10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 3, 2010

OR

¨ 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 001-32843

TIM HORTONS INC.

(Exact name of Registrant as specified in its charter)

Canada	98-0641955
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)
874 Sinclair Road, Oakville, ON, Canada	L6K 2Y1
(Address of principal executive offices)	(Zip code)

905-845-6511

(Registrant’s phone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at November 8, 2010
Common shares	172,905,120 shares

Exhibit Index on page 60.

TIM HORTONS INC. AND SUBSIDIARIES

INDEX

	Pages
PART I: Financial Information		3
Item 1. Financial Statements (Unaudited):		3
Condensed Consolidated Statement of Operations for the quarters and year-to-date periods ended October  3, 2010 and September 27, 2009		3
Condensed Consolidated Balance Sheet as at October 3, 2010 and January 3, 2010		4
Condensed Consolidated Statement of Cash Flows for the year-to-date periods ended October  3, 2010 and September 27, 2009		5
Condensed Consolidated Statement of Equity for the year-to-date period ended October  3, 2010 and year ended January 3, 2010		6
Notes to the Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3. Quantitative and Qualitative Disclosures about Market Risk		56
Item 4. Controls and Procedures		56
PART II: Other Information		57
Item 1. Legal Proceedings		57
Item 1A. Risk Factors		57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		58
Item 5. Other information		58
Item 6. Exhibits		58
Signature		59
Index to Exhibits		60

On October 1, 2010, the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York was US$0.9790 for Cdn$1.00.

Availability of Information

As a result of the reorganization of the Delaware-incorporated Tim Hortons Inc. (“THI USA”) on September 28, 2009, as a Canadian public company, we are currently a foreign private issuer in the U.S. for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as a result, we are no longer subject to the same Exchange Act filing requirements to which THI USA was subject. However, for purposes of providing continuity with our previous periodic reports under the Exchange Act as a U.S. domestic registrant, we currently continue to file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the Securities and Exchange Commission (“SEC”), instead of the reporting forms available to foreign private issuers.

We make available, through our internet website for investors (www.timhortons-invest.com), our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after electronically filing such material with the SEC and with the Canadian Securities Administrators (“CSA”). The reference to our website address does not constitute incorporation by reference of the information contained on the website into, and should not be considered, part of this document.

2

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(in thousands of Canadian dollars, except share and per share data)

	Third quarter ended				Year-to-date period ended
	October 3, 2010		September 27, 2009		October 3, 2010		September 27, 2009
			(note 1)				(note 1)
Revenues
Sales	$	468,000	$	422,995	$	1,318,292	$	1,239,459
Franchise revenues:
Rents and royalties		176,964		164,114		512,803		469,102
Franchise fees		25,556		23,605		61,899		63,319
		202,520		187,719		574,702		532,421
Total revenues		670,520		610,714		1,892,994		1,771,880
Costs and expenses
Cost of sales		398,957		362,500		1,121,351		1,066,084
Operating expenses		61,690		58,558		181,975		174,060
Franchise fee costs		24,908		21,754		63,113		61,147
General and administrative expenses (note 11)		35,790		35,363		107,207		104,533
Equity (income)		(4,015)		(3,931)		(11,032)		(10,363)
Asset impairment (note 2)		20,888		0		20,888		0
Other (income), net		(708)		(359)		(1,105)		(675)
Total costs and expenses, net		537,510		473,885		1,482,397		1,394,786
Operating income		133,010		136,829		410,597		377,094
Interest (expense)		(6,472)		(5,180)		(18,797)		(15,695)
Interest income		432		272		892		1,056
Income before income taxes		126,970		131,921		392,692		362,455
Income taxes (note 3)		45,268		64,988		125,492		140,677
Net income		81,702		66,933		267,200		221,778
Net income attributable to noncontrolling interests		7,874		5,754		20,362		16,400
Net income attributable to Tim Hortons Inc.	$	73,828	$	61,179	$	246,838	$	205,378
Basic earnings per common share attributable to Tim Hortons Inc. (note 4)	$	0.43	$	0.34	$	1.41	$	1.14
Diluted earnings per common share attributable to Tim Hortons Inc. (note 4)	$	0.42	$	0.34	$	1.41	$	1.13
Weighted average number of common shares outstanding — Basic (in thousands) (note 4)		173,482		180,681		174,744		180,878
Weighted average number of common shares outstanding — Diluted (in thousands) (note 4)		173,743		180,864		175,002		181,076
Dividend per common share	$	0.13	$	0.10	$	0.39	$	0.30

See accompanying Notes to the Condensed Consolidated Financial Statements.

3

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET - (Unaudited)

(in thousands of Canadian dollars, except share and per share data)

	As at
	October 3, 2010			January 3, 2010
				(note 1)
Assets
Current assets
Cash and cash equivalents	$	195,702		$	121,653
Restricted cash and cash equivalents		14,056			60,629
Restricted investments		37,876			20,186
Accounts receivable, net		139,004			179,942
Notes receivable, net (note 13)		12,180			20,823
Deferred income taxes		2,474			3,475
Inventories and other, net (note 5)		104,202			80,490
Assets held for sale – variable interest entity (note 6)		190,466			0
Advertising fund restricted assets (note 13)		28,074			26,681
Total current assets		724,034			513,879
Property and equipment, net		1,338,065			1,494,032
Notes receivable, net (note 13)		3,087			3,475
Deferred income taxes		10,582			8,919
Intangible assets, net		5,380			8,405
Equity investments		46,230			45,875
Other assets		27,912			19,706
Total assets	$	2,155,290		$	2,094,291
Liabilities and Equity
Current liabilities
Accounts payable (note 7)	$	143,014		$	135,248
Accrued liabilities:
Salaries and wages		20,247			23,268
Taxes		27,278			27,586
Other (note 7)		107,360			111,401
Liabilities held for sale – variable interest entity (note 6)		24,829			0
Deferred income taxes		118			376
Advertising fund restricted liabilities (note 13)		42,235			43,944
Current portion of long-term obligations (note 8)		109,526			7,821
Total current liabilities		474,607			349,644
Long-term obligations
Long-term debt (note 8)		241,006			336,302
Advertising fund restricted debt (note 13)		420			415
Capital leases		70,056			67,156
Deferred income taxes		4,232			10,159
Other long-term liabilities		75,054			74,929
Total long-term obligations		390,768			488,961
Commitments and contingencies (note 9)
Equity
Equity of Tim Hortons Inc.
Common shares ($2.84 stated value per share), Authorized: unlimited shares, Issued: 173,302,269 and 177,318,614 shares, respectively (note 10)		491,542			502,872
Common shares held in Trust, at cost: 330,405 and 278,500 shares, respectively (note 13)		(11,337	)		(9,437	)
Contributed surplus		2,844			0
Retained earnings		850,363			796,235
Accumulated other comprehensive loss		(133,605	)		(120,061	)
Total equity of Tim Hortons Inc.		1,199,807			1,169,609
Noncontrolling interests		90,108			86,077
Total equity		1,289,915			1,255,686
Total liabilities and equity	$	2,155,290		$	2,094,291

See accompanying Notes to the Condensed Consolidated Financial Statements.

4

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(in thousands of Canadian dollars)

	Year-to-date period ended
	October 3, 2010			September 27, 2009
				(note 1)
Cash flows provided from (used in) operating activities
Net income	$	267,200		$	221,778
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		88,368			83,383
Asset impairment (note 2)		20,888			0
Stock-based compensation expense (note 11)		9,500			6,801
Equity income, net of cash dividends		(494	)		88
Deferred income taxes		2,351			18,518
Changes in operating assets and liabilities
Restricted cash and cash equivalents		46,443			48,447
Accounts and notes receivable		37,141			(817	)
Inventories and other		(35,068	)		6,625
Accounts payable and accrued liabilities		7,226			(40,431	)
Settlement of cash flow hedges (note 8)		(4,791	)		0
Other, net		(1,904	)		6,385
Net cash provided from operating activities		436,860			350,777
Cash flows (used in) provided from investing activities
Capital expenditures		(78,988	)		(113,028	)
Proceeds from sale of restricted investments		20,240			0
Purchase of restricted investments		(37,832	)		(20,136	)
Principal payments received on notes receivable		8,491			2,263
Other investing activities		(7,415	)		(14,991	)
Net cash used in investing activities		(95,504	)		(145,892	)
Cash flows (used in) provided from financing activities
Purchase of common shares/treasury stock (note 10)		(136,036	)		(16,701	)
Purchase of common shares held in trust (note 11)		(3,252	)		(713	)
Purchase of common shares for settlement of restricted stock units (note 11)		(377	)		(232	)
Dividend payments to common shareholders		(68,004	)		(54,583	)
Distributions and other to noncontrolling interests		(16,331	)		(24,759	)
Proceeds from issuance of shares to noncontrolling interest		0			1,305
Proceeds from issuance of debt, net of issuance costs (note 8)		200,518			2,707
Principal payments on other long-term debt obligations (note 8)		(204,760	)		(3,893	)
Net cash used in financing activities		(228,242	)		(96,869	)
Effect of exchange rate changes on cash		(1,308	)		(5,115	)
Increase in cash and cash equivalents		111,806			102,901
Cash and cash equivalents at beginning of period		121,653			124,717
Less: Cash and cash equivalents included in assets held for sale (note 6)		(37,757	)		0
Cash and cash equivalents at end of period	$	195,702		$	227,618
Supplemental disclosures of cash flow information:
Interest paid	$	15,125		$	14,790
Income taxes paid	$	120,346		$	112,792
Non-cash investing and financing activities:
Capital lease obligations incurred	$	12,475		$	6,422

See accompanying Notes to the Condensed Consolidated Financial Statements.

5

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

(in thousands of Canadian dollars)

	Year-to-date period  ended October 3, 2010			Year ended January 3,  2010
Common shares
Balance at beginning of period	$	502,872		$	0
Converted from common stock		0			513,318
Repurchase of common shares (note 10)		(11,330	)		(10,446	)
Balance at end of period	$	491,542		$	502,872
Common stock
Balance at beginning of period	$	0		$	289
Converted to common shares		0			(289	)
Balance at end of period	$	0		$	0
Capital in excess of par value
Balance at beginning of period	$	0		$	929,102
Stock-based compensation, net		0			(322	)
Converted to common shares		0			(928,780	)
Balance at end of period	$	0		$	0
Treasury stock
Balance at beginning of period	$	0		$	(399,314	)
Purchased during the period		0			(16,701	)
Reissued during the period		0			264
Cancelled and retired during the period		0			415,751
Balance at end of period	$	0		$	0
Common shares held in Trust
Balance at beginning of period	$	(9,437	)	$	(12,287	)
Purchased during the period		(3,252	)		(713	)
Disbursed or sold from Trust during the period		1,352			3,563
Balance at end of period	$	(11,337	)	$	(9,437	)
Contributed surplus
Balance at beginning of period	$	0		$	0
Stock-based compensation, net		2,844			0
Balance at end of period	$	2,844		$	0
Retained earnings
Balance at beginning of period	$	796,235		$	677,550
Net income attributable to Tim Hortons Inc.		246,838			296,367
Dividends		(68,004	)		(72,506	)
Stock-based compensation		0			(2,221	)
Repurchase of common shares – excess of stated value (note 10)		(124,706	)		(102,955	)
Balance at end of period	$	850,363		$	796,235
Accumulated other comprehensive loss
Balance at beginning of period	$	(120,061	)	$	(55,348	)
Other comprehensive income (loss)		(13,544	)		(64,713	)
Balance at end of period	$	(133,605	)	$	(120,061	)
Total equity of Tim Hortons Inc.	$	1,199,807		$	1,169,609
Noncontrolling interests (notes 1 and 13)
Balance at beginning of period	$	86,077		$	91,811
Net income attributable to noncontrolling interests		20,362			23,446
Capital contribution from noncontrolling interests		0			1,305
Distributions and other to noncontrolling interests		(16,331	)		(30,485	)
Balance at end of period	$	90,108		$	86,077
Total equity	$	1,289,915		$	1,255,686

See accompanying Notes to the Condensed Consolidated Financial Statements.

6

TIM HORTONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY –

NUMBER OF COMMON SHARES OF TIM HORTONS INC.

(Unaudited)

(in thousands of common shares)

	Year-to-date period  ended   October 3, 2010			Year ended January 3,  2010
Common shares
Balance at beginning of period		177,319			180,997
Repurchased during the period (note 10)		(4,017	)		(3,678	)
Balance at end of period		173,302			177,319
Common stock
Balance at beginning of period		0			193,303
Converted to common shares		0			(193,303	)
Balance at end of period		0			0
Treasury stock
Balance at beginning of period		0			(11,754	)
Purchased during the period		0			(560	)
Reissued during the period		0			8
Cancelled and retired during the period		0			12,306
Balance at end of period		0			0
Common shares held in Trust
Balance at beginning of period		(279	)		(358	)
Purchased during the period		(91	)		(25	)
Disbursed or sold from Trust during the period		40			104
Balance at end of period		(330	)		(279	)
Common shares issued and outstanding		172,972			177,040

See accompanying Notes to the Condensed Consolidated Financial Statements.

7

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands of Canadian dollars, except share and per share data)

NOTE 1 MANAGEMENT STATEMENT AND BASIS OF PRESENTATION

Description of business

Tim Hortons Inc. is a corporation governed by the Canada Business Corporations Act (“CBCA”). For periods on or before September 27, 2009, Tim Hortons Inc. was a Delaware corporation (together with its subsidiaries, collectively referred to herein as “THI USA”).

References herein to “Tim Hortons,” or the “Company” refer to THI USA and its subsidiaries for periods on or before September 27, 2009 and to Tim Hortons Inc., the CBCA corporation, and its subsidiaries for periods on or after September 28, 2009, unless specifically noted otherwise.

At 12:00 a.m. on September 28, 2009, THI USA effected a merger that resulted in the conversion of issued and outstanding common stock of THI USA, US$0.001 par value per share, into an equal number of common shares, without par value, in the Company. The Company conducts the business previously conducted by THI USA in substantially the same manner. The merger was accounted for as a reorganization of entities under common control; therefore, there was no revaluation of THI USA’s consolidated assets and liabilities, and the Company continues to use the historical cost basis method of accounting.

The Company’s principal business is the development and franchising and, to a minimal extent, operation of quick service restaurants that serve coffee and other hot and cold beverages, baked goods, sandwiches, soups, and other food products. In addition, the Company has vertically integrated manufacturing, warehouse and distribution operations which supply a significant portion of the system restaurants with food products, including shelf-stable products, and, from one distribution centre, refrigerated and frozen food products, as well as paper and equipment. The Company also controls the real estate underlying a substantial majority of the system restaurants, which generates another source of revenue. As of October 3, 2010, the Company and its franchisees operated 3,082 restaurants in Canada (99.4% franchised) and 621 restaurants in the United States (“U.S.”) (99.7% franchised), including 127 self-serve licensed locations, under the name “Tim Hortons^®” and the Company had 268 primarily self-serve licensed locations in the Republic of Ireland and the United Kingdom.

Basis of presentation and principles of consolidation

The Company prepares its financial statements in accordance with U.S. GAAP. In the opinion of management, the accompanying Condensed Consolidated Financial Statements contain all adjustments (all of which are normal and recurring in nature) necessary to state fairly the Company’s financial position as of October 3, 2010 and January 3, 2010, and the condensed consolidated results of operations, comprehensive income (see note 12) and cash flows for the quarters and year-to-date periods ended October 3, 2010 and September 27, 2009. All of these financial statements are unaudited. These Condensed Consolidated Financial Statements should be read in conjunction with the 2009 Consolidated Financial Statements which are contained in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) and the Canadian Securities Administrators (“CSA”) on March 4, 2010. The January 3, 2010 Condensed Consolidated Balance Sheet was derived from the same audited 2009 Consolidated Financial Statements, but does not include all disclosures required by U.S. GAAP, and has been adjusted to reflect the retroactive application of Financial Accounting Standards Board’s (“FASB”) Accounting Standard Codification (“ASC”) 810—Consolidation (“ASC 810”) (see below).

The functional currency of Tim Hortons Inc. is the Canadian dollar, as the majority of the Company’s cash flows are in Canadian dollars. The functional currency of each of the Company’s subsidiaries and legal entities is the local currency in which each subsidiary operates, which is the Canadian dollar, the U.S. dollar or the Euro. The majority of the Company’s operations, restaurants and cash flows are based in Canada, and the Company is primarily managed in Canadian dollars. As a result, the Company’s reporting currency is the Canadian dollar.

These Condensed Consolidated Financial Statements include the results and balances of Tim Hortons Inc., its wholly-owned subsidiaries and certain independent operators and joint ventures consolidated in accordance with ASC 810 (see note 13). Intercompany accounts and transactions among consolidated entities have been eliminated upon consolidation. Investments in non-consolidated affiliates over which the Company exercises significant influence, but for which the Company is not the primary beneficiary and does not have control, are accounted for using the equity method. The Company’s share of the earnings or loss of these non-consolidated affiliates is included in equity income, which is included as part of operating income since these investments are operating ventures closely integrated in the Company’s business operations.

8

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

Restricted cash and cash equivalents and restricted investments

Amounts presented as Restricted cash and cash equivalents and Restricted investments on the Company’s Condensed Consolidated Balance Sheet relate to the Company’s Tim Card^® quick-pay cash card program. The combined balances as of October 3, 2010 and January 3, 2010 represent the net amount of cash loaded on the cards by customers, less redemptions. The balances are restricted, and cannot be used for any purpose other than application to settle obligations under the cash card program. Since the inception of the program, the interest on the restricted cash and cash equivalents and restricted investments has been contributed by the Company to the Company’s advertising and promotion funds to help offset costs associated with this program. Obligations under the cash card program are included in Accrued liabilities, Other on the Condensed Consolidated Balance Sheet and are disclosed in note 7.

From time to time, the Company invests some of these funds for periods in excess of three months, but less than one year. Only restricted cash and cash equivalents balances in excess of expected net redemptions over the investment time horizon are used for such investments, and the Company does not intend to redeem these investments prior to maturity. As a result, these investments are deemed to be held-to-maturity and are recorded at amortized cost on the Condensed Consolidated Balance Sheet. The carrying amount of the restricted investments approximates fair value due to the short-term nature of the investments. All restricted investments mature by February, 2011.

Increases or decreases in restricted cash and cash equivalents are reflected in Net cash provided from operating activities on the Condensed Consolidated Statement of Cash Flows since the funds will be used to fulfill current obligations to customers recorded in Accrued liabilities, Other on the Condensed Consolidated Balance Sheet. Changes in the customer obligations are included in Net cash provided from operating activities on the Condensed Consolidated Statement of Cash Flows as the offset to changes in restricted cash and cash equivalents balances. Purchases of and proceeds upon the maturity of restricted investments are included in Net cash used in investing activities on the Condensed Consolidated Statement of Cash Flows. Funding for these investments are drawn from restricted cash and cash equivalents balances.

Variable interest entities

In accordance with FASB Statement of Accounting Standards (“SFAS”) No. 167—Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”), now codified within ASC 810 (see Accounting changes – new accounting standards), the Company analyzes its variable interests, including its equity investments and certain license or operator arrangements with various entities. The Company determines which interests are interests in variable interest entities (“VIEs”), and then assesses whether the Company is considered to be the primary beneficiary of these VIEs. If the Company determines it is the primary beneficiary, the Company consolidates the VIE’s assets, liabilities, results of operations and cash flows (see note 13). If the Company is not the primary beneficiary, the Company accounts for such interests using other applicable U.S. GAAP.

Assets and liabilities held for sale

The Company classifies assets and related liabilities as held for sale when all of the following criteria are met:

• Executive management has committed to a plan to sell the assets;

• The assets are available for immediate sale in its present condition;

• An active program to locate a buyer and other actions required to complete the sale have been initiated;

• The assets are actively being marketed;

• The sale of the assets is probable and it is expected the sale will close within one year; and

• It is unlikely that significant changes to the sale plan will be made.

Upon designation of an asset as held for sale, the Company assesses the carrying value of the assets to determine if an impairment exists. If an impairment exists, the assets are recorded at estimated fair value, less cost to sell.

9

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

Accounting changes – new accounting standards

Effective January 4, 2010, the Company adopted FASB Statement of Accounting Standards (“SFAS”) No. 167—Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”), now codified within ASC 810. This Statement amended Interpretation 46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics: (i) the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance; and (ii) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. This statement also amended Interpretation 46(R) to focus on a more qualitative approach, rather than a quantitative approach previously required for determining the primary beneficiary of a variable interest entity, amended certain guidance for determining whether an entity is a variable interest entity, added an additional requirement to assess whether an entity is a variable interest entity on an ongoing basis, and required enhanced disclosures that provides users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The Company has retroactively applied this standard to comparative periods. See note 13 for additional information regarding the impact of the adoption of this standard.

Effective January 4, 2010, the Company adopted certain provisions within Accounting Standard Update (“ASU”) No. 2010-06—Fair Value Measurements: Improving Disclosures about Fair Value Measurements, as codified in ASC 820—Fair Value Measurements (“ASC 820”). This ASU provides amendments to ASC 820 that requires more enhanced disclosures about (i) the different classes of assets and liabilities measured at fair value, (ii) the valuation techniques and inputs used, (iii) the activity in Level 3 fair value measurements, and (iv) the transfers between Levels 1, 2 and 3 fair value measurements. This ASU was effective for interim or annual reporting periods beginning after December 15, 2009, except for certain disclosures applicable to Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those years. The adoption of this update did not have a significant impact on the Company’s financial statements or related disclosures (see note 15).

Effective June 15, 2010, the Company adopted ASU No. 2010-11—Scope Exception Related to Embedded Credit Derivatives, as codified in ASC 815—Derivatives and Hedging. This ASU clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only one form of embedded credit derivative qualifies for the exemption—one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. This ASU was effective for interim periods beginning after June 15, 2010. The adoption of this update did not have a significant impact on the Company’s financial statements or related disclosures (see note 15).

NOTE 2 ASSET IMPAIRMENT

An impairment review was initiated during the third quarter of 2010 regarding the Company’s Portland, Providence and Hartford markets in the New England region as the same-store sales growth and financial performance of these markets had continued to underperform based on the Company’s expectations. At the completion of this review, the Company determined that the future expected cash flows of these markets were insufficient to recover the carrying value of the long-lived assets in these markets. The fair value of these assets was determined to be approximately $11 million (note 15), resulting in an asset impairment charge of $20.9 million being recorded in the third quarter of 2010. The asset impairment charge is included in Asset impairment on the Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows. This asset impairment charge has also been reflected in the U.S. operating segment (note 14).

NOTE 3 INCOME TAXES

The effective income tax rate for the third quarter ended October 3, 2010 was 35.7%, compared to 49.3% for the third quarter ended September 27, 2009. The effective income tax rate for the year-to-date period ended October 3, 2010 was 32.0% compared to 38.8% for the year-to-date period ended September 27, 2009. The 2010 effective tax rates were negatively impacted by the asset impairment charge of $20.9 million recorded on long-lived assets (note 2) with no corresponding tax benefit recognized, offset by the benefit of 2010 Canadian statutory tax rate reductions. The 2009 effective tax rates were negatively impacted primarily by a tax charge resulting from the reorganization of the Company to a Canadian public company.

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TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

NOTE 4 EARNINGS PER COMMON SHARE ATTRIBUTABLE TO TIM HORTONS INC.

Basic earnings per common share attributable to Tim Hortons Inc. are computed by dividing net income attributable to Tim Hortons Inc. by the weighted average number of common shares outstanding. Diluted computations are based on the treasury stock method and include assumed issuances of outstanding restricted stock units (“RSUs”) and stock options with tandem stock appreciation rights (“SARs”), as prescribed in ASC 260—Earnings per share, as the sum of: (i) the amount, if any, the employee must pay upon exercise; (ii) the amount of compensation cost attributed to future services and not yet recognized; and (iii) the amount of tax benefits (both current and deferred), if any, that would be credited to contributed surplus assuming exercise of the options, net of shares assumed to be repurchased from the assumed proceeds, when dilutive.

The computations of basic and diluted earnings per common share attributable to Tim Hortons Inc. are shown below:

	Third quarter ended				Year-to-date period ended
	October 3, 2010		September 27, 2009		October 3, 2010		September 27, 2009
Net income attributable to Tim Hortons Inc. for computation of basic and diluted earnings per common share attributable to Tim Hortons Inc.	$	73,828	$	61,179	$	246,838	$	205,378
Weighted average shares outstanding for computation of basic earnings per common share attributable to Tim Hortons Inc. (in thousands)		173,482		180,681		174,744		180,878
Dilutive impact of restricted stock units (in thousands)		230		183		255		198
Dilutive impact of stock options with tandem SARs (in thousands)		31		0		3		0
Weighted average shares outstanding for computation of diluted earnings per common share attributable to Tim Hortons Inc. (in thousands)		173,743		180,864		175,002		181,076
Basic earnings per common share attributable to Tim Hortons Inc.	$	0.43	$	0.34	$	1.41	$	1.14
Diluted earnings per common share attributable to Tim Hortons Inc.	$	0.42	$	0.34	$	1.41	$	1.13

NOTE 5 INVENTORIES AND OTHER, NET

Inventories and other, net include the following as at October 3, 2010 and January 3, 2010:

	October 3, 2010			January 3,   2010
Raw materials	$	30,336		$	11,489
Work-in-process		321			0
Finished goods		58,722			57,411
		89,379			68,900
Inventory obsolescence provision		(877	)		(2,181	)
Inventories, net		88,502			66,719
Prepaids and other		15,700			13,771
Total inventories and other, net	$	104,202		$	80,490

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TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

NOTE 6 ASSETS AND LIABILITIES HELD FOR SALE – VARIABLE INTEREST ENTITY

In April 2010, the Company received notice from IAWS Group Ltd., a subsidiary of Aryzta AG (“Aryzta”), the Company’s 50-50 partner under the Maidstone Bakeries joint-venture (“Maidstone”), invoking the buy/sell provisions of the joint venture. This triggered the opportunity for the Company to either buy Aryzta’s 50% share of Maidstone for $475 million, or sell its 50% interest in Maidstone to Aryzta for $475 million. In August 2010, the Company decided to sell its 50% interest in Maidstone to Aryzta for gross proceeds of $475 million. The all-cash transaction was completed on October 29, 2010 (see note 17). The Company’s supply obligations for donuts and Timbits™ extend until early 2016, and it has supply rights until late 2017, at the Company’s option, allowing the Company sufficient flexibility to secure alternative means of supply, if desired. The Company will no longer be required to consolidate Maidstone after October 29, 2010 (see note 13) and, due to the continuing business relationship that will exist, Maidstone does not qualify to be presented as discontinued operations.

While the adoption of ASC 810 (previously SFAS No. 167) (see note 1) resulted in the consolidation of Maidstone, the Company’s chief decision maker continued to view and evaluate the performance of the Canadian segment with Maidstone accounted for on an equity accounting basis, which reflects 50% of its operating income (consistent with views and evaluations prior to the adoption of the Standard). As a result, the net revenues, and the remaining 50% of operating income of Maidstone, are included in Variable interest entities (see note 14).

The assets and liabilities of Maidstone are classified as held for sale as the assets held for sale criteria was met during the third quarter of 2010. After the affects of consolidation adjustments, the assets and liabilities of Maidstone are as follows:

	October 3, 2010
Cash and cash equivalents	$	37,757
Accounts receivable		3,284
Inventories		12,082
Property and equipment, net		135,555
Other assets – long-term		1,788
Total Assets	$	190,466
Accounts payable	$	14,929
Deferred income taxes – long-term		8,732
Other long-term liabilities		1,168
Total liabilities		24,829
Equity – Tim Hortons Inc.		80,648
Equity – Noncontrolling interest		84,989
Total equity		165,637
Total liabilities and equity	$	190,466

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TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

NOTE 7 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES – OTHER

Included within Accounts payable are the following obligations as at October 3, 2010 and January 3, 2010:

	October 3,   2010		January 3,    2010
Accounts payable	$	112,645	$	114,973
Construction holdbacks and accruals		30,369		20,275
	$	143,014	$	135,248

Included within Accrued liabilities, Other are the following obligations as at October 3, 2010 and January 3, 2010:

	October 3,   2010		January 3,   2010
Gift certificate obligations	$	6,376	$	8,348
Cash card obligations		51,694		74,292
Other accrued liabilities		49,290		28,761
	$	107,360	$	111,401

Other accrued liabilities include deferred revenues, accrued rent expense, deposits, and various equipment and other accruals.

NOTE 8 LONG-TERM DEBT

The following table outlines the Company’s long-term debt obligations as at October 3, 2010 and January 3, 2010:

	October 3,   2010			January 3,   2010
Senior unsecured notes, series 1 (4.20% coupon rate)	$	200,000		$	0
Term debt		100,000			300,000
Other debt		43,328			37,186
	$	343,328		$	337,186
Less: current portion (1)		(102,322	)		(884	)
Long-term debt	$	241,006		$	336,302

⁽¹⁾ Excludes current portion due under capital leases of $7,204 and $6,937 as of October 3, 2010 and January 3, 2010, respectively.

The Company has an unsecured five-year senior bank facility (“Senior Bank Facility”) with a syndicate of Canadian and U.S. financial institutions that includes a revolving facility of $200 million and US$100 million along with a $300 million (at inception) term loan (“Term Debt”), all of which mature on February 28, 2011. In the second quarter of 2010, the Company repaid $200 million of the Term Debt, prior to maturity and without penalty. The prepayment was made primarily with net proceeds from the issuance of $200 million of senior unsecured notes (“Senior Notes”). The remaining $100 million of Term Debt matures on February 28, 2011 upon expiration of the Senior Bank Facility.

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TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

As noted above, the Company issued $200 million of Senior Notes, which were offered on a private placement basis in Canada with a term of seven years, maturing June 1, 2017. The Senior Notes bear a fixed interest rate of 4.20% with interest payable in semi-annual installments, in arrears, commencing December 1, 2010. The Senior Notes rank equally and pari passu with each other and with the notes of every other series (regardless of their actual time of issue), with all other senior unsecured and unsubordinated indebtedness of Tim Hortons Inc. (the “Borrower”), including amounts owing under the Senior Bank Facility, except as to any sinking fund which pertains exclusively to any particular indebtedness of the Borrower and statutory preferred exceptions. The Senior Notes are initially guaranteed by The TDL Group Corp. (“TDL”), the Borrower’s main Canadian subsidiary. Together, the Borrower’s and TDL’s third party revenues must represent at least 75% of the consolidated revenues of the Company (or such threshold percentage established under the new Senior Bank Facility, upon amendment or after maturity thereof on or before March 31, 2011). These must be tested quarterly, on a rolling twelve-month basis. To the extent combined third party revenues of these two entities is less than 75% of consolidated revenues, additional guarantors must be added until 75% of consolidated revenues are reached or exceeded. Alternatively, if the Borrower’s third party revenues reach or exceed 75% of consolidated revenues, the guarantors will be released. There are also certain covenants limiting liens to secure borrowed money (subject to permitted exceptions), and limiting the Company’s ability to undertake certain acquisitions and dispositions, but there are no financial covenants.

The Senior Notes are redeemable, at the Borrower’s option, at any time, upon not less than 30 days notice, but no more than 60 days notice, at a redemption price equal to the greater of (i) a price calculated to provide a yield to maturity (from the redemption date) equal to the yield on a non-callable Government of Canada bond with a maturity equal to, or as close as possible to, the remaining term to maturity of the Senior Notes, plus 0.30% and (ii) par, together, in each case, with accrued and unpaid interest, if any, to the date fixed for redemption. In the event of a change of control and a rating downgrade to below investment grade, the Borrower will be required to make an offer to repurchase the Senior Notes at a redemption price of 101% of the principal amount, plus accrued and unpaid interest, if any, to the date of redemption.

In March 2010, the Company entered into bond forwards with a notional amount of $195 million as a cash flow hedge to limit the interest rate volatility in the period prior to the issuance of the Senior Notes. These bond forwards were settled in June 2010, resulting in an Other comprehensive loss of $4.9 million (see note 15), of which $4.6 million remains in Accumulated other comprehensive loss on the Condensed Consolidated Balance Sheet. This loss is being recognized in Interest expense over the seven-year term of the Senior Notes resulting in an effective interest rate of the Senior Notes of 4.59%.

In connection with the issuance of the Senior Notes, the Company has a total of approximately $1.2 million in deferred financing costs, which will be amortized as interest expense over the remaining term of the Senior Notes.

In 2006 and 2007, in connection with the Term Debt, the Company entered into interest rate swaps with a notional amount of $130 million (see note 15) which were used to fix a portion of the variable rate Term Debt at 5.04%. Upon partial prepayment of the Term Debt, the Company also settled one of these interest rate swaps with a notional amount of $30 million, resulting in recognition of $0.9 million from Other comprehensive loss to Interest (expense) in the second quarter of 2010. The remaining interest rate swaps fix the interest rate on the $100 million of outstanding Term Debt at 4.93%.

NOTE 9 COMMITMENTS AND CONTINGENCIES

The Company has guaranteed certain leases and debt payments, primarily related to franchisees, amounting to $0.9 million and $0.5 million as at October 3, 2010 and January 3, 2010, respectively. In the event of default by a franchise owner of a guaranteed obligation, the Company generally retains the right to acquire possession of the related restaurants. At October 3, 2010 and January 3, 2010, the Company is also the guarantor on $11.0 million and $9.7 million, respectively, in letters of credit and surety bonds with various parties; however, management does not expect any material loss to result from these instruments because management does not believe performance will be required as the underlying event(s) that would require payment are not expected to occur and have not occurred as of October 3, 2010. The length of the arrangements guaranteed by the Company or for which the Company is contingently liable varies, but generally does not exceed seven years.

The Company has entered into purchase arrangements with some of its suppliers for terms which generally do not exceed one fiscal year. The range of prices and volume of purchases under the agreements may vary according to the Company’s demand for the products and fluctuations in market rates. These agreements help the Company secure pricing stability from suppliers and product availability. The Company does not believe these agreements expose the Company to significant risk.

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TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

In addition to the guarantees described above, the Company is party to many agreements executed in the ordinary course of business that provide for indemnification of third parties under specified circumstances, such as lessors of real property leased by the Company, distributors, service providers for various types of services (including commercial banking, investment banking, tax, actuarial and other services), software licensors, marketing and advertising firms, securities underwriters and others. Generally, these agreements obligate the Company to indemnify the third parties only if certain events occur or claims are made, as these contingent events or claims are defined in each of the respective agreements. The Company believes that the resolution of any such claims that might arise in the future, either individually or in the aggregate, would not materially affect the earnings or financial condition of the Company.

On June 12, 2008, a claim was filed against the Company and certain of its affiliates in the Ontario Superior Court of Justice (the “Court”) by two of its franchisees, Fairview Donut Inc. and Brule Foods Ltd., alleging, generally, that the Company’s Always Fresh baking system and expansion of lunch offerings have led to lower franchisee profitability. The claim, which seeks class action certification on behalf of Canadian franchisees, asserts damages of approximately $1.95 billion. The plaintiffs filed a motion for certification of the putative class in May of 2009, and the Company filed its responding materials as well as a motion for summary judgment in November of 2009. Plaintiffs filed a motion requesting that the Company’s summary judgment motion be heard following hearing and determination of plaintiffs’ motion for certification. It was the Company’s position that the motions should be heard together. A hearing on plaintiffs’ motion to separate the certification and summary judgment motions was heard on May 13, 2010, and the court ruled in favour of the Company that the two motions should be heard together. Both motions are scheduled for April 2011, subject to the delivery of required materials and completion of examinations. On October 28, 2010, the Court granted plaintiffs leave to submit for the Court’s review proposed amendments to the amended statement of claim asserting claims for price maintenance, supplementing the already asserted claims for breach of contract, breach of the duty of good faith and fair dealing, negligent misrepresentation and unjust enrichment. The Company continues to believe the claim is without merit and will not be successful, and intends to oppose the certification motion and defend the claim vigorously. However, there can be no assurance that the outcome of the claim will be favourable to the Company or that it will not have a material adverse impact on the Company’s financial position or liquidity in the event that the ultimate determinations by the Court and/or appellate court are not in accordance with the Company’s evaluation of this claim. Neither the probability of this claim’s success nor the ultimate amount payable, if any, is determinable at this time, and, coupled with the Company’s position that this claim is without merit, the Company has not recorded any provisions in these Condensed Consolidated Financial Statements related to this claim.

In addition, the Company and its subsidiaries are parties to various legal actions and complaints arising in the ordinary course of business. Reserves related to the resolution of legal proceedings are included in Accounts payable on the Condensed Consolidated Balance Sheet. It is the opinion of the Company that the ultimate resolution of such matters will not materially affect the Company’s financial condition or earnings.

NOTE 10 COMMON SHARES

On March 1, 2010, the Company obtained regulatory approval from the Toronto Stock Exchange (“TSX”) to commence its 2010 share repurchase program (“2010 program”) for up to $200 million in common shares, not to exceed the regulatory maximum of 8,817,291 shares, equivalent to 5% of the outstanding common shares as of February 19, 2010. Purchases of common shares are being made through a combination of automatic trading plan (10b5-1) purchases and at management’s discretion in compliance with regulatory requirements, given prevailing market, cost, and other considerations. Purchases under the program are being made by the Company on any of the TSX, the New York Stock Exchange and/or other Canadian marketplaces, subject to applicable regulatory requirements. The 2010 program commenced March 3, 2010 and is due to end on March 2, 2011, or sooner if either the $200 million or 5% share maximum is reached. The 2010 program may also be discontinued at the Company’s discretion in compliance with applicable regulatory requirements. The Company has received provisional regulatory approval in November 2010 to amend its 2010 program (note 17). All shares purchased pursuant to the 2010 program will be cancelled.

In the year-to-date period ended October 3, 2010, the Company purchased and cancelled approximately 4.0 million common shares for a total cost of approximately $136.0 million under the Company’s 2009 repurchase program and the 2010 program, of which $11.3 million reduced the stated value of Common shares and the remainder was recorded as a reduction to Retained earnings.

In the year-to-date period ended September 27, 2009, the Company purchased approximately 0.6 million shares of common stock for a total cost of approximately $16.7 million under the Company’s 2009 repurchase program to be held in treasury. No shares were purchased during the second or third quarters of 2009 due to the suspension of purchases until the fourth quarter of 2009 when the Company completed its reorganization as a Canadian public company. All treasury shares were subsequently cancelled upon the reorganization of THI USA as a Canadian public company in September 2009.

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TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

NOTE 11 STOCK-BASED COMPENSATION

Total stock-based compensation expense included in General and administrative expenses on the Condensed Consolidated Statement of Operations is detailed as follows:

	Third quarter ended				Year-to-date period  ended
	October 3,     2010		September 27, 2009		October 3,     2010		September 27, 2009
Restricted stock units	$	1,736	$	1,552	$	5,052	$	4,476
Stock options and tandem SARs		1,707		599		3,160		1,322
Deferred stock units		610		572		1,288		1,003
Total stock-based compensation expense	$	4,053	$	2,723	$	9,500	$	6,801

The Company begins expensing performance-based RSUs at the time the performance measures are set. As a result, amounts relating to the planned May 2011 grants are currently being expensed, assuming the achievement of the performance condition is probable.

The Company has entered into total return swaps (“TRS”) as economic hedges for a portion of its outstanding stock options with tandem SARs (see note 15). The Company recognized a gain relating to the TRS of $1.6 million and $0.5 million in the third quarters of 2010 and 2009, respectively (gain of $2.0 million year-to-date 2010 and nil year-to-date 2009).

Details of stock-based compensation grants and settlements during 2010, on a year-to-date basis, are set forth below.

Deferred share units

Approximately 22,600 deferred share units (“DSUs”) were granted during the year-to-date period ended October 3, 2010 (35,000 year-to-date 2009) at a fair market value of $34.96 ($31.32 year-to-date 2009). Approximately 5,200 DSUs were settled during the year-to-date period ended October 3, 2010 (nil year-to-date 2009). DSU’s are liability-based awards and, as such, are revalued each reporting period to the Company’s closing share price.

Restricted stock units

The Company’s Human Resource and Compensation Committee (“HRCC”) approved awards of 14,487 and 174,946 of RSUs with dividend equivalent rights, which were granted in March 2010 and May 2010, respectively. The fair market value of each RSU awarded as part of this grant (the closing price of the Company’s common shares traded on the TSX on the business day preceding the grant) in March 2010 and May 2010 was $32.78 and $35.23, respectively. The awards granted in March 2010 vest in equal installments in May 2010 and May 2011 and the awards granted in May 2010 are scheduled to vest either in equal installments over, or in one lump sum at the end of, a 30-month period. In accordance with ASC 718—Compensation—Stock Compensation (“ASC 718”), RSUs granted to retirement-eligible employees are expensed immediately, unless the RSUs contain a performance measure. Performance-based RSUs expected to be granted to retirement eligible employees are expensed evenly over the period from the date on which the performance measure is set to the date on which the grant is expected to be made.

In the second quarter of 2010, the Company funded its employee benefit plan trust (the “Trust”), which, in turn, purchased approximately 91,000 common shares for approximately $3.3 million (25,000 shares for $0.7 million in Q2 2009). For accounting purposes, the cost of the purchase of shares held in trust has been accounted for as a reduction in outstanding common shares, and the Trust has been consolidated in accordance with ASC 810, since the Company is the primary beneficiary, as that term is defined by ASC 810. The Trust is used to fix the Company’s future cash requirements in connection with the settlement, after vesting, of outstanding RSUs by delivery of common shares held in the Trust to most of the Canadian officers and employees that participate in the 2006 Stock Incentive Plan, as amended and restated from time to time (the “2006 Plan”).

In the second quarter of 2010, approximately 92,000 (150,000 in Q2 2009) RSUs that were previously granted vested in accordance with the terms of such awards. The Company’s settlement obligations, after provision for the payment of minimum statutory withholding tax requirements for which employees are responsible, were satisfied by the disbursement of approximately 40,000 (66,000 in Q2 2009) shares held in the Trust and approximately 11,000 shares (8,000 shares in Q2 2009) were purchased by an agent of the Company on behalf of the respective eligible employees on the open market in May 2010, at an average purchase price of $35.63 ($28.94 in Q2 2009), and in 2009, approximately 8,000 shares were issued from treasury (nil in 2010 as the Company does not have treasury shares as a result of the September 28, 2009 reorganization).

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TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

Stock options and tandem stock appreciation rights

The HRCC approved awards of 403,269 stock options with tandem SARs, which were granted in May 2010 (533,392 in May 2009) at a fair value grant day price of $35.23 ($28.87 in May 2009), to officers of the Company. These awards were granted to retirement-eligible employees and non-retirement eligible employees. For purposes of the Black-Scholes-Merton option pricing model, the grants were segregated based on the year of the grant and retirement eligibility, and the assumptions were adjusted accordingly. All options with tandem SARs granted in 2010 and 2009 vest over three years and expire seven years from the date of issuance, provided that if an employee retires, the term decreases to four years after retirement. The fair value of these awards was determined in accordance with ASC 718 at the grant date and each subsequent remeasurement date by applying the Black-Scholes-Merton option pricing model using the following assumptions:

	Assumptions
Remeasurement date	October 3, 2010	January 3, 2010
Expected volatility	14% – 25%	23% – 28%
Risk-free interest rate	1.3% – 1.9%	1.4% – 2.5%
Expected life	1.1 – 4.6 years	1.9 – 4.4 years
Expected dividend yield	1.4%	1.2%
Closing share price	$37.36	$32.13

Awards granted to retirement-eligible employees are expensed on an accelerated basis, in accordance with ASC 718. The stock option with tandem SARs awards were revalued to fair value at October 3, 2010 using the closing share price on the Toronto Stock Exchange.

A total of 14,477 vested SARs were exercised and cash-settled for approximately $0.1 million during the year-to-date period ended October 3, 2010 (nil in the year-to-date period ended September 27, 2009). The associated options were cancelled.

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TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

NOTE 12 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

The components of Other comprehensive income (loss) and Total comprehensive income are shown below:

	Third quarter ended						Year-to-date period ended
	October 3, 2010			September 27, 2009			October 3, 2010			September 27, 2009
Net income	$	81,702		$	66,933		$	267,200		$	221,778
Other comprehensive income (loss)
Translation adjustments		(16,364	)		(24,995	)		(11,987	)		(46,712	)
Unrealized gains (losses) from Cash flow hedges:
Net gain (loss) from change in fair value of derivatives		(2,346	)		(738	)		(5,303	)		524
Amount of net (gain) loss reclassified to earnings during the period		510			2,511			3,746			(2,460	)
Total cash flow hedges		(1,836	)		1,773			(1,557	)		(1,936	)
Total other comprehensive income (loss)		(18,200	)		(23,222	)		(13,544	)		(48,648	)
Total comprehensive income		63,502			43,711			253,656			173,130
Total comprehensive income attributable to noncontrolling interests		7,874			5,754			20,362			16,400
Total comprehensive income attributable to Tim Hortons Inc.	$	55,628		$	37,957		$	233,294		$	156,730
Income tax (expense)/recovery components netted in the above table are detailed as follows:
	Third quarter ended						Year-to-date period ended
	October 3, 2010			September 27, 2009			October 3, 2010			September 27, 2009
Cash flow hedges:
Net gain (loss) from change in fair value of derivatives	$	843		$	29		$	1,945		$	261
Amounts reclassified to earnings	$	(252	)	$	(427	)	$	(1,956	)	$	(1,134	)

NOTE 13 VARIABLE INTEREST ENTITIES

VIEs for which the Company is the primary beneficiary

The Company’s 50-50 bakery joint venture, Maidstone, produces and supplies our restaurant system with par-baked donuts, Timbits^TM , some bread products, and pastries. Under the joint venture, a significant portion of Maidstone’s manufacturing activities either involves, or is conducted on behalf of, the Company to benefit the Tim Hortons restaurant chain. As such, the Company is subject to terms and conditions under various agreements, including the joint venture, supply, license and service agreements. Prior to the Company’s disposition of its 50% interest in Maidstone on October 29, 2010 (note 6), the Company was considered to have power (under the accounting principles of ASC 810) over Maidstone since the Company determined which par-baked products are to be manufactured by Maidstone, exclusively for Tim Hortons restaurants, and at pricing determined by both 50-50 joint venture parties. Tim Hortons restaurant owners and operators currently purchase all of their par-baked donuts, Timbits, and pastries and a significant portion of other bread products from Maidstone. For these reasons, the Company concluded that it was the primary beneficiary of Maidstone prior to its disposition. In fiscal 2009, the Company made a capital contribution of $1.3 million to Maidstone and had accounts payable outstanding of $5.5 million and $3.6 million as at October 3, 2010 and January 3, 2010, respectively. The assets and liabilities of Maidstone were classified as held for sale at October 3, 2010 (see note 6), and subsequently sold in the fourth quarter of 2010 (note 17).

18

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

The Company enters into arrangements, called operator agreements, in which the operator acquires the right to operate a Tim Hortons restaurant, but the Company is the owner of the equipment, signage and trade fixtures. If the legal entity within which such an operator operates does not have additional capital independently owned by the legal entity, it is considered to not be adequately capitalized and that entity is considered a VIE. The operator is required to pay a percentage of the restaurant’s weekly gross sales to the Company, thus exposing the Company to variability in rental and royalty revenues and in the collection of amounts due. The Company has the power to determine which operator will manage these restaurants and for what duration; and, both the Company and the operator have the option to terminate the agreement with 30 days notice. The Company is considered to be the primary beneficiary of such legal entities.

In addition, the Company offers a franchise incentive program (“FIP”) to certain U.S. franchisees which allows the franchisee to finance both the initial franchise fee and the purchase of certain equipment, signage and trade fixtures. These franchisees who participate in the FIP program do not have a significant amount of initial capital within their legal entities that is not financed directly by the Company. As a result, legal entities of franchisees under the FIP program, which do not have additional capital independently owned, are also considered to be VIEs. To supplement the FIP, the Company may offer additional relief and assistance to franchisees in developing markets in the U.S. where the brand is not yet established and the restaurants have lower sales levels. This additional relief may include assistance with costs of supplies; certain operating expenses, including rents and royalties; and, in certain markets, labour and other costs. The Company is considered to be the primary beneficiary in these circumstances since it absorbs losses and operating expenses of the FIP franchisee in the form of additional relief which is netted in the Company’s rents and royalties revenues. The Company is also considered to have power since it determines which U.S. franchisees will participate in the FIP program and which will be offered additional relief. Notes receivable from these FIP franchisees, which are generally non-interest bearing, are included in the table below.

The Company has consolidated 289 and 290 operator and FIP restaurants as at October 3, 2010 and January 3, 2010, respectively, or approximately 7.8% and 8.1% of the Company’s total systemwide restaurants, respectively. On average, a total of 283 and 274 operator and FIP restaurants were consolidated in the third quarter of 2010 and 2009, respectively (277 and 274 for year-to-date 2010 and 2009, respectively). The Company has no equity interest in any of its franchisees. None of the Company’s assets serve as collateral for the consolidated restaurants, and creditors of these operators have no recourse to the Company.

In connection with restricted stock unit awards granted to Company employees, the Company established the Trust, which purchases and retains common shares of the Company to satisfy the Company’s contractual obligation to deliver shares to settle the awards for most Canadian employees. The Company is considered to be the primary beneficiary of the Trust. Since inception, the Trust has been consolidated in accordance with ASC 810 and the cost of the shares held by the Trust of $11.3 million and $9.4 million as at October 3, 2010 and January 3, 2010, respectively, has been accounted for as a reduction in outstanding common shares on the Company’s Condensed Consolidated Balance Sheet.

The Company participates in two advertising funds established to collect and administer funds contributed for use in advertising and promotional programs designed to increase sales and enhance the reputation of the Company and its franchisees. The advertising funds are operated on behalf of the Company and its franchisees, with separate advertising funds administered for Canada and the U.S. The Company is the sole shareholder (Canada) and sole member (U.S.) and is considered to be the primary beneficiary of these funds which have historically been consolidated in accordance with ASC 952—Franchisors, and accordingly, the revenue, expenses and cash flows of the advertising funds are generally not included in the Company’s Condensed Consolidated Statement of Operations and Cash Flows because the contributions to these advertising funds are designated for specific purposes, and the Company acts, in substance, as an agent with regard to these contributions. The assets and liabilities of these advertising funds have been consolidated in accordance with ASC 810. Company contributions to these advertising funds totaled $1.2 million and $0.9 million for the quarters ended October 3, 2010 and September 27, 2009, respectively ($2.9 million and $3.0 million year-to-date 2010 and 2009, respectively).

19

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

The assets and liabilities associated with the Company’s consolidated 50-50 bakery joint-venture, restaurant VIEs (operator and FIP restaurants) and advertising funds are presented on a gross basis, prior to consolidation adjustments, and are as follows:

	As at
	October 3, 2010						January 3, 2010
	Joint Venture VIE (2)		Restaurant VIEs		Advertising fund VIEs		Joint Venture VIE		Restaurant VIEs		Advertising fund VIEs
Cash and cash equivalents		$    37,757	$	8,342	$	0		$    15,714	$	6,229	$	0
Restricted assets - current		0		0		28,074		0		0		26,681
Other current assets		20,874		4,128		0		26,751		5,268		0
Property and equipment, net		135,555		33,171		13,319		141,756		29,448		18,159
Other long-term assets (1)		1,939		947		2,515		2,809		4,162		1,256
Total assets		$  196,125	$	46,588	$	43,908		$   187,030	$	45,107	$	46,096
Notes payable to Tim Hortons Inc. – current (1)		$             0	$	25,473	$	0		$              0	$	22,843	$	0
Restricted liabilities – current		0		0		42,235		0		0		43,944
Other current liabilities (1)		15,973		12,849		0		11,119		13,765		0
Notes payable to Tim Hortons Inc. – long-term (1)		0		1,815		0		0		5,584		0
Restricted liabilities – long-term		0		0		420		0		0		415
Other long-term liabilities		9,900		1,516		1,253		7,818		639		1,737
Total liabilities		25,873		41,653		43,908		18,937		42,831		46,096
Equity of variable interest entities		170,252		4,935		0		168,093		2,276		0
Total liabilities and equity		$  196,125	$	46,588	$	43,908		$  187,030	$	45,107	$	46,096

⁽¹⁾ Various assets and liabilities are eliminated upon the consolidation of these variable interest entities, the most significant of which are the Notes payable to Tim Hortons Inc., which reduces the Notes receivable, net reported on the Condensed Consolidated Balance Sheet.

⁽²⁾ Classified as held for sale at October 3, 2010 (note 6), and subsequently sold in the fourth quarter of 2010 (note 17).

The liabilities recognized as a result of consolidating these VIEs do not necessarily represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims by our creditors as they are not legally included within our general assets.

VIEs for which the Company is not the primary beneficiary

The Company also has investments in certain real estate ventures determined to be VIEs of which the Company is not the primary beneficiary. The most significant of these is TIMWEN Partnership, owned on a 50/50 basis by the Company and Wendy’s International, Inc. (“Wendy’s”) to jointly develop the real estate underlying “combination restaurants” in Canada that offer Tim Hortons and Wendy’s products at one location, typically with separate franchisees operating the Tim Hortons and Wendy’s restaurants. Control is considered to be shared by both Tim Hortons and Wendy’s since all significant decisions of the TIMWEN Partnership must be made jointly.

These real estate ventures, including TIMWEN Partnership, are accounted for using the equity method, based on the Company’s ownership percentages, and are included in Equity investments on the Company’s Condensed Consolidated Balance Sheet. The maximum exposure to potential losses associated with these non-consolidated VIEs is limited to the Company’s equity investments which amounted to $46.2 million and $45.9 million as at October 3, 2010 and January 3, 2010, respectively. The Company had nil accounts payable outstanding with TIMWEN Partnership as at October 3, 2010 and $2.4 million outstanding as at January 3, 2010.

20

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

NOTE 14 SEGMENT REPORTING

The Company operates exclusively in the food-service industry and has determined that its reportable segments are those that are based on the Company’s methods of internal reporting and management structure and represent the manner in which the Company’s chief decision maker views and evaluates the various aspects of the Company’s business. The Company’s reportable segments are the geographic locations of Canada and the U.S. As set forth in the table below, there are no amounts of revenues shown between reportable segments nor do reportable segments include sales to variable interest entities.

The table below presents information about reportable segments:

	Third quarter ended												Year-to-date period ended
	October 3,     2010			% of Total			September 27, 2009			% of Total			October 3,     2010			% of Total			September 27, 2009			% of Total
Revenues
Canada	$	562,057			83.8	%	$	485,807			79.5	%	$	1,568,950			82.9	%	$	1,383,234			78.1	%
U.S.		33,573			5.0	%		32,071			5.3	%		91,421			4.8	%		105,115			5.9	%
Total reportable segments		595,630			88.8	%		517,878			84.8	%		1,660,371			87.7	%		1,488,349			84.0	%
Variable interest entities (1)		74,890			11.2	%		92,836			15.2	%		232,623			12.3	%		283,531			16.0	%
Total	$	670,520			100.0	%	$	610,714			100.0	%	$	1,892,994			100.0	%	$	1,771,880			100.0	%
Segment operating income (loss)
Canada (1) (2)	$	148,240			113.4	%	$	141,897			99.2	%	$	430,356			103.4	%	$	390,066			99.1	%
U.S. (3)		(17,483	)		(13.4	)%		1,079			0.8	%		(14,149	)		(3.4	)%		3,656			0.9	%
Reportable segment operating income		130,757			100.0	%		142,976			100.0	%		416,207			100.0	%		393,722			100.0	%
Variable interest entities (1)		9,032						6,906						23,255						19,459
Corporate charges (4)		(6,779	)					(13,053	)					(28,865	)					(36,087	)
Consolidated operating income		133,010						136,829						410,597						377,094
Interest expense, net		6,040						4,908						17,905						14,639
Income taxes		45,268						64,988						125,492						140,677
Net income		81,702						66,933						267,200						221,778
Net income attributable to noncontrolling interests		7,874						5,754						20,362						16,400
Net income attributable to Tim Hortons Inc.	$	73,828					$	61,179					$	246,838					$	205,378

⁽¹⁾ While the adoption of ASC 810 (previously SFAS No. 167) (see note 1) resulted in the consolidation of its 50-50 bakery joint-venture, the Company’s chief decision maker continued to view and evaluate the performance of the Canadian segment with this 50-50 bakery joint-venture accounted for on an equity accounting basis, which reflects 50% of its operating income (consistent with views and evaluations prior to the adoption of the Standard). As a result, the net revenues, and the remaining 50% of operating income of this joint venture have been included in Variable interest entities along with revenues and operating income from our non-owned consolidated restaurants.

⁽²⁾ Includes substantially all of the Company’s equity income.

⁽³⁾ Includes $20,888 of asset impairment charge in 2010.

⁽⁴⁾ Corporate charges include certain overhead costs which are not allocated to individual business segments, the impact of certain foreign currency exchange gains and losses, and the operating income from the Company’s wholly-owned Irish subsidiary, which continues to be managed corporately.

21

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

The following table provides information about capital spending:

	Third quarter ended										Year-to-date period ended
	October 3, 2010		% of Total			September 27, 2009		% of Total			October 3, 2010		% of Total			September 27, 2009		% of Total
Capital expenditures
Canada	$	22,234		72.9	%	$	34,757		79.5	%	$	63,462		80.3	%	$	90,298		79.9	%
U.S.		8,186		26.9	%		7,807		17.9	%		14,213		18.0	%		21,084		18.7	%
Variable interest entities		74		0.2	%		1,140		2.6	%		1,313		1.7	%		1,646		1.4	%
	$	30,494		100.0	%	$	43,704		100.0	%	$	78,988		100.0	%	$	113,028		100.0	%

The following table provides a reconciliation of total reportable segment long-lived assets and total assets to total consolidated long-lived assets and total consolidated assets, respectively:

	As at
	October 3, 2010		January 3, 2010
Total long-lived assets
Canada	$	971,252	$	967,879
U.S.		327,848		356,560
Total reportable segments		1,299,100		1,324,439
Variable interest entities (1)		26,914		156,712
Corporate long-lived assets		12,051		12,881
Consolidated long-lived assets	$	1,338,065	$	1,494,032
	As at
	October 3, 2010		January 3, 2010
Total assets
Canada	$	1,484,168	$	1,373,325
U.S.		416,107		478,395
Total reportable segments		1,900,275		1,851,720
Variable interest entities		39,485		226,470
Assets held for sale – variable interest entity		190,466		0
Corporate assets		25,064		16,101
Consolidated total assets	$	2,155,290	$	2,094,291

⁽¹⁾ Long-lived assets relating to the Company’s 50-50 bakery joint-venture are included in assets held for sale within current assets (note 6).

22

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

Revenues consisted of the following:

	Third quarter ended				Year-to-date period ended
	October 3,     2010		September 27, 2009		October 3,     2010		September 27, 2009
Sales
Distribution sales	$	387,030	$	324,283	$	1,069,144	$	937,311
Company-operated restaurant sales		6,080		5,876		16,525		18,617
Sales from variable interest entities		74,890		92,836		232,623		283,531
		468,000		422,995		1,318,292		1,239,459
Franchise revenues
Rents and royalties		176,964		164,114		512,803		469,102
Franchise fees		25,556		23,605		61,899		63,319
		202,520		187,719		574,702		532,421
Total revenues	$	670,520	$	610,714	$	1,892,994	$	1,771,880

Cost of sales related to Company-operated restaurants were $5.9 million and $6.2 million for the third quarters ended October 3, 2010 and September 27, 2009, respectively ($16.8 million and $21.4 million year-to-date 2010 and 2009, respectively).

The following table outlines the Company’s franchised locations and system activity for the third quarters and year-to-date periods ended October 3, 2010 and September 27, 2009:

	Third quarter ended						Year-to-date period  ended
	October 3,     2010			September 27, 2009			October 3,     2010			September 27, 2009
Franchise Restaurant Progression
Franchise restaurants in operation – beginning of period		3,610			3,455			3,560			3,403
Franchises opened		79			54			138			106
Franchises closed		(3	)		(4	)		(14	)		(19	)
Net transfers within the franchised system (primarily resales)		(4	)		(1	)		(2	)		14
Franchise restaurants in operation – end of period		3,682			3,504			3,682			3,504
Company-operated restaurants		21			23			21			23
Total systemwide restaurants – end of period (1)		3,703			3,527			3,703			3,527

⁽¹⁾ Includes various types of standard and non-standard restaurant formats with differing restaurant sizes and menu offerings as well as self-serve kiosks, which offer primarily coffee products and a limited product selection. Collectively, the Company refers to all of these units as “systemwide restaurants.”

Excluded from the above franchise restaurant progression table are 268 licensed locations in the Republic of Ireland and the United Kingdom as at October 3, 2010 (292 as of September 27, 2009).

23

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

NOTE 15 DERIVATIVES AND FAIR VALUE MEASUREMENTS

Derivatives

ASC 815—Derivatives and Hedging (“ASC 815”) requires companies to recognize all derivatives as either assets or liabilities at fair value on the Condensed Consolidated Balance Sheet. ASC 815 also permits companies to designate all derivatives that qualify as hedging instruments as fair value hedges, cash flow hedges, or hedges of net investments in foreign operations. This designation is based on the exposure being hedged.

The Company has a policy prohibiting speculative trading in derivatives. The Company may enter into derivatives that are not designated as hedging instruments for accounting purposes, but which largely offset the economic impact of certain foreign currency transactions.

The Company limits its counterparty risk associated with its derivative instruments by utilizing a number of different financial institutions. The Company continually monitors its positions and the credit ratings of its counterparties, and adjusts positions, if appropriate. The Company did not have any significant exposure to any individual counterparty at October 3, 2010 or January 3, 2010.

Cash flow hedges: The Company’s exposure to foreign exchange risk is mainly related to fluctuations between the Canadian dollar and the U.S. dollar. The Company is also exposed to changes in interest rates. The Company seeks to manage its cash flows and income exposures arising from these fluctuations and may use derivative products to reduce the risk of a significant impact on its cash flows or income. The Company does not hedge foreign currency and interest rate exposure in a manner that would entirely eliminate the effect of changes in foreign currency exchange rates or interest rates on net income and cash flows. The fair value of derivatives used by the Company are based on quoted market prices for comparable products and have therefore been classified as observable Level 2 inputs as defined by ASC 820.

The Company enters into cash flow hedges to reduce the exposure to variability in certain expected future cash flows. The types of cash flow hedges the Company may enter into include, but are not limited to: (i) interest rate swaps that effectively convert a portion of floating rate debt to fixed rate debt and are designed to reduce the impact of interest rate changes on future interest expense; (ii) forward foreign exchange contracts that are entered into to fix the price of U.S.-dollar-denominated future purchases; and (iii) interest rate forward contracts that were entered into to fix the future interest payments on the issuance of the Senior Notes.

For cash flow hedges, the effective portion of the gains or losses on derivatives is reported in the cash flow hedges component of Accumulated other comprehensive (loss) in Total equity of Tim Hortons Inc. and reclassified into earnings in the same period or periods in which the hedged transaction affects earnings. The ineffective portion of gains or losses on derivatives is reported in the Condensed Consolidated Statement of Operations. The Company discontinues hedge accounting: (i) when it determines that the cash flow derivative is no longer effective in offsetting changes in the cash flows of a hedged item; (ii) when the derivative expires or is sold, terminated or exercised; (iii) when it is probable that the forecasted transaction will not occur; or (iv) when management determines that designation of the derivative as a hedge instrument is no longer appropriate.

Fair value hedges: The Company may, from time to time, enter into fair value hedges to reduce the exposure to changes in the fair values of certain assets or liabilities. For fair value hedges, the gains or losses on derivatives, as well as the offsetting gains or losses attributable to the risk being hedged, are recognized in current earnings in the Condensed Consolidated Statement of Operations in Other (income), net. The fair value of derivatives used by the Company are based on quoted market prices for comparable products and have, therefore, been classified as observable Level 2 inputs as defined by ASC 820 (see below). There were no outstanding fair value hedges as at October 3, 2010 and January 3, 2010.

Other derivatives: The Company has a number of total return swaps outstanding that are intended to reduce the variability of cash flows and, to a lesser extent, earnings associated with stock-based compensation awards that will settle in cash, namely, the SARs that are associated with stock options (see note 11). The TRS did not qualify as accounting hedges under ASC 815, and, as such, they are being adjusted to fair value in accordance with ASC 815 at the end of each reporting period. The impact of the revaluation is reported in the Condensed Consolidated Statement of Operations. The fair value of these derivatives was determined using Level 2 inputs, as defined by ASC 820. Changes in the fair value of this derivative are included in General and administrative expense as an offset to fair value adjustments of the liability related to tandem SARs. The TRS each have a seven-year term but each contract allows for partial settlements, at the option of the Company, over the term, without penalty.

24

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

Fair Value Measurements

ASC 820 defines fair value, establishes a framework for measuring fair value under U.S. GAAP and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs. The first two levels are considered observable and the last unobservable. These are used to measure fair value as follows:

• Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

• Level 2—Inputs, other than Level 1 inputs, that are observable for the assets or liabilities, either directly or indirectly. Level 2 inputs include: quoted market prices for similar assets or liabilities; quoted prices in markets that are not active; or, other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In accordance with ASC 815 and ASC 820, the tables below outline the Company’s outstanding derivatives and fair value measurements as at October 3, 2010 and January 3, 2010 and for the second quarters and year-to-date periods ended October 3, 2010 and September 27, 2009.

25

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

Financial Assets and Liabilities

The following table summarizes the location and fair value of derivative instruments on our Condensed Consolidated Balance Sheet:

	As at October 3, 2010								As at January 3, 2010
	Notional amount		Fair  value hierarchy		Fair value asset (liability)			Location on Condensed Consolidated Balance Sheet	Notional amount		Fair  value hierarchy		Fair value asset (liability)			Location  on Condensed Consolidated Balance  Sheet
Derivatives designated as cash flow hedging instruments(1)
Forward currency contracts(2)	$	96,714		Level 2	$	(2,354	)	Accounts payable	$	85,802		Level 2	$	(1,410	)		Accounts payable
Interest rate swaps(3)		100,000		Level 2		(1,274	)	Accrued liabilities, Other		130,000		Level 2		(5,290	)		Other long- term liabilities
Total	$	196,714			$	(3,628	)		$	215,802			$	(6,700	)
Income tax effect						1,204		Deferred income taxes (current asset)						2,370			Deferred income taxes (current asset)
Net of income taxes					$	(2,424	)						$	(4,330	)
Derivatives not designated as cash flow hedging instruments(1)
TRS (4)	$	14,977		Level 2	$	2,503		Other long- term assets	$	8,958		Level 2	$	516			Other long- term assets

⁽¹⁾ In accordance with ASC 815.

⁽²⁾ Maturities as at October 3, 2010 extend between October, 2010 and December, 2011.

⁽³⁾ Each matures February 2011.

⁽⁴⁾ Maturities of May 2015, May 2016 and May 2017, respectively.

The Company values most of its derivatives using valuations that are calibrated to the initial trade prices. Subsequent valuations are based on observable inputs to the valuation model. Forward currency contracts and interest rate swaps are fair valued using prevailing exchange rates and interest rates. The TRS are fair valued using the Company’s closing common share price on the last business day of the fiscal period. In addition, the Company entered into interest rate forwards during the first quarter of 2010, which were settled during the second quarter of 2010.

26

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

The tables below summarize the effect of derivative instruments on our Condensed Consolidated Statement of Comprehensive Income (see note 12). The tables exclude amounts determined to be ineffective, which were not significant:

	Third quarter ended October 3, 2010
	Amount of gain (loss) recognized in OCI(1)			Amount of net (gain) loss reclassified to earnings			Location on Condensed Consolidated Statement of Operations		Total effect on  OCI(1)
Derivatives designated as cash flow hedging instruments under ASC 815
Forward currency contracts	$	(3,231	)	$	(286	)		Cost of sales	$	(3,517	)
Interest rate swaps		42			875			Interest (expense)		917
Interest rate forwards		0			173			Interest (expense)		173
Total	$	(3,189	)	$	762				$	(2,427	)
Income tax effect		843			(252	)		Income taxes		591
Net of income taxes	$	(2,346	)	$	510				$	(1,836	)
	Third quarter ended September 27, 2009
	Amount of gain (loss) recognized in OCI(1)			Amount of net (gain) loss reclassified to earnings			Location on Condensed Consolidated Statement of Operations		Total effect on  OCI(1)
Derivatives designated as cash flow hedging instruments under ASC 815
Forward currency contracts	$	(674	)	$	1,620			Cost of sales	$	946
Interest rate swaps		(93	)		1,318			Interest (expense)		1,225
Total	$	(767	)	$	2,938				$	2,171
Income tax effect		29			(427	)		Income taxes		(398	)
Net of income taxes	$	(738	)	$	2,511				$	1,773

⁽¹⁾ Other comprehensive income (loss).

27

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

	Year-to-date period ended October 3, 2010
	Amount of gain  (loss) recognized in  OCI(1)			Amount of net (gain)  loss reclassified to earnings			Location  on Condensed Consolidated Statement  of Operations		Total effect on OCI(1)
Derivatives designated as cash flow hedging instruments under ASC 815
Forward currency contracts	$	(1,924	)	$	979			Cost of sales	$	(945	)
Interest rate swaps		(469	)		4,486			Interest (expense)		4,017
Interest rate forwards		(4,855	)		237			Interest (expense)		(4,618	)
Total	$	(7,248	)	$	5,702				$	(1,546	)
Income tax effect		1,945			(1,956	)		Income taxes		(11	)
Net of income taxes	$	(5,303	)	$	3,746				$	(1,557	)
	Year-to-date period ended September 27, 2009
	Amount of gain  (loss) recognized in  OCI(1)			Amount of net (gain)  loss reclassified to earnings			Location  on Condensed Consolidated Statement  of Operations		Total effect on OCI(1)
Derivatives designated as cash flow hedging instruments under ASC 815
Forward currency contracts	$	1,214		$	(4,820	)		Cost of sales	$	(3,606	)
Interest rate swaps		(951	)		3,494			Interest (expense)		2,543
Total	$	263		$	(1,326	)			$	(1,063	)
Income tax effect		261			(1,134	)		Income taxes		(873	)
Net of income taxes	$	524		$	(2,460	)			$	(1,936	)

⁽¹⁾ Other comprehensive income (loss).

Derivatives not designated as hedging instruments under ASC 815 resulted in a gain of $1.6 million and $0.5 million in the third quarters of 2010 and 2009, respectively (gain of $2.0 million and nil year-to-date 2010 and 2009, respectively). These gains were recorded in General and administrative expense on the Condensed Consolidated Statement of Operations.

Non-financial Assets and Liabilities

The Company recorded an asset impairment charge of $20.9 million in the third quarter of 2010 relating to the long-lived assets of the Company’s Portland, Providence and Hartford markets in the New England region (note 2). The most significant long-lived assets are property and buildings for which the fair value of the underlying real estate was estimated to be approximately $11 million. Management estimated the fair value of the real estate assets by using independent property valuations obtained in 2008 factored by management’s estimate of current market conditions. This valuation is considered to be a Level 3 valuation on the fair value hierarchy. A 10% change in management’s fair value estimate of the assets would either increase or decrease the value of the assets by less than $2 million.

In addition, the Company values its assets held for sale at the lower of historical cost or fair value less cost to sell. When applicable, fair value is generally based on third-party appraisals. Assets held for sale that are valued using fair value less cost to sell were not significant as at October 3, 2010 and January 3, 2010 and have therefore not been separately disclosed.

28

TIM HORTONS INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(in thousands of Canadian dollars, except share and per share data)

NOTE 16 RECENT ACCOUNTING PRONOUNCEMENTS

In October 2009, the FASB issued Accounting Standard Update (“ASU”) No. 2009-13—Multiple Deliverable Revenue Arrangements, as codified in ASC 605—Revenue Recognition. The objective of this ASU is to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. The ASU also establishes a selling price hierarchy for determining the selling price of a deliverable and has expanded disclosures related to vendor’s multiple-deliverable revenue arrangements. This ASU is effective for fiscal years beginning after June 15, 2010, and the Company is currently assessing the potential impact, if any, the adoption of this ASU may have on its Condensed Consolidated Financial Statements.

In April 2010, the FASB issued ASU No. 2010-13—Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades as codified in ASC 718—Compensation—Stock Compensation (“ASC 718”). This update addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. ASC 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. This ASU is effective for fiscal years beginning on or after December 15, 2010, and the Company is currently assessing the potential impact, if any, the adoption of this update may have on its Condensed Consolidated Financial Statements.

In April 2010, the FASB issued ASU No. 2010-17—Revenue Recognition—Milestone Method of Revenue Recognition as codified in ASC 605—Revenue Recognition. This update provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive milestones that should be evaluated individually. This ASU is effective for fiscal years, and interim periods, beginning on or after June 15, 2010, and the Company is currently assessing the potential impact, if any, the adoption of this update may have on its Condensed Consolidated Financial Statements.

In July 2010, the FASB issued ASU No. 2010-20—Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses as codified in ASC 310—Receivables. This update improves the disclosures that an entity provides about the credit quality of its financing receivables, excluding short-term trade receivables, and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. This ASU is effective for public companies, for interim and annual reporting periods ending on or after December 15, 2010 regarding disclosures as of the end of the reporting period, and for interim and annual reporting periods beginning on or after December 15, 2010 regarding disclosures about activity that occurs during a reporting period. The Company is currently assessing the potential impact, if any, the adoption of this update may have on its Condensed Consolidated Financial Statements.

NOTE 17 SUBSEQUENT EVENTS

The sale of the Company’s 50% interest in Maidstone closed on October 29, 2010 for gross cash proceeds of $475 million. The accounting related to the sale of Maidstone is subject to the finalization of income tax, accounting and other considerations and will be recorded in the fourth quarter of 2010.

The Company received provisional regulatory approval from the TSX to amend its 2010 share repurchase program to increase the maximum number of shares that may be purchased under the program effective November 16, 2010. Subject to the receipt of final TSX approval, the Company plans to spend the $200 million originally contemplated in the 2010 normal course issuer bid, plus approximately an additional $200 million, with the final amount dependent upon average daily trading limits and share price, under the amended 2010 normal course issuer bid, which is based on a 10% of “public float” calculation, and which is due to terminate March 2, 2011.

After completing a comprehensive review and analysis of the performance of the Company’s U.S. operating segment, the Company decided to close certain restaurants and self-serve kiosks in certain markets in the New England region in the fourth quarter of 2010. The closure of these restaurants will result in closure costs, which will be recorded in the fourth quarter of 2010, commensurate with the timing of the decision to close the restaurants.

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TIM HORTONS INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the 2009 Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for the year ended January 3, 2010 (“2009 Form 10-K”), filed with the U.S. Securities and Exchange Commission (“SEC”) and the Canadian Securities Administrators (the “CSA”) on March 4, 2010, which have not been adjusted for the adoption of Financial Accounting Standards Board’s (“FASB”) Statement of Accounting Standards (“SFAS”) No. 167—Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”). 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 2009 Form 10-K, our Quarterly Report on Form 10-Q filed August 12, 2010 with the SEC and CSA, and set forth in our long-form Safe Harbor Statement referred to below under “Safe Harbor Statement,” as well as our other descriptions of risks set forth herein, 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 October 3, 2010, 3,682 or 99.4% of our restaurants were franchised, representing 99.4% of the locations in Canada and 99.7% of the locations in the United States. The amount of systemwide sales affects our franchise royalties and rental income, as well as our distribution income. Changes in systemwide sales are driven by changes in average same-store sales growth and changes in the number of restaurants. Average same-store sales growth, one of the key metrics we use to assess our performance, provides information on total retail sales at restaurants, which have been open for thirteen or more months, operating systemwide and provides a useful comparison between periods. We believe systemwide sales and average same-store sales growth provide meaningful information to investors concerning the size of our system, the overall health and financial performance 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 certain non-owned restaurants consolidated in accordance with Accounting Standards Codification (“ASC”) 810—Consolidation (“ASC 810”)); however, franchise restaurant sales result in royalties and rental income, which are included in our franchise revenues, and also generate distribution income.

We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations may also contain certain non-GAAP financial measures 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.

Effective January 4, 2010, we adopted a new accounting standard, SFAS No. 167, now codified within ASC 810, which requires us to consolidate variable interest entities of which we are considered the primary beneficiary. We have retroactively applied this standard to comparative periods.

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 governed by the Canada Business Corporations Act, and its subsidiaries for periods on or after September 28, 2009, unless specifically noted otherwise.

Executive Overview

We franchise and, to a much lesser extent, operate Tim Hortons restaurants in Canada and the U.S. As franchisor, we collect royalty income on our franchised restaurant sales. Our business model also includes controlling the real estate for most of our franchised restaurants. As of October 3, 2010, we leased or owned the real estate for approximately 79% 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, kiosks in offices, hospitals, colleges, and airports, as well as 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 in some cases, through third-party distributors. We 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, we have 268 licensed locations in the Republic of Ireland and the United Kingdom, which are mainly self-serve kiosks operating primarily under the name “Tim Hortons.”

Systemwide sales grew by 7.4% in the third quarter of 2010 (6.2% in the third quarter of 2009) and 8.8% on a year-to-date basis in 2010 (5.9% 2009 year-to-date) as a result of strong same-store sales growth and new restaurant expansion in both Canada and the

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U.S. Systemwide sales include restaurant-level sales at both franchised and Company-operated restaurants. 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 2010, Canadian same-store sales growth was 4.3% (3.1% in the third quarter of 2009). Average cheque was positively impacted this quarter by previous pricing in the system, but to a lesser extent than earlier in the year as pricing in certain markets lapped late in the quarter. Transaction growth continued to add positively to same-store sales growth benefiting from our ongoing menu initiatives, promotions, and operational initiatives such as our hospitality program. Our co-branding initiative with Cold Stone Creamery^® in Canada also had a slightly positive effect on same-store sales growth in the third quarter of 2010 and to a lesser extent year-to-date. Canadian same-store sales growth was 5.3% on a year-to-date basis in 2010 (2.7% on a year-to-date basis in 2009).

Our U.S. same-store sales growth was 3.3% in the third quarter of 2010 (4.3% in the third quarter of 2009). U.S. sales gains related primarily to a combination of a higher average cheque and, to a lesser extent, transaction growth. Average cheque benefited from a full quarter of pricing in the system (introduced early in second quarter 2010), while slight transaction growth was driven primarily by continued menu innovation, marketing programs designed to distinguish our quality and value position and ongoing operational programs. During the quarter, our Cold Stone Creamery co-branded locations had a moderately negative impact on same-store sales growth as we lapped a significant number of 2009 grand openings, as well as the shift of statutory holidays from our second quarter to our third quarter. On a year-to-date basis, U.S. same-store sales growth was 3.1% (3.6% in 2009 year-to-date).

Our Portland, Providence and Hartford markets in the New England region continued to underperform based on our expectations regarding same-store sales growth and financial performance, therefore, an impairment review was initiated during the third quarter of 2010. Upon completion of this review, we determined that the future expected cash flows of these markets were insufficient to recover the carrying value of the long-lived assets in these markets, resulting in an asset impairment charge of $20.9 million being recorded in our U.S. operating segment operating results in the third quarter of 2010.

Additionally, after completing a comprehensive review and analysis of the performance of our U.S. operating segment, we have decided to close 34 restaurants and 18 self-serve kiosks in our Hartford and Providence markets in the fourth quarter of 2010 and two restaurants in our Portland market. The closure of these restaurants will result in estimated closure costs not expected to exceed $30 million, which will be recorded in the fourth quarter of 2010, commensurate with the timing of the decision to close the restaurants. These markets represent a relatively small portion of our overall system in the U.S., but have had a disproportionately negative impact on earnings, average unit volumes and same-store sales growth in the U.S. segment. These closures will allow us to focus on and reinvest a portion of our savings from these closed restaurants into our core growth markets in the Northeast and Midwest U.S. by increasing our advertising and marketing scale where the brand continues to demonstrate strengthening average unit volumes, cash flows and brand progression. We expect this decision to contribute directly to operating income improvement in our U.S. segment in 2011.

Operating income decreased $3.8 million, or 2.8%, in the third quarter of 2010 compared to the third quarter of 2009. Operating income increased $33.5 million, or 8.9%, in the year-to-date period of 2010. Impacting operating income growth in both periods was the asset impairment charge of $20.9 million. Growth from operations during both these periods was driven by higher systemwide sales from continued same-store sales growth at existing locations and from additional restaurants in the system, which was also a significant contributor to higher revenues and higher distribution income. Partially offsetting growth from operations in both periods was lower franchise fee income and higher general and administrative expenses. In addition, the adoption of a new accounting standard relating to the consolidation of certain variable interest entities at the beginning of 2010, and retroactively applied to prior periods, positively impacted both our third quarter 2010 and year-to-date operating income growth rates by 1.8% and 0.6%, respectively.

Net income attributable to Tim Hortons Inc. increased $12.6 million, or 20.7%, in the third quarter of 2010 as compared to the third quarter of 2009, resulting primarily from a lower effective tax rate, offset, in part, by lower operating income and higher interest expense. Our effective tax rate was 35.7% in the third quarter of 2010, which was significantly lower than the 49.3% effective tax rate in the third quarter 2009, primarily as a result of certain tax-related expenses totaling $19.8 million incurred in the third quarter of 2009 in connection with our Canadian public company reorganization and lower 2010 statutory rates in Canada, partially offset by the $20.9 million asset impairment charge incurred in the third quarter of 2010 for which no corresponding tax benefit was recognized. Interest expense increased year-over-year reflecting a higher interest rate on our long-term debt. Diluted earnings per share attributable to Tim Hortons Inc. (“EPS”) increased to $0.42 in the third quarter of 2010 from $0.34 in the third quarter of 2009. The diluted weighted average number of shares outstanding in the third quarter of 2010 was 173.7 million, or 3.9% lower than the diluted weighted average share count in the third quarter of 2009, due primarily to our 2009 and 2010 share repurchase programs.

Net income attributable to Tim Hortons Inc. increased $41.5 million, or 20.2%, in the year-to-date period of 2010 as compared to the year-to-date period of 2009. This increase was driven by higher operating income, a lower effective tax rate, offset in part due to higher interest expense. In addition to higher interest rates on long-term debt, interest expense was also $1.1 million higher due to the early settlement of one interest rate swap associated with the partial prepayment of $200 million of our term debt and the write-off of deferred financing costs associated with the portion of the term debt that was prepaid. Diluted earnings per share for the year-to-date period were $1.41 per share as compared to $1.13 per share in the year-to-date period of 2009. The diluted weighted average number of shares outstanding was 3.4% lower in the year-to-date period of 2010 as a result of our 2009 and 2010 share repurchase programs.

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In April 2010, we received notice from IAWS Group Ltd., a subsidiary of Aryzta AG, our 50-50 partner under the Maidstone Bakeries joint-venture (“Maidstone Bakeries”), invoking the buy/sell provisions of the joint-venture agreement. We decided to sell our 50% interest in Maidstone Bakeries for gross cash proceeds of $475 million. Due to Aryzta’s ability to potentially leverage available surplus capacity for other channels and the international nature of their tax structure, this facility represents greater economic value to Aryzta than to Tim Hortons. The all-cash transaction closed on October 29, 2010. Our supply obligations for products extend for donuts and Timbits^TM until early 2016, and we have supply rights until late 2017, at our option, allowing us sufficient flexibility to secure alternative means of supply, if necessary. In addition, the existing agreements also have protections regarding intellectual property rights and dealing with competitors, as well as terms relating to price determination, that remain in effect after October 29, 2010. Maidstone Bakeries is currently consolidated in our financial results in accordance with ASC 810 (previously SFAS No. 167). We will no longer be required to consolidate Maidstone Bakeries after October 29, 2010 and, due to the continuing business relationship that will exist, Maidstone Bakeries does not qualify to be presented as discontinued operations. In fiscal 2009, Maidstone Bakeries contributed approximately $26 million to our adjusted operating income attributable to Tim Hortons Inc., $22 million to our net income, and $0.12 per share, representing our 50% share of earnings. For accounting purposes, approximately $40 million to $45 million of the pre-tax gain will be deferred and amortized over the remaining term of the supply agreement. Subject to the finalization of income tax, accounting and other considerations, we expect to record a gain on sale of Maidstone Bakeries in the fourth quarter of 2010 of between $355 million and $365 million before taxes, and between $310 million and $320 million after taxes.

We generate substantial cash flows from operations and have historically self-funded our growth requirements from internally-generated cash flows. We have, therefore, decided to distribute approximately $400 million of the approximately $430 million in after-tax proceeds from the sale of Maidstone Bakeries through the repurchase of common shares. In addition, we have also committed the remaining $30 million related to the Maidstone Bakeries sale to support our key relationship with restaurant owners with the intent of helping to partially mitigate anticipated rising operating costs. We have received regulatory approval from the Toronto Stock Exchange (TSX) under TSX normal course issuer bid rules to amend our 2010 share repurchase program to increase the maximum number of shares that may be purchased under the program effective November 16, 2010. Under the amended program, due to end on March 2, 2011, we plan to spend the $200 million originally contemplated in the 2010 repurchase program plus up to an additional $200 million, with the final amount dependent upon average daily trading limits and share price. It is also our intention, subject to regulatory approval and in parallel with our annual capital allocation process, to distribute the remaining net cash proceeds from the sale of Maidstone Bakeries of up to approximately $200 million through an additional normal course issuer bid, with approximately $400 million of the net proceeds expected to be distributed in its entirety through share repurchases by the end of the third quarter of 2011, subject to the Company’s discretion, in compliance with applicable regulatory requirements, to discontinue any such 2011 repurchase program (see “Liquidity and Capital Resources—Overview” for additional details).

The asset impairment charge and costs associated with the decision to close restaurants in the New England region, as well as the gain on sale of Maidstone Bakeries and the $30 million commitment to restaurant owners, were not contemplated as part of Management’s 2010 guidance for operating income growth, tax rate, or EPS.

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Selected Operating and Financial Highlights

	Third quarter ended				Year-to-date period ended
	October 3, 2010		September 27, 2009		October 3, 2010		September 27, 2009
Systemwide sales growth (1)		7.4%		6.2%		8.8%		5.9%
Average same-store sales growth
Canada		4.3%		3.1%		5.3%		2.7%
U.S.		3.3%		4.3%		3.1%		3.6%
Systemwide restaurants		3,703		3,527		3,703		3,527
Revenues (in millions)	$	670.5	$	610.7	$	1,893.0	$	1,771.9
Operating income (in millions)	$	133.0	$	136.8	$	410.6	$	377.1
Operating income attributable to Tim Hortons Inc. (in millions) (2)	$	124.0	$	129.9	$	387.3	$	357.6
Adjusted operating income attributable to Tim Hortons Inc. (in millions) (2)	$	144.9	$	129.9	$	408.2	$	357.6
Net income attributable to Tim Hortons Inc. (in millions)	$	73.8	$	61.2	$	246.8	$	205.4
Basic EPS	$	0.43	$	0.34	$	1.41	$	1.14
Diluted EPS	$	0.42	$	0.34	$	1.41	$	1.13
Weighted average number of common shares outstanding – Diluted (in millions)		173.7		180.9		175.0		181.1

⁽¹⁾ Systemwide 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 or year 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, including the effects of foreign currency translation, was 6.9% for both the third quarter ended 2010 and 2009, respectively, and 7.8% and 7.2% for year-to-date 2010 and 2009, respectively.

⁽²⁾ Operating income attributable to Tim Hortons Inc. is a non-GAAP measure. Operating income attributable to Tim Hortons Inc. excludes operating income attributable to noncontrolling interests. Prior to the adoption of a new accounting standard at the beginning of the first quarter of 2010, operating income was, for the most part, unaffected by noncontrolling interests, which is not the case post-adoption. This new accounting standard requires the consolidation of variable interest entities of which we are considered to be the primary beneficiary, including Maidstone Bakeries as well as, on average, approximately 277 non-owned restaurants. Previously, we did not consolidate Maidstone Bakeries and we consolidated approximately 120 non-owned restaurants, on average, in accordance with the prior accounting standard. Management believes that operating income attributable to Tim Hortons Inc. provides important information for comparison purposes to prior periods and for purposes of evaluating the Company’s operating income performance without the effects of the new accounting standard.

Adjusted operating income attributable to Tim Hortons Inc. is also a non-GAAP measure. Adjusted operating income attributable to Tim Hortons Inc. excludes operating income attributable to noncontrolling interests, as described above, and the asset impairment charge. The asset impairment charge impacted three U.S. operating markets, which represents approximately 2% of our overall systemwide restaurants. Given the foregoing, we have excluded the asset impairment charge as we consider this charge to have a disproportionate impact on overall performance of our consolidated business.

The presentation of these non-GAAP measures is made with operating income, the most directly comparable U.S. GAAP measure. We present information excluding amounts related to this new accounting standard and the asset impairment charge as it is more reflective of the way we manage and measure our performance internally. Therefore, these measures provide a more consistent view of management’s perspectives on underlying performance than the closest equivalent U.S. GAAP measure.

33

	Third quarter ended						Change from prior year
	October 3, 2010			September 27, 2009			$			%
Operating income	$	133.0		$	136.8		$	(3.8	)		(2.8	)%
Less: Operating income attributable to noncontrolling interests		(9.0	)		(6.9	)		(2.1	)		(30.8	)%
Operating income attributable to Tim Hortons Inc.		124.0			129.9			(5.9	)		(4.6	)%
Add: Asset impairment charge		20.9			0.0			20.9			n/m
Adjusted operating income attributable to Tim Hortons Inc.	$	144.9		$	129.9		$	14.9			11.5	%
	Year-to-date period ended						Change from prior year
	October 3, 2010			September 27, 2009			$			%
Operating income	$	410.6		$	377.1		$	33.5			8.9	%
Less: Operating income attributable to noncontrolling interests		(23.3	)		(19.5	)		(3.8	)		(19.5	)%
Operating income attributable to Tim Hortons Inc.		387.3			357.6			29.7			8.3	%
Add: Asset impairment charge		20.9			0.0			20.9			n/m
Adjusted operating income attributable to Tim Hortons Inc.	$	408.2		$	357.6		$	50.6			14.1	%

n/m—The comparison is not meaningful

Systemwide Sales Growth

Systemwide sales growth was 7.4% during the third quarter of 2010 (6.2% in third quarter of 2009), and 8.8% on a year-to-date basis in 2010 (5.9% in year-to-date 2009) as a result of continued same-store sales growth and new restaurant expansion in both Canada and the U.S.

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 99.4% of our system is franchised. The amount of systemwide sales impacts our royalties and rental income, as well as our distribution income. Changes in systemwide sales are driven by changes in average same-store sales and changes in the number of restaurants (i.e., historically the addition of new restaurants). 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 quarter or year for the period covered. Systemwide sales growth excludes sales from our Republic of Ireland and United Kingdom licensed locations 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 that have been open for thirteen or more months (i.e., includes both franchised and Company-operated restaurants) 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. Restaurant-level price increases are primarily used to offset higher restaurant-level costs on key items such as coffee and other commodities, labour, supplies, utilities and business expenses.

Product innovation is one of our focused strategies to drive same-store sales growth, including innovation at breakfast as well as other dayparts. During the third quarter of 2010, we promoted our iced coffee, iced cappuccino mocha, cheddar cheese bagel, blueberry-themed baked goods, chicken caesar wrap snackers, hot chicken sandwiches and, in our U.S. market, apple-themed baked goods. Earlier in the year, we promoted our new homestyle bun, featuring a turkey caesar sandwich, and strawberry-themed products. We continued our rollout of our Canadian hospitality program and our Cold Stone Creamery co-branding initiative, with sales benefiting positively from both of these initiatives.

34

New Restaurant Development

Opening restaurants in new and existing markets in Canada and the U.S. has historically been a significant contributor to our growth. The following summary outlines restaurant openings and closures for the third quarters and year-to-date periods ended October 3, 2010 and September 27, 2009, respectively:

	Third quarter ended				Year-to-date period ended
	October 3,     2010		September 27, 2009		October 3,     2010		September 27, 2009
Canada
Restaurants opened		44		36		79		71
Restaurants closed		(2)		(4)		(12)		(17)
Net change		42		32		67		54
U.S.
Restaurants opened		35		20		60		38
Restaurants closed		(1)		0		(2)		(2)
Net change		34		20		58		36
Total Company
Restaurants opened		79		56		139		109
Restaurants closed		(3)		(4)		(14)		(19)
Net change		76		52		125		90

From the end of the third quarter of 2009 to the end of the third quarter of 2010, we opened 206 system locations, including both full-serve and self-serve franchised locations and Company-operated restaurants, and we had 30 restaurant closures for a net increase of 176 restaurants. Historically, we have generally closed between 20 to 40 system restaurants annually, the majority of which are typically in Canada. Restaurant closures generally result from an opportunity to acquire a better location, which will permit us to upgrade size and layout or add a drive-thru. Restaurant closures made in the normal course typically occur at the end of a lease term or at the end of the useful life of the principal asset. 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. As mentioned earlier, we have decided to close 34 restaurants and 18 self-serve kiosks in our Hartford and Providence markets, and an additional two restaurants in our Portland market as a result of a thorough analysis of these restaurants and the markets. These restaurants will be closed in the fourth quarter of 2010.

Included in our third quarter 2010 U.S. restaurant openings were 24 self-serve kiosk locations (38 on a year-to-date basis in 2010). Self-serve kiosk locations have significantly different economics than our standard and non-standard restaurants, including substantially less capital investment, as well as significantly lower sales and, therefore, lower associated royalties and distribution income; however, such kiosks serve to increase our brand awareness and create another outlet to drive convenience, which is important in our developing markets.

One of our strategic planning initiatives is to grow differently in ways we have not grown before. Initiatives in support of this strategy include the expansion of our Cold Stone Creamery co-branding concept. In 2009, we began to co-brand certain U.S. restaurants with Cold Stone Creamery and, in the second half of 2009, we expanded this initiative to Canada. As of October 3, 2010, we had 165 co-branded locations, including 80 co-branded locations in the U.S. (77 in Tim Hortons restaurants and three in Cold Stone Creamery locations) and 85 co-branded locations in Tim Hortons restaurants in Canada. In addition, we have a few Cold Stone Creamery locations that are operating on a limited term agreement, and we are testing some take-home-only formats. In the fourth quarter of 2009, we entered into two separate licensing arrangements with Kahala Franchise Corp., the franchisor of the Cold Stone Creamery brand. The nature and purpose of the arrangements are to expand the parties’ co-branding initiative. We have exclusive development rights in Canada, and certain rights to use licenses within the U.S., in both cases to operate ice cream and frozen confections retail outlets.

In addition to the Cold Stone Creamery co-branding initiative, we began testing new concept restaurants in certain U.S. markets to differentiate our customer offering as a cafe and bake shop destination. At the end of the third quarter of 2010, we had three new concept restaurants opened in the U.S. These restaurants will be utilized to test various new products, equipment and restaurant design features in support of our U.S. strategic plan.

35

The following table shows our restaurant count as of October 3, 2010, January 3, 2010 and September 27, 2009:

Systemwide Restaurant Count

	As of October 3,  2010			As of January 3,  2010			As of September 27,  2009
Canada
Company-operated		19			13			18
Franchised – self-serve kiosks		98			98			99
Franchised – standard and non-standard		2,965			2,904			2,854
Total		3,082			3,015			2,971
% Franchised		99.4	%		99.6	%		99.4	%
U.S.
Company-operated		2			5			5
Franchised – self-serve kiosks		127			87			87
Franchised – standard and non-standard		492			471			464
Total		621			563			556
% Franchised		99.7	%		99.1	%		99.1	%
Total system
Company-operated		21			18			23
Franchised – self-serve kiosks		225			185			186
Franchised – standard and non-standard		3,457			3,375			3,318
Total		3,703			3,578			3,527
% Franchised		99.4	%		99.5	%		99.3	%

We have completed the process of actively converting many of our U.S. company-operated restaurants to operator agreements over the past few years. The effect of these conversions to date has been accretive to our U.S. segment operating income. Initially, after conversion, we usually provide additional relief to the operator and, in the majority of cases, we are required to consolidate these restaurants in accordance with variable interest entity accounting rules for consolidations, which recently changed effective for our first quarter of 2010. We consolidated approximately 120 non-owned restaurants, on average, under the previous accounting standard and, with the adoption of the new variable interest entities accounting standard, we are now consolidating, on average, approximately 277 non-owned restaurants in the year-to-date period ended October 3, 2010. We adopted this standard with retroactive application to prior periods for comparability. We believe that, in the long-term, the franchising strategy generally provides better overall profitability to the Company.

36

Segment Operating Income (Loss)

Systemwide sales and average same-store sales growth is affected by the business and economic environments in Canada and the U.S. We manage and review financial results from Canadian and U.S. operations separately. We, therefore, have determined the reportable segments for our business to be the geographic locations of Canada and the U.S. Each segment includes all manufacturing and distribution operations that are located in their respective geographic locations. We continue to manage the development of our international operations in the Republic of Ireland and the United Kingdom, which consist primarily of branded, licensed self-serve kiosk locations, corporately. As a result, operating income from these operations is included in Corporate charges in our segmented operating results and, currently it is insignificant. Our reportable segments exclude the effects of the variable interests accounting standard, reflective of the way the business is managed.

The following tables contain information about the operating income (loss) of our reportable segments:

	Third quarter ended								Change from third quarter 2009
	October 3, 2010		% of Revenues		September 27, 2009		% of Revenues		Dollars		Percentage
	(in thousands, except where noted)
Operating Income (Loss)
Canada (1)	$	148,240		22.1%	$	141,897		23.2%	$	6,343	4.5%
U.S. (2)		(17,483)		(2.6)%		1,079		0.2%		(18,562)	n/m
Reportable segment operating income		130,757		19.5%		142,976		23.4%		(12,219)	(8.5)%
Variable interest entities		9,032		1.3%		6,906		1.1%		2,126	30.8%
Corporate charges (3)		(6,779)		(1.0)%		(13,053)		(2.1)%		6,274	(48.1)%
Consolidated operating income	$	133,010		19.8%	$	136,829		22.4%	$	(3,819)	(2.8)%
	Year-to-date period ended								Change from Year-to-date period 2009
	October 3, 2010		% of Revenues		September 27, 2009		% of Revenues		Dollars			Percentage
	(in thousands, except where noted)
Operating Income (Loss)
Canada (1)	$	430,356		22.7%	$	390,066		22.0%		$40,290			10.3%
U.S. (2)		(14,149)		(0.7)%		3,656		0.2%		(17,805)			n/m
Reportable segment operating income		416,207		22.0%		393,722		22.2%		22,485			5.7%
Variable interest entities		23,255		1.2%		19,459		1.1%		3,796			19.5%
Corporate charges (3)		(28,865)		(1.5)%		(36,087)		(2.0)%		7,222			(20.0)%
Consolidated operating income	$	410,597		21.7%	$	377,094		21.3%		$33,503			8.9%

n/m—The comparison is not meaningful

⁽¹⁾ While the adoption of ASC 810 (previously SFAS No. 167) resulted in the consolidation of Maidstone Bakeries, the Company’s chief decision maker continues to view and evaluate the performance of the Canadian segment with Maidstone Bakeries accounted for on an equity accounting basis, which reflects 50% of its operating income (consistent with views and evaluations prior to the adoption of the Standard). As a result, the net revenues and the remaining 50% of operating income of Maidstone Bakeries have been included in the Variable interest entities line item, along with revenues and operating income from our non-owned consolidated restaurants.

⁽²⁾ Includes $20,888 million of an asset impairment charge in 2010.

⁽³⁾ Corporate charges include certain overhead costs that are not allocated to individual business segments, the impact of certain foreign currency exchange gains and losses, and the operating income from international operations (discussed below), which continue to be managed corporately.

37

Reportable segment operating income decreased $12.2 million, or 8.5%, in the third quarter of 2010 compared to the third quarter of 2009. Reportable segment operating income increased $22.5 million, or 5.7%, for the year-to-date period ended October 3, 2010 compared to the year-to-date period ended September 27, 2009. Both periods in 2010 were impacted negatively by the asset impairment charge of $20.9 million recorded in our U.S. operating segment (see below). Higher systemwide sales from continued same-store sales growth at existing locations and additional restaurants in the system drove higher revenues and distribution income and, consequently, operating income growth during the quarter and year-to-date periods. In the first quarter of 2009, the Company did not pass on some commodity cost increases to franchisees given the challenging economic environment, which reduced 2009 distribution income. With the improvement in business conditions, primarily in Canada, commodity cost increases were passed along in 2010, positively impacting 2010 income growth in comparison. Fewer U.S. company-operated restaurants resulted in lower operating loss and contributed positively to reportable segment operating income performance. We had lower corporate charges during the third quarter and year-to-date periods of 2010, primarily due to the 2009 public company reorganization costs incurred and lower professional fees year-over-year, offset in part by expenses associated with corporate initiatives in 2010. In addition, income associated with variable interest entities increased year-over-year, due primarily to improved income before income tax at Maidstone Bakeries. Overall, consolidated operating income decreased by $3.8 million, or 2.8%, during the third quarter to $133.0 million from $136.8 million in the third quarter of 2009, and increased by $33.5 million, or 8.9%, in the year-to-date period of 2010 to $410.6 million from $377.1 million for the year-to-date period of 2009.

38

Reportable operating income as a percentage of revenues decreased 3.9% to 19.5% during the third quarter of 2010 and decreased by 0.2% to 22.0% on a year-to-date basis in 2010. Impacting both periods in 2010 was the asset impairment charge of $20.9 million recorded in our U.S. operating segment (see below) which lowered the operating income as a percentage of revenue by 3.1% and 1.1% for the third quarter and year-to-date periods of 2010, respectively. In addition, earlier in 2010, we began to manage and distribute a number of new products, including some products from Maidstone Bakeries, through our distribution system in Canada. While these new products overall provide a net positive dollar benefit to Canadian operating income, the profit margin is lower than our previous mix of products, resulting in lower operating income as a percentage of revenues in the third quarter of 2010, and, to a lesser extent, also impacted the year-to-date period. Commodity cost increases passed on to franchisees in the first half of 2010, as noted above, more than offset the impact of these lower-margin products on a year-to-date basis.

Canada

Operating income in our Canadian segment for the third quarter of 2010 was $148.2 million, representing a growth rate of 4.5% over the comparable period in 2009. Growth during the quarter was driven primarily by higher systemwide sales, which increased our rents and royalties and distribution income. Increases in our distribution income, associated with new products being managed through our supply chain, also increased our Canadian segment operating income. The Canadian segment also benefited from manufacturing income relating to the new coffee roasting facility, which began operations in the fourth quarter of 2009. Higher earnings from our joint ventures, including Maidstone Bakeries, also contributed to the Canadian segment improvement. Partially offsetting these improvements were higher general and administrative costs due to higher salaries and benefits required to support the growth of the business as well as investments in our hospitality and co-branding strategies, higher professional fees, and higher promotional expenses. In addition, lower franchise fees relating primarily to fewer resales and a shift in mix of restaurant types opened also reduced operating income during the quarter. For the year-to-date period in 2010, our Canadian segment operating income was $430.4 million compared to $390.1 million. The same factors driving operating income growth during the quarter were prevalent throughout the year-to-date period as well.

Canadian systemwide sales grew during the third quarter of 2010 due to solid same-store sales growth of 4.3% at existing restaurants and the net addition of 111 restaurants since the third quarter of 2009. Same-store sales growth was positively impacted this quarter by previous pricing in the system, but to a lesser extent than earlier in the year as pricing in certain markets lapped late in the quarter. Transaction growth continued to add positively to same-store sales growth, benefiting from our ongoing menu initiatives, promotions, and operational initiatives such as our hospitality program. Our co-branding initiative with Cold Stone Creamery in Canada also had a slightly positive effect on same-store sales growth in the third quarter of 2010 and less of an impact on a year-to-date basis. On a year-to-date basis, same-store sales growth was 5.3% in 2010 compared to 2.7% in 2009. In the third quarter of 2010, we opened 44 restaurants in Canada and closed two, compared to opening 36 restaurants and closing four in the third quarter of 2009. On a year-to-date basis, we have opened 79 restaurants in Canada and closed 12 in 2010, as compared to opening 71 restaurants and closing 17 in the comparable period of 2009.

39

U.S.

The U.S. segment had an operating loss of $17.5 million in the third quarter of 2010, compared to operating income of $1.1 million in the third quarter of 2009 and an operating loss of $14.1 million for the year-to-date period of 2010 compared to operating income of $3.7 million year-to-date 2009. Excluding the asset impairment charge of $20.9 million, discussed below, our operating income in the U.S. segment for the third quarter of 2010 would have been $3.4 million, an increase of 215% compared to the third quarter of 2009 and operating income of $6.7 million for the year-to-date period of 2010, an increase of 84% over the prior year. This growth, which includes the negative results of the restaurants closed in the New England region, continues to show the strength of the underlying operating performance in our core Northeast and Midwest markets in the U.S.

For the third quarter, U.S. operating segment improvements, excluding the asset impairment, were mainly due to increased systemwide sales, resulting in higher distribution income, higher rents and royalties, operating income improvements from our U.S. coffee roasting operations and fewer Company-operated restaurants. These same factors drove operating income growth, excluding the asset impairment, on a year-to-date basis as well, but were partially offset by lower franchise fees.

Our Portland, Providence and Hartford markets in the New England region continued to underperform based on our expectations regarding same-store sales growth and financial performance, therefore, an impairment review was initiated during the third quarter of 2010. Upon completion of this review, we determined that the future expected cash flows of these markets were insufficient to recover the carrying value of the long-lived assets in these markets, resulting in an asset impairment charge of $20.9 million being recorded in our U.S. operating segment operating results in the third quarter of 2010.

Additionally, after completing a comprehensive review and analysis of the performance of our U.S. operating segment, we have decided to close 34 restaurants and 18 self-serve kiosks in the Hartford and Providence markets in the fourth quarter of 2010 and two restaurants in our Portland market. The Providence and Hartford markets are among the most densely penetrated market areas in the U.S. by quick service restaurants, and we were not successful in expanding our customer base to the levels required for future profitability. The closure of these restaurants will result in estimated closure costs not expected to exceed $30 million, which will be recorded in the fourth quarter of 2010, commensurate with the timing of the decision to close the restaurants. These markets represent a relatively small portion of our overall system in the U.S., but have had a disproportionately negative impact on earnings, average unit volumes, and same-store sales growth in the U.S. segment. Average annual unit volumes for standard restaurants in the Providence and Hartford markets were approximately half of other core markets in the U.S. Collectively the restaurants that we are closing had a negative impact of approximately $4.4 million on operating income year-to-date to the end of the third quarter in the U.S. operating segment, excluding the $20.9 million asset impairment charge. These closures will allow us to focus on and reinvest a portion of our savings from these closed restaurants into our core growth markets in the Northeast and Midwest U.S. by increasing our advertising and marketing scale where the brand continues to demonstrate strengthening average unit volumes, cash flows and brand progression. We expect this decision to contribute directly to operating income improvement in our U.S. segment in 2011.

U.S. systemwide sales grew during the third quarter of 2010 due to the net addition of 65 restaurants since the third quarter of 2009 and same-store sales growth of 3.3% in the third quarter of 2010 and 3.1% during year-to-date 2010. As previously discussed, 38 of the 65 net new restaurants added were self-serve kiosks that generate significantly lower sales and contribute minimally to operating earnings. Self-serve kiosks are one of the ways we seed our brand and offer convenience to our customers. U.S. sales in the third quarter of 2010 benefited from pricing taken in early May 2010. Our co-branding initiative with Cold Stone Creamery had a moderately negative impact on U.S. third quarter 2010 same-store sales growth due to the lapping of a significant number of grand openings in third quarter of 2009. Year-to-date, same-store sales was 3.1% in 2010 compared to 3.6% in 2009, with our co-branding initiative having a positive impact on same-store sales growth.

During the third quarter of 2010, we opened 35 new restaurants, of which 24 were self-serve kiosks and closed one restaurant. In the third quarter of 2009, we opened 20 new restaurants. On a year-to-date basis in 2010, we opened 60 restaurants, including the 38 self-serve kiosks, and closed two restaurants, as compared to opening 38 restaurants and closing two in the 2009 year-to-date period.

When the Company went public in 2006, we disclosed average unit volumes (“AUVs”) for fiscal 2005 relating to three of our most significant markets: Buffalo, Detroit and Columbus. The AUVs for the same basket of standard restaurants have increased from 2005 to 2010 year-to-date as follows: the group of standard restaurants in Buffalo increased AUVs from approximately US$1.5 million to approximately US$1.8 million; the Detroit standard restaurants increased their AUVs from approximately US$950,000 to nearly US$1.1 million; and, the Columbus standard restaurants increased their AUV’s from approximately US$875,000 to almost US$970,000.

Commensurate with the growth in our AUVs, we have expanded our presence in these markets since 2005. For example, in Buffalo, we have more than doubled our full-serve restaurant count from 48 to 111 locations today. In the Detroit DMA, we added about 40 locations for a total of 98 full-serve locations today, and in the Columbus market, we added 21 locations for a total count of 65 full-serve locations.

We anticipate that our U.S. segment operating income will continue to show volatility quarter-to-quarter as we expand our new unit growth in existing regional markets and into contiguous markets to build brand awareness and continued development and, where, initially, we provide more support to our franchisees.

40

Variable interest entities

Our variable interest entities’ income before income tax pertains to the entities that we are required to consolidate under ASC 810 (previously SFAS No. 167). These entities include Maidstone Bakeries, of which we had a 50% ownership interest, and certain non-owned restaurants. In the third quarter of 2010, the income attributable to variable interest entities was $9.0 million, compared to $6.9 million in the third quarter of 2009, of which $8.3 million and $6.5 million relate to Maidstone Bakeries, respectively. In addition, we consolidated 283 and 274 non-owned restaurants, on average, in the third quarter of 2010 and 2009, respectively. The retroactive implementation of ASC 810 (previously SFAS No. 167) has resulted in the consolidation of approximately 150 more non-owned restaurants than we were consolidating under the previous accounting standard. In addition, over the past year, we have had a gradual shift towards a greater proportion of U.S. non-owned consolidated restaurants as a result of the progression of U.S. restaurants to our operator model, versus Company-operated restaurants, and increased participation in our franchise incentive program. These U.S. locations have historically had lower revenues and income than Canadian, non-owned consolidated restaurants. On a year-to-date basis, variable interest entities income was $23.3 million in 2010 compared to $19.5 million in 2009, driven largely by income before income tax at Maidstone Bakeries of $22.0 million and $18.3 million, respectively.

Corporate charges

Corporate charges include certain overhead costs that are not allocated to individual business units and the impact of certain foreign currency exchange gains and losses. Corporate charges were $6.8 million in the third quarter of 2010 compared to $13.1 million in the third quarter of 2009 and on a year-to-date basis were $28.9 million and $36.1 million, in 2010 and 2009, respectively. The $6.3 million decrease in the quarter and $7.2 million decrease in the year-to-date period primarily reflects lower professional fees as spending related to corporate initiatives in 2010 were less than the $3.2 million incurred in the third quarter of 2009 and the $7.3 million incurred in the year-to-date period of 2009. The 2009 fees for professional advisory and shareholder communication costs were primarily associated with our public company reorganization that did not recur in 2010. Partially offsetting these lower costs were higher salary and benefits costs.

The Company, through a wholly-owned Irish subsidiary, has self-serve kiosks in certain licensed locations within convenience stores in the Republic of Ireland and the United Kingdom. These self-serve kiosks feature our premium coffee, tea, specialty hot beverages and a selection of donuts and muffins. As of October 3, 2010, there were 268 self-serve kiosks in licensed locations in the Republic of Ireland and in the United Kingdom, primarily operating under the “Tim Hortons” brand (third quarter 2009 – 292). These kiosks are operated by independent licensed retailers. At present, the distribution of coffee and other products through licensed locations with respect to these self-serve kiosks is not a material contributor to our net income and, therefore, is netted in corporate charges. These arrangements have resulted in incremental distribution sales and royalties. Our financial arrangements for these self-serve kiosks are different than our traditional franchise models, and we may not, therefore, collect similar data or include these locations in certain of our metrics, including systemwide and same-store sales.

41

Results of Operations

The following tables provide a summary of comparative results of operations and are followed by a more detailed discussion of results for the third quarter and year-to-date periods of 2010 as compared to the third quarter and year-to-date periods of 2009.

	Third quarter ended										Change from third quarter 2009
	October 3, 2010		% of Revenues			September 27, 2009		% of Revenues			$		%
	(in thousands, except where noted)
Revenues
Sales	$	468,000		69.8	%	$	422,995		69.3	%	$	45,005		10.6	%
Franchise revenues:
Rents and royalties (1)		176,964		26.4	%		164,114		26.9	%		12,850		7.8	%
Franchise fees		25,556		3.8	%		23,605		3.9	%		1,951		8.3	%
		202,520		30.2	%		187,719		30.7	%		14,801		7.9	%
Total revenues		670,520		100.0	%		610,714		100.0	%		59,806		9.8	%
Costs and expenses
Cost of sales		398,957		59.5	%		362,500		59.4	%		36,457		10.1	%
Operating expenses		61,690		9.2	%		58,558		9.6	%		3,132		5.3	%
Franchise fee costs		24,908		3.7	%		21,754		3.6	%		3,154		14.5	%
General and administrative expenses		35,790		5.3	%		35,363		5.8	%		427		1.2	%
Equity (income)		(4,015)		(0.6	)%		(3,931)		(0.6	)%		(84)		2.1	%
Asset impairment		20,888		3.1	%		0		0.0	%		20,888		n/m
Other (income), net		(708)		(0.1	)%		(359)		(0.1	)%		(349)		n/m
Total costs and expenses, net		537,510		80.2	%		473,885		77.6	%		63,625		13.4	%
Operating income		133,010		19.8	%		136,829		22.4	%		(3,819)		(2.8	)%
Interest (expense)		(6,472)		(1.0	)%		(5,180)		(0.8	)%		(1,292)		24.9	%
Interest income		432		0.1	%		272		0.0	%		160		58.8	%
Income before income taxes		126,970		18.9	%		131,921		21.6	%		(4,951)		(3.8	)%
Income taxes		45,268		6.8	%		64,988		10.6	%		(19,720)		(30.3	)%
Net income		81,702		12.2	%		66,933		11.0	%		14,769		22.1	%
Net income attributable to non-controlling interests		7,874		1.2	%		5,754		0.9	%		2,120		36.8	%
Net income attributable to Tim Hortons Inc.	$	73,828		11.0	%	$	61,179		10.0	%	$	12,649		20.7	%

n/m—The comparison is not meaningful

⁽¹⁾ Rents and royalties revenues consist of: (i) royalties, which typically range from 3.0% to 4.5% of gross franchise restaurant sales; and (ii) rents, which consist of base and percentage rent in Canada and percentage rent only in the U.S., and typically range from 8.5% to 10.0% of gross franchise restaurant sales. Franchise restaurant sales are reported to us by our franchisees. Franchise restaurant sales are not included in our Condensed Consolidated Financial Statements, other than approximately 283 and 274 non-owned restaurants on average in the third quarters of 2010 and 2009, respectively, whose results of operations are consolidated with ours pursuant to ASC 810. Franchise restaurant sales do, however, result in royalties and rental income, which are included in our franchise revenues, as well as distribution income. The reported franchise restaurant sales (including those consolidated pursuant to ASC 810) were:

	Third quarter ended
	October 3, 2010		September 27, 2009
Franchise restaurant sales:
Canada (in thousands of Canadian dollars)	$	1,331,095	$	1,239,145
U.S. (in thousands of U.S. dollars)	$	112,518	$	104,227

42

	Year-to-date period ended										Change from year-to-date 2009
	October 3, 2010		% of Revenues			September 27, 2009		% of Revenues			$		%
	(in thousands, except where noted)
Revenues
Sales	$	1,318,292		69.6	%	$	1,239,459		70.0	%	$	78,833		6.4	%
Franchise revenues:
Rents and royalties (1)		512,803		27.1	%		469,102		26.5	%		43,701		9.3	%
Franchise fees		61,899		3.3	%		63,319		3.6	%		(1,420)		(2.2	)%
		574,702		30.4	%		532,421		30.0	%		42,281		7.9	%
Total revenues		1,892,994		100.0	%		1,771,880		100.0	%		121,114		6.8	%
Costs and expenses
Cost of sales		1,121,351		59.2	%		1,066,084		60.2	%		55,267		5.2	%
Operating expenses		181,975		9.6	%		174,060		9.8	%		7,915		4.5	%
Franchise fee costs		63,113		3.3	%		61,147		3.5	%		1,966		3.2	%
General and administrative expenses		107,207		5.7	%		104,533		5.9	%		2,674		2.6	%
Equity (income)		(11,032)		(0.6	)%		(10,363)		(0.6	)%		(669)		6.5	%
Asset impairment		20,888		1.1	%		0		0.0	%		20,888		n/m
Other (income), net		(1,105)		(0.1	)%		(675)		0.0	%		(430)		63.7	%
Total costs and expenses, net		1,482,397		78.3	%		1,394,786		78.7	%		87,611		6.3	%
Operating income		410,597		21.7	%		377,094		21.3	%		33,503		8.9	%
Interest (expense)		(18,797)		(1.0	)%		(15,695)		(0.9	)%		(3,102)		19.8	%
Interest income		892		0.0	%		1,056		0.1	%		(164)		(15.5	)%
Income before income taxes		392,692		20.7	%		362,455		20.5	%		30,237		8.3	%
Income taxes		125,492		6.6	%		140,677		7.9	%		(15,185)		(10.8	)%
Net income		267,200		14.1	%		221,778		12.5	%		45,422		20.5	%
Net income attributable to non-controlling interests		20,362		1.1	%		16,400		0.9	%		3,962		24.2	%
Net income attributable to Tim Hortons Inc.	$	246,838		13.0	%	$	205,378		11.6	%	$	41,460		20.2	%

n/m—The comparison is not meaningful

⁽¹⁾ Rents and royalties revenues consist of: (i) royalties, which typically range from 3.0% to 4.5% of gross franchise restaurant sales; and (ii) rents, which consist of base and percentage rent in Canada and percentage rent only in the U.S., and typically range from 8.5% to 10.0% of gross franchise restaurant sales. Franchise restaurant sales are reported to us by our franchisees. Franchise restaurant sales are not included in our Condensed Consolidated Financial Statements, other than approximately 277 and 274 non-owned restaurants on average in year-to-date 2010 and 2009, respectively, whose results of operations are consolidated with ours pursuant to ASC 810. Franchise restaurant sales do, however, result in royalties and rental income, which are included in our franchise revenues, as well as distribution income. The reported franchise restaurant sales (including those consolidated pursuant to ASC 810) were:

	Year-to-date period ended
	October 3, 2010		September 27, 2009
Franchise restaurant sales:
Canada (in thousands of Canadian dollars)	$	3,871,320	$	3,556,286
U.S. (in thousands of U.S. dollars)	$	325,643	$	296,879

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Revenues

Sales

Sales during the third quarter of 2010 increased $45.0 million, or 10.6%, over the third quarter of 2009, with the growth coming from our distribution business, partially offset by lower sales from variable interest entities and Company-operated restaurants. Sales for the year-to-date period of 2010 increased $78.8 million, or 6.4%, substantially consistent with the same growth factors as the third quarter.

Distribution sales. Distribution sales for the third quarter of 2010 increased $62.7 million, or 19.3%, due to the sale of new products managed through our supply chain, and continued systemwide sales growth. Sales related to new products managed through our supply chain, including some products from Maidstone Bakeries, represented approximately $44.6 million, while product mix and pricing represented approximately $10.8 million due primarily to higher prices for coffee and other commodities due to higher underlying costs. We did not pass along all of these cost increases in 2009, but have done so in 2010 due to the improving economy, primarily in Canada. Systemwide sales growth increased sales by approximately $8.7 million due to the higher number of system restaurants year-over-year and continued same-store sales growth.

Distribution sales on a year-to-date basis increased by $131.8 million due to new products managed through our supply chain, including some products from Maidstone Bakeries, which contributed approximately $83.0 million, while sales growth associated with higher systemwide sales represented approximately $38.2 million. Product mix and pricing represented an increase of approximately $17.3 million, which was offset by foreign exchange fluctuations (see below).

Our distribution business will continue to be subject to changes related to the underlying costs of key commodities, such as coffee, sugar, etc. Underlying commodity costs can be impacted by currency changes, as well as by changes in the underlying commodity costs. These cost changes can impact distribution sales, costs and margins, and can create volatility quarter-over-quarter and year-over-year. Increases and decreases in commodity costs are largely passed through to franchisees, except for certain costs in 2009 which were absorbed by the Company, resulting in higher or lower sales and higher or lower costs of sales from our distribution business. These changes may impact margins as many of these products are typically priced based on a fixed-dollar mark-up.

Company-operated restaurant sales. Company-operated restaurant sales were $6.1 million in the third quarter of 2010 compared to $5.9 million in the third quarter of 2009. On average, there were 22 Company-operated restaurants during the third quarter of 2010 compared to 21 during the third quarter of 2009. For year-to-date 2010, the Company operated, on average, 20 Company-operated restaurants generating sales of $16.5 million, compared to operating 28 Company-operated restaurants, on average, with sales of $18.6 million year-to-date 2009. Lower sales during both periods were primarily the result of the mix of Company-operated restaurants, which can vary in size and sales volumes, and unfavourable foreign exchange (see below).

Variable interest entities’ sales. Variable interest entities’ sales represent sales from the consolidation of Maidstone Bakeries and the consolidation of non-owned restaurants under ASC 810. The majority of non-owned restaurants that are consolidated are either operated by a franchisee under an operator agreement or participate in our U.S. franchise incentive program. During the third quarter of 2010, we consolidated 283 non-owned restaurants (93 in Canada and 190 in the U.S.), on average, compared to 274 non-owned restaurants (100 in Canada and 174 in the U.S.), on average, during the third quarter of 2009. On a year-to-date basis, we consolidated 277 non-owned restaurants, on average, in 2010 (94 in Canada and 183 in the U.S.) and 274, on average, in 2009 (112 in Canada and 162 in the U.S.), respectively. Variable interest entities’ sales were $74.9 million and $92.8 million in the third quarter of 2010 and 2009, respectively. On a year-to-date basis, sales were $232.6 million and $283.5 million in 2010 and 2009, respectively. The decline in sales in both the third quarter and year-to-date periods in 2010 relate primarily to Maidstone Bakeries. Beginning in the second quarter of 2010, a more significant proportion of output from Maidstone Bakeries was managed and billed through our supply chain. The offset to this decline is reflected in our distribution sales, as described above. In addition, unfavourable foreign exchange translation also contributed to lower sales. We are consolidating a higher proportion of U.S. non-owned restaurants in 2010 as compared to 2009. These U.S. non-owned restaurants also generally have lower sales levels than those non-owned restaurants consolidated in Canada. Partially offsetting these sales declines were a higher number of non-owned restaurants required to be consolidated and increased sales, on average, at these restaurants year-over-year.

Foreign exchange. Sales from our U.S. segment are denominated in U.S. dollars and translated into Canadian dollars for the reporting of our results. The strengthening of the Canadian dollar relative to the U.S. dollar decreased the value of reported sales in the third quarter of 2010 by approximately 0.7% compared to the value that would have been reported had there been no exchange rate movement. Foreign exchange had an unfavourable impact on sales of approximately 1.4% for the 2010 year-to-date period.

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Franchise Revenues

Rents and Royalties. Revenues from rents and royalties were $177.0 million in the third quarter of 2010 compared to $164.1 million in the third quarter of 2009, representing an increase of $12.9 million, or 7.8%. Revenues from rents and royalties increased $43.7 million, or 9.3%, to $512.8 million for the year-to-date period of 2010 compared to $469.1 million for the year-to-date period of 2009.

Growth in rent and royalty revenues in both the third quarter and year-to-date periods of 2010 was driven primarily by growth in systemwide sales, partially offset by unfavourable foreign exchange. Rents and royalties revenue growth was higher than overall systemwide sales growth during these periods due to a lower rate of growth in franchisee relief compared to the rate of growth in systemwide sales. During the third quarter of 2010, relief was essentially flat when compared to the third quarter of 2009. On a year-to-date basis, relief was higher year-over-year with the increase in relief primarily related to our U.S. segment at restaurants that were either previously operated as Company restaurants or those opened for less than twelve months.

During both the third quarter and year-to-date periods of 2010, Canada and the U.S. contributed to our growth in rents and royalties largely in proportion to their overall share of systemwide sales, excluding the effect of foreign exchange translation. Continued same-store sales growth contributed approximately $7.1 million to our rents and royalties revenue growth during the third quarter of 2010 and approximately $30.6 million in the year-to-date period. The addition of 137 new full-serve restaurants in the system year-over-year provided approximately $6.4 million of growth during the third quarter of 2010 and approximately $16.5 million in the year-to-date period.

Franchise Fees. Franchise fees include the sales revenue from initial equipment packages, as well as fees to cover costs and expenses related to establishing a franchisee’s business. Franchise fees were $25.6 million during the third quarter of 2010 compared to $23.6 million in the third quarter of 2009, representing an increase of $2.0 million, or 8.3%. Franchise fees were higher during the third quarter of 2010 due to 22 co-branding renovations in Canada to add Cold Stone Creamery and a higher number of traditional franchise sales. Partially offsetting these higher revenues were lower revenues over the prior year due to fewer non-traditional franchise sales, fewer resales and replacements and lower revenues recognized under our U.S. franchise incentive program. Revenues from the sale of equipment under the U.S. franchise incentive program are deferred until the franchise restaurant has exceeded and maintained certain sales volume levels and other recognition criteria. This incentive program impacts the timing of revenue recognition of these U.S. franchise fees. We recognized lower revenues from this program in the third quarter of 2010 compared to the third quarter of 2009.

On a year-to-date basis, franchise fees decreased by $1.4 million, or 2.2%, to $61.9 million for the year-to-date period of 2010 compared to $63.3 million for the year-to-date period of 2009. Lower franchise fees resulted primarily from lower revenues recognized under our U.S. franchise incentive program, and fewer resales and replacements. Partially offsetting these lower revenues were higher revenues associated with 72 co-branding renovations to add Cold Stone Creamery in Canada.

Foreign exchange. Franchise revenues from our U.S. segment are denominated in U.S. dollars and translated into Canadian dollars for reporting of our results. The overall strengthening of the Canadian dollar relative to the U.S. dollar decreased the value of reported rents and royalties and franchise fee revenues in the third quarter of 2010 by approximately 0.4% and 0.7%, respectively, compared to the value that would have been reported had there been no exchange rate movement (0.8% and 0.5% on a year-to-date basis for 2010, respectively).

Total Costs and Expenses

Cost of Sales

Cost of sales increased $36.5 million, or 10.1%, compared to the third quarter of 2009, primarily due to costs increasing in the distribution business, offset in part by lower cost of sales from variable interest entities and Company-operated restaurants. Cost of sales for the year-to-date period of 2010 increased $55.3 million, or 5.2%.

Distribution cost of sales. Distribution cost of sales increased $58.6 million, or 20.7%, for the quarter, driven mainly by costs associated with new products managed through our supply chain and systemwide sales growth. Costs associated with new products being managed through our supply chain contributed approximately $43.8 million of the increase. The increase in the number of franchised restaurants open and higher average same-store sales growth contributed approximately $7.7 million of the increase in cost of sales.

For the year-to-date period of 2010, distribution cost of sales increased by $115.7 million, or 14.2%, over the comparable period in 2009. Costs associated with new products managed through our supply chain represented approximately $80.5 million and systemwide sales growth represented approximately $32.0 million. Foreign exchange fluctuations reduced cost of sales (see below).

Distribution cost of sales represented 63.5% and 62.9% of our total costs and expenses, net, in the third quarter and year-to-date period of 2010, respectively, compared to 59.6% and 58.6% of our total costs and expenses, net, in the third quarter and year-to-date period of 2009, respectively, reflecting a shift in underlying product mix through the distribution business, primarily as a result of the new products being managed through our supply chain and the cost increases noted above.

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Company-operated restaurants cost of sales. Cost of sales for our Company-operated restaurants, which includes food, paper, labour and occupancy costs, varies with the average number and mix of Company-operated restaurants. During the third quarter of 2010, these costs decreased by $0.3 million to $5.9 million compared to the third quarter of 2009 and decreased by $4.6 million to $16.8 million for the year-to-date period of 2010. Lower cost of sales for both the third quarter and for the year-to-date period of 2010 were primarily the result of the mix of Company-operated restaurants, and the impact of foreign exchange, which further reduced costs. On average, we operated 22 restaurants in the third quarter of 2010 compared to 21 restaurants in the third quarter of 2009. On a year-to-date basis, we operated, on average, 20 restaurants in 2010 compared to 28 restaurants in 2009.

Variable interest entities’ cost of sales. Variable interest entities’ cost of sales represent sales from the consolidation of Maidstone Bakeries and the consolidation of non-owned restaurants under ASC 810. During the third quarter of 2010, we consolidated 283 non-owned restaurants (93 in Canada and 190 in the U.S.) compared to 274 non-owned restaurants (100 in Canada and 174 in the U.S.), on average, during the third quarter of 2009. On a year-to-date basis, we consolidated, on average, 277 non-owned restaurants in 2010 (94 in Canada and 183 in the U.S.) and 274, on average, in 2009 (112 in Canada and 162 in the U.S.), respectively. Variable interest entities’ cost of sales was $51.8 million and $73.7 million in the third quarter of 2010 and 2009, respectively. On a year-to-date basis, cost of sales was $171.8 million and $227.7 million in 2010 and 2009, respectively. The decline in cost of sales for both the third quarter and for the year-to-date period of 2010 relates primarily to cost of sales from Maidstone Bakeries. Beginning in the second quarter of 2010, a more significant proportion of output from Maidstone Bakeries was managed and billed through our supply chain and, therefore, was reflected in the higher distribution cost of sales, noted above. In addition, lower commodity costs at Maidstone Bakeries also contributed to lower cost of sales. Partially offsetting these cost of sales declines were a higher number of non-owned restaurants required to be consolidated. We are consolidating a higher proportion of U.S. non-owned restaurants in 2010 as compared to 2009, which lowered cost of sales due to foreign exchange fluctuations and these non-owned restaurants generally have lower costs per restaurant than Canadian restaurants consolidated under ASC 810.

Foreign exchange. Cost of sales from our U.S. segment are denominated in U.S. dollars and translated into Canadian dollars for reporting of our consolidated results. The strengthening of the Canadian dollar relative to the U.S. dollar decreased the value of reported cost of sales during the third quarter of 2010 by approximately 0.8%. Year-to-date, foreign exchange decreased the value of reported cost of sales by approximately 1.5%.

Operating Expenses

Total operating expenses, representing primarily rent expense, depreciation, and other property and support costs, were $61.7 million in the third quarter of 2010 as compared $58.6 million in the third quarter of 2009, representing an increase of $3.1 million, or 5.3%. Rent expense increased year-over-year due to 98 additional properties that were leased and then subleased to franchisees and higher percentage rent expense on certain properties resulting from increased restaurant sales. Depreciation expense was also higher as the total number of properties we either own or lease and then sublease to franchisees increased to 2,927 in the third quarter of 2010 compared to 2,821 in the comparable period of 2009. Partially offsetting these higher expenses was a favourable impact of foreign exchange, which reduced our third quarter 2010 reported costs (see below).

On a year-to-date basis, operating expenses were $182.0 million in 2010, increasing $7.9 million, or 4.5%, compared to $174.1 million in 2009. Rent expense increased year-over-year due to the additional properties that were leased and then sublease to franchisees. Depreciation expense was also higher as the total number of properties we either own or lease and then subleased to franchisees increased over the comparable period of 2009 and due to higher percentage rent on certain properties resulting from increased restaurant sales. Partially offsetting these higher expenses year-to-date was a favourable impact from foreign exchange and lower project costs compared to the year-to-date period of 2009, which were impacted by the timing of certain expenses and, both of which reduced reported costs during the year-to-date period of 2010 (see below).

Operating expenses from our U.S. segment are denominated in U.S. dollars and translated into Canadian dollars for reporting of our consolidated results. The overall strengthening of the Canadian dollar relative to the U.S. dollar decreased the overall value of operating expenses by approximately 0.8% compared to the value that would have been reported in the third quarter of 2010 had there been no exchange rate movement, and by approximately 1.5% year-to-date.

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Franchise Fee Costs

Franchise fee costs include costs of equipment sold to franchisees as part of the commencement of their restaurant business, as well as training and other costs necessary to ensure a successful restaurant opening, including the introduction of our co-brand into an existing location.

Franchise fee costs were $24.9 million during the third quarter of 2010 compared to $21.8 million in the third quarter of 2009, representing an increase of $3.2 million, or 14.5%. Franchise fee costs were higher during the third quarter of 2010 due to 22 co-branding renovations in Canada to add Cold Stone Creamery, higher equipment costs associated with a higher number of traditional franchise sales, and amortization expense related to the intangible asset associated with our exclusive development rights for Cold Stone Creamery in Canada. Partially offsetting these higher costs were lower costs associated with fewer non-traditional franchise sales, fewer resales and replacements, lower franchise sales recognized under our U.S. franchise incentive program and lower support costs and expenses associated with establishing a franchisee’s business.

On a year-to-date basis, franchise fee costs increased by $2.0 million, or 3.2%, to $63.1 million compared to $61.1 million in the year-to-date period of 2009. Higher franchise fee costs resulted from higher costs associated with 72 co-branding renovations in Canada to add Cold Stone Creamery, higher support costs and expenses associated with establishing a franchisee’s business, and amortization expense related to the intangible asset associated with our exclusive development rights for Cold Stone Creamery in Canada. Partially offsetting these higher costs were lower franchise sales recognized under our U.S. franchise incentive program and fewer resales and replacement restaurants.

Franchise fee costs from our U.S. segment are denominated in U.S. dollars and translated into Canadian dollars for reporting our consolidated results. The strengthening of the Canadian dollar relative to the U.S. dollar decreased the value of franchise fee costs by approximately 0.8% compared to the value that would have been reported in the third quarter of 2010 had there been no exchange rate movement and by approximately 0.8% on a year-to-date basis.

General and Administrative Expenses

General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support current operations and provide the infrastructure to support future growth.

General and administrative expenses increased $0.4 million, or 1.2%, during the third quarter of 2010 to $35.8 million, primarily related to higher salary and benefits in support of the growth in our business, spending related to corporate initiatives in 2010, and higher promotional expenses, which were mainly offset by $3.2 million of professional advisory fees related to our 2009 public company reorganization incurred in the third quarter of 2009 that did not recur in 2010.

On a year-to-date basis, general and administrative expenses were $107.2 million in 2010 as compared to $104.5 million in the year-to-date period of 2009, representing an increase of $2.7 million, or 2.6%. Higher salaries and benefits, spending related to corporate initiatives in 2010, promotional activities, higher depreciation expense, and additional shareholder communication costs for our 2010 annual general meeting were the primary contributors to the increase. Higher shareholder communication costs were due to our inability to utilize the U.S. “notice and access” methodology that we used for our 2009 annual meeting as a result of now being a Canadian public company. Partially offsetting these higher expenses were professional advisory fees of $7.3 million incurred in year-to-date 2009 related to our public company reorganization that did not recur in 2010.

In general, our objective is for general and administrative expense growth not to exceed systemwide sales growth. There can be quarterly fluctuations in general and administrative expenses due to timing of recurring expenses or certain other events that may impact growth rates in any particular quarter.

Our U.S. segment general and administrative expenses are denominated in U.S. dollars and translated into Canadian dollars for reporting our consolidated results. The overall strengthening of the Canadian dollar relative to the U.S. dollar decreased the value of general and administrative expenses by approximately 0.8% compared to the value that would have been reported in the third quarter of 2010 had there been no exchange rate movement, and by approximately 1.7% year-to-date.

Equity Income

Equity income relates to income from equity investments in joint ventures and other investments over which we exercise significant influence but which do not meet the consolidation requirements under SFAS No. 167, now codified in ASC 810. Our most significant equity investment is our 50% interest in TIMWEN Partnership, which leases Canadian Tim Hortons/Wendy’s combination restaurants. Equity income during the third quarter of 2010 was $4.0 million, increasing $0.1 million from the third quarter of 2009. On a year-to-date basis, equity income increased $0.7 million to $11.0 million in 2010. Equity income from our TIMWEN Partnership is not expected to grow significantly as we are unlikely to add any new properties to this venture in the future.

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Asset Impairment

Our Portland, Providence and Hartford markets in the New England region continued to underperform based on our expectations regarding same-store sales growth and financial performance, therefore, an impairment review was initiated during the third quarter of 2010. Upon completion of this review, we determined that the future expected cash flows of these markets were insufficient to recover the carrying value of the long-lived assets in these markets, resulting in an asset impairment charge of $20.9 million being recorded in our U.S. operating segment operating results in the third quarter of 2010. The most significant long-lived assets are property and buildings for which the fair value of the underlying real estate was estimated to be approximately $11 million. Management estimated the fair value of the real estate assets by using independent property valuations obtained in 2008 factored for management’s estimate of current market conditions. This valuation is considered to be a Level 3 valuation on the U.S. GAAP fair value hierarchy. A 10% change in management’s fair value estimate of the assets would either increase or decrease the value of the assets by less than $2 million.

Other Income and Expense, net

Other income and expense, net, includes amounts that are not directly derived from our primary businesses. This includes gains and losses on asset sales, other asset write-offs, and foreign exchange gains and losses. In the third quarter of 2010, other income, net, was $0.7 million versus $0.4 million in the third quarter of 2009. On a year-to-date basis, other income, net, was $1.1 million in 2010 as compared to $0.7 million in 2009.

Interest Expense

Total interest expense, including interest on our Senior Notes (see “Liquidity and Capital Resources—Overview”) and our credit facilities and capital leases, was $6.5 million in the third quarter of 2010 and $5.2 million in the third quarter of 2009, representing an increase of $1.3 million. Higher interest expense is primarily related to a higher interest rate on our long-term debt, which increased approximately 1.6% year-over-year. Our Senior Notes, which were issued in the second quarter of 2010, have a fixed interest rate over seven years, whereas our long-term debt that was retired had a much higher variable component, which resulted in lower rates historically.

Interest expense was $18.8 million for the year-to-date period of 2010 as compared to $15.7 million in the year-to-date period of 2009, representing an increase of $3.1 million. Higher interest expense resulted primarily from a higher weighted-average interest rate on our long-term debt, and a $0.9 million settlement loss arising from the early termination and settlement of a $30 million interest rate swap related to the $200 million early prepayment of our existing $300 million term loan which matures in February 2011. In addition, interest from additional capital leases contributed to higher interest expense year-to-date.

The remaining $100 million of our existing term loan matures in February 2011 (see “Liquidity and Capital Resources—Overview”).

Interest Income

Interest income was $0.4 million in the third quarter of 2010 compared to $0.3 million in the third quarter of 2009. On a year-to-date basis, interest income was $0.9 million and $1.1 million in 2010 and 2009, respectively. Reduced interest income on a year-to-date basis was related primarily to lower overall rates on deposits in early 2010.

Income Taxes

The effective income tax rate for the third quarter ended October 3, 2010 was 35.7%, compared to 49.3% for the third quarter ended September 27, 2009. The effective income tax rate for the year-to-date period ended October 3, 2010 was 32.0% compared to 38.8% for the year-to-date period ended September 27, 2009. The 2009 effective tax rates were negatively impacted primarily by a tax charge resulting from our reorganization of the Company as a Canadian public company. The 2010 effective tax rates were negatively impacted by the impairment charge of $20.9 million recorded on long-lived assets with no corresponding tax benefit recognized, offset by the benefit of 2010 Canadian statutory rate reductions.

There were revisions proposed to the U.S. Internal Revenue Code of 1986, that would affect the federal income taxation of foreign earnings (the “proposals”). On August 10, 2010, President Obama signed the Education Jobs and Medicaid Assistance Act of 2010 that included certain revisions in the proposals (the “enacted proposals”). We previously disclosed in connection with our public company reorganization, that the proposals, which we referred to at the time as the “Obama proposals,” if enacted, in whole or in part, may increase our effective tax rate by up to 3.5% commencing in the year the proposals became effective. Management has determined that the enacted proposals are not expected to result in the previously anticipated increase and are expected to have a minimal impact on the Company at this time.

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Net income attributable to noncontrolling interests

Net income attributable to noncontrolling interests relates to the consolidation of Maidstone Bakeries and the consolidation of non-owned restaurants under ASC 810. During the third quarter of 2010, we consolidated approximately 283 and 274 non-owned restaurants, on average, during the third quarter of 2010 and 2009, respectively. On a year-to-date basis, we consolidated, on average, 277 and 274 non-owned restaurants in 2010 and 2009, respectively.

Net income attributable to noncontrolling interests was $7.9 million and $5.8 million in the third quarter of 2010 and 2009, respectively, of which $8.3 million and $6.5 million related to Maidstone Bakeries, respectively. On a year-to-date basis, net income attributable to noncontrolling interest was $20.4 million in 2010 compared to $16.4 million in 2009, of which $22.0 million and $18.3 million related to Maidstone Bakeries, respectively. Lower commodity costs at Maidstone Bakeries was the primary factor that resulted in higher net income attributable to noncontrolling interest in both the quarter and year-to-date periods.

Comprehensive Income

In the third quarter of 2010, comprehensive income was $63.5 million compared to $43.7 million in the third quarter of 2009. Net income increased $14.8 million quarter-over-quarter, as discussed above. Other comprehensive income included a translation adjustment loss of $16.4 million in the third quarter of 2010 and a translation adjustment loss of $25.0 million in the third quarter of 2009. Translation adjustment income (loss) arises primarily from the translation of our U.S. net assets into our reporting currency, Canadian dollars, at the period-end rates. The remainder of the quarter-over-quarter change in other comprehensive income is attributable to losses of $1.8 million and gains of $1.8 million in the third quarters of 2010 and 2009, respectively, related to cash flow hedges, net of taxes.

Comprehensive income was $253.7 million compared to $173.1 million in the year-to-date periods of 2010 and 2009, respectively. Net income increased $45.4 million year-over-year, as discussed above. Other comprehensive income included a translation adjustment loss of $12.0 million in the year-to-date period of 2010 and a translation adjustment loss of $46.7 million in the year-to-date period of 2009. The remainder of the year-over-year change in other comprehensive income is attributable to losses of $1.6 million and losses of $1.9 million in the year-to-date periods of 2010 and 2009, respectively, related to cash flow hedges, net of taxes.

The 2010 exchange rates were Cdn. $1.0205, and $1.0624 for US$1.00 on October 3, 2010 and July 4, 2010, respectively. The 2009 exchange rates were Cdn. $1.0510, Cdn. $1.0917, and Cdn. $1.1542 for US$1.00 on January 3, 2010, September 27, 2009 and June 28, 2009, respectively. The exchange rate on December 28, 2008 was Cdn. $1.2092 for US$1.00.

XBRL Filing

Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised that, pursuant to Rule 406T of Regulation S-T the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and is otherwise not subject to liability under these sections. The financial information contained in the XBRL-related documents is “unaudited” and/or “unreviewed,” as applicable.

As a result of the inherent limitations within the rendering tools, we have identified discrepancies that could not be corrected and, therefore, our XBRL tagged financial statements and footnotes should be read in conjunction with our Condensed Consolidated Financial Statements contained within this Form 10-Q.

Liquidity and Capital Resources

Overview

Our primary source of liquidity has historically been, and continues to be, cash generated from Canadian operations which has, for the most part, self-funded our operations, growth in new restaurants, capital expenditures, dividends, share repurchases, acquisitions and investments during the last five years. Our U.S. operations have historically been a net user of cash given investment plans and stage of growth, and we expect this trend to continue through the remainder of 2010. Our Canadian and U.S. revolving credit facilities provide additional sources of liquidity, if needed.

In the year-to-date period of 2010, we generated $436.9 million of cash from operations, as compared to cash generated from operations of $350.8 million in the year-to-date period of 2009, for a net increase of $86.1 million (see “Comparative Cash Flows” below). We believe that we will continue to generate adequate operating cash flows to fund both our capital expenditures and expected debt service requirements over the next twelve months. If additional funds are needed for strategic initiatives, significant acquisitions and/or other new business opportunities, or other corporate purposes beyond current availability under our revolving credit facilities, we believe, with the strength of our balance sheet and our strong capital structure, we could borrow additional funds. Our ability to incur additional indebtedness will be limited by our financial and other covenants under our existing credit facilities and our senior unsecured notes. If such additional borrowings are significant, our capital structure could be weakened, and it is possible that our credit rating would be impacted and we would not be able to borrow on terms which are favourable to us. It is our intent to target maintaining an investment grade credit rating.

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In the second quarter of 2010, we issued $200 million of senior unsecured notes (“Senior Notes”), which we offered on a private placement basis in Canada with a term of seven years, maturing June 1, 2017. Net proceeds from the Senior Notes were primarily used to repay $200 million of our existing term loan (“Term Debt”), prior to maturity and without penalty.

The Senior Notes bear a fixed interest rate of 4.20% with interest payable in semi-annual installments, in arrears, commencing December 1, 2010. The Senior Notes rank equally and pari passu with each other and with the notes of every other series (regardless of their actual time of issue), with all other senior unsecured and unsubordinated indebtedness of Tim Hortons Inc. (the “Borrower”), including amounts owing under the senior bank facility (“Senior Bank Facility”), except as to any sinking fund which pertains exclusively to any particular indebtedness of the Borrower and statutory preferred exceptions. The Senior Notes are initially guaranteed by The TDL Group Corp. (“TDL”), the Borrower’s main Canadian subsidiary. Together, the Borrower’s and TDL’s third party revenues must represent at least 75% of the consolidated revenues of the Company (or such threshold percentage established under the new Senior Bank Facility, upon amendment or maturity thereof on or before March 31, 2011). These must be tested quarterly, on a rolling twelve-month basis. To the extent combined third party revenues of these two entities is less than 75% of consolidated revenues, then additional guarantors must be added until 75% of consolidated revenues are reached or exceeded. Alternatively, if the Borrower’s third party revenues reach or exceed 75% of consolidated revenues, the guarantors will be released. There are also certain covenants limiting liens to secure borrowed money (subject to permitted exceptions) and limiting our ability to undertake certain acquisitions and dispositions, but there are no financial covenants.

The Senior Notes are redeemable, at the Borrower’s option, at any time, upon not less than 30 days notice, but no more than 60 days notice, at a redemption price equal to the greater of (i) a price calculated to provide a yield to maturity (from the redemption date) equal to the yield on a non-callable Government of Canada bond with a maturity equal to, or as close as possible to, the remaining term to maturity of the Senior Notes, plus 0.30% and (ii) par, together, in each case, with accrued and unpaid interest, if any, to the date fixed for redemption. In the event of a change of control and a rating downgrade to below investment grade, the Borrower will be required to make an offer to repurchase the Senior Notes at a redemption price of 101% of the principal amount, plus accrued and unpaid interest, if any, to the date of redemption.

In March 2010, we entered into interest rate forwards with a notional amount of $195 million as a cash flow hedge to limit the interest rate volatility in the period prior to the issuance of the Senior Notes. These bond forwards were settled in June 2010, resulting in an Other comprehensive loss of $4.9 million. This loss will be recognized in interest expense over the seven-year term of the Senior Notes resulting in an effective interest rate of the Senior Notes of 4.59%.

Our existing Senior Bank Facility, which consists of $100 million Term Debt (after our $200 million early prepayment mentioned above) and two revolving credit facilities (U.S. $100 million and $200 million), matures on February 28, 2011. These facilities are at variable interest rates that are based upon either bankers’ acceptances or LIBOR plus a margin, or a fixed base rate. If certain market conditions caused LIBOR to be unascertainable or not reflective of the cost of funding, the Administration Agent can cause the borrowing to be at the base rate which is historically higher than LIBOR. This facility does not carry a market disruption clause and is supported by a syndicate lending group of 11 financial institutions, of which Canadian financial institutions hold approximately 61% of the total funding commitment. We carefully monitor our bank group and currently believe our access to liquidity is substantially unchanged despite credit market conditions. As part of our public company reorganization, we amended and restated the senior bank facility, effective September 28, 2009, to include, among other administrative changes, the Company and our primary U.S. subsidiary as a borrower, and also added the Company as a guarantor. We plan to refinance the remaining $100 million in term debt and replace our two revolving credit facilities with an appropriate facility before both mature on February 28, 2011.

In connection with the Term Debt, we entered into interest rate swaps in 2006 and 2007 with a notional amount of $130 million which were used to fix a portion of the variable rate Term Debt at 5.04%. Upon partial prepayment of the Term Debt, we also settled an interest rate swap with a notional amount of $30 million, resulting in recognition of $0.9 million from Other comprehensive loss to Interest expense in the second quarter of 2010. The remaining interest rate swaps fix the interest rate on the $100 million of outstanding Term Debt at 4.93%. These remaining swaps will be settled when the remaining portion of the term debt is refinanced.

When evaluating our leverage position, we review metrics that consider the impact of long-term operating and capital leases as well as other long-term debt obligations. We believe this provides a more meaningful and conservative measure of our leverage position given our significant investments in real estate. At October 3, 2010, we had approximately $420.6 million in long-term debt and capital leases included in current and long-term obligations on our balance sheet. Our remaining $100 million Term Debt is classified as current given the timing of its maturity. We continue to believe that the strength of our balance sheet, including our cash position, provides us with opportunity and flexibility for future growth while still enabling us to return excess cash to our shareholders through a combination of our share repurchase program and dividends. Given the credit conditions in financial markets and our increased cash balance due to the sale of Maidstone Bakeries, we continue to be more focused on capital preservation rather than yield when investing our cash. We invest primarily in short-term money market instruments of several large Canadian financial institutions, thereby minimizing both our liquidity risk and counterparty risk associated with our cash and cash equivalents.

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Our primary liquidity and capital requirements are for new restaurant construction, renovations of existing restaurants, expansion of our business through vertical integration and general corporate needs. In addition, we utilize cash to fund our dividends and share repurchase programs. Historically, our annual working capital needs have not been significant because of our focused management of accounts receivable and inventory. In each of the last five fiscal years, operating cash flows have funded our capital expenditure requirements for new restaurant development, remodeling, technology initiatives and other capital needs. Our strategic plan outlined key aspects of our business that we intend to focus on during the next four years. Leveraging significant levels of vertical integration and continuing to explore additional systemwide benefits through vertical integration was one of the key initiatives outlined in the “More than a Great Brand” strategic plan. Consistent with that plan, we are in the process of constructing a replacement distribution centre in Kingston, Ontario which will provide warehouse and distribution capability and capacity for frozen and refrigerated products in addition to dry goods to our restaurant owners. Total planned capital expenditures on this facility are currently estimated to be approximately $45 million, with approximately $20 million to be incurred in 2010. The facility is expected to be fully operational in the second half of 2011 and serve more than 650 restaurants in eastern Ontario, and Quebec, responding to continued projected growth in that market. As with other vertical integration initiatives, we expect this new facility will deliver important system benefits, including improved efficiency and cost-effective service for our restaurant owners, as well as providing a reasonable return for the Company. Distribution is a critical element of our business model as it allows us to control costs to our franchisees and service our restaurants efficiently and effectively while contributing to our profitability.

Our Board of Directors approved a 2010 share repurchase program for up to $200 million, or 8,817,291 of our shares, representing 5% of our outstanding shares, as of February 19, 2010. The 2010 program, which received Toronto Stock Exchange (“TSX”) approval on March 1, 2010 under TSX normal course issuer bid rules, commenced on March 3, 2010 and is due to end on March 2, 2011. Under its original terms, the program could terminate earlier than March 2, 2010 if the $200 million maximum or the 5% of outstanding share limit was reached, or, at the discretion the Company, subject to the Company’s compliance with regulatory requirements. The sale of Maidstone Bakeries for gross cash proceeds of $475 million closed on October 29, 2010 (see “Executive Overview”). In connection with our decision to distribute approximately $400 million of the approximately $430 million in after-tax proceeds from that sale to shareholders through increased share repurchases, we have obtained regulatory approval from the TSX to amend our 2010 share repurchase program to increase the maximum number of shares that may be purchased effective November 16, 2010. Under the amended program, we plan to spend the $200 million originally contemplated, plus up to an additional $200 million, with the final amount dependent upon average daily trading limits and share price. Under the amended 2010 share repurchase program, we may spend a maximum of $400 million, subject to the limitation that we cannot repurchase more than the regulatory maximum of 17,531,446 of our shares (representing 10% of our public float as of February 19, 2010, as defined under TSX rules) and the program may terminate earlier if either the $400 million maximum or the regulatory share maximum is achieved prior to March 2, 2011. The maximum number of shares that may be purchased during any trading day under the amended program remains at 25% of the average daily trading volume on the TSX, based on the six completed calendar months ended January 31, 2010, for a daily total of 125,025 common shares. This limit, for which there are permitted exceptions, was determined in accordance with regulatory requirements in connection with the original implementation of the program. The common shares have been, and will continue to be, purchased under the program through a combination of automatic trading plan purchase and purchases made at Management’s discretion in compliance with regulatory requirements, and given market, cost and other considerations. Repurchases will be made on the TSX, the New York Stock Exchange, and/or other marketplaces, subject to compliance with applicable regulatory requirements. There can be no assurance as to the precise number of shares that will be repurchased under the share repurchase program, or the aggregate dollar amount of the shares purchased. We may discontinue purchases at any time, subject to compliance with applicable regulatory requirements. Shares purchased pursuant to the share repurchase program have been, and will continue to be, cancelled.

In addition, subject to receipt of regulatory approval and in parallel with our annual capital allocation process, it is our intention to distribute an additional $200 million of the net proceeds from the Maidstone Bakeries sale beyond the termination of the amended 2010 program through an additional 2011 share repurchase program, with approximately $400 million of the after-tax proceeds expected to be distributed in its entirety by the end of the third quarter of 2011, subject to the Company’s discretion, in compliance with applicable regulatory requirements, to discontinue any such 2011 repurchase program. In addition, we have also committed the remaining $30 million related to the Maidstone Bakeries sale to support our key relationship with restaurant owners with the intent of helping to partially mitigate anticipated rising operating costs.

During the year-to-date period of 2010, we spent $136.0 million to purchase and cancel approximately 4.0 million of the Company’s common shares as part of our 2009 and 2010 share repurchase programs at an average cost of $33.87 per share.

Our Board of Directors approved a 30.0% increase in the quarterly dividend to $0.13 per share in February 2010. The Company declared and paid its September 2010, June 2010 and March 2010 dividends at the new rate. Our Board of Directors has declared a quarterly dividend payable on December 14, 2010 to shareholders of record as of December 1, 2010 at the $0.13 rate per share. The Company’s long-term targeted dividend payout range is 30%-35% of prior year, normalized annual net income attributable to Tim Hortons Inc. in dividends each year to return value to shareholders based on the Company’s earnings growth, focusing initially on the lower end of the range. The payment of future dividends, however, remains subject to the discretion of our Board of Directors.

Our outstanding share capital is comprised of common shares. An unlimited number of common shares, without par value, is authorized and we had 172,905,120 common shares outstanding at November 8, 2010. As at this same date, we had issued options to acquire 1,106,089 of its common shares pursuant to our 2006 Stock Incentive Plan, of which 283,581 were exercisable.

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Comparative Cash Flows

Operating Activities. Net cash generated from operating activities in the year-to-date period of 2010 was $436.9 million, representing an increase of $86.1 million from the year-to-date period of 2009. The increase was driven primarily by an increase in earnings, excluding the non-cash asset impairment charge of $20.9 million, and changes in timing of working capital movements, primarily in accounts receivable, and accounts payables and accrued liabilities, partially offset by an increase in inventory. In 2009, we had higher deferred taxes as a result of the non-cash deferred tax valuation allowance that was recorded in connection with our public company reorganization. In addition, we paid $4.8 million in 2010 relating to an interest rate forward which was settled at the time we prepaid a portion of our term debt (see “Financing Activities” below).

Investing Activities. Net cash used in investing activities decreased $50.4 million from $145.9 million in the year-to-date period of 2009 to $95.5 million in the year-to-date period of 2010. Capital expenditures are typically the largest ongoing component of investing activities and represented the largest portion of the decrease year-over-year. We purchased $37.8 million and $20.1 million of restricted investments in 2010 and 2009, respectively, and received proceeds from the sale of restricted investments of $20.2 million (nil in 2009) in the year-to-date period of 2010. In addition, we also received $8.5 million from the repayment of notes receivable in 2010 as compared to $2.3 million in 2009.

Capital expenditures are summarized as follows:

	Year-to-date period ended
	October 3, 2010		September 27, 2009
	(in millions)
Capital expenditures
New restaurants	$	36.1	$	48.5
Restaurant replacements and renovations		26.2		21.4
New coffee roasting facility		1.3		24.2
New distribution facility		4.6		0.0
Other capital needs		10.8		18.9
Total capital expenditures	$	79.0	$	113.0

New restaurant development spending decreased in 2010 due primarily to our focus on renovating Cold Stone Creamery co-branded locations in Canada so that openings were timed for the peak summer season. As a result, new restaurants openings, and the associated capital spending, will be more heavily weighted in the fourth quarter of 2010. In 2009, expenditures for other capital needs related primarily to an enterprise resource planning computer system implementation and other equipment purchases required for ongoing business needs. We continue to expect future capital needs related to our normal business activities to be funded through ongoing operations. In 2010, we expect to open 130 to 150 restaurants in Canada and 40 to 60 locations in the U.S. with the majority of these locations being standard locations, but will also include non-standard locations in both markets. Our 2010 capital expenditures are expected to be between $180 million and $200 million, including the commencement of the replacement distribution facility in Kingston, Ontario, mentioned above.

Capital expenditures for new restaurants by operating segment were as follows:

	Year-to-date period ended
	October 3, 2010		September 27, 2009
	(in millions)
Capital expenditures – new restaurants
Canada	$	25.9	$	34.9
U.S.		10.2		13.6
Total	$	36.1	$	48.5

Financing Activities. Financing activities used cash of $228.2 million in the year-to-date period of 2010 compared to $96.9 million in the year-to-date period of 2009. In the year-to-date period of 2010, we purchased and cancelled $136.0 million of common shares and paid dividends of $68.0 million. In the year-to-date period of 2009, we repurchased $16.7 million of our shares of common stock and paid dividends of $54.6 million. In 2010, we issued $200 million of Senior Notes on a private placement basis in Canada. The net proceeds from the issuance of the Senior Notes were used, primarily, for the prepayment of $200 million of our term debt. Distributions to noncontrolling interests were $16.3 million and $24.8 million the year-to-date-period of 2010 and 2009, respectively. In addition, we purchased $3.3 million of common shares that are held in trust for the purpose of settling future restricted stock units at the time of vesting (2009: $0.7 million).

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Off-Balance Sheet Arrangements

We do not have “off-balance sheet” arrangements as of October 3, 2010 and September 27, 2009 as that term is described by the SEC.

Basis of Presentation

The functional currency of Tim Hortons Inc. is the Canadian dollar as the majority of our cash flows are in Canadian dollars. The functional currency of each of our subsidiaries and legal entities is the local currency in which each subsidiary operates, which is the Canadian dollar, the U.S. dollar or the Euro. The majority of our operations, restaurants and cash flows are based in Canada, and we are primarily managed in Canadian dollars. As a result, our reporting currency is the Canadian dollar.

Application of Critical Accounting Policies

The Condensed Consolidated Financial Statements and accompanying footnotes included in this report have been prepared in accordance with accounting principles generally accepted in the United States with certain amounts based on management’s best estimates and judgments. To determine appropriate carrying values of assets and liabilities that are not readily available from other sources, management uses assumptions based on historical results and other factors that they believe are reasonable. Actual results could differ from those estimates. Also, materially different amounts may result under materially different conditions or from using materially different assumptions. However, management currently believes that any materially different amounts resulting from materially different conditions or material changes in facts or circumstances are unlikely.

Other than the adoption of the new accounting standards, as noted below, there have been no significant changes in critical accounting policies or management estimates since the year ended January 3, 2010. A comprehensive discussion of our critical accounting policies and management estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2009 Form 10-K for the year ended January 3, 2010, filed with the SEC and the CSA on March 4, 2010, which are incorporated herein by reference.

Effective January 4, 2010, we adopted SFAS No. 167, now codified within ASC 810. This Statement amended Interpretation
46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics: (i) the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance; and (ii) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. This Statement also amended Interpretation 46(R) to focus on a more qualitative approach, rather than a quantitative approach previously required for determining the primary beneficiary of a variable interest entity, amended certain guidance for determining whether an entity is a variable interest entity, added an additional requirement to assess whether an entity is a variable interest entity, on an ongoing basis, and requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. See our Condensed Consolidated Financial Statements Note 13 – Variable Interest Entities for additional information regarding the impact of the adoption of this standard. Effective January 4, 2010, we adopted certain provisions within Accounting Standard Update (“ASU”) No. 2010-06—Fair Value Measurements: Improving Disclosures about Fair Value Measurements, as codified in ASC 820—Fair Value Measurements. This ASU provides amendments to ASC 820 that requires more enhanced disclosures about (i) the different classes of assets and liabilities measured at fair value, (ii) the valuation techniques and inputs used, (iii) the activity in Level 3 fair value measurements, and (iv) the transfers between Levels 1, 2 and 3 fair value measurements. This ASU is effective for interim or annual reporting periods beginning after December 15, 2009, except for certain disclosures applicable to Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those years. The adoption of this update did not have a significant impact on our financial statements or related disclosures.

Effective June 15, 2010, we adopted ASU No. 2010-11—Scope Exception Related to Embedded Credit Derivatives, as codified in ASC 815—Derivatives and Hedging. This ASU clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only one form of embedded credit derivative qualifies for the exemption—one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. This ASU was effective for interim periods beginning after June 15, 2010. The adoption of this update did not have a significant impact on our financial statements or related disclosures.

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Recently Issued Accounting Standards

In October 2009, the FASB issued Accounting Standard Update (“ASU”) No. 2009-13—Multiple Deliverable Revenue Arrangements, as codified in ASC 605—Revenue Recognition. The objective of this ASU is to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. The ASU also establishes a selling price hierarchy for determining the selling price of a deliverable and has expanded disclosures related to vendor’s multiple-deliverable revenue arrangements. This ASU is effective for fiscal years beginning after June 15, 2010, and we are currently assessing the potential impact, if any, the adoption of this ASU may have on our Consolidated Financial Statements.

In April 2010, the FASB issued ASU No. 2010-13—Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades as codified in ASC 718—Compensation—Stock Compensation. This update addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. ASC 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. This ASU is effective for fiscal years beginning on or after December 15, 2010, and we are currently assessing the potential impact, if any, the adoption of this update may have on our Consolidated Financial Statements.

In April 2010, the FAS issued ASU No. 2010-17—Revenue Recognition—Milestone Method of Revenue Recognition as codified in ASC 605—Revenue Recognition. This update provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive milestones that should be evaluated individually. This ASU is effective for fiscal years, and interim periods, beginning on or after June 15, 2010, and we are currently assessing the potential impact, if any, the adoption of this update may have on our Condensed Consolidated Financial Statements.

In July 2010, the FASB issued ASU No. 2010-20—Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses as codified in ASC 310—Receivables. This update improves the disclosures that an entity provides about the credit quality of its financing receivables, excluding short-term trade receivables, and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. This ASU is effective for public companies, for interim and annual reporting periods ending on or after December 15, 2010 regarding disclosures as of the end of the reporting period, and for interim and annual reporting periods beginning on or after December 15, 2010 regarding disclosures about activity that occurs during a reporting period. We are currently assessing the potential impact, if any, the adoption of this update may have on our Condensed Consolidated Financial Statements.

Impact of Accounting Pronouncements Not Yet Implemented

In February 2010, the SEC released Commission Statement in Support of Convergence and Global Accounting Standards. The statement includes a detailed Work Plan to be executed by the SEC staff in its analysis in determining both whether and how to incorporate International Financial Reporting Standards (“IFRS”) into the U.S. financial reporting system. IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board. Under the proposed roadmap, if the SEC incorporates IFRS into the US domestic reporting system, companies could be required to prepare financial statements and accompanying notes in accordance with IFRS as early as fiscal 2015. As a foreign private issuer, the Company is able to apply IFRS earlier if certain approvals are obtained.

Further, although Canadian securities laws generally require Canadian reporting issuers to apply IFRS beginning in 2011, National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency permits issuers that have a class of securities registered under section 12 of the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) or are required to file reports under section 15(d) of the Exchange Act and which are not registered or required to be registered as an investment company under the U.S. Investment Company Act of 1940 to elect to prepare financial statements that are filed with or delivered to a securities regulatory authority or regulator (other than acquisition statements) in accordance with U.S. GAAP. Pending the developments of the SEC’s work plan, the Company is currently assessing the impact that the adoption of IFRS would have on the condensed consolidated financial statements, accompanying notes and disclosures, and will continue to monitor the development of the potential implementation of IFRS.

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Market Risk

Our exposure to various market risks remains substantially the same as reported in our 2009 Form 10-K for the year ended January 3, 2010.

Foreign Exchange Risk

Our exposure to various foreign exchange risks remains substantially the same as reported in our 2009 Form 10-K for the year ended January 3, 2010.

Commodity Risk

Our exposure to various commodity risks remains substantially the same as reported in our 2009 Form 10-K for the year ended January 3, 2010.

In addition, a number of commodities are experiencing elevated spot market prices relative to historic prices. We currently have purchase contracts in place covering key commodities such as coffee, wheat, sugar, and cooking oils that generally extend to the second quarter of 2011, albeit at prices generally higher than those secured thus far for 2010. The current strength of the Canadian dollar may help to mitigate some of these price increases as these commodities are sourced in U.S. dollars. In addition, as stated in our 2009 Form 10-K, we may be subject to higher commodity prices depending upon prevailing market conditions at the time we make purchases beyond our current commitments.

Our business will continue to be subject to changes related to the underlying costs of key commodities. These cost changes can impact revenues, costs and margins, and can create volatility quarter-over-quarter and year-over-year. Increases and decreases in commodity costs are largely passed through to franchisees, resulting in higher or lower revenues and higher or lower costs of sales from our business. These changes may impact margins as many of these products are typically priced based on a fixed-dollar mark-up. Although we have implemented purchasing practices that mitigate our exposure to volatility to a certain degree, as mentioned above, if costs increased to a greater degree for 2011 purchases, we and our franchisees have some ability to increase product pricing to offset a rise in commodity prices, subject to franchisee and customer acceptance, respectively.

Interest Rate Risk

In the second quarter of 2010, we issued $200 million of Senior Notes, which were offered on a private placement basis in Canada with a term of seven years. Net proceeds from the Senior Notes were primarily used to prepay $200 million of our existing Term Debt, prior to maturity. The Senior Notes bear a fixed coupon interest rate of 4.20%, and an effective rate of 4.59% (resulting from the settlement of bond forwards used to hedge the interest rate prior to the issuance of the Senior Notes). The remaining $100 million of Term Debt is fixed through interest rate swaps which convert the variable rate debt from a floating rate to a fixed rate of 4.93%. The combination of the Senior Notes and the interest rate swaps fix the interest rate on 100% of our outstanding debt. As our cash is invested in short term variable rate instruments, we are now exposed on a net basis to interest rate movements on a net asset position when historically we have been exposed on a net liability position. If interest rates change by 100 basis points, the impact on our annual net income would not be material.

Inflation

Our exposure to various inflationary risks remains substantially the same as reported in our 2009 Form 10-K for the year ended January 3, 2010.

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SAFE HARBOR STATEMENT

Certain information contained our Report on Form 10-Q for the fiscal quarter ended October 3, 2010 (“Report”), including information regarding future financial performance and plans, expectations, and objectives of management constitute forward-looking information within the meaning of Canadian securities laws and forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. We refer to all of these as forward-looking statements. A forward-looking statement is not a guarantee of the occurrence of future events or circumstances, and such future events or circumstances may not occur. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks,” “outlook,” “forecast” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could” or “may.” Examples of forward-looking statements in the Report include, but are not limited to, statements concerning management’s expectations relating to possible or assumed future results, our strategic goals and our priorities, and the economic and business outlook for us, for each of our business segments and for the economy generally. The forward-looking statements contained in our Report are based on currently-available information and are subject to various risks and uncertainties, including, but not limited to, risks described in our Report on Form 10-K filed on March 4, 2010 (the “2009 From 10-K”) and the Report on Form 10-Q filed on August 12, 2010 (the “Q2 2010 Form 10-Q”) with the U.S. Securities and Exchange Commission, and the Canadian Securities Administrators and the risks and uncertainties discussed in the Report, that could materially and adversely impact our business, financial condition and results of operations (i.e., the “risk factors”). Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also materially adversely affect our business, financial condition, and/or operating results. Forward-looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions about: the absence of a material increase in competition within the quick service restaurant segment of the food service industry; the absence of an adverse event or condition that damages our strong brand position and reputation; continuing positive working relationships with the majority of the Company’s franchisees; there being no significant change in the Company’s ability to comply with current or future regulatory requirements; the absence of any material adverse effects arising as a result of litigation; and general worldwide economic conditions. We are presenting this information for the purpose of informing you of management’s current expectations regarding these matters, and this information may not be appropriate for other purposes.

Many of the factors that could determine our future performance are beyond our ability to control or predict. Investors should carefully consider our risk factors and the other information set forth in our Report (including our long-form Safe Harbor statement contained in Exhibit 99 thereto), our 2009 Form 10-K and Q2 2010 Form 10-Q, and are further cautioned not to place undue reliance on the forward-looking statements contained in our Report, which speak only as of the date of the Report. The events and uncertainties outlined in the risk factors, as well as other events and uncertainties not set forth below, could cause our actual results to differ materially from the expectation(s) included in the forward-looking statement, and if significant, could materially affect the Company’s business, sales revenue, stock price, financial condition, and/or future results, including, but not limited to, causing the Company to (i) close restaurants, (ii) fail to realize our same-store sales, which are critical to achieving our operating income and other financial targets, (iii) fail to meet the expectations of our securities analysts or investors, or otherwise fail to perform as expected, (iv) have insufficient cash to engage in or fund expansion activities, dividends, or share repurchase programs, or (v) increase costs, corporately or at store level, which may result in increased restaurant-level pricing, which, in turn, may result in decreased customer demand for our products resulting in lower sales, revenue, and earnings. We assume no obligation to update or alter any forward-looking statements after they are made, whether as a result of new information, future events, or otherwise, except as required by applicable law.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information is incorporated by reference from the section titled “Market Risk” on page 55 of this Form 10-Q.

ITEM 4. CONTROLS AND PROCEDURES

(a) The Company, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, performed an evaluation of the Company’s disclosure controls and procedures, as contemplated by Securities Exchange Act Rule 13a-15. Disclosure controls and procedures include those designed to ensure that information required to be disclosed is accumulated and communicated to the Company’s management as appropriate to allow timely decisions regarding disclosure. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, that such disclosure controls and procedures were effective.

(b) There was no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On June 12, 2008, a claim was filed against the Company and certain of its affiliates in the Ontario Superior Court of Justice (the “Court”) by two of its franchisees, Fairview Donut Inc. and Brule Foods Ltd., alleging, generally, that the Company’s Always Fresh baking system and expansion of lunch offerings have led to lower franchisee profitability. The claim, which seeks class action certification on behalf of Canadian franchisees, asserts damages of approximately $1.95 billion. The plaintiffs filed a motion for certification of the putative class in May of 2009 and the Company filed its responding materials as well as a motion for summary judgment in November of 2009. Plaintiffs filed a motion requesting that the Company’s summary judgment motion be heard following hearing and determination of plaintiffs’ motion for certification. It was the Company’s position that the motions should be heard together. A hearing on plaintiffs’ motion to separate the certification and summary judgment motions was heard on May 13, 2010 and the court ruled in favour of the Company that the two motions should be heard together. Both motions are now scheduled for April 2011, subject to the delivery of required materials and completion of examinations. On October 28, 2010, the Court granted plaintiffs leave to submit for the Court’s review proposed amendments to the amended statement of claim asserting claims for price maintenance, supplementing the already asserted claims for breach of contract, breach of the duty of good faith and fair dealing, negligent misrepresentation and unjust enrichment. The Company continues to believe the claim is without merit and will not be successful, and the Company intends to oppose the certification motion and defend the claim vigorously. However, there can be no assurance that the outcome of the claim will be favourable to the Company or that it will not have a material adverse impact on the Company’s financial position or liquidity in the event that the ultimate determinations by the Court and/or appellate court are not in accordance with the Company’s evaluation of this claim. Neither the probability of this claim’s success nor the ultimate amount payable, if any, is determinable at this time and, coupled with the Company’s position that this claim is without merit, the Company has not recorded any provisions in the Condensed Consolidated Financial Statements.

From time to time, the Company is also a defendant in litigation arising in the normal course of business. Claims typically pertain to “slip and fall” accidents at franchised or Company-operated restaurants, employment claims and claims from customers alleging illness, injury or other food quality, health or operational concerns. Other claims and disputes have arisen in connection with supply contracts, the site development and construction of system restaurants and/or leasing of underlying real estate, and with respect to various franchisee matters, including but not limited to those described in the first paragraph above. Certain of these claims are not covered by existing insurance policies; however, many are referred to and are covered by insurance, except for deductible amounts, and to-date, these claims have not had a material effect on the Company. Reserves related to the resolution of legal proceedings are included in the Condensed Consolidated Balance Sheets as a liability under “Accounts payable.” As of the date of hereof, the Company believes that the ultimate resolution of such matters will not materially affect the Company’s financial condition or earnings.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed under the heading “Risk Factors” in our 2009 Form 10-K filed on March 4, 2010 and our Q2 2010 Form 10-Q filed on August 12, 2010 with the SEC and the CSA, as well as information in our other public filings, press releases, and in our Safe Harbor statement. Any of these “risk factors” could materially affect our business, financial condition or future results. The risks described in the 2009 Form 10-K, the Q2 2010 Form 10-Q and the additional information provided in this Form 10-Q and elsewhere, as described above, may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares Purchased (1)		(b) Average Price Paid per Share (Cdn.) (2)		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Approximate Dollar Value of Shares that  May Yet be Purchased Under the Plans or Programs (Cdn.) (3) (4)
Monthly Period #7 (July 5, 2010 — August 8, 2010)		408,904	$	34.85		408,904	$	124,399,238
Monthly Period #8 (August 9, 2010 — September 5, 2010)		323,941		36.74		323,941		112,500,104
Monthly Period #9 (September 6, 2010 — October 3, 2010)		313,400		37.85		313,400		100,639,613
Total		1,046,245	$	36.34		1,046,245	$	100,639,613 (4)

⁽¹⁾ Based on settlement date.

⁽²⁾ Inclusive of commissions paid to the broker to repurchase the shares.

⁽³⁾ Exclusive of commissions paid to the broker to repurchase the shares.

⁽⁴⁾ On March 1, 2010, the Company obtained regulatory approval from the Toronto Stock Exchange (“TSX”) under TSX normal course issuer bid rules to commence a 2010 share repurchase program (“2010 program”) for up to $200 million in common shares, not to exceed the regulatory maximum of 8,817,291 shares, equivalent to 5% of the outstanding common shares as of February 19, 2010. The TSX has approved of the amendment of the 2010 program, to increase the maximum number of shares that may be purchased effective November 16, 2010. Under the amended program, the Company plans to spend the $200 million originally contemplated in the 2010 program plus up to an additional $200 million, with the final amount dependent upon average daily trading limits and share price. Under the amended 2010 program, the Company may spend a maximum of $400 million, subject to the limitation that the Company cannot repurchase more than the regulatory maximum of 17,531,446 of its shares (representing 10% of the Company’s “public float” as of February 19, 2010, as defined under TSX rules). Purchases of common shares have been, and will continue to be, made through a combination of automatic trading plan purchases, and at management’s discretion in compliance with regulatory requirements, and given prevailing market, cost, and other considerations. Repurchases will be made by the Company on any of the TSX, the New York Stock Exchange and/or other Canadian marketplaces, subject to regulatory requirements. Shares repurchased pursuant to the 2010 program will be cancelled. The 2010 program commenced March 3, 2010 and will end on March 2, 2011, or sooner if either the $400 million or the regulatory share maximum is achieved. The first purchases were made under the 2010 program on March 9, 2010. There can be no assurance as to the precise number of shares that will be repurchased under the 2010 program, or the aggregate dollar amount of the shares purchased. The 2010 program may also be discontinued at the Company’s discretion in compliance with applicable regulatory requirements.

Dividend Restrictions with Respect to Part II, Item 2 Matters

The terms of the Company’s senior credit facilities contain limitations on the payment of dividends by the Company. The Company may not make any dividend distribution unless, at the time of, and after giving effect to the aggregate dividend payment, the Company is in compliance with the financial covenants contained in the senior credit facilities, and there is no default outstanding under the senior credit facilities.

ITEM 5. OTHER INFORMATION

New England Region Impairment and Closures

The Company’s Portland, Providence and Hartford markets in the New England region continued to underperform based on the Company’s expectations regarding same-store sales growth and financial performance, therefore, an impairment review was initiated during the third quarter of 2010. The Company disclosed on November 10, 2010 that, upon completion of such review, that it determined that the future expected cash flows of these markets were insufficient to recover the carrying value of the long-lived assets in these markets, resulting in a non-cash asset impairment charge of $20.9 million being recorded in the Company’s U.S. operating segment operating results in the third quarter of 2010.

Additionally, after completing a comprehensive review and analysis of the performance of our U.S. operating segment, the Company disclosed its intention on November 10, 2010 to close 34 restaurants and 18 self-serve kiosks in the Hartford and Providence markets in the fourth quarter of 2010 and two restaurants in the Portland market. The closure of these restaurants will result in primarily cash closure costs not expected to exceed $30 million, which will be recorded in the fourth quarter of 2010, commensurate with the timing of the decision to close the restaurants, and may be paid out over a period of time. These markets represent a relatively small portion of the Company’s overall system in the U.S., but have had a disproportionately negative impact on earnings, average unit volumes and average same-store sales growth in the U.S. segment. The Company believes that these closures will allow it to focus on and reinvest a portion of its savings from these closed restaurants into its core growth markets in the Northeast and Midwest U.S. by increasing its advertising and marketing scale where the brand continues to demonstrate strengthening average unit volumes, cash flows and brand progression. The Company expects this decision to contribute directly to operating income improvement in its U.S. segment in 2011.

Share Repurchase Program

        On November 10, 2010, the Company announced that it had received regulatory approval to amend its 2010 share repurchase program to increase the number of shares that may be repurchased under the program effective November 16, 2010. Under the amended repurchase program, the Company plans to spend the $200 million originally contemplated for the 2010 program plus up to an additional $200 million from the after-tax cash proceeds that the Company realized from the previously announced October 29, 2010 closing of the sale of its 50% joint venture interest in Maidstone Bakeries (the “Maidstone Transaction”), with the final amount that might be spent being dependent upon average daily trading limits and share price.

Under the amended 2010 share repurchase program, we may spend a maximum of $400 million, subject to the limitation that we cannot repurchase more than the regulatory maximum of 17,531,446 of the Company’s common shares (representing 10% of our public float as of February 19, 2010, as defined under TSX rules), and the program may terminate earlier if either the $400 million maximum or the regulatory share maximum is achieved prior to March 2, 2011. The maximum number of shares that may be purchased during any trading day under the amended program remains at 25% of the average daily trading volume on the TSX, based on the six completed calendar months ended January 31, 2010, for a daily total of 125,025 common shares. This limit, for which there are permitted exceptions, was determined in accordance with regulatory requirements in connection with the original implementation of the program. The common shares have been, and will continue to be, purchased under the program through a combination of automatic trading plan purchase and purchases made at management’s discretion in compliance with regulatory requirements, and given market, cost and other considerations. Repurchases will be made on the TSX, the New York Stock Exchange, and/or other marketplaces, subject to compliance with applicable regulatory requirements. There can be no assurance as to the precise number of shares that will be repurchased under the share repurchase program, or the aggregate dollar amount of the shares purchased. We may discontinue purchases at any time, subject to compliance with applicable regulatory requirements. Shares purchased pursuant to the share repurchase program have been, and will continue to be, cancelled.

In addition, the Company announced its intention, subject to regulatory approval and in parallel with its annual capital allocation process, to distribute the remaining of up to approximately $200 million in after-tax proceeds from the Maidstone Transaction to repurchase additional shares of the Company under a 2011 repurchase program, subject to the Company’s discretion, in compliance with applicable regulatory requirements, to discontinue any such 2011 repurchase program.

Commitment Regarding Distributions to Franchisees

On November 10, 2010, the Company also committed to distribute the remaining $30 million related to the Maidstone Transaction to support the Company’s key relationship with restaurant owners with the intent of helping to partially mitigate anticipated rising operating costs.

Declaration of Regular Quarterly Dividend

On November 10, 2010, the Company also disclosed that its Board of Directors has approved a Cdn. $0.13 per common share quarterly dividend. The dividend is payable on December 14, 2010 to shareholders of record on December 1, 2010. Dividends are declared and paid in Canadian dollars to all shareholders with Canadian resident addresses. For U.S. shareholders, dividends paid will be converted to U.S. dollars based on prevailing exchange rates at the time of conversion by the Company for registered shareholders and by Clearing and Depository Services Inc. for beneficial shareholders. The declaration of any future dividends is subject to the Board’s discretion.

Adoption of Majority Voting Policy for Election of Directors

On November 10, 2010, the Company adopted amendments, effective immediately, to the Company’s Governance Guidelines to implement a policy to provide for a majority voting standard for the election of directors in uncontested elections. Under the new policy, if a nominee does not receive the affirmative vote of at least the majority of the votes cast, the Director shall promptly tender his or her resignation for consideration by the Company’s Nominating and Corporate Governance Committee and the Board. A copy of the Company’s amended Governance Guidelines is available under the Corporate Governance section of the Company’s investor website at www.timhortons-invest.com. The reference to our website address does not constitute incorporation by reference of the information contained on the website into, and should not be considered, part of this document.

ITEM 6. EXHIBITS

(a) Index to Exhibits on Page 60.

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SIGNATURE

Pursuant to the requirements 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.

	TIM HORTONS INC. (Registrant)
Date: November 10, 2010	/s/ CYNTHIA J. DEVINE
	Cynthia J. Devine
	Chief Financial Officer

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TIM HORTONS INC. AND SUBSIDIARIES

INDEX TO EXHIBITS

Exhibit Number	Description
31(a)*	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31(b)*	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32(a)*	Section 1350 Certification of Chief Executive Officer
32(b)*	Section 1350 Certification of Chief Financial Officer
99*	Safe Harbor Under the Private Securities Litigation Reform Act of 1995
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

* Exhibits attached hereto

Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised pursuant to Rule 406T of Regulation S-T that the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise not subject to liability under these sections. The financial information contained in the XBRL-related documents is “unaudited” or “unreviewed.”

60

EX-31.(A)

Exhibit 31(a)

CERTIFICATIONS

I, Donald B. Schroeder, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Tim Hortons Inc.;

2. Based on my knowledge, this 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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

d) 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 reasonably 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 the 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: November 10, 2010

/s/ DONALD B. SCHROEDER

Name: Donald B. Schroeder

Title:   Chief Executive Officer

EX-31.(B)

Exhibit 31(b)

CERTIFICATIONS

I, Cynthia J. Devine, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Tim Hortons Inc.;

2. Based on my knowledge, this 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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

d) 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 reasonably 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 the 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: November 10, 2010

/s/ CYNTHIA J. DEVINE

Name: Cynthia J. Devine

Title:   Chief Financial Officer

EX-32.(A)

Exhibit 32(a)

Certification of CEO Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002 *

This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and accompanies the quarterly report on Form 10-Q (the “Form 10-Q”) for the quarter ended October 3, 2010 of Tim Hortons Inc. (the “Issuer”).

I, Donald B. Schroeder, the Chief Executive Officer of Issuer certify that, to the best of my knowledge:

(i) the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

(ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer.

Dated: November 10, 2010

/s/ DONALD B. SCHROEDER

Name: Donald B. Schroeder

* This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the Company specifically incorporates this certification therein by reference.

EX-32.(B)

Exhibit 32(b)

Certification of CFO Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002 *

This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and accompanies the quarterly report on Form 10-Q (the “Form 10-Q”) for the quarter ended October 3, 2010 of Tim Hortons Inc. (the “Issuer”).

I, Cynthia J. Devine, the Chief Financial Officer of Issuer certify that, to the best of my knowledge:

(i) the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

(ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer.

Dated: November 10, 2010

/s/ CYNTHIA J. DEVINE

Name: Cynthia J. Devine

* This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the Company specifically incorporates this certification therein by reference.

EX-99

Exhibit 99

TIM HORTONS INC.

Safe Harbor Under the Private Securities Litigation Reform Act of 1995 and Canadian Securities Laws

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those disclosed in the statement. Canadian securities laws have corresponding safe harbor provisions, subject to certain additional requirements including the requirement to state the assumptions used to make the forecasts set out in forward-looking statements. Tim Hortons Inc. (the “Company”) desires to take advantage of these “safe harbor” provisions.

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks,” “outlook,” “forecast” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could” or “may.” Examples of forward-looking statements that may be contained in our public disclosure from time to time include, but are not limited to, statements concerning management’s expectations relating to possible or assumed future results, our strategic goals and our priorities, and the economic and business outlook for us, for each of our business segments and for the economy generally. Many of the factors that could determine our future performance are beyond our ability to control or predict. The following factors, in addition to other factors set forth in our Form 10-K filed on March 4, 2010 and the Quarterly Report on Form 10-Q filed August 12, 2010 with the U.S. Securities and Exchange Commission (“SEC”) and the Canadian Securities Administrators (“CSA”), and in other press releases, communications, or filings made with the SEC or the CSA, could cause our actual results to differ materially from the expectation(s) included in forward-looking statements and, if significant, could materially affect the Company’s business, sales revenue, share price, financial condition, and/or future results, including causing the Company to (i) close restaurants, (ii) fail to realize same-store sales, which are critical to achieving our operating income and other financial targets, (iii) fail to meet the expectations of our securities analysts or investors, or otherwise fail to perform as expected, (iv) have insufficient cash to engage in or fund expansion activities, dividends, or share repurchase programs, or (v) increase costs, corporately or at store level, which may result in increased restaurant-level pricing, which in turn may result in decreased customer demand for our products resulting in lower sales, revenue, and earnings. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also materially adversely affect our business, financial condition, and/or operating results. We assume no obligation to update or alter any forward-looking statements after they are made, whether as a result of new information, future events, or otherwise, except as required by applicable law.

Forward-looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions about: the absence of a material increase in competition within the quick service restaurant segment of the food service industry; the absence of an adverse event or condition that damages our strong brand position and reputation; continuing positive working relationships with the majority of the Company’s franchisees; there being no significant change in the Company’s ability to comply with current or future regulatory requirements; the absence of any material adverse effects arising as a result of litigation; and general worldwide economic conditions. We are presenting this information for the purpose of informing you of management’s current expectations regarding these matters, and this information may not be appropriate for any other purposes.

Competition . The quick service restaurant industry is intensely competitive with respect to price, service, location, personnel, qualified franchisees, real estate sites and type and quality of food. The Company and its franchisees compete with international, regional and local organizations, primarily through the quality, variety, and value perception of food products offered. The number and location of units, quality and speed of service, attractiveness of facilities, effectiveness of advertising/marketing and operational programs, discounting activities, price, changing demographic patterns and trends, changing consumer preferences and spending patterns or a desire for a more diversified menu, changing health or dietary preferences and perceptions, and new product development by the Company and its competitors are also important factors. Certain of the Company’s competitors, most notably in the U.S., have greater financial and other resources than we do, including substantially larger marketing budgets and greater leverage from their marketing spend.

Factors Affecting Growth and Other Important Strategic Initiatives. There can be no assurance that the Company will be able to achieve new restaurant or same-store sales growth objectives, that new restaurants will be profitable or that strategic initiatives will be successfully implemented. Early in the development of new markets, the opening of new restaurants may have a negative effect on the same-store sales of existing restaurants in the market. The Company may also enter markets where our brand is not well known and where it has little or operating experience and as a result, may not achieve the level of penetration needed in order to drive brand recognition, convenience, increased leverage to marketing dollars, and other benefits the Company believes penetration yields. When the Company enters new markets, it may be necessary to increase franchisee relief and support costs, which lowers its earnings. There can be no assurance that the Company will be able to successfully adapt its brand, development efforts, and restaurants to these differing market conditions. The Company may also continue to selectively close restaurants that are not achieving acceptable levels of profitability or change its growth strategies over time, where appropriate. Such closures may be accompanied by impairment charges that may have a negative impact on our earnings. The Company also intends to evaluate potential mergers, acquisitions, joint venture investments, alliances, vertical integration opportunities and divestitures, which are subject to many of the same risks that also affect new store development as well as various other risks. In addition, there can be no assurance that the Company will be able to complete the desirable transactions, for reasons including restrictive covenants in debt instruments or other agreements with third parties. The Company may continue to pursue strategic alliances (including co-branding) with third parties for different types of development models and products and there can be no assurance that: significant value will be recognized through such strategic alliances; the Company will be able to maintain our strategic alliances; or, the Company will be able to enter into new strategic relationships in the future. Entry into such relationships as well as the expansion of the Company’s current business through such initiatives may expose it to additional risks that may adversely affect the Company’s brand and business. The Company’s financial outlook and long-range targets are based on the successful implementation, execution and customer acceptance of the Company’s strategic plans and initiatives; accordingly, the failure of any of these criteria could cause the Company to fall short of achievement of its financial objectives and long-range goals.

Food Safety and Health Concerns. Incidents or reports, whether true or not, of food-borne illness and injuries caused by or claims of food tampering, employee hygiene and cleanliness failures or impropriety at Tim Hortons or other quick service restaurants unrelated to Tim Hortons could result in negative publicity, damage our brand value and potentially lead to product liability or other claims. Any decrease in customer traffic or temporary closure of any of our restaurants as a result of such incidents or negative publicity may have a material adverse effect on our business and results of operations.

Litigation. The Company is or may be subject to claims incidental to the business, including: obesity litigation; health and safety risks or conditions of the Company’s restaurants associated with design, construction, site location and development, indoor or airborne contaminants and/or certain equipment utilized in operations; employee claims for employment or labour matters, including potentially, class action suits regarding wages, discrimination, unfair or unequal treatment, harassment, wrongful termination, and overtime compensation claims; claims from franchisees regarding profitability or wrongful termination of their franchise or operating (license) agreement(s); taxation authorities regarding certain tax disputes; and falsified claims. The Company’s current exposure with respect to pending legal matters could change if determinations by judges and other finders of fact are not in accordance with management’s evaluation of these claims and the Company’s exposure could exceed expectations and have a material adverse effect on its financial condition and results of operations.

The Importance of Canadian Segment Performance and Brand Reputation. The Company’s financial performance is highly dependent upon its Canadian operating segment, which accounted for approximately 86.7% of its consolidated revenues, and substantially all of its profit, in 2009. Any substantial or sustained decline in the Company’s Canadian business would materially and adversely affect its financial performance. The Company’s success is also dependent on its ability to maintain and enhance the value of its brand, its customers’ connection to its brand, and a positive relationship with its franchisees. Brand value can be severely damaged, even by isolated incidents, including those that may be beyond the Company’s control such as actions taken or not taken by its franchisees relating to health or safety, litigation and claims (including litigation by, other disputes with, or negative relationship with franchisees), security breaches or other fraudulent activities associated with its electronic payment systems, illegal activity targeted at the Company and incidents occurring at or affecting its strategic business partners (including in connection with co-branding initiatives and our self-serve kiosk model), affiliates, corporate social responsibility programs, or falsified claims or health or safety issues at our vertically integrated manufacturing plants.

Distribution Operations and Supply Chain. The occurrence of any of the following factors is likely to result in increased operating costs and decreased profitability of the Company’s distribution operations and supply chain and may also injure our brand, negatively affect our results of operations and our ability to generate expected earnings and/or increase costs, and/or negatively impact our relationship with our franchisees: higher transportation or shipping costs; inclement weather, which could affect the cost and timely delivery of ingredients and supplies; increased food and other supply costs; shortages or interruptions in the availability or supply of perishable food products and/or their ingredients; the failure of our distribution business to perform at historic levels, and political, physical, environmental or technological disruptions in the Company’s or its suppliers’ manufacturing and/or warehouse plants, facilities or equipment.

Importance of Franchisees. A substantial portion of the Company’s earnings come from royalties and other amounts paid by franchisees, who operated 99.4% of the Tim Hortons restaurants as of October 3, 2010. The Company’s revenues and profits would decline and its brand reputation could also be harmed if a significant number of franchisees were to experience, among other things, operational or financial difficulties or labour shortages or significant increases in labour costs. Although the Company generally enjoys a positive working relationship with the vast majority of its franchisees, active and/or potential disputes with franchisees could damage its reputation and/or its relationships with the broader franchisee group. The Company’s franchisees are independent contractors and, as a result, the quality of their operations may be diminished by factors beyond the Company’s control. Any operational shortcoming of a franchise restaurant is likely to be attributed by consumers to the Company’s entire system, thus damaging its brand reputation and potentially affecting revenues and profitability.

Government Regulation. The Company and its franchisees are subject to various federal, state, provincial, and local (“governmental”) laws and regulations. The development and operation of restaurants depend to a significant extent on the selection, acquisition, and development of suitable sites, which are subject to laws and regulations regarding zoning, land use, environmental matters (including limitation of vehicle emissions in drive-thrus; anti-idling bylaws; regulation of litter, packaging and recycling requirements; regulation relating to discharge, storage, handling, release and/or disposal of hazardous or toxic substances; and other governmental laws and regulations), traffic, franchise, design and other matters. Additional governmental laws and regulations affecting the Company and its franchisees include: business licensing; franchise laws and regulations; health, food preparation, sanitation and safety; labour (including applicable minimum wage requirements, overtime, working and safety conditions, family leave and other employment matters, and citizenship requirements); nutritional disclosure and advertising; regulations, laws, treaties or the interpretation or enforcement thereof relating to tax matters that may affect our anticipated effective tax rate, operating income (in the context of non-consolidated joint ventures), cash tax payment liabilities, and/or tax reserves, realization of the Company’s tax assets, business planning within our corporate structure that have tax implications, ongoing tax disputes, and disclosure of tax related matters; tax laws affecting our franchisees’ business; employee benefits; accounting; and anti-discrimination. Compliance with these laws and regulations and planning initiatives undertaken in connection therewith could increase the cost of doing business and, depending upon the nature of the Company’s and its franchisees’ responsive actions thereto could damage our reputation. Changes in these laws and regulations, or the implementation of additional regulatory requirements, particularly increases in applicable minimum wages, tax law, planning or other matters that may, among other things, affect the Company’s anticipated effective tax rate and/or tax reserves; business planning within our corporate structure; our strategic initiatives and/or the types of projects we may undertake in furtherance of our business, or franchise requirements, may adversely affect the Company’s financial results.

In addition, a taxation authority may disagree with certain views of the Company with respect to the interpretation of tax treaties, laws and regulations and take the position that material federal income tax liabilities, interests, penalties or amounts are payable by the Company, including in connection with the public company reorganization. Contesting such disagreements or assessments may be lengthy and costly and, if the Company were unsuccessful in disputing the same, the implications could be materially adverse to us and affect our anticipated effective tax rate, projected results, future operations and financial condition, where applicable.

Economic, Market and Other Conditions. The quick-service restaurant industry is affected by changes in international, national, regional, and local economic and political conditions, consumer preferences and perceptions (including food safety, health or dietary preferences and perceptions), discretionary spending patterns, consumer confidence, demographic trends, seasonality, weather events and other calamities, traffic patterns, the type, number and location of competing restaurants, enhanced governmental regulation (including nutritional and franchise regulations), changes in capital market conditions that affect valuations of restaurant companies in general or the value of the Company’s stock in particular, and litigation relating to food quality, handling or nutritional content. Factors such as inflation, higher energy and/or fuel costs, food costs, the cost and/or availability of a qualified workforce and other labour issues, benefit costs, legal claims, legal and regulatory compliance (including environmental regulations), new or additional sales tax on the Company’s products, disruptions in its supply chain or changes in the price, availability and shipping costs of supplies, and utility and other operating costs, also affect restaurant operations and expenses and impact same-store sales and growth opportunities. The ability of the Company and its franchisees to finance new restaurant development, improvements and additions to existing restaurants, acquire and sell restaurants, and pursue other strategic initiatives (such as acquisitions and joint ventures), are affected by economic conditions, including interest rates and other government policies impacting land and construction costs and the cost and availability of borrowed funds. In addition, unforeseen catastrophic or widespread events affecting the health and/or welfare of large numbers of people in the markets in which the Company’s restaurants are located and/or which otherwise cause a catastrophic loss or interruption in the Company’s ability to conduct its business, would affect its ability to maintain and/or increase sales and build new restaurants. Unforeseen events, including war, terrorism and other international, regional or local instability or conflicts (including labour issues), public health issues (including tainted food and water supply or widespread/pandemic illness such as the avian or H1N1 flu), and natural disasters such as earthquakes, hurricanes, or other adverse weather and climate conditions could disrupt the Company’s operations, disrupt the operations of its franchisees, suppliers, or customers, or result in political or economic instability.

Reliance on Systems. If the network and information systems and other technology systems that are integral to retail operations at system restaurants and at the Company’s manufacturing facilities, the Maidstone Bakeries facility, and corporate offices are damaged or interrupted from power outages, computer and telecommunications failures, computer worms, viruses and other destructive or disruptive software, security breaches, catastrophic events and improper or personal usage by employees, such an event could have an adverse impact on the Company and its customers, franchisees and employees, including a disruption of our operations, customer dissatisfaction or a loss of customers or revenues. The Company relies on third party vendors to retain data, process transactions and provide certain services. In the event of failure in such third party vendors’ systems and processes, the Company could experience business interruptions or privacy and/or security breaches surrounding our data. In the third quarter of 2009, the Company implemented an integrated financial system for the reporting and processing of financial data across numerous departmental and operational areas. This implementation and the conversion of these processes expose the Company to risk, including risks associated with maintaining and designing internal control and SOX 404 compliance, as well as corresponding Canadian requirements. Initially, the Company has experienced delays in business processes as new users adjust to utilizing the new financial system, which may impact the Company’s relations with its franchisees, vendors and suppliers.

Foreign Exchange Fluctuations. The Company’s Canadian restaurants are vulnerable to increases in the value of the U.S. dollar as certain commodities, such as coffee, are priced in U.S. dollars in international markets. Conversely, the Company’s U.S. restaurants are impacted when the U.S. dollar falls in value relative to the Canadian dollar, as U.S. operations would be less profitable because of the increase in U.S. operating costs resulting from the purchase of supplies from Canadian sources, and profits from U.S. operations will contribute less to (or, for losses, have less of an impact on) the Company’s consolidated results. Increases in these costs could make it harder to expand into the U.S. and increase relief and support costs to U.S. franchisees, affecting the Company’s earnings. The opposite impact occurs when the U.S. dollar strengthens against the Canadian dollar. In addition, fluctuations in the values of Canadian and U.S. dollars can affect the value of the Company’s common stock and any dividends the Company pays.

Privacy Protection. If the Company fails to comply with new and/or increasingly demanding laws and regulations regarding the protection of customer, supplier, vendor, franchisee, employee and/or business data, or if the Company (or a third party with which it has entered into a strategic alliance) experiences a significant breach of customer, supplier, vendor, franchisee, employee or Company data, the Company’s reputation could be damaged and result in lost sales, fines, lawsuits and diversion of management attention. The introduction of credit payment systems and the Company’s reloadable cash card makes us more susceptible to a risk of loss in connection with these issues, particularly with respect to an external security breach of customer information that the Company, or third parties under arrangement(s) with it, control.

Other Significant Risk Factors. The following factors could also cause the Company’s actual results to differ from its expectations: an inability to adequately protect the Company’s intellectual property and trade secrets from infringement actions or unauthorized use by others (including in certain international markets that have uncertain or inconsistent laws and/or application with respect to intellectual property and contract rights); liabilities and losses associated with owning and leasing significant amounts of real estate; an inability to retain executive officers and other key personnel or attract additional qualified management personnel to meet business needs; changes in its debt levels and a downgrade on its credit ratings; and certain anti-takeover provisions that may have the effect of delaying or preventing a change in control.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date and time made. Except as required by federal or provincial securities laws, the Company undertakes no obligation to publicly release any revisions to forward-looking statements, or to update them to reflect events or circumstances occurring after the date forward-looking statements are made, or to reflect the occurrence of unanticipated events.