The following discussion of our financial condition and results of operations should be read in conjunction with the 2007 Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 26, 2008. We prepare our financial statements in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). All amounts are expressed in Canadian dollars unless otherwise noted. The following discussion includes forward-looking statements that are not historical facts but reflect our current expectation regarding future results. Actual results may differ materially from the results discussed in the forward-looking statements because of a number of risks and uncertainties, including the matters discussed below. Please refer to "Risk Factors" included in our Annual Report on Form 10-K and the risk factors set forth in our Safe Harbor statement attached hereto as Exhibit 99, 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 franchise and Company-operated restaurants. As of June 29, 2008, 3,203 or 98.3% of our restaurants were franchised, representing 99.3% in Canada and 91.9% in the U.S. The amount of systemwide sales affects our franchisee royalties and rental income, as well as our distribution sales. We believe systemwide sales and average same-store sales provide meaningful information to investors concerning the size and health of our system, the overall health and financial performance of our brand and franchisee base, and ultimately, our financial performance on a consolidated and segmented basis. Changes in systemwide sales are driven by changes in average same-store sales and changes in the number of restaurants. Average same-store sales, one of the key metrics we use to assess our performance, provides information on total retail sales at restaurants operating systemwide throughout the relevant period and provides a useful comparison between periods. Franchise restaurant sales generally are not included in our Consolidated Financial Statements (except for restaurants consolidated in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 46R - Consolidation of Variable Interest Entities - an interpretation of ARB No. 51 (revised December 2003) ("FIN 46R"); however, franchise restaurant sales result in royalties and rental income, which are included in our franchise revenues, and also impact distribution revenues.

This Management's Discussion and Analysis of Financial Condition and Results of Operations may contain certain non-GAAP financial measures to assist readers in understanding our 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 U.S. GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with U.S. GAAP and a reconciliation to U.S. GAAP measures.

References herein to "Tim Hortons," the "Company," "we," "our," or "us" refer to Tim Hortons Inc. and its subsidiaries, unless specifically noted otherwise.

Executive Overview

We franchise, and to a lesser extent, operate Tim Hortons restaurants in Canada and the U.S. As the 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 June 29, 2008, we leased or owned the real estate for approximately 82% of our system restaurants, which generates a recurring stream of rental income. Real estate that is not controlled by us is generally for non-standard restaurants, including, for example, kiosks in offices, hospitals, colleges, and airports, as well as some self-serve kiosks located in gas and convenience locations. We distribute coffee and other beverages, non-perishable food, supplies, packaging and equipment to system restaurants in Canada through our five distribution centres. In the third quarter of 2007, we completed the roll-out of distribution of frozen and refrigerated products from our Guelph facility, which now services 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 213 licensed locations in the Republic of Ireland and the United Kingdom, which are primarily self-serve kiosks operating under the name "Tim Hortons."

Systemwide sales grew by 9.8% in the second quarter of 2008 and 8.6% on a year-to-date basis in 2008, as a result of new restaurant expansion in both Canada and the U.S. and continued same-store sales growth. Systemwide sales include restaurant-level sales at both franchised and Company-operated restaurants.

In the second quarter of 2008, Canadian same-store sales growth was 5.7% (6.6% in Q2 2007). Pricing impacted the second quarter 2008 Canadian growth rates by approximately 4.4% and the shift of Easter from April 2007 to March 2008 had a positive impact of approximately 0.5% in Canada. On a year-to-date basis, Canadian same-store sales growth was 4.6% (6.5% in 2007 year-to-date) of which pricing accounted for approximately 3.5% of the increase. Included in the second quarter and year-to-date pricing impact is approximately 1.6% from pricing that was taken in July 2007 in certain Canadian markets (Ontario, Atlantic Canada and

Manitoba). The benefit of this July 2007 pricing will no longer be a contributing factor to our same-store sales growth in the second half of 2008. As a result of pricing implemented this year, there will be approximately 3.2% pricing impact in the third and fourth quarters of 2008 in Canada versus the comparable period in 2007. Our first quarter Canadian same-store sales growth was impacted by the significant snowfall in key markets and the introduction of new statutory holidays in Ontario and Manitoba in 2008, all of which resulted in a reduction of customer visits.

Our U.S. same-store sales growth was 3.1% in the second quarter of 2008 (3.8% in Q2 2007) and on a year-to-date basis was 2.1% (3.9% in 2007). Pricing impacted U.S. same-store sales growth in the second quarter of 2008 by approximately 2.5% and by 1.2% on a year-to-date basis. The shift of Easter from April 2007 to March 2008 had a positive impact on second quarter same-store sales in the U.S. of less than 0.4%. As a result of pricing implemented this year, there will be approximately 3% pricing impact in the third and fourth quarters of 2008 in the U.S. versus the comparable period in 2007. Our 2008 year-to-date same-store growth rates were impacted earlier in the year by the significant snowfall in many of our U.S. markets, compounded by economic weakness and higher consumer cost pressures, including high gasoline prices.

The U.S. economy has continued to show signs of a slowdown and the Canadian economy has also experienced some weakness. Historically, we have proven to be fairly resilient in challenging economic circumstances due in part to our quality product offering at a reasonable price, but the state of the macro-economic environment and resulting sales climate continues to be challenging. We are actively monitoring the situation and focusing on delivering quality products at prices that provide value to our customers. We are not immune to recessionary impacts and we expect, overall, to see more volatility quarter-to-quarter in the quick-service restaurant sector and continued challenges in the macro-economic environment. This challenging environment may result in reductions in customer visits. On a year-to-date basis, same-store sales growth rates for both Canada and the U.S. are within the same-store sales growth targets established in February 2008 of 4%-6% in Canada and 2%-4% in the U.S.

In the second quarter of 2008, our revenues increased $45.4 million, or 9.8%, over the second quarter of 2007 and increased $81.1 million, or 9.1%, in the year-to date period ended June 29, 2008 over the prior year-to-date period ended July 1, 2007. These increases were primarily a result of growth in the number of systemwide restaurants and continued average same-store sales gains, which resulted in higher royalty, rental and distribution revenues. In addition, distribution revenues were higher relating to implementation of three-channel distribution (dry, frozen and refrigerated) in Ontario. The transition of the Guelph facility to three-channel delivery was fully completed in the third quarter of 2007. Franchise fee revenues were also higher due to a higher number of new restaurant units sold during the quarter.

Operating income increased $10.8 million, or 10.1%, in the second quarter of 2008 compared to the second quarter of 2007 primarily as a result of higher revenues, as discussed above, higher equity income and higher other income, partially offset by higher general and administrative expense. Included in general and administrative expense was $3.1 million of restructuring charges recorded in the second quarter of 2008 in connection with the streamlining of the management team (see below). Adjusted operating income growth for the second quarter of 2008, excluding the restructuring charges, was 13.0% (see "Selected Operating and Financial Highlights" for a reconciliation to the closest U.S. GAAP measure).

Operating income increased $13.1 million, or 6.5%, in the year-to-date period ended June 29, 2008 over the comparable year-to-date period in 2007. This increase was primarily due to the higher revenues, as discussed above, partially offset by higher general and administrative expense, lower equity income, and lower franchise fee income. In the year-to-date period of 2007, equity income included a non-cash tax benefit of approximately $1 million recognized by our bakery joint venture. This tax benefit did not recur in 2008. In addition, franchise fee costs were higher in 2008 as a result of a higher number of new units sold, and higher renovation and other support costs. General and administrative expense was $7.5 million higher in 2008 on a year-to-date basis compared to the year-to-date period in 2007 of which $3.1 million related to restructuring charges. Adjusted operating income growth, excluding the $3.1 million restructuring charges, was 8.0% for the year-to-date period ended June 29, 2008, as compared to the year-to-date period ended July 1, 2007 (see "Selected Operating and Financial Highlights" for a reconciliation to the closest U.S. GAAP measure).

Our operating income performance during the first half of 2008 was below our annual targeted growth rate of 10%; however, it is consistent with our expectations as we had anticipated a challenging first half of the year. We are on track to achieve our 10% operating income growth target, excluding restructuring charges (see below). Several factors underlie our ability to meet our operating income and other previously established targets, including our year-to-date performance; our menu, promotional and operational initiatives; and pricing, including the increases put into the market earlier this year. Offsetting factors include continued macro-economic weakness, pressures on consumers and related competitive activity in the sector to drive traffic, along with our ability to complete real estate projects within our planned timeframe.

Net income increased $7.7 million, or 11.5%, during the second quarter of 2008 as compared to the second quarter of 2007. The increase in net income was the result of the higher operating income and a lower effective tax rate. Diluted earnings per share increased to $0.41 in the second quarter of 2008 from $0.36 in the second quarter of 2007. The diluted weighted average number of shares outstanding in the second quarter of 2008 was 184.3 million, which was 2.6% lower than the diluted weighted average share count in the second quarter of 2007, due to the Company's share repurchase program.

On a year-to-date basis, 2008 net income increased $10.3 million, or 8.1%, as compared to the year-to-date period ended July 1, 2007. The increase in year-to-date net income was the result of the higher operating income and a lower effective tax rate, partially offset by higher net interest expense. Diluted earnings per share increased to $0.74 in the year-to-date period ended June 29, 2008 as

compared to $0.67 in the year-to-date period ended July 1, 2007. The diluted weighted average number of shares outstanding was 185.0 million or 2.6% lower than the diluted weighted average share count in the year-to-date period of 2007, due to the Company's share repurchase program.

On April 30, 2008, we announced changes to our executive management structure to both strengthen and streamline executive oversight of key business operations. In addition, certain employees have left or will be leaving the organization under various retirement and other arrangements. A restructuring charge of $3.1 million was recorded in the second quarter of 2008 in general and administrative expense relating to these retirement and other arrangements. The restructuring is expected to result in future annualized savings of approximately $1 million. Our 2008 operating income target of 10% growth did not anticipate this one-time charge.

As part of our vertical integration strategy, our Board of Directors has approved the construction of a new coffee roasting facility, which will be located in southern Ontario. The Company will invest approximately $30 million in this facility, primarily in 2009. Consistent with our vertical integration investment strategy, the new roasting facility will provide system benefits important to our Franchisees and the Company. When fully operational, this facility, coupled with our existing coffee roasting operation in Rochester, New York, will provide about three-quarters of our system needs. Equally important, our green coffee blending capability will help us protect the quality, integrity and supply of our proprietary coffee blend from tree to cup, at a very competitive rate for our franchisees and provide for a reasonable return on our investment. We continue to selectively invest in growth opportunities in our business and believe our financial position is a key enabler of our future growth.

In the second quarter of 2008, we repurchased 1.5 million shares of our common stock at an average cost of $33.14 per share for a total cost of $48.9 million. On a year-to-date basis, we have repurchased 2.9 million shares of common stock, for a total cost of $100.3 million.

Our Board of Directors approved a 28.6% increase in the quarterly dividend to $0.09 per share in February 2008. We declared and paid our March and May 2008 dividends at this new rate. Our Board of Directors declared a quarterly dividend payable on September 2, 2008 to shareholders of record as of August 18, 2008, also at the $0.09 rate per share. Our current dividend policy is to pay a total of 20-25% of prior year, normalized annual net earnings in dividends each year. The payment of future dividends remains subject to the discretion of our Board of Directors.

Selected Operating and Financial Highlights



                                               Second quarter ended            Year-to-date period ended
                                             June 29,         July 1,         June 29,           July 1,
                                               2008             2007            2008               2007
Systemwide sales growth(1)                          9.8 %         10.9 %             8.6 %             10.6 %
Average same-store sales growth(2)
Canada                                              5.7 %          6.6 %             4.6 %              6.5 %
U.S.                                                3.1 %          3.8 %             2.1 %              3.9 %
Systemwide restaurants                            3,257          3,078             3,257              3,078
Revenues (in millions)                      $     510.7       $  465.3      $      971.0       $      889.9
Operating income (in millions)              $     117.1       $  106.3      $      213.6       $      200.5
Adjusted operating income (in
millions)(3)                                $     120.2       $  106.3      $      216.7       $      200.5
Net income (in millions)                    $      75.0       $   67.2      $      136.8       $      126.5
Basic and diluted earnings per share        $      0.41       $   0.36      $       0.74       $       0.67
Weighted average number of shares of
common stock outstanding - Diluted (in
millions)                                         184.3          189.3             185.0              190.0

(1) Total systemwide sales growth and U.S. average same-store sales growth is determined using a constant exchange rate to exclude the effects of foreign currency translation. U.S. dollar sales are converted to Canadian dollar amounts using the average exchange rate of the base quarter for the period covered. Systemwide sales growth excludes sales from our Republic of Ireland and United Kingdom licensed locations.

(2) Historically, in our U.S. business, a restaurant was included in our average same-store sales calculation beginning the 13th month after the restaurant's opening. Commencing in the first quarter of 2008, we began calculating our Canadian average same-store sales growth on this basis as well. This change aligns same-store calculation methodologies between Canada and the U.S., and with current industry practices. This adjustment did not have a significant impact on reported Canadian same-store sales for the second quarter and year-to-date period ended June 29, 2008. The comparative second quarter and year-to-date period ended July 1, 2007 Canadian same-store sales growth rates, set forth above, have been recalculated using the 2008 methodology.

(3) Adjusted operating income is a non-GAAP measure. The presentation of this non-GAAP measure is made with operating income, the most directly comparable U.S. GAAP measure. Management believes that pro-forma adjusted operating income information is important for comparison purposes to prior periods and for purposes of evaluating management's operating

                                   Second quarter ended         Change from prior year
                                  June 29,         July 1,
                                    2008            2007            $             %
                                           (in millions, except where noted)
   Reported operating income   $        117.1    $     106.3   $      10.8      10.1%
   Restructuring charge                   3.1             -            3.1      n/m

   Adjusted operating income   $        120.2    $     106.3   $      13.9      13.0%


                                 Year-to-date period ended      Change from prior year
                                  June 29,         July 1,
                                    2008            2007            $             %
                                           (in millions, except where noted)
   Reported operating income   $        213.6    $     200.5   $      13.1       6.5%
   Restructuring charge                   3.1             -            3.1      n/m

   Adjusted operating income   $        216.7    $     200.5   $      16.2       8.0%

n/m The comparison is not meaningful.

Systemwide Sales Growth

Our financial results are driven largely by changes in systemwide sales, which include restaurant-level sales at both franchise and Company-operated restaurants, although approximately 98.3% of our system is franchised. The amount of systemwide sales impacts our franchisee royalties and rental income, as well as our distribution sales. Changes in systemwide sales are driven by changes in average same-store sales and changes in the number of restaurants. Systemwide sales growth excludes sales from our Republic of Ireland and United Kingdom licensed locations.

Average Same-Store Sales Growth

Average same-store sales, one of the key metrics we use to assess our performance, provides information on total retail sales at restaurants operating systemwide (i.e., includes both franchised and Company-operated restaurants) throughout the relevant period and provides a useful comparison between periods. Our average same-store sales growth is 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, labour, supplies, and other utility costs.

Product innovation continues to be one of our focused strategies to drive same-store sales growth, including innovation at breakfast as well as other day parts. In the second quarter of 2008, our promotional program included: Slow Roast Beef sandwich, Homestyle Hash Browns, Chocolate Brownie Iced Capp Supreme, Whole Grain Raspberry Muffins, Green Tea, Strawberry Blossom Donuts, Maple-themed products and, in the U.S. only, French Vanilla Iced Coffee.

As mentioned above, Canadian and U.S. average same-store sales growth are calculated on a consistent basis, with restaurants being included beginning in the 13th month following the restaurant's opening. This change is also consistent with current industry practices. We have adjusted our historical quarterly average same-store sales growth data for 2006 and 2007 and on an annual basis for the prior 10 years to align with the new methodology, which is presented along with the original (as reported) growth data in our first quarter 2008 Form 10-Q, filed with the SEC on May 7, 2008.

Our historical average same-store sales trends are not necessarily indicative of future results.

New Restaurant Development

Opening restaurants in new and existing markets in Canada and the U.S. has been
a significant contributor to our growth. Below is a summary of store openings
and closures for the second quarter and year-to-date periods ended June 29, 2008
and July 1, 2007, respectively:



                           Second quarter ended         Year-to-date period ended
                           June 29,       July 1,       June 29,           July 1,
                             2008          2007           2008              2007
     Canada
     Restaurants opened           23           12               45                28
     Restaurants closed          (11 )         (3 )            (17 )              (6 )

     Net change                   12            9               28                22

     U.S.
     Restaurants opened            8            6               11                11
     Restaurants closed           (1 )         (1 )             (3 )              (2 )

     Net change                    7            5                8                 9

     Total Company
     Restaurants opened           31           18               56                39
     Restaurants closed          (12 )         (4 )            (20 )              (8 )

     Net change                   19           14               36                31

From the end of the second quarter of 2007 to the end of the second quarter of 2008, we opened 215 system restaurants, including both franchised and Company-operated restaurants, and we had 36 restaurant closures for a net increase of 179 restaurants. Typically, 20 to 40 system restaurants are closed annually, primarily in Canada. Restaurant closures typically result from an opportunity to acquire a better location which will permit us to upgrade size and layout or add a drive-thru. We have also closed, and may continue to close restaurants for which the restaurant location has performed below our expectations for an extended period of time, or we believe that sales from the restaurant can be absorbed by surrounding restaurants.

Systemwide Restaurant Count

The following table shows our restaurant count as of June 29, 2008, December 30,
2007 and July 1, 2007:



                                   As of          As of          As of
                                  June 29,     December 30,     July 1,
                                    2008           2007          2007
               Canada
               Company-operated         21               30          26
               Franchised            2,830            2,793       2,707

               Total                 2,851            2,823       2,733

               % Franchised           99.3 %           98.9 %      99.0 %
               U.S.
               Company-operated         33               42          50
               Franchised              373              356         295

               Total                   406              398         345

               % Franchised           91.9 %           89.4 %      85.5 %
               Total system
               Company-operated         54               72          76
               Franchised            3,203            3,149       3,002

               Total                 3,257            3,221       3,078

               % Franchised           98.3 %           97.8 %      97.5 %

Segment Operating Income (Loss)

Systemwide sales and average same-store sales growth are 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.

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

                                                                                                Change from
                                                 Second quarter ended                           prior year
                                  June 29,        % of         July 1,        % of
                                    2008        Revenues        2007        Revenues         $         Percentage
                                                        (in thousands, except where noted)
Operating Income (Loss)
Canada                            $ 130,433         25.5 %    $ 115,969         24.9 %    $ 14,464           12.5 %
U.S.                                   (190 )        n/m             79          n/m          (269 )          n/m
. . .