discussion and Analysis of Financial Condition and Results of Operations may contain certain non-GAAP financial measures, which do not have a standardized meaning prescribed by U.S. GAAP, to assist readers in understanding the Company's performance. Non-GAAP financial measures are measures that either exclude or include amounts that are not excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with GAAP and a reconciliation to GAAP measures.

References herein to "Tim Hortons," the "Company," "we," "our," or "us" refer to Tim Hortons Inc., a Delaware corporation and its subsidiaries ("THI USA"), for periods on or before September 27, 2009 and to Tim Hortons Inc., a corporation incorporated under the Canada Business Corporations Act and its subsidiaries ("New THI"), for periods on or after September 28, 2009, unless specifically noted otherwise.

Executive Overview

We franchise and, to a minimal extent, operate Tim Hortons restaurants in Canada and the U.S. As the franchisor, we collect royalties on our franchised restaurant sales. Our business model also includes controlling the real estate for most of our franchised restaurants. As of September 27, 2009, we leased or owned the real estate for approximately 80% of our system restaurants, which generates a recurring stream of rental income. Real estate not controlled by us is generally for non-standard restaurants, including, for example, non-standard sites in offices, hospitals, colleges, and airports, as well as our self-serve kiosks located in gas and convenience locations and grocery stores. We distribute coffee and other beverages, non-perishable food, supplies, packaging and equipment to system restaurants in Canada through our five distribution centres, and supply frozen and some refrigerated products from our Guelph facility to approximately 85% of our Ontario restaurants. In the U.S., we supply similar products to system restaurants through third-party distributors. In addition to our Canadian and U.S. franchising business, as of the end of the third quarter of 2009, we had 292 licensed locations in the Republic of Ireland and the United Kingdom, which are mainly self-serve kiosks, and operate primarily under the name "Tim Hortons."

Systemwide sales grew by 6.2% in the third quarter of 2009 (7.8% in the third quarter of 2008) and 5.9% on a year-to-date basis in 2009 (8.3% 2008 year-to-date) as a result of new restaurant expansion and continued same-store sales growth in both Canada and the U.S. Systemwide sales include restaurant-level sales at both franchised and Company-operated restaurants. Total systemwide sales growth is determined using a constant exchange rate to exclude the effects of foreign currency translation. U.S. dollar sales are converted into Canadian dollar amounts using the average exchange rate of the base year for the period covered.

In the third quarter of 2009, same-store sales increased 3.1% in Canada and 4.3% in the U.S. Transaction growth and a slight increase in average cheque, trends that continued from the second quarter, helped to overcome a shift in product mix, and generally challenging macro-economic conditions, including high unemployment, that continued to persist during the third quarter. In addition, promotional and menu activities contributed to the sales performance in both markets. Our co-branding initiative with Cold Stone Creamery ® continued to be a significant contributor to our U.S. same-store sales increase in the third quarter and also contributed to same-store sales growth on a year-to-date basis. Same-store sales increased 2.7% in Canada and 3.6% in the U.S. during the first three quarters of 2009 compared to 4.4% in Canada and 1.2% in the U.S. for the 2008 year-to-date period.

In the third quarter of 2009, our revenues increased $54.6 million, or 10.7%, over the third quarter of 2008, primarily as a result of higher distribution sales driven from both new products being managed through the supply chain and an increase in systemwide sales. Higher commodity costs and foreign exchange translation also contributed to higher distribution revenues. In addition, growth in the number of systemwide restaurants and continued average same-store sales gains drove higher rent and royalty revenues, net of franchisee relief. Franchise fees were also higher in the third quarter of 2009 primarily as a result of higher number of resales and sales of non-standard units. Offsetting these increases in revenues were lower revenues from Company-operated restaurants and sales from non-owned consolidated restaurants.

Operating income increased $6.6 million, or 5.4%, in the third quarter of 2009 compared to the third quarter of 2008 primarily as a result of higher revenues, as discussed above, and higher contribution from our U.S. operations. Partially offsetting operating income growth were higher general and administrative expenses and lower other income. We incurred $3.2 million of professional advisory fees and shareholder-related transaction costs related to our public company reorganization in the third quarter of 2009 ($7.3 million year-to-date). These costs were not included in our 2009 annual operating income target and impacted our operating income growth rate by 2.6% in the third quarter of 2009 and by 2.1% on a year-to-date basis.

Our revenues increased $146.8 million, or 9.9%, in the year-to-date period ended September 27, 2009 to $1,626.8 million from $1,480.0 million in the year-to-date period ended September 28, 2008, primarily as a result of higher distribution sales and an increase in rents and royalties due to higher systemwide sales. Operating income grew $18.5 million, or 5.5%, in the 2009 year-to-date period, primarily as a result of the higher revenues and higher contributions from our U.S. operations. Partially offsetting operating income growth was lower other income, lower equity income, and higher general and administrative costs. The higher general and administrative expense included $7.3 million of professional advisory fees and shareholder-related transaction costs incurred year-to-date related to our public company reorganization, partially offset by the 2008 management restructuring charge of $3.1 million that did not recur in 2009 year-to-date.

There continued to be significant macro-economic challenges in North America throughout the third quarter, characterized by persistently high unemployment levels and other pressures in the U.S. and in certain Canadian regions that have a heavier manufacturing base, including our key market of Ontario. While we are not immune from recessionary and inflationary impacts, historically, we have proven to be fairly resilient in Canada during challenging economic times, and we continue to be well-positioned, due, in part, to our quality product offering at a reasonable price. We continued to grow in the third quarter and year-to-date periods of 2009 by supporting the needs of our customers who are looking for value as a result of economic challenges, without trading off quality. We do expect, overall, to see continued volatility quarter-to-quarter in the quick service restaurant sector, which may include reductions or gains in customer visits in our business.

We are pleased with the strength of our sales performance in the Canadian segment to the end of the third quarter, considering the challenging economic conditions experienced throughout 2009. Based on year-to-date performance to the end of the third quarter, however, we currently expect to be at the low end or slightly under our 3% to 5% annual same-store sales growth target for 2009 in the Canadian segment. We do not expect sales growth to accelerate sufficiently in the last quarter of 2009 to bring results up from 2.7% year-to-date to above the low end of the range. Despite the foregoing, we remain confident in our ability to meet our targeted consolidated operating income growth range of 11% to 13% growth, excluding the impacts of the reorganization as a Canadian public company (targeted rate is 6% to 8% growth excluding the impacts of asset impairment and related closure costs in 2008 and the 2009 reorganization as a Canadian public company).

Net income attributable to Tim Hortons Inc. decreased $17.6 million, or 22.3%, during the third quarter of 2009 as compared to the third quarter of 2008 and $10.2 million, or 4.7%, in the year-to-date period. In the third quarter of 2009, we recorded certain tax-related expenses, including a non-cash U.S. deferred tax valuation allowance, totaling $19.9 million in connection with our public company reorganization. These tax charges, coupled with the professional advisory fees and shareholder-related transaction costs incurred in the quarter of $3.1 million after tax, lowered our net income by $23.1 million and the growth rate by 29.3%. On a year-to-date basis, the higher tax expense and professional advisory fees and shareholder-related transaction costs incurred relating to our public company reorganization decreased net income by $27.1 million. Higher operating income in both the quarter and on a year-to-date basis, as well as lower net interest expense in the third quarter, partially offset the higher tax expense and advisory fees noted above. Diluted earnings per share attributable to Tim Hortons Inc. ("EPS") decreased to $0.34 in the third quarter of 2009 from $0.43 in the third quarter of 2008 and $1.13 in the 2009 year-to-date period compared to $1.17 in the 2008 comparable period. EPS was impacted by $0.13 in the third quarter and $0.15 in the 2009 year-to-date period as a result of the impact of the public company

reorganization costs related to certain tax related expenses, including a non-cash valuation allowance on deferred tax assets, and professional advisory fees and shareholder-related transaction costs. The diluted weighted average number of shares outstanding in the third quarter and year-to-date periods of 2009 were 1.0% and 2.1% lower, respectively, than the diluted weighted average share count in the comparable periods of 2008, due to our share repurchase programs.

In the first quarter of 2009, we spent $16.7 million to purchase approximately 0.6 million shares of Company common stock as part of our 2009 share repurchase program at an average cost of $29.85 per share. As a result of our Board's decision in May 2009 to approve a transaction to reorganize as a public Canadian company (see below), we decided to defer purchases in the 2009 share repurchase program in the second and third quarters. Now that the public company reorganization is complete, our Board has approved the resumption of our share repurchase program, beginning in the fourth quarter of 2009. We currently expect to spend up to $150 million during the remainder of the program until it terminates on March 1, 2010. Shares will be repurchased through a combination of a 10b5-1, or automatic trading program, and/or through management's discretion, subject to regulatory requirements, and market, cost, and other considerations.

In February 2009, our Board of Directors approved an 11.1% increase in the quarterly dividend to $0.10 per share. The Company declared and paid its March 2009, June 2009 and September 2009 dividends at this new rate. Our Board of Directors declared a quarterly dividend payable on December 15, 2009 to shareholders of record as of December 1, 2009 at the $0.10 rate per share as well. The Company's current dividend policy is to pay a total of 20% to 25% of prior year, normalized annual net income attributable to Tim Hortons Inc. in dividends each year, returning value to shareholders based on the Company's earnings growth. The payment of future dividends, however, remains subject to the discretion of our Board of Directors. As of September 28, 2009, dividends are declared and paid in Canadian dollars to all shareholders with Canadian resident addresses. For U.S. resident stockholders, dividends paid will be converted to U.S. dollars based on prevailing exchange rates at time of conversion by the Clearing and Depository Services Inc. for beneficial shareholders and by the Company's transfer agent for registered shareholders. As a Canadian public company, dividends paid by the Company to Canadian resident shareholders are designated as "eligible dividends" for Canadian tax purposes. For resident U.S. shareholders, dividends paid by the Company effective after September 28, 2009 are generally subject to Canadian withholding taxes at a rate of 15% of the gross amount of the dividends paid, which may be eligible as a foreign tax credit for U.S. tax purposes, depending on the individual resident shareholder's tax situation.

As previously announced, effective September 28, 2009, we completed a corporate reorganization of our Company to become a Canadian public company. In addition to operational and administrative benefits, this transaction is expected to positively impact our effective tax rate commencing in 2010 by allowing us to continue to take advantage of the lower Canadian federal income tax rates and addressing certain adverse implications to us of the Fifth Protocol of the Canada-United States Income Tax Convention ratified in December of 2008. We incurred certain charges for discrete items, the majority of which are non-cash tax charges, and transaction costs to implement the reorganization. The impact of the transaction-related charges will cause our 2009 tax rate to increase to between 37% and 39% (exceeding our 2009 targeted range of 32% to 34%) and the transaction costs could cause our 2009 operating income to fall below the targeted range. As such, we have considered the achievement of our annual target excluding these costs (see above). For a description of the transaction and related information, including risks and uncertainties associated with the transaction, please refer to Part II, Item 1A below and the registration statement on Form S-4, as amended, Registration No. 333-160286 (central index key: 0001467019) ("S-4"), filed with the SEC by New THI. The S-4 is available through the SEC's website at www.sec.gov under New THI's filings, as well as at www.sedar.com, the website maintained by the Canadian Securities Administrators.

Construction of our new coffee roasting facility located in Hamilton, Ontario is now substantially complete. We plan to commence commercial production in late November 2009. We expect the total cost to construct the facility will be approximately $30 million when completed. Consistent with our vertical integration investment strategy, the new roasting facility will provide system benefits important to our franchisees and the Company. When fully operational, this facility, coupled with our existing coffee roasting operation in Rochester, New York, will provide at least 75% of our total coffee requirements. Equally important, our green coffee blending capability at this new facility will help us protect the quality, integrity and supply of our proprietary coffee blend from bean to cup, at a competitive rate for our franchisees and provide for a reasonable return on our investment. The green blending portion of the operation is expected to commence in 2010. One of our strategies for growth is leveraging our existing, and exploring additional, vertical integration opportunities. As evidenced above with respect to our new coffee facility, we continue to selectively invest in growth opportunities for our business and to support our franchisees' business and believe our financial position is a key enabler of our future growth in this regard.

Selected Operating and Financial Highlights



                                             Third quarter ended                        Year-to-date period ended
                                     September 27,          September 28,         September 27,          September 28,
                                         2009                   2008                   2009                  2008
Systemwide sales growth (1)                     6.2 %                  7.8 %                 5.9 %                  8.3 %
Average same-store sales growth
(2)
Canada                                          3.1 %                  3.8 %                 2.7 %                  4.4 %
U.S.                                            4.3 %                 (0.6 )%                3.6 %                  1.2 %
Systemwide restaurants                        3,527                  3,294                 3,527                  3,294
Revenues (in millions)              $         563.6        $         509.0        $      1,626.8        $       1,480.0
Operating income (in millions)      $         129.2        $         122.6        $        356.0        $         337.5
Net income attributable to Tim
Hortons Inc. (in millions)          $          61.2        $          78.8        $        205.4        $         215.6
Basic EPS                           $          0.34        $          0.43        $         1.14        $          1.17
Diluted EPS                         $          0.34        $          0.43        $         1.13        $          1.17
Weighted average number of
shares of common stock
outstanding - Diluted (in
millions)                                     180.9                  182.7                 181.1                  185.0

(1) Total systemwide sales growth and U.S. average same-store sales growth is determined using a constant exchange rate to exclude the effects of foreign currency translation. U.S. dollar sales are converted to Canadian dollar amounts using the average exchange rate of the base quarter for the period covered. Systemwide sales growth excludes sales from our Republic of Ireland and United Kingdom licensed locations. Systemwide sales growth in Canadian dollars, which includes the effects of foreign currency translation, was 6.9% and 7.7% for the third quarter ended 2009 and 2008, respectively, and 7.2% and 7.6% for the year-to-date periods ended September 27, 2009 and September 28, 2008, respectively.

(2) For Canadian and U.S. restaurants, average same-store sales growth is calculated by including restaurants beginning in the 13th month following the restaurant's opening.

Systemwide Sales Growth

Our financial results are driven largely by changes in systemwide sales, which include restaurant-level sales at both franchised and Company-operated restaurants, although approximately 99.3% of our total system is franchised. The amount of systemwide sales impacts our franchisee royalties and rental revenue, as well as our distribution sales. Changes in systemwide sales are driven by changes in average same-store sales and changes in the number of restaurants. Systemwide sales growth excludes sales from our licensed locations in the Republic of Ireland and United Kingdom as these locations operate on a significantly different business model compared to our North American operations.

Average Same-Store Sales Growth

Average same-store sales growth, one of the key metrics we use to assess our performance, provides information on total retail sales at restaurants operating systemwide (i.e., includes both franchised and Company-operated restaurants) throughout the relevant period and provides a useful comparison between periods. Our average same-store sales growth is generally attributable to several key factors, including new product introductions, improvements in restaurant speed of service and other operational efficiencies, more frequent customer visits, expansion into broader menu offerings and pricing. The timing of restaurant-level price increases are evaluated on and vary by region. Price increases are primarily used to offset higher restaurant-level costs on key items such as coffee, labour, supplies, utility and other costs.

Product innovation is one of our focused strategies to drive same-store sales growth, including innovation at breakfast as well as other day parts. In the third quarter, we had an active menu and product-focused promotional program designed to reinforce value to our customers. We promoted the sausage and a biscuit offering in both Canada and the U.S. with attractive price points. We also continued to benefit from, and provided promotional support for, Chicken Wrap Snackers. This is a new menu item introduced late in the first quarter focused on the snacking and lunch day parts. Blueberry themed promotions were featured in both markets, including Blueberry Bloom donuts, Blueberry Glazed donuts and Whole Grain Blueberry muffins, and Blueberry Timbits®, all of which proved to be very popular with our customers. In Canada, to increase the breadth and variety of our soup program, we introduced Italian Wedding soup. We also had a national free sample day for hash browns with the purchase of any breakfast sandwich, and promoted hot beverages featuring French Vanilla Cappuccino. In the U.S. market, we extended blueberry flavors to include Iced Capp and Iced Coffee as part of the Blueberry themed products promotion, and also featured a US$1.99 Iced Cappuccino promotion. Our product offerings, promotional activity, and operational efficiencies led to traffic growth, and average cheque was up slightly.

New Restaurant Development

Opening restaurants in new and existing markets in Canada and the U.S. has been
a significant contributor to our growth. Below is a summary of restaurant
openings and closures for the third quarters ended September 27, 2009 and
September 28, 2008, respectively, and for the year-to-date periods ended
September 27, 2009 and September 28, 2008, respectively:



                                           Third quarter ended                      Year-to-date period ended
                                   September 27,         September 28,         September 27,         September 28,
                                       2009                  2008                  2009                  2008
Canada
Restaurants opened                            36                    30                    71                    75
Restaurants closed                            (4 )                 (11 )                 (17 )                 (28 )


Net change                                    32                    19                    54                    47

U.S.
Restaurants opened                            20                    19                    38                    30
Restaurants closed                            -                     (1 )                  (2 )                  (4 )


Net change                                    20                    18                    36                    26


Total Company
Restaurants opened                            56                    49                   109                   105
Restaurants closed                            (4 )                 (12 )                 (19 )                 (32 )


Net change                                    52                    37                    90                    73

From the end of the third quarter of 2008 to the end of the third quarter of 2009, we opened 270 system locations, including both full-serve and self-serve franchised locations and Company-operated restaurants, and we had 37 restaurant closures for a net increase of 233 restaurants, of which 70 were self-serve kiosks. Typically, 20 to 40 system restaurants are closed annually, primarily in Canada. Restaurant closures generally result from an opportunity to acquire a better location which will permit us to upgrade design and/or layout or add a drive-thru. We have also closed, and may continue to close, restaurants for which the restaurant location has performed below our expectations for an extended period of time, and/or we believe that sales from the restaurant can be absorbed by surrounding restaurants. Included in the 37 restaurant closures noted above was the closure of 11 Company-operated restaurants in southern New England, primarily during the fourth quarter of 2008. These restaurant closures were outside of the normal course of business, as a result of a strategic review of our U.S. operations undertaken to improve the profitability in our U.S. operating segment. The closure costs and a related asset impairment charge associated with these restaurants were recorded in our fourth quarter 2008 financial results.

During 2008, we modified our restaurant development plan in our U.S. segment to include self-serve kiosks and to selectively expand our use of full-service, non-standard units in order to promote greater market presence and penetration with less capital. While our core strategy of developing standard restaurants . . .