RESULTS OF OPERATIONS

MDS management is focused on building shareholder value through the profitable growth of the Company. The two main drivers of profit growth for MDS are increases in comparable shop sales and increases in shop count through the sale of additional franchised units. These two drivers are closely integrated, as the sale of franchises is much easier in an environment where franchised shop sales and profits are growing.

Growing Comparable Shop Sales

MDS management believes the key to growing sales in the Midas system in North America is to focus on those services that are most critical to the regular maintenance of vehicles: brake replacement, fluid replacement and tire replacement. These services are required of all vehicles at periodic intervals and management believes future success in automotive service requires that a service provider possess expertise, credibility and top-of-mind awareness in all three categories. These periodic services will serve as the gateway to forming broader, long-term relationships with customers, including factory scheduled maintenance and major repairs.

Brakes: The Midas system has long been a leader in the brake category throughout North America. The Company's strength in brake services dates back nearly 30 years and is backed by the well-known Midas lifetime guarantee. Brakes are the largest and most profitable service category for the Midas system. Brake sales at retail have declined over the past several years, producing a significant drag on overall system sales performance. The Company's efforts to drive retail brake sales starts with ensuring brake product quality across the Midas system. During 2008, the Company introduced new mandatory minimum performance standards for Midas brake friction to be used by franchisees. In connection with the improved product quality standards, the Company launched its SecureStop branded brake service, which helps Midas differentiate the service provided by Midas shops amongst numerous competitors who rely almost exclusively on price. In 2009, the Company changed its promotional brake strategy from national single-price-point television advertising to a more locally-focused advertising approach. Brake service is very competitive on a local level and management believes the move to local advertising provides Midas franchisees with greater flexibility in addressing local market conditions. Furthermore, it allows for a more consistent share of voice in brake promotions. Finally, the Company is in the process of redefining its selling and operating process for customers in need of brake services. The new process will focus on establishing greater operating uniformity throughout the Midas system, including phone handling, customer interaction, product stocking and the brake inspection process.

Tires: In the last five years, Midas successfully launched a major retail initiative to significantly expand Midas shop sales of tires and related tire services. In support of this objective, the Company formed an alliance with Bridgestone-Firestone to distribute tires directly to Midas system shops throughout North America. As a result, comparable shop sales of tires and related tire services in North America increased significantly in each of the past four years. Despite this multi-year success in driving tire sales, tires remain a relatively small component of the Midas system's overall sales mix:
less than 6% in the U.S. and 9% in Canada for 2008. Management believes that achieving a 20% sales mix in tires is both attainable and important to the future growth of the Midas system in North America.

The Company continues to test a significantly expanded tire program in certain company-operated and franchised Midas shops. If this program succeeds, it will serve as a model for shops throughout the Midas system. Going forward, the Company believes that sales of tires and related tire services will be a significant component of future revenue growth for the Midas system.

Fluid Exchanges: In fiscal 2005, the Company began the roll out of a series of initiatives designed to build sales in maintenance services as a means to increase repeat customer business. The program most importantly included the standardization of the Midas oil change service and vehicle inspection process, providing all customers with suggested factory maintenance schedules and increasing the Midas shop's focus and capabilities in fluid exchange services, which are an increasingly important component of factory scheduled maintenance.

In response to the Company's efforts to build maintenance revenues and increase shop visit frequency, comparable shop sales of oil changes in North America have increased in the past two years. However, revenues from this category still represent only 8% of Midas system sales, and the typical Midas shop performs only about seven oil changes per day. While oil change revenue and car count have been growing over the past several years, management believes the Midas system has the capacity to significantly increase that number by leveraging the operating knowledge of the SpeeDee system and enhancing local marketing efforts. Growth in car count is important to driving sales growth in the Midas system.

Since fiscal 1998, annual Midas shop closings have exceeded annual new shop openings. The annual shop closing rate during this period of approximately 2.8% is consistent with other mature retail companies, however the opening rate has lagged. This reduced opening rate is due to a variety of factors including the increased complexity of the Midas shop operating model, a lack of focus on new shop development by the MDS management team during many of those years, an over-supply of automotive repair centers in general, and a re-deployment of capital by MDS away from real estate investments.

During this time the Company has also diverted many new franchisees that may have opened new shops away from new shop development and instead have helped them buy existing Midas shops from existing Midas franchisees. Midas is an older franchise system and thus numerous long-term franchisees have struggled with the ongoing changes required to adapt to the current automotive aftermarket. The Company has been working diligently to identify those franchisees that are not capable or not willing to adapt to the new environment and has been assisting them in transitioning out of the Midas system. This has caused many new franchisees to purchase existing Midas shops rather than to develop new ones. This transformation has been underway for some time and Midas has averaged approximately 100 shop transitions per year in the past three fiscal years, with most shops transitioned to new franchisees.

The benefits of transitioning Midas shops to new franchisees can be seen in the performance of these shops. Sales at shops within the first year after transition have historically far outperformed the sales performance of the broader Midas system. In some cases, the improvement is dramatic with sales rising by more than 100%. In the next several years the Company hopes to accelerate the number of transitions each year and thereby increase the capacity of the Midas system as a whole to adapt and thrive in this new business environment.

In addition to transitions, the Company believes that the roll-out of the Midas-SpeeDee Co-Brand concept and the acquisition/conversion of competing automotive repair centers both provide a significant opportunity to grow the North American franchise system. A successful test of the new Midas-SpeeDee Co-Brand concept has the potential to create a new growth platform for the Company by substantially enhancing the economics and return-on-investment of a franchised automotive service shop. Because the automotive service market is both fragmented and saturated, the Company believes that unit growth is best achieved through acquisitions and conversions of independents rather than de novo opening of newly constructed sites. These two opportunities are explained in greater detail below.

The Midas-SpeeDee Co-Brand Opportunity: In April 2008, MDS acquired the SpeeDee auto service franchise system. The SpeeDee business model focuses on fluid exchanges and maintenance, providing a high quality auto service experience in a quick-service format. SpeeDee leverages the quick-service customer relationship as a gateway to a broader general repair relationship with its customers.

The Company believes the acquisition of SpeeDee provides both the Midas and SpeeDee franchise systems with a unique opportunity for growth in the future. By combining into one location Midas' expertise in general repairs and strong brand awareness with SpeeDee's strength in executing quick-lube and fluid exchanges, the Company believes it can create a powerful new format focused on satisfying the needs of time-pressed consumers seeking value, excellence and a long-term auto service relationship. The Company expects that a Midas-SpeeDee Co-Brand format shop will see customers much earlier in the lifecycle of their vehicle (relative to the typical Midas shop) and will be more able to convert these vehicles into general repair customers (relative to the typical SpeeDee shop) as the vehicles age. The resulting higher unit sales volume may produce a higher return on investment for the franchisee by better leveraging shop overhead expenses.

The Company launched its first test of the Midas-SpeeDee Co-Brand concept with three shops during the third quarter of fiscal 2008. All three were existing SpeeDee locations in California that added the Midas brand to their shop. A fourth Co-Branded unit, also in California, opened on a de novo basis in October 2008. The initial results have been encouraging. The three SpeeDee shops that converted to Co-Brand units in California have generated significant comparable shop sales increases since launch, and the shops have far outperformed the SpeeDee-only units in the same region. In the most recent third fiscal quarter, these shops generated an 11% sales increase, which was on top of the 8% increase achieved in the same quarter one year ago when the new format was launched. On a year-to-date basis, these original Co-Brands units are up more than 14% compared to a 1% sales improvement in the SpeeDee shops in California and a nearly 6% decline in sales for Midas shops in California. The Company plans to Co-Brand several additional SpeeDee locations before the close of fiscal 2009.

During December of 2008, the Company began a test of the Co-Brand concept within existing Midas shops. Four Midas company-operated shops in suburban Chicago were remodeled to accommodate the operating requirements of the SpeeDee concept. In the second quarter of fiscal 2009, the four shops combined to deliver a comparable shop increase of approximately 8.5%

The ongoing testing of the Midas-SpeeDee Co-Brand concept encompasses numerous shop formats, and the Company expects that such testing will continue into 2010. The results of these tests will be critical in determining the issues involved with integrating the SpeeDee model into selected Midas locations across the U.S. and Canada. If successful, the new Co-Brand format could provide a platform for accelerating Company growth by providing Co-Brand opportunities to existing Midas and SpeeDee franchisees, as well as a superior format for de novo shop growth in the future.

Acquisitions and Conversions: The U.S. automotive repair industry is highly fragmented. This is demonstrated by the fact that Midas, as one of the largest automotive maintenance and repair providers in the U.S., has less than 1% of the automotive repair shops in the U.S. Despite the increase in the number of vehicles on the road in the U.S. over the last 15 years, the number of automotive service outlets in the U.S. has been in decline. Vehicle complexity and the resulting need for highly skilled technicians, training programs and technologically advanced diagnostic equipment, along with the increased cost of real estate, has caused a net decrease of almost 7% of all automotive repair outlets in the past 10 years. More recently, automobile dealerships have been closing in record numbers, causing consumers to seek out alternatives.

The Company believes that the acquisition of existing automotive repair shops, as well as the conversion of independent repair facilities to the Midas, SpeeDee or Co-Brand formats, is the most efficient way to grow the MDS system. Furthermore, the Company believes that the current economic environment will result in an increase in acquisition and conversion opportunities, as competitors struggle to remain viable during this economic downturn. During the third quarter of fiscal 2009, the Company completed four conversions of non-Midas locations to Midas shops.

Third Quarter Fiscal 2009 Compared with Third Quarter Fiscal 2008

The following is a summary of the Company's sales and revenues for the third
quarter of fiscal 2009 and 2008: ($ in millions)



                                                         Percent                Percent
                                                 2009    to Total       2008    to Total
 Franchise royalties and license fees           $ 14.0       30.2 %    $ 14.7       31.2 %
 Real estate revenues from franchised shops        8.2       17.7         8.8       18.7
 Company-operated shop retail sales               17.0       36.6        15.2       32.3
 Replacement part sales and product royalties      5.9       12.7         7.1       15.1
 Software sales and maintenance revenue            1.3        2.8         1.3        2.7

 Total sales and revenues                       $ 46.4      100.0 %    $ 47.1      100.0 %

Total sales and revenues for the third quarter of fiscal 2009 declined $0.7 million, or 1.5 %, from the third quarter of fiscal 2008. Within the retail auto service business, royalty revenues and license fees decreased $0.7 million, or 4.8%, from fiscal 2008. Approximately $0.1 million of this was due to lower Midas retail sales as total North American comparable shop sales declined 1.4%, approximately $0.5 million was due to a reduction in the number of Midas shops in operation and approximately $0.1 million was due to a stronger U.S. dollar reducing the value of Canadian and European royalties.

While royalty revenue in the Midas system was down in the third quarter of fiscal 2009, U.S. car count rose by 18% and U.S. oil change revenues increased by 30% on a comparable shop basis. The Company's recent transition to a more locally focused, higher frequency advertising program is generating increased customer visits; however, this increased traffic has not yet translated into increased comparable shop sales. The Company believes the increased traffic is creating the foundation for future revenue growth as automobiles continue to age and satisfied oil change customers return to Midas for their general service and repair needs.

Revenues from real estate leases declined $0.6 million to $8.2 million driven by a net reduction in the number of shops paying rent to Midas due to shop closures, lower revenue from sales-based rental agreements and a weaker Canadian dollar.

Sales from company-operated shops were $17.0 million in the third quarter of fiscal 2009 compared to $15.2 million in the third quarter of fiscal 2008. The increased revenues reflect a comparable shop sales increase of 3.9% during the third quarter of fiscal 2009, as well as an increase in the company-operated shop count due to shop acquisitions in the past 12 months.

Total operating costs and expenses were $41.8 in the third quarter of fiscal 2009 and fiscal 2008. Occupancy expenses for franchised shops increased $0.2 million, or 3.6%, due to scheduled increases in rent expense for shops leased by the Company, partially offset by a decrease in shops under lease. Company-operated shop costs and expenses rose to $18.0 million from $15.8 million in the third quarter of fiscal 2009. The increase in operating expenses was driven by higher sales, additional shops and incremental overhead required to support the higher shop count compared to the same period one year ago, as well as incremental one-time expenses for the launch and grand-opening of the Co-Brand concept in the Company's shops in San Diego. Payroll and employee benefit costs increased to 43.5% of company-operated shop sales in the third quarter of fiscal 2009 compared to 42.8% in the same period of the prior year due to increased headcount to launch the San Diego Co-Brand units. Company-operated shop occupancy and other expenses as a percentage of company-operated shop sales decreased to 34.1% for the third quarter of fiscal 2009 compared to 34.9% in the third quarter of fiscal 2008. Company-operated shop cost of sales increased from 26.3% of company-operated shop sales in the third quarter of fiscal 2008 to 28.2% in the third quarter of fiscal 2009, primarily as a result of an increase in the proportion of sales of oil and tires and higher discounts that helped to drive customer traffic.

Replacement part cost of sales decreased to 88.1% of replacement part sales and product royalties, from 88.7% in the third quarter of fiscal 2008. The decreased cost of replacement part sales relative to revenue was due to a more favorable mix on the products sold to franchisees. Warranty expense in the third quarter of fiscal 2009 was $0.1 million, which was a decrease of $0.1 million from the prior year. On July 1, 2009, the Company's Canadian Midas system adopted a warranty program similar to the one that began in the U.S. in January 2008 (See Note 8 of the Notes to Condensed Financial Statements). As a result, no warranty expense was recorded in Canada during the third fiscal quarter because the Company's Canadian supply chain partners are responsible for the warranty for the first 12 months. After that 12 month period expires, the Company records a periodic warranty expense as warranties are redeemed, which is exactly offset by warranty revenue. The Company will begin to record warranty expenses in Canada in the third quarter of fiscal 2010. Under this new program, the Company's U.S. warranty expense began in January 2009. Over time, the combined U.S. and Canadian warranty expense will grow on a year-over-year basis reflecting the cumulative growth of the warranty obligation under these programs. However, because recognition of the deferred warranty obligation will exactly offset the growth in warranty expense, it will have no net impact on the Company's operating income.

Selling, general and administrative expenses in the third quarter of fiscal 2009 declined $0.4 million, or 3.1%, from the third quarter of fiscal 2008 to $12.5 million. The decrease reflects savings on corporate operating expenses such as travel, fringe benefits and stock compensation. In addition, in October 2009, the Company reduced its corporate staff by 16 people (nearly 10% of the corporate office staff). The Company expects to save at least $1 million in annual operating expenses as a result of this action and will record a charge of approximately $0.3 million in the fourth quarter of fiscal 2009 to cover severance and outplacement expenses related to this action. In this difficult revenue environment, the Company's management remains very focused on cost control.

During the third quarter of fiscal 2009, MDS recorded business transformation charges of $0.1 million related to the Company's partial funding of the rollout of a new shop image for Canadian Midas franchisees. During the third quarter of fiscal 2008, the Company recorded business transformation charges of $0.9 million. The 2008 charges reflected $0.6 million for the Company's partial funding of the rollout of a new shop image for Midas franchisees and $0.3 million for the closure of an unprofitable company-operated shop. The Company's new image funding program will end during fiscal 2009 with the final business transformation charges related to this program being recorded during the fourth quarter of fiscal 2009.

During the third quarter of both fiscal 2009 and fiscal 2008, the Company recorded a loss on sale of $0.1 million in connection with the sale of certain company-operated shop assets.

As a result of the above changes, operating income decreased $0.7 million to $4.6 million in the third quarter of fiscal 2009 from $5.3 million in third quarter of fiscal 2008 and operating income margin decreased to 9.9% of sales from 11.3% of sales.

Other income was $0.1 million in the third quarter of fiscal 2009 compared to other expense of $0.1 million in fiscal 2008. Other income consists primarily of interest income on overdue customer accounts and foreign currency exchange gains or losses.

The Company's effective tax rate was 47.5% in the third quarter of fiscal 2009 compared to 46.0% in the third quarter of fiscal 2008 and the 2009 statutory tax rate of 39.2%. The fiscal 2009 variance from the statutory rate was due to the write-down of the deferred tax assets related to certain Canadian and state net operating loss carry forwards based a re-assessment of their future utilization.

As a result of the above items, net income decreased $0.3 million from net income of $1.7 million in the third quarter of fiscal 2008 to net income of $1.4 million in the third quarter of fiscal 2009.

First Nine Months of Fiscal 2009 Compared with First Nine Months of Fiscal 2008

The following is a summary of the Company's sales and revenues for the first
nine months of fiscal 2009 and 2008: ($ in millions)



                                                            Percent                   Percent
                                                  2009      to Total        2008      to Total
Franchise royalties and license fees             $  41.0        29.9 %     $  43.7        31.1 %
Real estate revenues from franchised shops          24.6        18.0          26.2        18.6
Company-operated shop retail sales                  49.4        36.0          46.3        32.9
Replacement part sales and product royalties        18.0        13.1          20.7        14.7
Software sales and maintenance revenue               4.1         3.0           3.8         2.7

Total sales and revenues                         $ 137.1       100.0 %     $ 140.7       100.0 %

Total sales and revenues for the first nine months of fiscal 2009 declined $3.6 million, or 2.6%, from the first nine months of fiscal 2008. Within the retail auto service business, royalty revenues and license fees decreased $2.7 million, or 6.2%, from fiscal 2008. This decrease reflects weakness in Midas retail sales as total North American comparable shop sales declined 2.6%, a reduction in the number of Midas shops in operation, a stronger U.S. dollar reducing the value of Canadian and European royalties and lower franchise fees. While royalty revenue in the Midas system was down in the first nine months of fiscal 2009, U.S. car count rose by 12% and U.S. oil change revenues increased by 26% on a comparable shop basis.

Revenues from real estate leases declined $1.6 million to $24.6 million driven by a net reduction in the number of shops paying rent to Midas due to shop closures, lower revenue from sales-based rental agreements and a weaker Canadian dollar.

Sales from company-operated shops were $49.4 million in the first nine months of fiscal 2009 compared to $46.3 million in the first nine months of fiscal 2008. The increased revenues reflect an increase in the company-operated shop count due to shop acquisitions in the past 12 months, as well as a comparable shop sales increase of 0.8% during the first nine months of fiscal 2009.

Replacement part sales and product royalties decreased 13.0% from $20.7 million to $18.0 million in the first nine months of fiscal 2009. The Company recorded lower sales of tires to U.S. Midas franchisees despite the fact that tire revenues grew 6.2% at retail. U.S. Franchisees are purchasing more tires from local distributors approved by Bridgestone-Firestone in order to diversify their tire offering. These local purchases are direct between the Midas franchisee and the local tire distributor and do not flow through the Company's billing system and are therefore not included in sales and revenues. Software sales and maintenance revenue increased $0.3 million to $4.1 million reflecting continued growth in the Company's R.O. Writer point-of-sale software business, especially with customers outside of the Midas system.

Total operating costs and expenses declined $0.7 million, or 0.6%, in the first nine months of fiscal 2009 to $124.9 million. Occupancy expenses for franchised shops were $17.1 million in the first nine months of fiscal 2009 and fiscal 2008. Company-operated shop costs and expenses rose to $51.4 million from $46.9 million in the first nine months of fiscal 2009. The increase in operating expenses was driven by higher sales, additional shops and incremental overhead required to support the higher shop count and one-time costs associated with launching the Co-Brand test concept in Chicago and San Diego. Payroll and employee benefit

Replacement part cost of sales decreased to 87.8% of replacement part sales and product royalties, from 89.9% in the first nine months of fiscal 2008. The decreased cost of replacement part sales relative to revenue was due to a more favorable mix on the products sold to franchisees. Warranty expense was $0.5 in the first nine months of fiscal 2009 and fiscal 2008. U.S. warranty expense will increase each quarter during fiscal 2009 while no warranty expense will be recorded in Canada until the third quarter of 2010. Both trends reflect changes in the warranty programs in both countries whereby Midas franchisees are now . . .