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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q/A



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



For the quarterly period ended July 4, 2004



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 0-31051



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SMTC CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 98-0197680                          
|(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) |  | (I.R.S. EMPLOYER IDENTIFICATION NO.)



635 HOOD ROAD

MARKHAM, ONTARIO, CANADA L3R 4N6

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)



(905) 479-1810

(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)



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Indicate by check mark whether SMTC Corporation: (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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x



As of August 6, 2004, SMTC Corporation had 35,752,665 shares of common stock, par value $0.01
per share, and one share of special voting stock, par value $0.01 per share, outstanding. As of August 6, 2004, SMTC Corporations subsidiary, SMTC Manufacturing Corporation of Canada, had 37,454,061 exchangeable shares outstanding, each of
which is exchangeable into one share of common stock of SMTC Corporation.



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SMTC Corporation

Form 10-Q/A



Explanatory Note



This amendment on Form 10-Q/A is filed to amend Part I, Item 1, Financial Statements, to restate (a) SMTC Corporations balance sheet for the quarter ended July 4,
2004 as a result of a technical accounting requirement (Financial Accounting Standard Boards Emerging Issues Task Force Issue No. 95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include Both
a Subjective Acceleration Clause and a Lock-Box Arrangement) and (b) Note 4 to the consolidated financial statements. The second quarter balance sheet is restated to reclassify the revolver balance of $13.3 million under the Companys credit
facilities with Congress Financial Corporation and its affiliates from a long-term liability to a current liability. Additionally, the Companys consolidated statements of cash flows for the three and six months ended July 4, 2004 have been
revised to adjust the repayment of pre-existing long-term debt and to identify the increase in revolving debt and the repayment of long-term debt, amounts that were previously included in the increase in long-term debt line item.



Additionally, all share information relating to shares outstanding, earnings per share and
all employee stock options and warrants has been adjusted to reflect a reverse stock split of the Companys issued and outstanding common and exchangeable shares whereby every five shares of common stock were exchanged for one share of common
stock and every five exchangeable shares were exchanged for one exchangeable share, which was completed on October 4, 2004. This adjusted information appears in the consolidated statements of operations for all periods presented as well as notes 1,
2, 5 and 6 to the consolidated financial statements, portions of Part I, Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations and Part II, Items 2 and 4.



Further, note 11 to the consolidated financial statements has been added to disclose certain
subsequent events, and information regarding those subsequent events has been added to portions of Part I, Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations.



Finally, information relating to the Companys execution of a letter of understanding
with Congress Financial Corporation has been added to note 4 and to portions of Part I, Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations.



Table of Contents



|           |  |                                                                                                                          |  |         
|---------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | --------
|           |  |                                                                                                                          |  | Page No.
|           |  |                                                                                                                         
|PART I     |  | Financial Information                                                                                                    |  |         
|           |  |                                                                                                                         
|Item 1.    |  | Financial Statements.                                                                                                    |  | 3       
|           |  |                                                                                                                         
|           |  | Consolidated Balance Sheets as of December 31, 2003 and July 4, 2004 (unaudited)                                         |  | 3       
|           |  |                                                                                                                         
|           |  | Consolidated Statements of Operations for the three and six months ended July 4, 2004 and June 29, 2003 (unaudited)      |  | 4       
|           |  |                                                                                                                         
|           |  | Consolidated Statement of Changes in Shareholders Equity (Deficiency) for the six months ended July 4, 2004 (unaudited) |  | 6       
|           |  |                                                                                                                         
|           |  | Consolidated Statements of Cash Flows for the three and six months ended July 4, 2004 and June 29, 2003 (unaudited)      |  | 7       
|           |  |                                                                                                                         
|           |  | Notes to Consolidated Financial Statements                                                                               |  | 9       
|           |  |                                                                                                                         
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.                                   |  | 26      
|           |  |                                                                                                                         
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk.                                                              |  | 54      
|           |  |                                                                                                                         
|Item 4.    |  | Controls and Procedures.                                                                                                 |  | 54      
|           |  |                                                                                                                         
|PART II    |  | Other Information                                                                                                        |  |         
|           |  |                                                                                                                         
|Item 2.    |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.                                        |  | 55      
|           |  |                                                                                                                         
|Item 4.    |  | Submission of Matters to a Vote of Security Holders.                                                                     |  | 55      
|           |  |                                                                                                                         
|Item 5.    |  | Other Information.                                                                                                       |  | 56      
|           |  |                                                                                                                         
|Item 6.    |  | Exhibits and Reports on Form 8-K.                                                                                        |  | 56      
|           |  |                                                                                                                         
|Signatures |  |                                                                                                                          |  | 58      



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##### Table of Contents

SMTC CORPORATION



Consolidated Balance Sheets

(Expressed in thousands of U.S. dollars)

(Unaudited)



PART I FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



|                                                                                                      |  |              |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                      |  | July 4, 2004 |          |   | December 31,2003 |  
|                                                                                                      |  |              |          |   | (audited)        |  
|Assets                                                                                                |  |              |          |   |                  |   |          |  
|                                                                                                      |  |             
|Current assets:                                                                                       |  |              |          |   |                  |   |          |  
|Cash                                                                                                  |  | $            | 51       |   |                  | $ | 167      |  
|Accounts receivable, net of an allowance for doubtful accounts of $1,808 (December 31, 2003 - $2,096) |  |              | 32,081   |   |                  |   | 41,318   |  
|Inventories (note 3)                                                                                  |  |              | 34,590   |   |                  |   | 31,463   |  
|Prepaid expenses                                                                                      |  |              | 2,807    |   |                  |   | 1,922    |  
|                                                                                                      |  |              |          |   |                  |   |          |  
|                                                                                                      |  |              | 69,529   |   |                  |   | 74,870   |  
|                                                                                                      |  |             
|Capital assets                                                                                        |  |              | 28,011   |   |                  |   | 30,805   |  
|Other assets                                                                                          |  |              | 5,659    |   |                  |   | 3,088    |  
|                                                                                                      |  |              |          |   |                  |   |          |  
|                                                                                                      |  | $            | 103,199  |   |                  | $ | 108,763  |  
|                                                                                                      |  |              |          |   |                  |   |          |  
|Liabilities and Shareholders Equity (Deficiency)                                                     |  |              |          |   |                  |   |          |  
|                                                                                                      |  |             
|Current liabilities:                                                                                  |  |              |          |   |                  |   |          |  
|Accounts payable                                                                                      |  | $            | 28,255   |   |                  | $ | 40,565   |  
|Accrued liabilities                                                                                   |  |              | 15,720   |   |                  |   | 18,843   |  
|Income taxes payable                                                                                  |  |              | 1,022    |   |                  |   | 355      |  
|Revolving debt (note 4)                                                                               |  |              | 13,307   |   |                  |   |         |  
|Current portion of long-term debt (note 4)                                                            |  |              | 2,967    |   |                  |   | 70,077   |  
|Current portion of capital lease obligations                                                          |  |              | 60       |   |                  |   | 193      |  
|                                                                                                      |  |              |          |   |                  |   |          |  
|                                                                                                      |  |              | 61,331   |   |                  |   | 130,033  |  
|                                                                                                      |  |             
|Long-term debt (note 4)                                                                               |  |              | 27,387   |   |                  |   |         |  
|Capital lease obligations                                                                             |  |              | 35       |   |                  |   | 35       |  
|                                                                                                      |  |             
|Shareholders equity (deficiency):                                                                    |  |              |          |   |                  |   |          |  
|Capital stock (note 5)                                                                                |  |              | 71,618   |   |                  |   | 55,911   |  
|Warrants (note 5)                                                                                     |  |              | 10,372   |   |                  |   | 1,523    |  
|Loans receivable                                                                                      |  |              | (5       | ) |                  |   | (5       | )
|Additional paid-in capital (note 5)                                                                   |  |              | 184,748  |   |                  |   | 174,483  |  
|Deficit                                                                                               |  |              | (252,287 | ) |                  |   | (253,217 | )
|                                                                                                      |  |              |          |   |                  |   |          |  
|                                                                                                      |  |              | 14,446   |   |                  |   | (21,305  | )
|                                                                                                      |  |              |          |   |                  |   |          |  
|                                                                                                      |  | $            | 103,199  |   |                  | $ | 108,763  |  
|                                                                                                      |  |              |          |   |                  |   |          |  



See
accompanying notes to consolidated financial statements.



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SMTC CORPORATION



Consolidated Statements of Operations

(Expressed in thousands of U.S. dollars, except share quantities and per
share amounts)



(Unaudited)



|                                                                |  |                    |        |              |                  |         |             |  |              |         |  |   |         |  
|--------------------------------------------------------------- |  | ------------------ | ------ | ------------ | ---------------- | ------- | ----------- |  | ------------ | ------- |  | - | ------- | -
|                                                                |  | Three months ended |        |              | Six months ended |        
|                                                                |  | July 4,2004        |        | June 29,2003 |                  |         | July 4,2004 |  | June 29,2003 |        
|Revenue                                                         |  | $                  | 66,306 |              | $                | 70,746  |             |  | $            | 135,729 |  | $ | 152,247 |  
|Cost of sales                                                   |  |                    | 58,966 |              |                  | 66,010  |             |  |              | 121,542 |  |   | 139,565 |  
|                                                                |  |                    |        |              |                  |         |             |  |              |         |  |   |         |  
|Gross profit                                                    |  |                    | 7,340  |              |                  | 4,736   |             |  |              | 14,187  |  |   | 12,682  |  
|Selling, general and administrative expenses (note 9)           |  |                    | 4,198  |              |                  | 4,762   |             |  |              | 8,505   |  |   | 9,457   |  
|Amortization                                                    |  |                    | 1,158  |              |                  | 972     |             |  |              | 2,330   |  |   | 1,944   |  
|Restructuring charges (note 9)                                  |  |                    |       |              |                  | (360    | )           |  |              |        |  |   | (121    | )
|                                                                |  |                    |        |              |                  |         |             |  |              |         |  |   |         |  
|Operating earnings (loss)                                       |  |                    | 1,984  |              |                  | (638    | )           |  |              | 3,352   |  |   | 1,402   |  
|Interest                                                        |  |                    | 1,198  |              |                  | 1,321   |             |  |              | 2,490   |  |   | 2,839   |  
|                                                                |  |                    |        |              |                  |         |             |  |              |         |  |   |         |  
|Earnings (loss) before income taxes and discontinued operations |  |                    | 786    |              |                  | (1,959  | )           |  |              | 862     |  |   | (1,437  | )
|Income tax expense (note 7)                                     |  |                    | 646    |              |                  | 34,446  |             |  |              | 769     |  |   | 34,635  |  
|                                                                |  |                    |        |              |                  |         |             |  |              |         |  |   |         |  
|Earnings (loss) from continuing operations                      |  |                    | 140    |              |                  | (36,405 | )           |  |              | 93      |  |   | (36,072 | )
|Earnings (loss) from discontinued operations (note 10)          |  |                    | 837    |              |                  | (3,450  | )           |  |              | 837     |  |   | (3,751  | )
|                                                                |  |                    |        |              |                  |         |             |  |              |         |  |   |         |  
|Net earnings (loss)                                             |  | $                  | 977    |              | $                | (39,855 | )           |  | $            | 930     |  | $ | (39,823 | )
|                                                                |  |                    |        |              |                  |         |             |  |              |         |  |   |         |  



See
accompanying notes to consolidated financial statements.



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SMTC CORPORATION



Consolidated Statements of Operations (continued)

(Expressed in thousands of U.S. dollars, except share quantities and per share amounts)



(Unaudited)



|                                                                                                         |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | ------------- | ---------------- | --------- | ------------ |  | ------------- | --------- |  | - | --------- | -
|                                                                                                         |  | Three months ended |           |               | Six months ended |          
|                                                                                                         |  | July 4, 2004       |           | June 29, 2003 |                  |           | July 4, 2004 |  | June 29, 2003 |          
|Earnings (loss) per share:                                                                               |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  
|Basic earnings (loss) per share from continuing operations                                               |  | $                  | 0.02      |               | $                | (6.35     | )            |  | $             | 0.01      |  | $ | (6.29     | )
|Earnings (loss) per share from discontinued operations                                                   |  | $                  | 0.09      |               | $                | (0.60     | )            |  | $             | 0.12      |  | $ | (0.65     | )
|                                                                                                         |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  
|Basic earnings (loss) per share                                                                          |  | $                  | 0.11      |               | $                | (6.95     | )            |  | $             | 0.13      |  | $ | (6.94     | )
|                                                                                                         |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  
|Diluted earnings (loss) per share                                                                        |  | $                  | 0.11      |               | $                | (6.95     | )            |  | $             | 0.13      |  | $ | (6.94     | )
|                                                                                                         |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  
|Weighted average number of common shares used in the calculations of earnings (loss) per share (note 6): |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  
|Basic                                                                                                    |  |                    | 9,064,497 |               |                  | 5,737,956 |              |  |               | 7,365,457 |  |   | 5,737,956 |  
|Diluted                                                                                                  |  |                    | 9,067,794 |               |                  | 5,737,956 |              |  |               | 7,378,800 |  |   | 5,737,956 |  
|                                                                                                         |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  



See
accompanying notes to consolidated financial statements.



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SMTC CORPORATION



Consolidated Statement of Changes in Shareholders Equity (Deficiency)

(Expressed in thousands of U.S.
dollars)



Six months ended July 4, 2004

(Unaudited)



|                                                           |  |              |        |   |          |   |        |                          |  |   |                 |   |  |         |    |   |                     |   |          |   |  |   |         |  
|---------------------------------------------------------- |  | ------------ | ------ | - | -------- | - | ------ | ------------------------ |  | - | --------------- | - |  | ------- | -- | - | ------------------- | - | -------- | - |  | - | ------- | -
|                                                           |  | Capitalstock |        |   | Warrants |   |        | Additionalpaid-incapital |  |   | Loansreceivable |   |  | Deficit |    |   | Shareholdersequity |  
|Balance, December 31, 2003                                 |  | $            | 55,911 |   |          | $ | 1,523  |                          |  | $ | 174,483         |   |  | $       | (5 | ) |                     | $ | (253,217 | ) |  | $ | (21,305 | )
|Private placement of Special Warrants, net of costs        |  |              | 18,983 |   |          |   | 7,617  |                          |  |   |                 |   |  |         |   |   |                     |   |         |   |  |   | 26,600  |  
|Consideration issued upon conversion of debt, net of costs |  |              | 112    |   |          |   | 2,755  |                          |  |   | 6,754           |   |  |         |   |   |                     |   |         |   |  |   | 9,621   |  
|Cancellation of warrants (note 5(c))                       |  |              |       |   |          |   | (1,523 | )                        |  |   | (232            | ) |  |         |   |   |                     |   |         |   |  |   | (1,755  | )
|Cancellation of warrants (note 5(c))                       |  |              |       |   |          |   |       |                          |  |   | 355             |   |  |         |   |   |                     |   |         |   |  |   | 355     |  
|Conversion of shares from exchangeable to common stock     |  |              | (3,388 | ) |          |   |       |                          |  |   | 3,388           |   |  |         |   |   |                     |   |         |   |  |   |        |  
|Net earnings for the period                                |  |              |       |   |          |   |       |                          |  |   |                |   |  |         |   |   |                     |   | 930      |   |  |   | 930     |  
|                                                           |  |              |        |   |          |   |        |                          |  |   |                 |   |  |         |    |   |                     |   |          |   |  |   |         |  
|Balance, July 4, 2004                                      |  | $            | 71,618 |   |          | $ | 10,372 |                          |  | $ | 184,748         |   |  | $       | (5 | ) |                     | $ | (252,287 | ) |  | $ | 14,446  |  
|                                                           |  |              |        |   |          |   |        |                          |  |   |                 |   |  |         |    |   |                     |   |          |   |  |   |         |  



See accompanying notes to consolidated
financial statements.



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SMTC CORPORATION



Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. dollars)



(Unaudited)



|                                                   |  |                    |         |   |                  |   |         |             |  |   |              |   |  |   |         |  
|-------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | ----------- |  | - | ------------ | - |  | - | ------- | -
|                                                   |  | Three months ended |         |   | Six months ended |  
|                                                   |  | July 4,2004        |         |   | June 29,2003     |   |         | July 4,2004 |  |   | June 29,2003 |  
|Cash provided by (used in):                        |  |                    |         |   |                  |   |         |             |  |   |              |   |  |   |         |  
|                                                   |  |                    |         |  
|Operations:                                        |  |                    |         |   |                  |   |         |             |  |   |              |   |  |   |         |  
|Net earnings (loss)                                |  | $                  | 977     |   |                  | $ | (39,855 | )           |  | $ | 930          |   |  | $ | (39,823 | )
|Items not involving cash:                          |  |                    |         |   |                  |   |         |             |  |   |              |   |  |   |         |  
|Amortization                                       |  |                    | 1,158   |   |                  |   | 972     |             |  |   | 2,330        |   |  |   | 1,944   |  
|Depreciation                                       |  |                    | 1,411   |   |                  |   | 2,178   |             |  |   | 2,919        |   |  |   | 4,730   |  
|Deferred income taxes                              |  |                    |        |   |                  |   | 34,221  |             |  |   |             |   |  |   | 34,325  |  
|Gain on disposition of capital assets              |  |                    |        |   |                  |   | (25     | )           |  |   | (15          | ) |  |   | (25     | )
|Impairment of assets                               |  |                    |        |   |                  |   | 3,226   |             |  |   |             |   |  |   | 3,226   |  
|Gain on disposal of assets previously written down |  |                    |        |   |                  |   | (208    | )           |  |   |             |   |  |   | (208    | )
|Discount on prepayment of shareholder loans        |  |                    |        |   |                  |   | 389     |             |  |   |             |   |  |   | 389     |  
|Change in non-cash operating working capital:      |  |                    |         |   |                  |   |         |             |  |   |              |   |  |   |         |  
|Accounts receivable                                |  |                    | 6,035   |   |                  |   | 9,755   |             |  |   | 9,237        |   |  |   | 12,850  |  
|Inventories                                        |  |                    | 3,058   |   |                  |   | 7,686   |             |  |   | (3,127       | ) |  |   | 7,625   |  
|Prepaid expenses                                   |  |                    | (651    | ) |                  |   | 393     |             |  |   | (885         | ) |  |   | 951     |  
|Income taxes recoverable/payable                   |  |                    | 541     |   |                  |   | (75     | )           |  |   | 667          |   |  |   | 590     |  
|Accounts payable                                   |  |                    | (14,390 | ) |                  |   | (4,503  | )           |  |   | (12,310      | ) |  |   | (7,343  | )
|Accrued liabilities                                |  |                    | (3,431  | ) |                  |   | (4,246  | )           |  |   | (4,759       | ) |  |   | (7,730  | )
|                                                   |  |                    |         |   |                  |   |         |             |  |   |              |   |  |   |         |  
|                                                   |  |                    | (5,292  | ) |                  |   | 9,908   |             |  |   | (5,013       | ) |  |   | 11,501  |  
|                                                   |  |                    |         |  
|Financing:                                         |  |                    |         |   |                  |   |         |             |  |   |              |   |  |   |         |  
|Repayment of pre-existing long-term debt           |  |                    | (41,504 | ) |                  |   | (13,709 | )           |  |   | (41,084      | ) |  |   | (15,429 | )
|Increase in revolving debt                         |  |                    | 13,307  |   |                  |   |        |             |  |   | 13,307       |   |  |   |        |  
|Increase in long-term debt                         |  |                    | 1,400   |   |                  |   |        |             |  |   | 1,400        |   |  |   |        |  
|Repayment of long-term debt                        |  |                    | (39     | ) |                  |   |        |             |  |   | (39          | ) |  |   |        |  
|Principal payments on capital lease obligations    |  |                    | (41     | ) |                  |   | (12     | )           |  |   | (133         | ) |  |   | (95     | )
|Net proceeds from issuance of shares               |  |                    | 25,849  |   |                  |   |        |             |  |   | 25,849       |   |  |   |        |  
|Net proceeds from issuance of warrants             |  |                    | 8,972   |   |                  |   |        |             |  |   | 8,972        |   |  |   |        |  
|Deferred financing fees                            |  |                    | (2,715  | ) |                  |   |        |             |  |   | (3,265       | ) |  |   |        |  
|Repayment of shareholder loans                     |  |                    |        |   |                  |   | 3,795   |             |  |   |             |   |  |   | 3,795   |  
|                                                   |  |                    |         |   |                  |   |         |             |  |   |              |   |  |   |         |  
|                                                   |  |                    | 5,229   |   |                  |   | (9,926  | )           |  |   | 5,007        |   |  |   | (11,729 | )
|                                                   |  |                    |         |  
|Investments:                                       |  |                    |         |   |                  |   |         |             |  |   |              |   |  |   |         |  
|Purchase of capital assets                         |  |                    | (101    | ) |                  |   | (35     | )           |  |   | (125         | ) |  |   | (88     | )
|Proceeds from sale of capital assets               |  |                    |        |   |                  |   | 233     |             |  |   | 15           |   |  |   | 233     |  
|Other                                              |  |                    |        |   |                  |   |        |             |  |   |             |   |  |   | 30      |  
|                                                   |  |                    |         |   |                  |   |         |             |  |   |              |   |  |   |         |  
|                                                   |  |                    | (101    | ) |                  |   | 198     |             |  |   | (110         | ) |  |   | 175     |  
|                                                   |  |                    |         |   |                  |   |         |             |  |   |              |   |  |   |         |  
|Increase (decrease) in cash                        |  |                    | (164    | ) |                  |   | 180     |             |  |   | (116         | ) |  |   | (53     | )
|                                                   |  |                    |         |  
|Cash, beginning of period                          |  |                    | 215     |   |                  |   | 137     |             |  |   | 167          |   |  |   | 370     |  
|                                                   |  |                    |         |   |                  |   |         |             |  |   |              |   |  |   |         |  
|Cash, end of period                                |  | $                  | 51      |   |                  | $ | 317     |             |  | $ | 51           |   |  | $ | 317     |  
|                                                   |  |                    |         |   |                  |   |         |             |  |   |              |   |  |   |         |  



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SMTC CORPORATION



Consolidated Statements of Cash Flows (continued)

(Expressed in thousands of U.S. dollars)



(Unaudited)



|                                                                                                         |  |                    |        |                  |   |             |  |              |        |  |   |      
|-------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- | - | ----------- |  | ------------ | ------ |  | - | -----
|                                                                                                         |  | Three months ended |        | Six months ended
|                                                                                                         |  | July 4,2004        |        | June 29,2003     |   | July 4,2004 |  | June 29,2003
|Supplemental disclosures:                                                                                |  |                    |        |                  |   |             |  |              |        |  |   |      
|Cash paid during the period:                                                                             |  |                    |        |                  |   |             |  |              |        |  |   |      
|Income taxes                                                                                             |  | $                  | 15     |                  | $ |            |  | $            | 78     |  | $ | 144  
|Interest                                                                                                 |  |                    | 2,191  |                  |   | 1,384       |  |              | 3,355  |  |   | 1,384
|                                                                                                         |  |                    |        |                 
|Non-cash transactions:                                                                                   |  |                    |        |                  |   |             |  |              |        |  |   |      
|Repayment of long term debt and existing warrants by issuance of shares and warrants (see notes 4 and 5) |  |                    | 10,000 |                  |   |            |  |              | 10,000 |  |   |     
|                                                                                                         |  |                    |        |                 
|Increase in other assets and accrued liabilities                                                         |  |                    | 1,636  |                  |   |            |  |              | 1,636  |  |   |     
|                                                                                                         |  |                    |        |                  |   |             |  |              |        |  |   |      



See
accompanying notes to consolidated financial statements.



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SMTC CORPORATION



Notes to Consolidated Financial Statements

(Expressed in thousands of U.S. dollars, except share quantities and
per share amounts)



Three and six months ended
July 4, 2004 and June 29, 2003

(Unaudited)



|1. | Basis of presentation:
|-- | ----------------------



The Companys accounting principles are in accordance with accounting principles generally accepted in the United States.



The accompanying unaudited interim consolidated balance sheet as at July 4,
2004, unaudited consolidated statements of operations for the three and six month periods ended July 4, 2004 and June 29, 2003, unaudited consolidated statement of changes in shareholders equity (deficit) for the six month period ended July 4,
2004, and unaudited consolidated statements of cash flows for the three and six month periods ended July 4, 2004 and June 29, 2003 have been prepared on substantially the same basis as the annual consolidated financial statements.



On October 4, 2004, the Company completed a reverse stock split of its
issued and outstanding common and exchangeable shares whereby every five shares of common stock were exchanged for one share of common stock and every five exchangeable shares were exchanged for one exchangeable share, resulting in 7,775,181 common
shares outstanding and 6,866,152 exchangeable shares outstanding. All share information relating to shares outstanding and all employee stock options and warrants have been retroactively adjusted to reflect the reverse stock split.



Management believes these unaudited consolidated financial statements
reflect all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the Companys financial position, operating results and cash flows for the periods presented.
The results of operations for the three and six month periods ended July 4, 2004 are not necessarily indicative of results to be expected for the entire year. These unaudited interim consolidated financial statements should be read in conjunction
with the annual consolidated financial statements and notes thereto for the year ended December 31, 2003.



|2. | Stock-based compensation:
|-- | -------------------------



The Company accounts for stock options issued to employees using the intrinsic value method of Accounting Principles Board Opinion No. 25. Compensation
expense is recorded on the date stock options are granted only if the current fair value of the underlying stock exceeds the exercise price. The Company has provided the pro forma disclosures required by Financial Accounting Standards Board
(FASB) Statement No. 123, Accounting for Stock-Based Compensation (Statement 123), as amended by FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (Statement 148).



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SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|2. | Stock-based compensation (continued):
|-- | -------------------------------------



The table below sets out the pro forma amounts of net loss per share that would have resulted if the Company had accounted for its employee stock plans
under the fair value recognition provisions of Statement 123.



|                                               |  |                    |       |   |                  |   |         |              |  |   |              |   |  |   |         |  
|---------------------------------------------- |  | ------------------ | ----- | - | ---------------- | - | ------- | ------------ |  | - | ------------ | - |  | - | ------- | -
|                                               |  | Three months ended |       |   | Six months ended |  
|                                               |  | July 4, 2004       |       |   | June 29,2003     |   |         | July 4, 2004 |  |   | June 29,2003 |  
|Net earnings (loss), as reported               |  | $                  | 977   |   |                  | $ | (39,855 | )            |  | $ | 930          |   |  | $ | (39,823 | )
|Stock-based compensation expense               |  |                    | (69   | ) |                  |   | (309    | )            |  |   | (44          | ) |  |   | (658    | )
|                                               |  |                    |       |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Pro forma earnings (loss)                      |  |                    | 908   |   |                  |   | (40,164 | )            |  |   | 886          |   |  |   | (40,481 | )
|                                               |  |                    |       |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Basic earnings (loss) per share, as reported   |  | $                  | 0.11  |   |                  | $ | (6.95   | )            |  | $ | 0.13         |   |  | $ | (6.94   | )
|Stock-based compensation expense               |  |                    | (0.01 | ) |                  |   | (0.05   | )            |  |   | (0.01        | ) |  |   | (0.11   | )
|                                               |  |                    |       |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Pro forma basic earnings (loss) per share      |  |                    | 0.10  |   |                  |   | (7.00   | )            |  |   | 0.12         |   |  |   | (7.05   | )
|                                               |  |                    |       |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Diluted earnings (loss) per share, as reported |  | $                  | 0.11  |   |                  | $ | (6.95   | )            |  | $ | 0.13         |   |  | $ | (6.94   | )
|Stock-based compensation expense               |  |                    | (0.01 | ) |                  |   | (0.05   | )            |  |   | (0.01        | ) |  |   | (0.11   | )
|                                               |  |                    |       |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Pro forma diluted earnings (loss) per share    |  | $                  | 0.10  |   |                  | $ | (7.00   | )            |  | $ | 0.12         |   |  | $ | (7.05   | )
|                                               |  |                    |       |   |                  |   |         |              |  |   |              |   |  |   |         |  



No stock-based
compensation expense has been recorded in the statement of operations for the three and six months ended July 4, 2004 and June 29, 2003.



The estimated fair value of options is calculated at the date of grant, is amortized over the vesting period, on a straight-line basis, and was determined
using the Black-Scholes option pricing model with assumptions made as to the risk-free interest rate, dividend yield, expected life and volatility. During the three and six months ended July 4, 2004, the Company granted 30,000 options to purchase
common stock at an exercise price of $4.00 per share, the fair market value on the date of grant. During the six months ended June 29, 2003, the Company granted 8,000 options to purchase common stock at an exercise price of $3.75 per share, the fair
market value on the date of grant. During the three and six months ended July 4, 2004, the Company recorded a pro-forma stock-based compensation expense of $69 and $44, respectively.



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##### Table of Contents

SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|3. | Inventories:
|-- | ------------



|                |  |             |        |                  |   |       
|--------------- |  | ----------- | ------ | ---------------- | - | ------
|                |  | July 4,2004 |        | December 31,2003
|Raw materials   |  | $           | 19,523 |                  | $ | 16,229
|Work in process |  |             | 6,263  |                  |   | 7,037 
|Finished goods  |  |             | 8,293  |                  |   | 7,621 
|Other           |  |             | 511    |                  |   | 576   
|                |  |             |        |                  |   |       
|                |  | $           | 34,590 |                  | $ | 31,463
|                |  |             |        |                  |   |       



|4. | Debt:
|-- | -----



|                               |  |             |        |                  |   |       
|------------------------------ |  | ----------- | ------ | ---------------- | - | ------
|                               |  | July 4,2004 |        | December 31,2003
|Senior Debt - Revolving (a)    |  | $           | 13,307 |                  | $ |      
|                               |  |             |        |                  |   |       
|Senior Debt - Term (a)         |  | $           | 1,361  |                  | $ |      
|Subordinated Debt (b)          |  |             | 27,593 |                  |   |      
|Other (b)                      |  |             | 1,400  |                  |   |      
|Senior Debt - pre-existing (b) |  |             |       |                  |   | 70,077
|                               |  |             |        |                  |   |       
|                               |  |             | 30,354 |                  |   | 70,077
|                               |  |            
|Less current portion           |  |             | 2,967  |                  |   | 70,077
|                               |  |             |        |                  |   |       
|                               |  | $           | 27,387 |                  | $ |      
|                               |  |             |        |                  |   |       



In connection with
the initial public offering completed on July 27, 2000, the Company and certain of its subsidiaries entered into a credit agreement (the Credit Agreement) that provided for an initial term loan and amounts made available under revolving
credit loans, swing line loans and letters of credit. Between July 27, 2000 and May 31, 2004, the Company and its lenders amended the Credit Agreement from time to time.



On June 1, 2004, the Company announced that it completed a recapitalization. The June 1, 2004 recapitalization consisted of
three main components: a private placement of equity securities, a new secured credit facility and a transaction with the Companys pre-existing lenders to repay a portion of and restructure a portion of the Companys existing debt
obligations under the Credit Agreement, which was amended and restated as of such date (the Amended Credit Agreement). Prior to closing on June 1, 2004 the Company had total indebtedness outstanding under the Credit Agreement of $77,500,
consisting of a term loan of $4,200 and amounts outstanding under the revolving credit loan and swing line loans of $73,300. In addition, the Company had a net book value of $500 of deferred financing fees related to the Credit Agreement.



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##### Table of Contents

SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|4. | Debt (continued):
|-- | -----------------



(a) Senior Debt:



On June 1, 2004, the Company entered into a 3-year $40,000 revolving credit facility and a $1,400 term loan facility with Congress Financial Corporation
and its affiliates (Congress), which was used in part to repay a portion of the outstanding debt under the Credit Agreement and to fund future working capital needs. The availability under the Congress credit facilities are subject to
certain borrowing base conditions based on the eligible inventory and accounts receivable of the Company and bears interest at a rate of 0.5% in excess of the Canadian prime rate for Canadian denominated loans and 0.5% in excess of the US prime rate
for US denominated loans. The Congress credit facilities are secured by the present and future assets of the Company, and require the Company to be in compliance with a financial covenant based on achieving certain EBITDA (earnings before interest,
depreciation and amortization) targets during the term of the facility. The initial term of the revolving credit facility is three years, with a one-year renewal period at the option of the lender, at which time the facility would become annually
renewable. The term loan bears interest at a rate of 1% in excess of the US prime rate.



The Company incurred costs of $1,400 related to the completion of the Congress credit facilities. These costs were recorded as a non-current deferred charge, and are being amortized as additional interest expense over
the term of the credit facility using the effective interest method.



The revolving credit and term loan facilities and the Credit Agreement (as amended on June 1, 2004) are jointly and severally guaranteed by and secured by the assets of the Company and the assets and capital stock of each of the
Companys subsidiaries (other than certain foreign subsidiaries) and its future subsidiaries. The security interest granted to Congress ranks senior to the security interest in favor of the pre-existing lenders.



Although the revolving credit facility has a three-year term, expiring in
2007, and the Company believes it will have the ability to maintain this debt outstanding for more than one year, the Company has classified its borrowings under the facility at July 4, 2004 as a current liability in accordance with the provisions
set forth in Emerging Issues Task Force 95-22 Balance Sheet Classifications, Borrowings Outstanding Under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement (EITF 95-22). EITF
95-22 requires revolving credit agreements with a required lock-box arrangement that include subjective acceleration clauses to be classified as current liabilities. Accordingly, the accompanying balance sheets have been restated and borrowings
under the revolving credit facility previously reported as a long-term liability, amounting to $13,307 at July 4, 2004, have been reclassified to a current liability.



On November 16, 2004, the Company, together with Congress, executed a letter of understanding amending the terms of the
revolving credit facility. The letter of understanding provides that, at the Companys option, it may elect to use a springing lock-box arrangement whereby remittances from customers are forwarded to the Companys general bank
account and the Company is not required to reduce the borrowings under the facility unless certain conditions exist.



Pursuant to the letter of understanding, should the Company elect to change to the springing lock-box arrangement, availability under the facility may be
reduced by the eligible inventory. The Company will be required to revert back to a required lock-box arrangement if (a) availability under the revolving credit facility is less than the greater of (i) $2,500 or (ii) 25% of the outstanding
borrowings under the credit facility or (b) the occurrence of an event of default. Management does not foresee being precluded from exercising the option of converting to a springing lock-box based on its expected financing needs over the next
twelve months however, due to the effective cash management aspect of the current lock-box arrangement, the Company has no plans to move to a springing lock-box arrangement at this time.



The letter of understanding, although signed subsequent to the third quarter of 2004, qualified as a refinancing of the
revolving credit facility in effect at the end of the third quarter of 2004 and as such, the debt was classified as long-term at October 3, 2004. The Company has the option to use a springing lock-box arrangement and based on managements
assessment of the subjective acceleration clauses at the end of the third quarter of 2004, the debt was classified as long-term.



(b) Subordinated Debt:



On June 1, 2004 the Company completed a transaction with the Companys pre-existing lenders under which the Company satisfied a portion of its
indebtedness outstanding under the Credit Agreement. The Company paid consideration with a fair value of $50,000, comprised of a cash payment of $40,000 and $10,000 of common stock of the Company and warrants (see note 5(b)), in exchange for a
reduction of debt with a par value of $50,000 and cancellation of the warrants issued and to be issued to such lenders under the Credit Agreement.



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SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|4. | Debt (continued):
|-- | -----------------



The pre-existing lenders converted the remaining $27,500 of outstanding indebtedness into a tranche A term loan in the amount of $15,000 and a tranche B
term loan in the amount of $12,500 under the Amended Credit Agreement. The tranche A term loan matures on December 31, 2007 and bears interest at the U.S. base rate plus 2.5%. The tranche B term loan matures December 31, 2008 and bears interest at a
rate equal to 8% payment in kind (PIK) interest plus 4% cash interest during the period the tranche A term loan is outstanding and 6% PIK interest plus 6% cash interest thereafter. The tranche B PIK interest is added to the outstanding
principal balance during the term of the loan.



The Company
accounted for the transactions with the pre-existing lenders as a modification of debt. The Company allocated the fair value of the $50,000 consideration to the outstanding debt and cancelled warrants using the relative fair value method, resulting
in a reduction of debt outstanding of $48,600 and allocation of $1,400 to the cancelled warrants. The amount allocated to the cancelled warrants was recorded as long-term debt, and is being amortized as a reduction of interest expense over the term
of the term loans using the effective interest method.



The
Company incurred costs in relation to completion of the term loan transactions with the pre-existing lenders of $1,800, and these costs and the remaining net book value of the previous deferred financing fees were recorded as a non-current deferred
charge and are being amortized as additional interest expense over the term of the term loans using the effective interest method.



|5. | Capital stock:
|-- | --------------



| | (a) | Private Placement of Special Warrants:
| | --- | --------------------------------------



On March 3, 2004, the Company completed a private placement, fully underwritten by a syndicate of Canadian investment dealers, of 33,350,000 Special
Warrants (each a Special Warrant and collectively, the Special Warrants) of SMTC Manufacturing Corporation of Canada (SMTC Canada), an indirect wholly owned subsidiary of the Company. Each Special Warrant was
issued at a price of C$1.20 per Special Warrant, resulting in aggregate proceeds of C$40,020. The proceeds, net of underwriters commissions and certain other expenses, were placed into escrow on March 3, 2004, pending receipt of shareholder
approval.



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##### Table of Contents

SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|5. | Capital stock (continued):
|-- | --------------------------



Subject to the satisfaction of applicable legal requirements, each Special Warrant was exercisable for one unit, consisting of one-fifth of an
exchangeable share of SMTC Canada, and one-half of a warrant to purchase one-fifth of an exchangeable share of SMTC Canada. Each whole warrant (a Purchase Warrant) is exercisable for one-fifth of an exchangeable share of SMTC Canada at
an exercise price of C$9.25 per share until March 3, 2009. The Special Warrants were exercised into units on June 2, 2004.



Subject to the satisfaction of applicable legal requirements, each exchangeable share of SMTC Canada can be exchanged on a one-for-one basis for one share
of the common stock of the Company. Each exchangeable share of SMTC Canada, as nearly as practicable, is intended to be the economic equivalent of a share of common stock of the Company and holders of the exchangeable shares of SMTC Canada are able
to exercise essentially the same voting rights with respect to the Company as they would have if they had exchanged their exchangeable shares of SMTC Canada for common stock of the Company. On or after July 27, 2015, subject to certain adjustment
and acceleration provisions, SMTC Canada will redeem all of the outstanding exchangeable shares by delivering common shares of the Company on a one-for-one basis.



The proceeds, net of underwriter commissions and other expenses and including interest earned while held in escrow, were
released from escrow on June 1, 2004, and were used to repay a portion of the debt under the Credit Agreement (note 4).



The gross proceeds of C$40,020 ($29,372 based on the exchange rate at June 1, 2004) were allocated between the exchangeable shares and Purchase Warrants
using the relative fair value method.



The gross proceeds were
allocated between the exchangeable shares and warrants in the amounts of $20,962 and $8,410, respectively.



The Company incurred total costs related to the private placement of $2,772, resulting in net proceeds of $26,600. These costs were offset against the
exchangeable shares and warrants in proportion to their relative fair values, resulting in net proceeds allocated to these instruments of $18,983 and $7,617, respectively.



(b) Consideration Issued upon Conversion of Debt



On June 1, 2004, the pre-existing lenders exchanged $10 million of outstanding debt (see note 4(b)) and all warrants
previously issued or required to be issued for 2,233,389 shares of common stock and 11,166,947 warrants (the Conversion Warrants). Each warrant is



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##### Table of Contents

SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|5. | Capital stock (continued):
|-- | --------------------------



exercisable for one-tenth of one share of common stock of the Company at an exercise price of $6.90 per share of common stock. The warrants may be
exercised by the holders at any time on or before March 4, 2009.



The common stock and the Conversion Warrants issued to the pre-existing lenders are subject to transfer restrictions on trading. The pre-existing lenders have agreed to retain:



| |  | all of the shares of common stock, Conversion Warrants and shares of common stock underlying such Conversion Warrants until September 1, 2004;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  | at least 2/3 of the shares of common stock, Conversion Warrants and shares of common stock underlying such Conversion Warrants until December 1, 2004; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | at least 1/6 of the shares of common stock and, Conversion Warrants and shares of common stock underlying such Conversion Warrants until March 1, 2005.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



The fair value of the consideration paid upon conversion of $10,000 of debt
was allocated between the common stock and Conversion Warrants using the relative fair value method. The fair value of the consideration paid was allocated between the common stock and Conversion Warrants in the amounts of $7,137 and $2,863,
respectively.



The Company incurred total costs of $379
related to the conversion. These costs were offset against the common stock and Conversion Warrants in proportion to their relative fair values, resulting in net proceeds allocated to these instruments of $6,866 and $2,755, respectively The excess
of the amount allocated to the common stock over the par value of $6,754 was recorded as additional paid in capital.



(c) Cancellation of Warrants



In connection with a December 2002 amendment to the Credit Agreement, the Company agreed to issue to the pre-existing lenders Series A and Series B
warrants to purchase common stock of the Company. As part of the December 2002 amendment, the Company also agreed to issue to the lenders Series C through Series H warrants to purchase common stock of the Company at an exercise price equal to the
fair market value at the date of the grant provided that Series C through Series H warrants were only required to be issued if the Company failed to meet certain financial covenants for the relevant fiscal quarter as follows:



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##### Table of Contents

SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in
thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|5. | Capital stock (continued):
|-- | --------------------------



|         |  |                                            |  |                  |  
|-------- |  | ------------------------------------------ |  | ---------------- | -
|Series   |  | Number of days after end of fiscal
quarter |  | % of commonstock |  
|Series C |  | 45 days after first quarter 2003           |  | 0.75             | %
|Series D |  | 45 days after second quarter 2003          |  | 0.75             | %
|Series E |  | 45 days after third quarter 2003           |  | 0.75             | %
|Series F |  | 90 days after fourth quarter 2003          |  | 0.75             | %
|Series G |  | 45 days after first quarter 2004           |  | 1.00             | %
|Series H |  | 45 days after second quarter 2004          |  | 1.00             | %



An aggregate of
1,509,998 Series A and Series B warrants were issued during 2002, representing the right to purchase approximately 302,000 shares of common stock of the Company. The fair value of the Series A and Series B warrants was measured using a Black-Scholes
pricing model at December 31, 2002. In addition, the Company did not meet certain financial covenants for the quarters ended June 29, 2003 and September 28, 2003 and, as such, issued 228,210 Series D warrants (representing the right to purchase
approximately 45,642 shares of common stock of the Company) and 229,934 Series E warrants (representing the right to purchase approximately 45,987 shares of common stock of the Company) during 2003. At June 1, 2004, the aggregate fair value of the
Series A, B, D and E warrants of $1,525 was classified as warrants in shareholders equity (deficiency).



The Company did not meet the applicable covenants for the quarter ended December 31, 2003, and, as such, was legally obligated to issue 231,672 Series F
warrants, representing the right to purchase approximately 46,334 shares of common stock of the Company.



The fair value of the Series F warrants was initially measured using a Black-Scholes pricing model at December 31, 2003, and was remeasured each reporting
period until legally issued. At June 1, 2004, the fair value of the Series F warrants to be issued of $232 was classified as additional paid-in capital.



In conjunction with the recapitalization of the Company (note 4), the warrants issued and to be issued pursuant to the December 2002 amendment to the
Credit Agreement were cancelled. As described in note 4, an amount of $1,400 was allocated to the cancelled warrants, and was recorded as long term debt. The difference between the amount allocated of $1,400 and the aggregate fair value of the
warrants and warrants to be issued included in shareholders equity of $1,755 was recorded as additional paid-in-capital.



(d) Reverse Stock Split.



On October 4, 2004, the Company completed a reverse stock split of its issued and outstanding common and exchangeable shares whereby every five shares of
common stock were exchanged for one share of common stock and every five exchangeable shares were exchanged for one exchangeable share, resulting in 7,775,181 common shares outstanding and 6,866,152 exchangeable shares outstanding. All share
information relating to shares outstanding and all employee stock options and warrants have been retroactively adjusted to reflect the reverse stock split.



16



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##### Table of Contents

SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in
thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|6. | Earnings (loss) per share:
|-- | --------------------------



The following table sets forth the calculation of basic and diluted earnings (loss) per share:



|                                               |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  
|---------------------------------------------- |  | ------------------ | --------- | ------------- | ---------------- | --------- | ------------ |  | ------------- | --------- |  | - | --------- | -
|                                               |  | Three months ended |           |               | Six months ended |          
|                                               |  | July 4, 2004       |           | June 29, 2003 |                  |           | July 4, 2004 |  | June 29, 2003 |          
|Numerator:                                     |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  
|Net earnings (loss) from continuing operations |  | $                  | 140       |               | $                | (36,405   | )            |  | $             | 93        |  | $ | (36,072   | )
|Net earnings (loss)                            |  |                    | 977       |               |                  | (39,855   | )            |  |               | 930       |  |   | (39,823   | )
|                                               |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  
|Denominator:                                   |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  
|Weighted average shares - basic                |  |                    | 9,064,497 |               |                  | 5,737,956 |              |  |               | 7,365,457 |  |   | 5,737,956 |  
|Effect of dilutive securities:                 |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  
|Employee stock options                         |  |                    |          |               |                  |          |              |  |               | 2,211     |  |   |          |  
|Warrants                                       |  |                    | 3,297     |               |                  |          |              |  |               | 11,132    |  |   |          |  
|                                               |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  
|Weighted-average shares  diluted              |  |                    | 9,067,794 |               |                  | 5,737,956 |              |  |               | 7,378,800 |  |   | 5,737,956 |  
|                                               |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  
|Earnings (loss) per share:                     |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  
|Basic and diluted, from continuing operations  |  | $                  | 0.02      |               | $                | (6.35     | )            |  | $             | 0.01      |  | $ | (6.29     | )
|Basic and diluted                              |  | $                  | 0.11      |               | $                | (6.95     | )            |  | $             | 0.13      |  | $ | (6.94     | )
|                                               |  |                    |           |               |                  |           |              |  |               |           |  |   |           |  



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SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in
thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|6. | Earnings (loss) per share (continued):
|-- | --------------------------------------



For the three months ended July 4, 2004, the calculation of weighted average shares - diluted did not include 167,294 options and 22,241,988 warrants
(representing the right to purchase 1,113,397 shares of common stock and 3,335,000 exchangeable shares), as the effect would have been anti-dilutive. For the six months ended July 4, 2004, the calculation of weighted average shares - diluted did not
include 124,294 options and 22,202,811 warrants (representing the right to purchase 1,105,562 shares of common stock and 3,335,000 exchangeable shares), as the effect would have been anti-dilutive.



|7. | Income taxes:
|-- | -------------



The net tax expense recorded by the Company includes $534 related to an intercompany dividend and $112 related to taxes in certain jurisdictions.



During the quarter ended July 4, 2004, the Company incurred
tax on an intercompany dividend payment, of which approximately $9,300 was offset against tax loss carryforwards. This had the effect of reducing the deferred tax asset and related valuation allowance by the same amount.



Taxes related to income from discontinued operations were offset against tax
loss carryforwards.



Whether or not the recapitalization
results in an ownership change for purposes of Section 382 of the Internal Revenue Code, which imposes a limitation on a corporations use of net operating loss (NOL) carryforwards following an ownership change, depends
upon whether the exchangeable shares of SMTC Canada are treated as shares of the Company under U.S. tax principles. Because the tax law governing the exchangeable shares is unclear, it is uncertain whether Section 382 will apply to the
recapitalization. If deemed applicable, Section 382 would limit the amount of NOLs available to offset taxable income in future years and would preclude the full utilization of the Companys NOLs.



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##### Table of Contents

SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in
thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|8. | Segmented information:
|-- | ----------------------



The Company derives its revenue from one dominant industry segment, the electronics manufacturing services industry. The Company operates and manages
geographically and has facilities in the United States, Canada and Mexico. The Company monitors the performance of its geographic operating segments based on EBITA (earnings before interest, taxes and amortization) before restructuring charges,
discontinued operations and the effect of a change in accounting policies. Discontinued operations relate to the Appleton manufacturing operations, previously included in the results of the United States segment and the Cork, Ireland facility,
previously included in the results of the European segment (note 10). Intersegment adjustments reflect intersegment sales that are generally recorded at prices that approximate arms-length transactions. Information about the operating segments
is as follows:



|                                                                  |  |                                 |         |                     |                               |         |                     |  |   |              |  |                     |   |         |                    |   |         |   |  |   |         | 
|----------------------------------------------------------------- |  | ------------------------------- | ------- | ------------------- | ----------------------------- | ------- | ------------------- |  | - | ------------ |  | ------------------- | - | ------- | ------------------ | - | ------- | - |  | - | ------- | 
|                                                                  |  | Three months ended July 4, 2004 |         |                     | Six months ended July 4, 2004 |        
|                                                                  |  | Totalrevenue                    |         | Intersegmentrevenue |                               |         | Net externalrevenue |  |   | Totalrevenue |  | Intersegmentrevenue |   |         | Netexternalrevenue |  
|United States                                                     |  | $                               | 44,579  |                     | $                             | (30     | )                   |  | $ | 44,549       |  |                     | $ | 85,352  |                    | $ | (58     | ) |  | $ | 85,294  | 
|Canada                                                            |  |                                 | 24,278  |                     |                               | (2,521  | )                   |  |   | 21,757       |  |                     |   | 56,680  |                    |   | (6,245  | ) |  |   | 50,435  | 
|Mexico                                                            |  |                                 | 31,977  |                     |                               | (31,977 | )                   |  |   |             |  |                     |   | 73,502  |                    |   | (73,502 | ) |  |   |        | 
|                                                                  |  |                                 |         |                     |                               |         |                     |  |   |              |  |                     |   |         |                    |   |         |   |  |   |         | 
|                                                                  |  | $                               | 100,834 |                     | $                             | (34,528 | )                   |  | $ | 66,306       |  |                     | $ | 215,534 |                    | $ | (79,805 | ) |  | $ | 135,729 | 
|                                                                  |  |                                 |         |                     |                               |         |                     |  |   |              |  |                     |   |         |                    |   |         |   |  |   |         | 
|EBITA (before discontinued operations and restructuring
charges): | 
|United States                                                     |  |                                 | $       | 858                 |                               |         |                     |  |   |              |  |                     |   | $       | 874                |  
|Canada                                                            |  |                                 |         | (710                | )                             |         |                     |  |   |              |  |                     |   |         | (721               | )
|Mexico                                                            |  |                                 |         | 2,994               |                               |         |                     |  |   |              |  |                     |   |         | 5,529              |  
|                                                                  |  |                                 |         |                     |                               |         |                     |  |   |              |  |                     |   |         |                    |  
|                                                                  |  |                                 |         | 3,142               |                               |         |                     |  |   |              |  |                     |   |         | 5,682              |  
|                                                                  |  |                                 |         |                    
|Interest                                                          |  |                                 |         | 1,198               |                               |         |                     |  |   |              |  |                     |   |         | 2,490              |  
|Amortization                                                      |  |                                 |         | 1,158               |                               |         |                     |  |   |              |  |                     |   |         | 2,330              |  
|                                                                  |  |                                 |         |                     |                               |         |                     |  |   |              |  |                     |   |         |                    |  
|Earnings before income taxes and discontinued operations          |  |                                 | $       | 786                 |                               |         |                     |  |   |              |  |                     |   | $       | 862                |  
|                                                                  |  |                                 |         |                     |                               |         |                     |  |   |              |  |                     |   |         |                    |  
|Capital expenditures:                                             |  |                                 |         |                     |                               |         |                     |  |   |              |  |                     |   |         |                    |  
|Canada                                                            |  |                                 | $       | 99                  |                               |         |                     |  |   |              |  |                     |   | $       | 105                |  
|Mexico                                                            |  |                                 |         | 2                   |                               |         |                     |  |   |              |  |                     |   |         | 20                 |  
|                                                                  |  |                                 |         |                     |                               |         |                     |  |   |              |  |                     |   |         |                    |  
|                                                                  |  |                                 | $       | 101                 |                               |         |                     |  |   |              |  |                     |   | $       | 125                |  
|                                                                  |  |                                 |         |                     |                               |         |                     |  |   |              |  |                     |   |         |                    |  





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SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in
thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|8. | Segmented information (continued):
|-- | ----------------------------------



|                                                                   |  |                                  |         |                     |                                |         |                     |  |   |              |   |                     |   |         |                    |   |         |   |  |   |         | 
|------------------------------------------------------------------ |  | -------------------------------- | ------- | ------------------- | ------------------------------ | ------- | ------------------- |  | - | ------------ | - | ------------------- | - | ------- | ------------------ | - | ------- | - |  | - | ------- | 
|                                                                   |  | Three months ended June 29, 2003 |         |                     | Six months ended June 29, 2003 |        
|                                                                   |  | Totalrevenue                     |         | Intersegmentrevenue |                                |         | Net externalrevenue |  |   | Totalrevenue |   | Intersegmentrevenue |   |         | Netexternalrevenue |  
|United States                                                      |  | $                                | 43,994  |                     | $                              | (2,334  | )                   |  | $ | 41,660       |   |                     | $ | 101,715 |                    | $ | (4,513  | ) |  | $ | 97,202  | 
|Canada                                                             |  |                                  | 34,511  |                     |                                | (6,211  | )                   |  |   | 28,300       |   |                     |   | 64,628  |                    |   | (11,136 | ) |  |   | 53,492  | 
|Europe                                                             |  |                                  | 981     |                     |                                | (230    | )                   |  |   | 751          |   |                     |   | 2,542   |                    |   | (1,079  | ) |  |   | 1,463   | 
|Mexico                                                             |  |                                  | 33,645  |                     |                                | (33,610 | )                   |  |   | 35           |   |                     |   | 63,248  |                    |   | (63,157 | ) |  |   | 91      | 
|                                                                   |  |                                  |         |                     |                                |         |                     |  |   |              |   |                     |   |         |                    |   |         |   |  |   |         | 
|                                                                   |  | $                                | 113,131 |                     | $                              | (42,385 | )                   |  | $ | 70,746       |   |                     | $ | 232,133 |                    | $ | (79,885 | ) |  | $ | 152,248 | 
|                                                                   | 
|EBITA (before discontinued operations and restructuring charges ): |  |                                  |         |                     |                               
|                                                                   |  |                                  |         |                     |                                |         |                     |  |   |              |   |                     |   |         |                    |   |         |   |  |   |         | 
|United States                                                      |  |                                  | $       | (247                | )                              |         |                     |  |   |              |   |                     |   | $       | 265                |  
|Canada                                                             |  |                                  |         | (1,452              | )                              |         |                     |  |   |              |   |                     |   |         | (970               | )
|Europe                                                             |  |                                  |         | 63                  |                                |         |                     |  |   |              |   |                     |   |         | 89                 |  
|Mexico                                                             |  |                                  |         | 1,610               |                                |         |                     |  |   |              |   |                     |   |         | 3,841              |  
|                                                                   |  |                                  |         |                     |                                |         |                     |  |   |              |   |                     |   |         |                    |   |         |   |  |   |         | 
|                                                                   |  |                                  |         |                     |                                |         |                     |  |   | (26          | ) |                     |   |         |                    |   |         |   |  |   | 3,225   | 
|                                                                   |  |                                  |         |                    
|Interest                                                           |  |                                  |         | 1,321               |                                |         |                     |  |   |              |   |                     |   |         | 2,839              |  
|Amortization                                                       |  |                                  |         | 972                 |                                |         |                     |  |   |              |   |                     |   |         | 1,944              |  
|Restructuring charges (note 9)                                     |  |                                  |         | (360                | )                              |         |                     |  |   |              |   |                     |   |         | (121               | )
|                                                                   |  |                                  |         |                     |                                |         |                     |  |   |              |   |                     |   |         |                    |  
|Loss before income taxes and discontinued operations               |  |                                  | $       | (1,959              | )                              |         |                     |  |   |              |   |                     |   | $       | (1,437             | )
|                                                                   |  |                                  |         |                     |                                |         |                     |  |   |              |   |                     |   |         |                    |  
|Capital expenditures:                                              |  |                                  |         |                     |                                |         |                     |  |   |              |   |                     |   |         |                    |  
|United States                                                      |  |                                  | $       | 35                  |                                |         |                     |  |   |              |   |                     |   | $       | 71                 |  
|Mexico                                                             |  |                                  |         |                    |                                |         |                     |  |   |              |   |                     |   |         | 17                 |  
|                                                                   |  |                                  |         |                     |                                |         |                     |  |   |              |   |                     |   |         |                    |   |         |   |  |   |         | 
|                                                                   |  |                                  |         |                     |                                |         |                     |  | $ | 35           |   |                     |   |         |                    |   |         |   |  | $ | 88      | 
|                                                                   |  |                                  |         |                     |                                |         |                     |  |   |              |   |                     |   |         |                    |   |         |   |  |   |         | 



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SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in
thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|8. | Segmented information (continued):
|-- | ----------------------------------



The following enterprise-wide information is provided. Geographic revenue information reflects the destination of the product shipped. Long-lived assets
information is based on the principal location of the asset.



|                    |  |                    |        |                  |   |             |  |                  |         |  |   |        
|------------------- |  | ------------------ | ------ | ---------------- | - | ----------- |  | ---------------- | ------- |  | - | -------
|                    |  | Three months ended |        | Six months ended
|                    |  | July 4,2004        |        | June 29,2003     |   | July 4,2004 |  | June 29, 2003   
|Geographic revenue: |  |                    |        |                  |   |             |  |                  |         |  |   |        
|United States       |  | $                  | 49,620 |                  | $ | 57,275      |  | $                | 101,838 |  | $ | 122,105
|Canada              |  |                    | 2,563  |                  |   | 6,938       |  |                  | 5,545   |  |   | 16,034 
|Europe              |  |                    | 3,316  |                  |   | 2,611       |  |                  | 6,046   |  |   | 6,001  
|Asia                |  |                    | 5,683  |                  |   | 1,779       |  |                  | 8,958   |  |   | 3,613  
|Mexico              |  |                    | 5,124  |                  |   | 2,143       |  |                  | 13,342  |  |   | 4,494  
|                    |  |                    |        |                  |   |             |  |                  |         |  |   |        
|                    |  | $                  | 66,306 |                  | $ | 70,746      |  | $                | 135,729 |  | $ | 152,247
|                    |  |                    |        |                  |   |             |  |                  |         |  |   |        
|                    |  |                    |        |                 
|                    |  |                    |        |                  |   | July 4,2004 |  | December 31,2003
|Long-lived assets:  |  |                    |        |                  |   |             |  |                  |         |  |   |        
|United States       |  |                    |        |                  |   |             |  | $                | 10,815  |  | $ | 11,767 
|Canada              |  |                    |        |                  |   |             |  |                  | 2,072   |  |   | 2,810  
|Mexico              |  |                    |        |                  |   |             |  |                  | 15,124  |  |   | 16,228 
|                    |  |                    |        |                  |   |             |  |                  |         |  |   |        
|                    |  |                    |        |                  |   |             |  | $                | 28,011  |  | $ | 30,805 
|                    |  |                    |        |                  |   |             |  |                  |         |  |   |        



The Company
manufactures a limited number of products for each customer. If the Company loses any of its largest customers or any product line manufactured for one of its largest customers, it could experience a significant reduction in revenue. Also, the
insolvency of one or more of its largest customers or the inability of one or more of its largest customers to pay for its orders could decrease revenue. As many costs and operating expenses are relatively fixed, a reduction in net revenue can
decrease profit margins and adversely affect business, financial condition and results of operations.



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SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in
thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|9. | Restructuring and other charges:
|-- | --------------------------------



The following table details the components of the restructuring and other charges including the write-down of intangible assets:



|                                                                                     |  |                    |   |              |                  |      |             |  |   |              |   |  |   |      |  
|------------------------------------------------------------------------------------ |  | ------------------ | - | ------------ | ---------------- | ---- | ----------- |  | - | ------------ | - |  | - | ---- | -
|                                                                                     |  | Three months ended |   |              | Six months ended |     
|                                                                                     |  | July 4,2004        |   | June 29,2003 |                  |      | July 4,2004 |  |   | June 29,2003 |  
|Lease and other contract obligations                                                 |  | $                  |  |              | $                | 122  |             |  | $ |             |   |  | $ | 122  |  
|Adjustments of previously recorded lease and other contract obligations              |  |                    |  |              |                  | (661 | )           |  |   |             |   |  |   | (661 | )
|Severance                                                                            |  |                    |  |              |                  | 317  |             |  |   |             |   |  |   | 556  |  
|Adjustments to other facility exit costs                                             |  |                    |  |              |                  | (303 | )           |  |   |             |   |  |   | (303 | )
|Proceeds on assets previously written down                                           |  |                    |  |              |                  | (224 | )           |  |   |             |   |  |   | (224 | )
|Other charges                                                                        |  |                    |  |              |                  | 389  |             |  |   |             |   |  |   | 389  |  
|                                                                                     |  |                    |   |              |                  |      |             |  |   |              |   |  |   |      |  
|                                                                                     |  |                    |  |              |                  | (360 | )           |  |   |             |   |  |   | (121 | )
|                                                                                     |  |                    |   |              |                  |      |             |  |   |              |   |  |   |      |  
|Other charges (adjustments) included In selling, general and administrative expenses |  |                    |  |              |                  |     |             |  |   | (287         | ) |  |   |     |  
|                                                                                     |  |                    |   |              |                  |      |             |  |   |              |   |  |   |      |  
|                                                                                     |  | $                  |  |              | $                | (360 | )           |  | $ | (287         | ) |  | $ | (121 | )
|                                                                                     |  |                    |   |              |                  |      |             |  |   |              |   |  |   |      |  



(a) Restructuring
charges:



2001 plan:



During 2001, in response to excess capacity caused by the slowing technology
end market, the Company commenced a restructuring program aimed at reducing its cost structure (the 2001 Plan). Accordingly, the Company recorded restructuring and other charges related to the 2001 Plan of $67,231, consisting of a
write-down of goodwill and other intangible assets, the costs associated with exiting or resizing facilities and the write-down of inventory related to the closure of a facility. In addition, the Company recorded other charges of $23,953 related
primarily to accounts receivable, inventory and asset impairment charges. During 2003, the Company recorded an additional charge for lease and other contract obligations related to the 2001 Plan of $2,178 due to a revision in the estimate of
sub-lease recoveries associated with the facility lease in Monterrey, Mexico. The Company also recorded an adjustment to other facility exit costs of $219 during 2003 related to the 2001 Plan due to the settlement of certain obligations for less
than the original estimated amounts.



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SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|9. | Restructuring and other charges (continued):
|-- | --------------------------------------------



There were no restructuring and other charges related to the 2001 Plan recorded during the six months ended July 4, 2004 and June 29, 2003.



The following table details the related amounts included in accrued
liabilities as at July 4, 2004 relating to the 2001 Plan:



|                                     |  |                        |       |              |   |      |                       |  |   |      
|------------------------------------ |  | ---------------------- | ----- | ------------ | - | ---- | --------------------- |  | - | -----
|                                     |  | Accrual atApril 4,2003 |       | Cashpayments |   |      | Accrual atJuly 4,2004
|Lease and other contract obligations |  | $                      | 2,719 |              | $ | (154 | )                     |  | $ | 2,565
|                                     |  |                        |       |              |   |      |                       |  |   |      



2002 plan:



In response to the continuing industry economic downturn, the Company
took further steps to realign its cost structure and plant capacity (the 2002 Plan) and announced third and fourth quarter net restructuring charges of $36,900 related to the cost of exiting equipment and facility leases, severance costs
asset impairment charges, inventory exposures and other facility exit costs and other charges of $2,135 primarily related to the costs associated with the disengagement of a customer and the continued downturn. During fiscal year 2003, the Company
recorded an additional charge for lease and other contract obligations of $326 primarily associated with the idling of equipment leases at the Donegal facility and recorded an adjustment to lease and other contract obligations related to the 2002
Plan of $4,123 for the expected or actual settlement of the amounts, including the Austin facility lease, for less than the originally estimated amounts. Also during fiscal year 2003, the Company recorded severance costs of $2,418 related to the
additional severance for the closure or resizing of facilities pursuant to the 2002 Plan, and the change in senior management during the year. Of this amount, $239 was recorded during the first quarter of 2003 and related to severance costs
associated with the closure of the Austin facility and the resizing of other facilities. The first and second quarter severance costs related to 110 plant and operational employees, primarily at the Austin and Mexico facilities. The Company also
recorded during 2003 other facility exit costs of $96 related to additional costs incurred associated with the closure of the Charlotte facility. The Company also recorded an adjustment to other facility exit costs of $701 due to the settlement of
certain obligations for less than the original estimated amounts.



During the first six months of 2003, the Company recorded lease and other contract obligations of $122 associated with the cost of idling of equipment leases at the Donegal facility. Adjustments to previously recorded lease and other
contract obligations of $661 and to other facility exit costs of $303 relate to the Company settling certain obligations for less than the



23



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SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|9. | Restructuring and other charges (continued):
|-- | --------------------------------------------



original estimated amounts. Severance costs of $556 relate to 110 plant and operational employees associated with the closure of the Austin facility and
the resizing of other facilities. The Company also recorded a gain of $224 related to the disposal of assets previously written down at the Donegal and Austin facilities. During the second quarter of 2003, the Company recorded a discount of $389 on
the prepayment of shareholder loans.



The following table
details the related amounts included in accrued liabilities as at July 4, 2004 in respect of the 2002 Plan:



|                                     |  |                        |       |              |   |        |                       |  |   |      
|------------------------------------ |  | ---------------------- | ----- | ------------ | - | ------ | --------------------- |  | - | -----
|                                     |  | Accrual atApril 4,2004 |       | Cashpayments |   |        | Accrual atJuly 4,2004
|Lease and other contract obligations |  | $                      | 5,555 |              | $ | (1,334 | )                     |  | $ | 4,221
|Severance                            |  |                        | 503   |              |   | (47    | )                     |  |   | 456  
|Other facility exit costs            |  |                        | 305   |              |   | (125   | )                     |  |   | 180  
|                                     |  |                        |       |              |   |        |                       |  |   |      
|                                     |  | $                      | 6,363 |              | $ | (1,506 | )                     |  | $ | 4,857
|                                     |  |                        |       |              |   |        |                       |  |   |      



(b) Other charges
(recoveries):



During the first quarter of 2004 the Company
received proceeds of $287 from the sale of an asset previously written off. This amount has been recorded in selling, general and administrative expenses.



|10. | Discontinued Operations:
|--- | ------------------------



(a) Appleton:



During the third quarter of 2003, the Company sold the manufacturing operations of the Appleton facility for cash proceeds of $3,058 and recorded a loss
on disposition of $235. The Appleton facility has historically been included in the results of the United States segment (note 8).



The following information included in discontinued operations relates to the sale of the Appleton manufacturing operations:



|                                             |  |                    |     |              |                  |        |             |  |              |     |  |   |        |  
|-------------------------------------------- |  | ------------------ | --- | ------------ | ---------------- | ------ | ----------- |  | ------------ | --- |  | - | ------ | -
|                                             |  | Three months ended |     |              | Six months ended |       
|                                             |  | July 4,2004        |     | June 29,2003 |                  |        | July 4,2004 |  | June 29,2003 |    
|Revenue                                      |  | $                  |    |              | $                | 3,766  |             |  | $            |    |  | $ | 8,265  |  
|Earnings (loss) from discontinued operations |  |                    | 460 |              |                  | (3,450 | )           |  |              | 460 |  |   | (3,751 | )
|                                             |  |                    |     |              |                  |        |             |  |              |     |  |   |        |  



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##### Table of Contents

SMTC CORPORATION



Notes to Consolidated Financial Statements (continued)

(Expressed in thousands of U.S. dollars, except share quantities and per share amounts)



Three and six months ended July 4, 2004 and June 29, 2003

(Unaudited)



|10. | Discontinued Operations (continued):
|--- | ------------------------------------



Included in the earnings (loss) from discontinued operations for the six months ended June 29, 2003 is a restructuring charge of $3,226 recorded during
the second quarter of 2003, reflecting the write-down of the Appleton assets to the estimated realizable value and loss from operations for the three and six months ended June 29, 2003 of $224 and $525, respectively. Included in earnings (loss) from
discontinued operations for the six months ended July 4, 2004 are proceeds from the settlement of a lawsuit of $243 and an adjustment to the remaining accrual for closing costs of $217.



(b) Cork:



In February 2002, the main customer of the Cork, Ireland facility was placed into administration as part of a financial restructuring. As a result, on
March 19, 2002, the Company announced that it was closing the Cork, Ireland facility and that it was taking steps to place the subsidiary that operated that facility in voluntary administration. Included in earnings (loss) from discontinued
operations for the six months ended July 4, 2004 are proceeds from the liquidation of $377.



|11. | Subsequent Events:
|--- | ------------------



(a) In October 2004, the Company settled a legal suit related to a facility lease in Monterrey, Mexico. A recovery of $1,694 was recorded in the three
months ending October 3, 2004 to adjust the provision recorded to the amount of the settlement.



(b) During the third quarter of 2004, the Company announced changes to its manufacturing operations as it continues to execute its transformation plan.
This plan seeks to provide greater focus on new customer and new product introduction and technical activities, to improve capacity utilization and to align its cost structure to expected revenue. The Companys Markham, Ontario facility will
become the technical centre of excellence, with particular emphasis on assisting current and new customers to develop, prototype and bring new products to full production and will continue to manufacture low volume, high complexity printed circuit
board assemblies. The Companys Chihuahua, Mexico facility will serve as its primary assembly operation offering customers high quality services in a highly efficient, cost effective site. As the result of operational and administrative
changes, the Company recorded severance charges of $1,026 in the three months ending October 3, 2004 relating to 99 and 69 employees at the Chihuahua, Mexico and Markham, Ontario facilities, respectively, and expects to incur further restructuring
charges of approximately $1,000 related to a layoff of further employees, and relocation and transition costs during the fourth quarter of 2004.



(c) During the third quarter of 2004, the Company settled a claim in its favour for net proceeds of $1,822, related to a four year dispute over obsolete
inventory with a former customer.



25



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##### Table of Contents

Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations



SELECTED CONSOLIDATED FINANCIAL DATA



The consolidated financial statements and our selected consolidated financial data have been prepared in accordance with United States GAAP.



Consolidated Statement of Operations Data:

(in millions, except per share amounts)



(Unaudited)



|                                                                |  |                    |      |               |                  |       |              |  |               |       |  |   |       |  
|--------------------------------------------------------------- |  | ------------------ | ---- | ------------- | ---------------- | ----- | ------------ |  | ------------- | ----- |  | - | ----- | -
|                                                                |  | Three months ended |      |               | Six months ended |      
|                                                                |  | July 4, 2004       |      | June 29, 2003 |                  |       | July 4, 2004 |  | June 29, 2003 |      
|Revenue                                                         |  | $                  | 66.3 |               | $                | 70.7  |              |  | $             | 135.7 |  | $ | 152.2 |  
|Cost of sales                                                   |  |                    | 59.0 |               |                  | 66.0  |              |  |               | 121.5 |  |   | 139.5 |  
|                                                                |  |                    |      |               |                  |       |              |  |               |       |  |   |       |  
|Gross profit                                                    |  |                    | 7.3  |               |                  | 4.7   |              |  |               | 14.2  |  |   | 12.7  |  
|Selling, general and administrative expenses (a)                |  |                    | 4.2  |               |                  | 4.8   |              |  |               | 8.5   |  |   | 9.5   |  
|Amortization                                                    |  |                    | 1.1  |               |                  | 1.0   |              |  |               | 2.3   |  |   | 1.9   |  
|Restructuring charges (adjustments) (a)                         |  |                    |     |               |                  | (0.4  | )            |  |               |      |  |   | (0.1  | )
|                                                                |  |                    |      |               |                  |       |              |  |               |       |  |   |       |  
|Operating earnings (loss)                                       |  |                    | 2.0  |               |                  | (0.7  | )            |  |               | 3.4   |  |   | 1.4   |  
|Interest                                                        |  |                    | 1.2  |               |                  | 1.3   |              |  |               | 2.5   |  |   | 2.8   |  
|                                                                |  |                    |      |               |                  |       |              |  |               |       |  |   |       |  
|Earnings (loss) before income taxes and discontinued operations |  |                    | 0.8  |               |                  | (2.0  | )            |  |               | 0.9   |  |   | (1.4  | )
|Income tax expense (b)                                          |  |                    | 0.6  |               |                  | 34.4  |              |  |               | 0.8   |  |   | 34.6  |  
|                                                                |  |                    |      |               |                  |       |              |  |               |       |  |   |       |  
|Earnings (loss) from continuing operations                      |  |                    | 0.2  |               |                  | (36.4 | )            |  |               | 0.1   |  |   | (36.0 | )
|Earnings (loss) from discontinued operations (c)                |  |                    | 0.8  |               |                  | (3.5  | )            |  |               | 0.8   |  |   | (3.8  | )
|                                                                |  |                    |      |               |                  |       |              |  |               |       |  |   |       |  
|Earnings (loss)                                                 |  |                    | 1.0  |               |                  | (39.9 | )            |  | $             | 0.9   |  | $ | (39.8 | )
|                                                                |  |                    |      |               |                  |       |              |  |               |       |  |   |       |  
|Earnings (loss) per common share (d):                           |  |                    |      |               |                  |       |              |  |               |       |  |   |       |  
|                                                                |  |                    |      |              
|Basic earnings (loss) per share from continuing operations      |  | $                  | 0.02 |               | $                | (6.35 | )            |  | $             | 0.01  |  | $ | (6.29 | )
|Earnings (loss) per share from discontinued operations          |  |                    | 0.09 |               |                  | (0.60 | )            |  |               | 0.12  |  |   | (0.65 | )
|                                                                |  |                    |      |               |                  |       |              |  |               |       |  |   |       |  
|Basic earnings (loss) per share                                 |  | $                  | 0.11 |               | $                | (6.95 | )            |  | $             | 0.13  |  | $ | (6.94 | )
|Diluted earnings (loss) per share                               |  | $                  | 0.11 |               | $                | (6.95 | )            |  | $             | 0.13  |  | $ | (6.94 | )
|                                                                |  |                    |      |               |                  |       |              |  |               |       |  |   |       |  
|Weighted average number of shares outstanding (d):              |  |                    |      |               |                  |       |              |  |               |       |  |   |       |  
|Basic                                                           |  |                    | 9.1  |               |                  | 5.7   |              |  |               | 7.4   |  |   | 5.7   |  
|Diluted                                                         |  |                    | 9.1  |               |                  | 5.7   |              |  |               | 7.4   |  |   | 5.7   |  
|                                                                |  |                    |      |               |                  |       |              |  |               |       |  |   |       |  

---

|(a) | The Company recorded other charges of $0.3 million during the six months ended July 4, 2004 relating to proceeds received from the sale of an asset previously written off. This
amount has been recorded in selling, general and administrative expenses. Refer to note 9 to our July 4, 2004 interim consolidated financial statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26



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##### Table of Contents

During the three months ended June 29, 2003, the Company recorded restructuring charges of $0.4 million
relating to lease and other contract obligations and severance costs. The Company also recorded adjustments to previous recorded lease and other contract obligations and previously recorded facility exit costs of $1.0 million and a gain of $0.2
million related to the disposal of assets previously written down. During the second quarter of 2003 the Company also recorded an other charge of $0.4 million related to a discount on the prepayment of shareholder loans. Refer to note 9 to our July
4, 2004 interim consolidated financial statements.



During the
six months ended June 29, 2003, the Company recorded restructuring charges of $0.7 million relating to lease and other contract obligations and severance costs. The Company also recorded adjustments to previous recorded lease and other contract
obligations and previously recorded facility exit costs of $1.0 million and a gain of $0.2 million related to the disposal of assets previously written down. During the first six months of 2003 the Company also recorded an other charge of $0.4
million related to a discount on the prepayment of shareholder loans. Refer to note 7 to our July 4, 2004 interim consolidated financial statements.



|(b) | The net tax expense recorded by the Company includes $0.5 million related to an intercompany dividend and $0.1 million related to taxes in certain jurisdictions. During the quarter
ended July 4, 2004, the Company incurred tax on an intercompany dividend payment, of which approximately $9.3 million was offset against tax loss carryforwards. This had the effect of reducing the deferred tax asset and related valuation allowance
by the same amount. Taxes related to income from discontinued operations were offset against tax loss carryforwards. During the second quarter of 2003 the Company performed its quarterly review of its deferred tax assets in accordance with SFAS No.
109. This review resulted in a decision to establish a full valuation allowance for its deferred tax assets. Refer to note 7 to our interim consolidated financial statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | During the three months ended July 4, 2004, the Company recorded the receipt of distribution for the proceeds of the Cork liquidation of $0.4 million. Refer to note 10 to our July
4, 2004 interim consolidated financial statements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the third quarter of 2003, the Company sold the manufacturing operations of the Appleton facility for cash proceeds of $3.1 million. Included in earnings (loss) from discontinued operations for the three months and six months ended
June 29, 2003 is a restructuring charge of $3.2 million reflecting the write-down of the assets to the estimated realizable value and a loss from operations of $0.3 million and $0.6 million, respectively. Included in earnings (loss) from
discontinued operations for the three and six months ended July 4, 2004 are proceeds from the settlement of a lawsuit of $0.2 million and an adjustment to the remaining accrual for closing costs of $0.2 million. Refer to note 10 to our July 4, 2004
interim consolidated financial statements.



|(d) | On October 4, 2004 the Company completed a reverse stock split of its issued and outstanding common stock whereby every five shares of common stock were exchanged for one common
share, resulting in 7,775,181 common shares outstanding. The Companys subsidiary, SMTC Manufacturing Corporation of Canada, completed a reverse stock split of its issued and outstanding exchangeable shares whereby every five exchangeable
shares were exchanged for one exchangeable share, resulting in 6,866,152 exchangeable shares outstanding. All previously reported per share amounts have been retroactively adjusted to reflect the reverse stock split.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Consolidated Balance Sheet Data:

(in millions)



|                                         |  |                          |       |                   |   |       |  
|---------------------------------------- |  | ------------------------ | ----- | ----------------- | - | ----- | -
|                                         |  | July 4, 2004 (Unaudited) |       | December 31, 2003 |  
|Cash                                     |  | $                        | 0.1   |                   | $ | 0.2   |  
|Working capital (deficiency)             |  |                          | 21.5  |                   |   | (55.2 | )
|Total assets                             |  |                          | 103.2 |                   |   | 108.8 |  
|Total debt, including current maturities |  |                          | 43.7  |                   |   | 70.1  |  
|Shareholders equity (deficiency)        |  |                          | 14.4  |                   |   | (21.3 | )



27



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations



Overview



We provide advanced electronics manufacturing services, or EMS, to electronics industry original equipment manufacturers, or
OEMs, primarily in the industrial, enterprise computing and networking, and communications market segments. We currently service our customers through five manufacturing and technology centers strategically located in key technology corridors in the
United States, Canada and the cost-effective location of Mexico. Our full range of value-added supply chain services include product design, procurement, prototyping, advanced cable and harness interconnect, high-precision enclosures, printed
circuit board assembly, test, final system build, comprehensive supply chain management, packaging, global distribution and after sales support.



As the technology sector grew rapidly in the years 1999 and 2000, we sought to take advantage of such growth and completed several acquisitions. When the
technology sector declined, we found ourselves with significant excess capacity and incurred significant operating losses. As a result, in fiscal year 2001, we began an operational restructuring that is substantially complete and involved closing
six and selling one of our manufacturing facilities.



In early
2004, we initiated a transformation plan designed to lower indebtedness, restore profitability and create growth. The transformation plan has several components, including refinancing, strategy development, capability strengthening and organization
renewal.



In the first and second quarters of 2004, our
priority was refinancing to strengthen our balance sheet by lowering total indebtedness, restructuring a major portion of remaining debt into longer terms and establishing a new secured credit facility. On June 1, 2004, we completed a
recapitalization, which consisted of three main components: a private placement of equity securities, a transaction with SMTCs pre-existing lenders to repay a portion of SMTCs pre-existing debt and restructure the balance of SMTCs
pre-existing debt and a new secured credit facility with Congress Financial Corporation and its affiliates. We refer to the recapitalization in this report as the Recapitalization Transaction. The following summary briefly describes the
material terms of the recapitalization.



Private Placement
of Equity Securities (share amounts adjusted to reflect reverse stock split)



The private placement consisted of a committed private placement fully underwritten by a syndicate of Canadian investment dealers comprised of Orion Securities Inc., CIBC World Markets Inc., GMP Securities Limited and
RBC Dominion Securities Inc. (collectively, the Underwriters) of 33,350,000 Special Warrants of SMTC Canada (each a Special Warrant and, collectively, the Special Warrants) to qualified investors at a price of
C$1.20 (approximately US$0.90) per Special Warrant, representing an aggregate amount of issue of C$40.02 million, C$37.3 million net of underwriting expenses, or approximately US$29.4 million, US$26.6 million net of underwriting expenses, based on
the exchange rate on March 3, 2004) (the Offering). While we completed the Offering of Special Warrants on March 3, 2004, the Special Warrants and the net proceeds from the Offering were held in escrow until June 1, 2004, until all
conditions to release were satisfied. Proceeds were used for debt reduction and to fund working capital.



The Offering of Special Warrants included the following terms:



| |  | Each Special Warrant was exercisable, without any additional consideration, into one unit consisting of one-fifth of an exchangeable share, and one half of one warrant to purchase
one-fifth of an exchangeable share. Each whole warrant is exercisable for one-fifth of an exchangeable share at an exercise price of C$9.25 per exchangeable share until March 3, 2009. The Special Warrants were exercised for units on June 2, 2004.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



28



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##### Table of Contents

| |  | Subject to satisfaction of applicable legal requirements, each exchangeable share may be exchanged on a one-for-one basis for one share of common stock. Each exchangeable share, as
nearly as practicable, is the economic equivalent of a share of common stock, and holders of exchangeable shares are entitled to dividend and liquidation rights and participation in a tender offer, share exchange offer, issuer bid, take-over bid or
similar transaction with respect to the common stock to the same extent and on an economically equivalent basis as the holders of common stock. Holders of exchangeable shares are able to exercise essentially the same voting rights with respect to
SMTC as they would have if they had exchanged their exchangeable shares for shares of common stock.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Transaction with SMTCs Pre-existing Lenders



The Recapitalization Transaction included a transaction with SMTCs pre-existing lenders, (the Pre-existing Lenders) under which SMTC:



| |  | repaid $40 million of debt at par;
| | - | ----------------------------------



| |  | exchanged $10 million of debt for $10 million of SMTCs common stock and warrants valued on the same terms as the private placement; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | converted $27.5 million in debt into second lien subordinated debt with maturity ranging from four to five years.
| | - | -----------------------------------------------------------------------------------------------------------------



In addition, all warrants issued (or required to be issued) to the
Pre-existing Lenders prior to the closing of the Recapitalization Transaction were cancelled.



New Secured Credit Facility



In connection with the Recapitalization Transaction, we entered into new asset-based credit facilities with Congress Financial Corporation and its affiliates (Congress). The Congress Credit Facility is available to the
Companys U.S. and Canadian operating entities in a maximum amount of $40 million. The Congress Credit Facility includes a term loan of up to $2 million, which bears interest at the reference rate plus 1.00%, and a revolving loan that bears
interest at the reference rate plus 0.50%. The reference rate is the Canadian prime rate for the loans in Canada and the U.S. prime rate for the loans in the United States. The Congress Credit Facility provides for customary fees, including a 1.00%
closing fee, an unused line fee of 0.25% and a termination fee of up to 2.00%.



The Congress Credit Facility included the following terms:



| |  | The borrowing base for the revolving loan facilities provided by Congress is calculated using a formula based on (i) the lesser of 50% of the value of the eligible inventory of the
Companys U.S. and Canadian operating entities valued at the lower of cost or market value, or 85% of such inventorys appraised value, both subject to a $5 million cap and (ii) 85% of the eligible accounts receivable of those entities.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Congress Credit Facility includes a single financial covenant that requires the Company to maintain a specified level of consolidated EBITDA. The Company will be required to
achieve consolidated EBITDA of $5.0 million cumulatively for the first two quarters of 2004, which the Company achieved, $7.5 million cumulatively for the first three quarters of 2004 and $11.0 million cumulatively for 2004 in total. Thereafter, the
Company will be required to maintain consolidated EBITDA of $11.0 million on a rolling four quarter basis.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Congress Credit Facility is secured by the current and future assets of the Companys U.S. and Canadian operations. The security interest granted to Congress ranks senior
to any security interest in favor of the Pre-existing Lenders.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Congress Credit Facility includes representations, warranties, covenants and events of default that are customary for asset based credit facilities.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



The Company drew approximately $12.5 million under the Congress Credit
Facility at the closing of the Recapitalization Transaction on June 1, 2004.



Although the revolving credit facility has a three-year term, expiring in 2007, and the Company believes it will have the ability to maintain this debt outstanding for more than one year, the Company has classified
its borrowings under the facility at July 4, 2004 as a current liability in accordance with the provisions set forth in Emerging Issues Task Force 95-22 Balance Sheet Classifications, Borrowings Outstanding Under Revolving Credit Agreements that
include both a Subjective Acceleration Clause and a Lock-Box Arrangement (EITF 95-22). EITF 95-22 requires revolving credit agreements with a required lock-box arrangement that include subjective acceleration clauses to be classified
as current liabilities. Accordingly, the accompanying balance sheets have been restated and borrowings under the revolving credit facility previously reported as a long-term liability, amounting to $13,307 at July 4, 2004, have been reclassified to
a current liability.



On November 16, 2004, the Company,
together with Congress, executed a letter of understanding amending the terms of the revolving credit facility. The letter of understanding provides that, at the Companys option, it may elect to use a springing lock-box arrangement
whereby remittances from customers are forwarded to the Companys general bank account and the Company is not required to reduce the borrowings under the facility unless certain conditions exist.



Pursuant to the letter of understanding, should the Company elect to change
to the springing lock-box arrangement, availability

under the facility may be reduced by the eligible inventory. The Company will be required to revert
back to a required lock-box arrangement if (a) availability under the revolving credit facility is less than the greater of (i) $2,500 or (ii) 25% of the outstanding borrowings under the credit facility or (b) the occurrence of an event of default.
Management does not foresee being precluded from exercising the option of converting to a springing lock-box based on its expected financing needs over the next twelve months however, due to the effective cash management aspect of the current
lock-box arrangement, the Company has no plans to move to a springing lock-box arrangement at this time.



The letter of understanding, although signed subsequent to the third quarter of 2004, qualified as a refinancing of the revolving credit facility in
effect at the end of the third quarter of 2004 and as such, the debt was classified as long-term at October 3, 2004. The Company has the option to use a springing lock-box arrangement and based on managements assessment of the subjective
acceleration clauses at the end of the third quarter of 2004, the debt was classified as long-term.



29



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##### Table of Contents

Certain Effects of the Recapitalization Transaction



| |  | Upon the closing of the Recapitalization Transaction, SMTCs overall indebtedness was decreased by approximately $37.5 million. As of July 4, 2004, SMTCs aggregate
indebtedness under the Credit Facilities was $43.7 million.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Excluding the effects of the October 4, 2004 one for five reverse stock split, shares of SMTCs common stock (including shares of common stock issuable upon exchange of
outstanding exchangeable shares of our subsidiary SMTC Canada) outstanding immediately prior to the closing of the Recapitalization Transaction, after the closing of the Recapitalization Transaction and after the exercise of the warrants underlying
the Special Warrants and the warrants that were issued to our Pre-existing Lenders are set forth in the following table:
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                        |  |              |  |                    |  |           
|----------------------------------------------------------------------- |  | ------------ |  | ------------------ |  | ----------
|                                                                        |  | CommonShares |  | ExchangeableShares |  | Total     
|Existing stockholders as at May 28, 2004                                |  | 24,375,718   |  | 4,314,061          |  | 28,689,779
|Shares issued in connection with the exercise of the Special Warrants   |  |             |  | 33,350,000         |  | 33,350,000
|Shares issued to Pre-existing Lenders in exchange for debt              |  | 11,166,947   |  |                   |  | 11,166,947
|                                                                        |  |              |  |                    |  |           
|Total shares outstanding post closing of Recapitalization Transaction   |  | 35,542,665   |  | 37,664,061         |  | 73,206,726
|Exchangeable shares issuable upon exercise of the warrants              |  |             |  | 16,675,000         |  | 16,675,000
|Common stock issuable to Pre-existing Lenders upon exercise of warrants |  | 5,583,475    |  |                   |  | 5,583,475 
|                                                                        |  |              |  |                    |  |           
|Total shares outstanding post closing at June 1, 2004(a)                |  | 41,126,140   |  | 54,339,061         |  | 95,465,201
|                                                                        |  |              |  |                    |  |           

---

|(a) | Assumes that all warrants are exercised and that no options are exercised.
|--- | --------------------------------------------------------------------------



The following table approximates the shares of SMTCs common stock (including shares of common stock issuable upon exchange of outstanding exchangeable shares of our
subsidiary SMTC Canada) outstanding immediately prior to the closing of the Recapitalization Transaction, after the closing of the Recapitalization Transaction and after the exercise of the warrants underlying the Special Warrants and the warrants
that were issued to our Pre-existing Lenders, after giving effect to the one for five reverse stock split:



|                                                                                                                      |  |              |  |                    |  |           
|--------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------ |  | ----------
|                                                                                                                      |  | CommonShares |  | ExchangeableShares |  | Total     
|Existing stockholders as at May 28, 2004, after the effects of the reverse stock split                                |  | 4,875,144    |  | 862,812            |  | 5,737,956 
|Shares issued in connection with the exercise of the Special Warrants, after the effects of the reverse stock split   |  |             |  | 6,670,000          |  | 6,670,000 
|Shares issued to Pre-existing Lenders in exchange for debt, after the effects of the reverse stock split              |  | 2,233,389    |  |                   |  | 2,233,389 
|                                                                                                                      |  |              |  |                    |  |           
|Total shares outstanding post closing of Recapitalization Transaction, after the effects of the reverse stock split   |  | 7,108,533    |  | 7,532,812          |  | 14,641,345
|Exchangeable shares issuable upon exercise of the warrants, after the effects of the reverse stock split              |  |             |  | 3,335,000          |  | 3,335,000 
|Common stock issuable to Pre-existing Lenders upon exercise of warrants, after the effects of the reverse stock split |  | 1,116,698    |  |                   |  | 1,116,698 
|                                                                                                                      |  |              |  |                    |  |           
|Total shares outstanding post closing at June 1, 2004, after the effects of the reverse stock split (a)               |  | 8,225,231    |  | 10,867,812         |  | 19,093,043
|                                                                                                                      |  |              |  |                    |  |           

---

|(a) | Assumes that all warrants are exercised and that no options are exercised.
|--- | --------------------------------------------------------------------------



Corporate History



SMTC Corporation is the result of the July 1999 combination of Surface Mount and HTM. Surface Mount was established in Toronto, Ontario in 1985. HTM was established in Denver, Colorado in 1990. SMTC was established in
Delaware in 1998. After the combination, we purchased Zenith Electronics facility in Chihuahua, Mexico, which expanded our cost-effective manufacturing capabilities in an important geographic region. In September 1999, we established a
manufacturing presence in the Northeastern United States and expanded our value-added services to include high precision enclosure capabilities by acquiring Boston, Massachusetts based W.F. Wood. In July 2000, we acquired Pensar Corporation, an EMS
company specializing in design engineering and headquartered in Appleton, Wisconsin. On July 27, 2000, we consummated an initial public offering of 6,625,000 shares of our common stock and 4,375,000 exchangeable shares of our subsidiary SMTC
Manufacturing Corporation of Canada, or SMTC Canada. Each exchangeable share of SMTC Canada is exchangeable at the option of the holder at any time into one share of our common stock, subject to compliance with applicable securities laws. On August
18, 2000, we sold an additional 1,650,000 shares of common stock upon exercise of the underwriters over-allotment option. In November 2000, we acquired Qualtron Teoranta, a provider of specialized cable and harness interconnect assemblies,
based in Donegal, Ireland and with a subsidiary in Haverhill, Massachusetts. In fiscal 2001, we closed our facilities in Denver, Colorado and Haverhill, Massachusetts. In fiscal 2002, we closed our facility in Cork, Ireland. In fiscal 2003, we
closed our facilities in Donegal, Ireland, Austin, Texas and Charlotte, North Carolina and sold the majority of our operations in Appleton, Wisconsin.



30



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##### Table of Contents

Results of Operations



Our contractual arrangements with our key customers generally provide a framework for our overall relationship with our customer. Revenue from the sale of
products is recognized when goods are shipped to customers since title has passed to the customer, persuasive evidence of an arrangement exists, performance has occurred, all customer-specified test criteria have been met and the earnings process is
complete. The Company also derives revenue from engineering and design services. Service revenue is recognized as services are performed. Actual production volumes are based on purchase orders for the delivery of products. Typically, these orders do
not commit to firm production schedules for more than 30 to 90 days in advance. To minimize inventory risk, generally we order materials and components only to the extent necessary to satisfy existing customer forecasts or purchase orders.
Fluctuations in material costs typically are passed through to customers. We may agree, upon request from our customers, to temporarily delay shipments, which causes a corresponding delay in our revenue recognition.



Our fiscal year end is December 31. The consolidated financial statements of
SMTC are prepared in accordance with United States GAAP, which conforms in all material respects to Canadian GAAP, except as disclosed in Note 19 to the December 31, 2003 annual consolidated financial statements. In 2001 the amortization and the
write-down of goodwill related to the Qualtron Teoranta acquisition are $0.2 million and $2.2 million lower, respectively, under Canadian GAAP. Under United States GAAP, the shares issued as consideration in the Qualtron Teoranta acquisition were
valued using the share price at the announcement date of the acquisition and under Canadian GAAP, the shares were valued on the consummation date. In 2002, the transitional goodwill impairment charge of $55.6 million was recognized in opening
retained earnings under Canadian GAAP. Under United States GAAP, the cumulative adjustment was recognized in earnings during 2002. There were no Canadian GAAP differences in 2003.



31



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##### Table of Contents

The following table sets forth certain operating data as a percentage of revenue for the periods ended:



(Unaudited)



|                                                                |  |                    |   |  |                  |    |  |              |   |  |               |   
|--------------------------------------------------------------- |  | ------------------ | - |  | ---------------- | -- |  | ------------ | - |  | ------------- | --
|                                                                |  | Three months ended |   |  | Six months ended |   
|                                                                |  | July 4, 2004       |   |  | June 29, 2003    |    |  | July 4, 2004 |   |  | June 29, 2003 |   
|Revenue                                                         |  | 100.0              | % |  | 100.0            | %  |  | 100.0        | % |  | 100.0         | % 
|Cost of sales                                                   |  | 89.0               |   |  | 93.3             |    |  | 89.5         |   |  | 91.7          |   
|                                                                |  |                    |   |  |                  |    |  |              |   |  |               |   
|Gross profit                                                    |  | 11.0               |   |  | 6.7              |    |  | 10.5         |   |  | 8.3           |   
|Selling, general and administrative expenses                    |  | 6.3                |   |  | 6.8              |    |  | 6.3          |   |  | 6.2           |   
|Amortization                                                    |  | 1.7                |   |  | 1.4              |    |  | 1.7          |   |  | 1.3           |   
|Restructuring charges (adjustments)                             |  |                   |   |  | (0.6             | )  |  |             |   |  | (0.1          | ) 
|                                                                |  |                    |   |  |                  |    |  |              |   |  |               |   
|Operating earnings (loss)                                       |  | 3.0                |   |  | (1.0             | )  |  | 2.5          |   |  | 0.9           |   
|Interest                                                        |  | 1.8                |   |  | 1.8              |    |  | 1.9          |   |  | 1.8           |   
|                                                                |  |                    |   |  |                  |    |  |              |   |  |               |   
|Earnings (loss) before income taxes and discontinued operations |  | 1.2                |   |  | (2.8             | )  |  | 0.7          |   |  | (0.9          | ) 
|Income tax expense                                              |  | 0.9                |   |  | 48.7             |    |  | 0.6          |   |  | 22.7          |   
|                                                                |  |                    |   |  |                  |    |  |              |   |  |               |   
|Earnings (loss) from continuing operations                      |  | 0.3                |   |  | (51.5            | )  |  | 0.1          |   |  | (23.6         | ) 
|Earnings (loss) from discontinued operations                    |  | 1.2                |   |  | (4.9             | )  |  |             |   |  | (2.5          | ) 
|                                                                |  |                    |   |  |                  |    |  |              |   |  |               |   
|Earnings (loss)                                                 |  | 1.5                | % |  | (56.4            | )% |  | 0.1          | % |  | (26.1         | )%
|                                                                |  |                    |   |  |                  |    |  |              |   |  |               |   



Quarter ended July 4, 2004 compared
to quarter ended June 29, 2003



Revenue



Revenue decreased $4.4 million, or 6.2%, from $70.7 million for the second
quarter of 2003 to $66.3 million for the second quarter of 2004. The decline in revenue primarily resulted from lower production volume from Alcatel as certain programs near completion, resulting in approximately $8.8 million in lower revenue in the
quarter. Revenue was also lower from IBM, which was partially offset by increases from Square D, Ingenico and other top 10 customers. During the second quarter of 2004 the Company continued its focus on the industrial sector resulting in a
substantial change to the product mix from the second quarter of 2003. The industrial sector represented 61.5% of total sales for the second quarter of 2004, compared to 44.6% for the same period in 2003. The proportion of sales to both the
enterprise computing and networking and the communications sectors declined to 28.2% and 10.3% respectively during the second quarter of 2004 from 38.7% and 16.7% respectively for the same period in 2003.



During the second quarter of 2004, we recorded approximately $2.4 million of
sales of raw materials inventory to customers, which carried no margin, compared to $2.2 million for the same period in 2003. The Company purchases raw materials based on customer purchase orders. To the extent the customer requires these orders to
be altered or changed, the customer is generally obligated to purchase the original on-order raw material.



Due to changes in market conditions, the life cycle of products, the nature of specific programs and other factors, customer volumes produced by the
Company typically vary from quarter to quarter. Through the course of the current year, we expect that business for certain customers is likely to grow as customer programs ramp up to meet market demand. Conversely, we also expect business for
certain customers to decline as certain product programs near completion. For the second quarter, the Companys ten largest customers represented approximately 86% of revenue. Revenue from our three largest customers was $12.2 million from
Ingenico, $11.2 million from IBM, and $7.5 million from Square D representing 18.4%, 16.9% and 11.3%, respectively, of total revenue for the period. This compares with revenue from IBM of $20.0 million and Ingenico of $10.0 million for the second
quarter of 2003 representing 28.2%, and 14.2%, respectively, of total revenue for the period. No other customers represented more than 10% of revenue in either period. Through the balance of the



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current year, we expect the revenue mix from our various customers to change such that Square D is likely not to
represent over 10% of our revenues in the latter half of the year as its major program with SMTC nears completion.



The Company operates in a highly competitive and dynamic marketplace in which current and prospective customers from time to time seek to lower their
costs through a competitive tendering process among EMS providers. This process creates an opportunity to increase revenue to the extent we are successful in the tender process, however there is also the potential for revenue decline to the extent
we are unsuccessful in this process. Furthermore, even if we are successful, there is potential for our margins to decline. If we lose any of our larger product lines manufactured for one of our customers, we could experience further declines in
revenue.



During the second quarter of 2004, 48.2% of our
revenue was manufactured in Mexico, 30.7% in Canada, and 21.1% in the United States. For the second quarter of 2003, 42.3% of our revenue was manufactured in Mexico, 31.3% in the United States, 25.2% in Canada and 1.2% in Europe. We terminated
manufacturing in Europe during the second quarter of 2003.



Gross Profit



Gross profit increased $2.6 million from $4.7 million, or
6.7% of revenue, for the second quarter of 2003 to $7.3 million, or 11.0% of revenue, for the second quarter of 2004. The improvement in gross profit and margin primarily is due to the effect of the change in customer mix. Gross margins improved as
a result of a higher concentration of sales to the industrial sector relative to both the enterprise computing and networking and communications sectors. Margins in the industrial sector are typically higher due to a greater degree of product
customization and smaller, more diversified lot sizes.



The
Company writes down estimated obsolete or excess inventory for the difference between the cost of inventory and estimated realizable value based upon customer forecasts, shrinkage, the aging and future demand of the inventory, past experience with
specific customers and the ability to sell back inventory to customers or suppliers. If these estimates change, additional write-downs may be required.



Selling, General & Administrative Expenses



Selling, general and administrative expenses decreased $0.6 million from $4.8 million, or 6.8% of revenue, for the second quarter of 2003 to $4.2 million,
or 6.3% of revenue, for the second quarter of 2004. The decrease in selling, general and administrative expenses in absolute dollars and as a percentage of revenue is a result of corporate wide cost containment measures.



The Company determines the allowance for doubtful accounts for estimated
credit losses based on the length of time the receivables have been outstanding, customer and industry concentrations, the current business environment and historical experience.



Amortization



Amortization of intangible assets of $1.1 million for the second quarter of 2004 and $1.0 million for the second quarter of 2003 include the amortization
of deferred finance costs related to the establishment of our senior credit facility in July 2000 and subsequent amendments thereto.



The costs associated with our credit facilities of $3.3 million are being amortized over the term of the debt.



Restructuring and Other Charges



2001 plan:



During 2001, in response to excess capacity caused by the slowing technology end market, the Company commenced a
restructuring program aimed at reducing its cost structure (the 2001 Plan).



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##### Table of Contents

Accordingly, the Company recorded restructuring and other charges related to the 2001 Plan of $67.2 million, consisting
of a write-down of goodwill and other intangible assets, the costs associated with exiting or resizing facilities and the write-down of inventory related to the closure of a facility. During fiscal year 2003, the Company recorded an additional
charge for lease and other contract obligations related to the 2001 Plan of $2.2 million due to a revision in the estimate of sub-lease recoveries associated with the facility lease in Monterrey, Mexico. The Company also recorded an adjustment to
other facility exit costs of $0.2 million during fiscal year 2003 related to the 2001 Plan due to the settlement of certain obligations for less than the original estimated amounts.



There were no restructuring and other charges related to the 2001 Plan recorded during the second quarters of 2004 and 2003.



The following table details the related amounts included in
accrued liabilities as at July 4, 2004 relating to the 2001 Plan:



|                                     |  |                        |     |              |   |      |                       |  |   |    
|------------------------------------ |  | ---------------------- | --- | ------------ | - | ---- | --------------------- |  | - | ---
|(in millions)                        |  | Accrual atApril 4,2004 |     | Cashpayments |   |      | Accrual atJuly 4,2004
|Lease and other contract obligations |  | $                      | 2.7 |              | $ | (0.1 | )                     |  | $ | 2.6
|                                     |  |                        |     |              |   |      |                       |  |   |    



The following table
discloses the restructuring amounts included in accrued liabilities by segment relating to the 2001 Plan:



|              |  |                        |     |              |   |      |                       |  |   |    
|------------- |  | ---------------------- | --- | ------------ | - | ---- | --------------------- |  | - | ---
|(in millions) |  | Accrual atApril 4,2004 |     | Cashpayments |   |      | Accrual atJuly 4,2004
|US            |  | $                      | 0.5 |              | $ | (0.1 | )                     |  | $ | 0.4
|Canada        |  |                        | 2.2 |              |   |     |                       |  |   | 2.2
|              |  |                        |     |              |   |      |                       |  |   |    
|              |  | $                      | 2.7 |              | $ | (0.1 | )                     |  | $ | 2.6
|              |  |                        |     |              |   |      |                       |  |   |    



In October 2004, the
Company settled a legal suit related to the facility lease in Monterrey, Mexico. A recovery of $1.7 million was recorded in the third quarter of 2004 to adjust the provision to the amount of the settlement.



34



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##### Table of Contents

2002 plan:



In response to the continuing industry economic downturn, the Company took further steps to realign its cost structure and plant capacity (the 2002
Plan) and announced third and fourth quarter net restructuring charges of $36.9 million related to the cost of exiting equipment and facility leases, severance costs asset impairment charges, inventory exposures and other facility exit costs.
During fiscal year 2003, the Company recorded an additional charge for lease and other contract obligations of $0.3 million primarily associated with the idling of equipment leases at the Donegal facility and recorded an adjustment to lease and
other contract obligations related to the 2002 Plan of $4.1 million for the expected or actual settlement of the amounts, including the Austin facility lease, for less than the originally estimated amounts. Also during fiscal year 2003, the Company
recorded severance costs of $2.4 million related to the additional severance for the closure or resizing of facilities pursuant to the 2002 Plan, and the change in senior management during the year and other facility exit costs of $0.1 million
related to additional costs incurred associated with the closure of the Charlotte facility. The Company also recorded an adjustment to other facility exit costs of $0.7 million during fiscal year 2003 due to the settlement of certain obligations for
less than the original estimated amounts.



There were no
restructuring and other charges related to the 2002 Plan recorded during the second quarter of 2004. The following table details the components of the restructuring and other charges related to the 2002 Plan recorded in the second quarter of 2003:



|                                                                        |  |                            |      |  
|----------------------------------------------------------------------- |  | -------------------------- | ---- | -
|(in millions)                                                           |  | Quarter endedJune 29, 2003 |     
|Lease and other contract obligations                                    |  | $                          | 0.1  |  
|Adjustments to previously recorded lease and other contract obligations |  |                            | (0.7 | )
|Severance                                                               |  |                            | 0.3  |  
|Adjustments to other facility exit costs                                |  |                            | (0.3 | )
|Proceeds on assets previously written down                              |  |                            | (0.2 | )
|Other charges                                                           |  |                            | 0.4  |  
|                                                                        |  |                            |      |  
|                                                                        |  | $                          | (0.4 | )
|                                                                        |  |                            |      |  



Lease and other
contract obligations of $0.1 million are associated with the cost of idling of equipment leases at the Donegal facility. Adjustments to previously recorded lease and other contract obligations of $0.7 million and to other facility exit costs of $0.3
million relate to the Company settling certain obligations for less than the original estimated amounts. Severance costs of $0.3 million relate to 110 plant and operational employees associated with the closure of the Austin facility and the
resizing of other facilities. The Company also recorded a gain of $0.2 million related to the disposal of assets previously written down at the Donegal and Austin facilities.



During the second quarter of 2003, the Company recorded a discount of $0.4 million on the prepayment of shareholder loans
that had a carrying value of $4.2 million, resulting in net proceeds of $3.8 million.



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The following table details the related amounts included in accrued liabilities as at July 4, 2004
relating to the 2002 Plan:



|                                     |  |                         |     |              |   |      |                       |  |   |    
|------------------------------------ |  | ----------------------- | --- | ------------ | - | ---- | --------------------- |  | - | ---
|                                     |  |                         |    
|(in millions)                        |  | Accrual at April 4,2004 |     | Cashpayments |   |      | Accrual atJuly 4,2004
|Lease and other contract obligations |  | $                       | 5.6 |              | $ | (1.4 | )                     |  | $ | 4.2
|Severance                            |  |                         | 0.5 |              |   |     |                       |  |   | 0.5
|Other facility exit costs            |  |                         | 0.3 |              |   | (0.1 | )                     |  |   | 0.2
|                                     |  |                         |     |              |   |      |                       |  |   |    
|                                     |  | $                       | 6.4 |              | $ | (1.5 | )                     |  | $ | 4.9
|                                     |  |                         |     |              |   |      |                       |  |   |    



The following table discloses the
restructuring amounts included in accrued liabilities by segment relating to the 2002 Plan:



|              |  |                        |     |              |   |      |                       |  |   |    
|------------- |  | ---------------------- | --- | ------------ | - | ---- | --------------------- |  | - | ---
|(in millions) |  | Accrual atApril 4,2004 |     | Cashpayments |   |      | Accrual atJuly 4,2004
|US            |  | $                      | 3.8 |              | $ | (0.8 | )                     |  | $ | 3.0
|Canada        |  |                        | 1.4 |              |   | (0.3 | )                     |  |   | 1.1
|Mexico        |  |                        | 1.2 |              |   | (0.4 | )                     |  |   | 0.8
|              |  |                        |     |              |   |      |                       |  |   |    
|              |  | $                      | 6.4 |              | $ | (1.5 | )                     |  | $ | 4.9
|              |  |                        |     |              |   |      |                       |  |   |    



We expect the majority
of the remaining restructuring accrual related to severance charges and equipment lease obligations to be paid by the end of fiscal year 2005. We are attempting to negotiate a settlement of the remaining facility lease obligations.



The restructuring charges are based on certain estimates and assumptions
using the best available information at the time and are subject to change.



2004 plan:



During the third
quarter of 2004, the Company announced changes to its manufacturing operations as it continues to execute its transformation plan, to provide greater focus on new customer and new product introduction and technical activities, to improve capacity
utilization and to align its cost structure to expected revenue. The Companys Markham, Ontario facility will become the technical centre of excellence, with particular emphasis on assisting current and new customers to develop, prototype and
bring new products to full production and will continue to manufacture low volume, high complexity printed circuit board assemblies. The Companys Chihuahua, Mexico facility will serve as SMTCs primary assembly operation offering
customers high quality services in a highly efficient, cost effective site. As the result of operational and administrative changes, in the third quarter of 2004, the Company recorded severance charges of $1.0 million relating to 99 and 69 employees
at the Chihuahua, Mexico and Markham, Ontario facilities, respectively, and expects to incur further restructuring charges of approximately $1.0 million related to a layoff of further employees, and relocation and transition costs during the fourth
quarter of 2004. Also, during the third quarter of 2004, the Company settled a claim in its favour for net proceeds of $1.8 million, related to a four year dispute over obsolete inventory with a former customer.



Interest Expense



Interest expense decreased $0.1 million from $1.3 million for the second quarter of 2003 to $1.2 million for the second
quarter of 2004 due to lower average debt outstanding during the second quarter of 2004, partially offset by higher interest rates. The weighted average interest rates with respect to the debt for second quarter of 2003 and 2004 were 7.1% and 7.2%,
respectively.



Income Tax Expense



The net tax expense recorded by the Company includes $0.5 million related to
an intercompany dividend and $0.1 million related to taxes in certain jurisdictions.



During the quarter ended July 4, 2004, the Company incurred tax on an intercompany dividend payment, of which approximately $9.3 million was offset against tax loss carryforwards. This had the effect of reducing the
deferred tax asset and related valuation allowance by the same amount.



Taxes related to income from discontinued operations were offset against tax loss carryforwards.



In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of its deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management considers the scheduled reversal of deferred tax liabilities, change of control limitations, projected
future taxable income and tax planning strategies in making this assessment. FASB Statement No. 109, Accounting for Income Taxes, states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence,
such as cumulative losses in recent years in the jurisdictions to which the deferred tax assets relate. As a result of the quarterly review undertaken at the end of the second quarter of 2003, the Company concluded that given the weakness and
uncertainty in the current economic environment, it was appropriate to establish a full valuation allowance for the deferred tax assets arising from its operations in the jurisdictions to which the deferred tax assets relate. As a result, the total
valuation allowance for deferred tax assets in all jurisdictions worldwide



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##### Table of Contents

increased from approximately $34.5 million at December 31, 2002 to approximately $68.4 million at December 31, 2003. In
addition, the Company expects to provide a full valuation allowance on future tax benefits until it can demonstrate a sustained level of profitability that establishes its ability to utilize the assets in the jurisdictions to which the assets
relate.



At December 31, 2003, the Company had total net
operating loss carryforwards of approximately $142.4 million, of which $4.2 million will expire in 2010, $0.3 million will expire in 2011, $1.3 million will expire in 2012, $1.6 million will expire in 2018, $81.2 million will expire in 2021, $20.2
million will expire in 2022 and $33.6 million will expire in 2023.



Whether or not the recapitalization results in an ownership change for purposes of Section 382 of the Internal Revenue Code, which imposes a limitation on a corporations use of net operating loss (NOL) carryforwards
following an ownership change, depends upon whether the exchangeable shares of SMTC Canada are treated as shares of the Company under U.S. tax principles. Because the tax law governing the exchangeable shares is unclear, it is uncertain
whether Section 382 will apply to the recapitalization. If deemed applicable, Section 382 would limit the amount of NOLs available to offset taxable income in future years and would preclude the full utilization of the Companys NOLs.



Discontinued Operations



Appleton:



During the third quarter of 2003, the Company sold the manufacturing operations of the Appleton facility for cash proceeds
of $3.1 million and recorded a loss on disposal of $0.2 million.



The following information included in discontinued operations relates to the sale of the Appleton manufacturing operations:



|                                             |  |               |     |              |   |      |  
|-------------------------------------------- |  | ------------- | --- | ------------ | - | ---- | -
|                                             |  | Quarter ended |    
|(in millions)                                |  | July 4,2004   |     | June 29,2003 |  
|Revenue                                      |  | $             |    |              | $ | 3.8  |  
|                                             |  |               |     |              |   |      |  
|Earnings (loss) from discontinued operations |  | $             | 0.4 |              | $ | (3.5 | )
|                                             |  |               |     |              |   |      |  



Included in the
earnings (loss) from discontinued operations for the second quarter of 2003 is a restructuring charge of $3.2 million reflecting the write-down of the Appleton assets to the estimated realizable value and loss from operations of $0.3 million.



Included in earnings (loss) from discontinued operations for
the second quarter of 2004 the Company recorded proceeds from the settlement of a lawsuit of $0.2 million and an adjustment to the remaining accrual for closing costs of $0.2 million.



Cork:



In February 2002, the main customer of the Cork, Ireland facility was placed into administration as part of a financial restructuring. As a result, on
March 19, 2002, the Company announced that it was closing the Cork, Ireland facility and that it was taking steps to place the subsidiary that operated that facility in voluntary administration. During the second quarter of 2004 the Company received
a distribution from the proceeds of the liquidation of $0.4 million.



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##### Table of Contents

Six months ended July 4, 2004 compared to the six months ended June 29, 2003



Revenue



Revenue decreased $16.5 million, or 10.8%, from $152.2 million for the first six months of 2003 to $135.7 million for the
first six months of 2004. The decline in revenue primarily resulted from lower production volume from Alcatel as certain programs near completion, resulting in approximately $13.8 million in lower revenue for the first six months of 2004. Revenue
was also lower from IBM, which was partially offset by increases from Square D, Ingenico and other top 10 customers. During the first six months of 2004 the Company continued its focus on the industrial sector resulting in a substantial change to
the product mix from the first six months of 2003. The industrial sector represented 59.9% of total sales for the first six months of 2004, compared to 41.6% for the same period in 2003. The proportion of sales to both the enterprise computing and
networking and the communications sectors declined to 28.5% and 11.6% respectively during the first six months of 2004 from 38.3% and 20.2% respectively for the same period in 2003.



During the first six months of 2004, we recorded approximately $4.5 million of sales of raw materials inventory to
customers, which carried no margin, compared to $4.4 million for the same period in 2003. The Company purchases raw materials based on customer purchase orders. To the extent the customer requires these orders to be altered or changed, the customer
is generally obligated to purchase the original on-order raw material.



Due to changes in market conditions, the life cycle of products, the nature of specific programs and other factors, customer volumes produced by the Company typically vary from quarter to quarter. Through the course of the current year, we
expect that business for certain customers is likely to grow as customer programs ramp up to meet market demand. Conversely, we also expect business for certain customers to decline as certain product programs near completion. For the first six
months of 2004, the Companys ten largest customers represented approximately 86% of revenue. Revenue from our three largest customers was $25.0 million from IBM, $24.1 million from Ingenico and $18.5 million from Square D representing 18.4%,
17.7% and 13.7%, respectively, of total revenue for the period. This compares with revenue from IBM of $40.0 million, Alcatel of $18.9 million and Ingenico of $18.4 million for the first six months of 2003 representing 26.3%, 12.4% and 12.1%,
respectively, of total revenue for the period. No other customers represented more than 10% of revenue in either period. Through the balance of the current year, we expect the revenue mix from our various customers to change such that Square D is
likely not to represent over 10% of our revenues in the latter half of the year as its major program with SMTC nears completion.



The Company operates in a highly competitive and dynamic marketplace in which current and prospective customers from time to time seek to lower their
costs through a competitive tendering process among EMS providers. This process creates an opportunity to increase revenue to the extent we are successful in the tender process, however there is also the potential for revenue decline to the extent
we are unsuccessful in this process. Furthermore, even if we are successful, there is potential for our margins to decline. If we lose any of our larger product lines manufactured for one of our customers, we could experience further declines in
revenue.



During the first six months of 2004, 54.1% of our
revenue was manufactured in Mexico, 27.0% in Canada, and 18.9% in the United States. For the first six months of 2003, 37.5% of our revenue was manufactured in the United States, 37.4% in Mexico, 23.5% from Canada and 1.5% from Europe. We terminated
manufacturing in Europe during the second quarter of 2003.



Gross Profit



Gross profit increased $1.5 million from $12.7 million,
or 8.3% of revenue, for the first six months of 2003 to $14.2 million, or 10.5% of revenue, for the first six months of 2004. The improvement in gross profit primarily is due to the change in customer mix. Gross margins improved as a result of a
higher concentration of sales to the industrial sector relative to both the enterprise computing and networking and communications sectors. Margins in the industrial sector are typically higher due to a greater degree of product customization and
smaller, more diversified lot sizes.



The Company writes down
estimated obsolete or excess inventory for the difference between the cost of inventory and estimated realizable value based upon customer forecasts, shrinkage, the aging and future demand of the inventory, past experience with specific customers
and the ability to sell back inventory to customers or suppliers. If these estimates change, additional write-downs may be required.



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Selling, General & Administrative Expenses



Selling, general and administrative expenses decreased $1.0 million from $9.5 million for the first six months of 2003 to
$8.5 million for the first six months of 2004. Selling, general and administrative expenses for the first six months of 2004 include an adjustment of $0.3 million related to proceeds received on the sale of an asset previously written off. Excluding
this adjustment, selling, general and administrative expenses decreased $0.7 million from $9.5 million, or 6.2% of revenue, for the first six months of 2003, to $8.8 million, or 6.5% of revenue for the first six months of 2004. The decrease in
selling, general and administrative expenses is a result of corporate wide cost containment measures. The increase in selling, general and administrative expenses as a percentage of revenue is due to the lower revenue base.



The Company determines the allowance for doubtful accounts for estimated
credit losses based on the length of time the receivables have been outstanding, customer and industry concentrations, the current business environment and historical experience.



Amortization



Amortization of intangible assets of $2.3 million for the first six months of 2004 and $1.9 million for the first six months of 2003 include the
amortization of deferred finance costs related to the establishment of our senior credit facility in July 2000 and subsequent amendments thereto.



The costs associated with our credit facilities of $3.3 million are being amortized over the term of the facility.



Restructuring and Other Charges



2001 plan:



During 2001, in response to excess capacity caused by the slowing technology end market, the Company commenced a
restructuring program aimed at reducing its cost structure (the 2001 Plan). Accordingly, the Company recorded restructuring and other charges related to the 2001 Plan of $67.2 million, consisting of a write-down of goodwill and other
intangible assets, the costs associated with exiting or resizing facilities and the write-down of inventory related to the closure of a facility. During fiscal year 2003, the Company recorded an additional charge for lease and other contract
obligations related to the 2001 Plan of $2.2 million due to a revision in the estimate of sub-lease recoveries associated with the facility lease in Monterrey, Mexico. The Company also recorded an adjustment to other facility exit costs of $0.2
million during fiscal year 2003 related to the 2001 Plan due to the settlement of certain obligations for less than the original estimated amounts.



There were no restructuring and other charges related to the 2001 Plan recorded during the first six months of 2004 and 2003.



The following table details the related amounts included in accrued
liabilities as at July 4, 2004 relating to the 2001 Plan:



|                                     |  |                            |     |              |   |      |                       |  |   |    
|------------------------------------ |  | -------------------------- | --- | ------------ | - | ---- | --------------------- |  | - | ---
|(in millions)                        |  | Accrual atDecember 31,2003 |     | Cashpayments |   |      | Accrual atJuly 4,2004
|Lease and other contract obligations |  | $                          | 2.9 |              | $ | (0.3 | )                     |  | $ | 2.6
|                                     |  |                            |     |              |   |      |                       |  |   |    



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The following table discloses the restructuring amounts included in accrued liabilities by segment
relating to the 2001 Plan:



|              |  |                             |     |              |   |      |                       |  |   |    
|------------- |  | --------------------------- | --- | ------------ | - | ---- | --------------------- |  | - | ---
|(in millions) |  | Accrual at December 31,2003 |     | Cashpayments |   |      | Accrual atJuly 4,2004
|US            |  | $                           | 0.7 |              | $ | (0.3 | )                     |  | $ | 0.4
|Canada        |  |                             | 2.2 |              |   |     |                       |  |   | 2.2
|              |  |                             |     |              |   |      |                       |  |   |    
|              |  | $                           | 2.9 |              | $ | (0.3 | )                     |  | $ | 2.6
|              |  |                             |     |              |   |      |                       |  |   |    



In October 2004, the
Company settled a legal suit related to the facility lease in Monterrey, Mexico. A recovery of $1.7 million was recorded in the third quarter of 2004 to adjust the provision to the amount of the settlement.



2002 plan:



In response to the continuing industry economic downturn, the Company took further steps to realign its cost structure and
plant capacity (the 2002 Plan) and announced third and fourth quarter net restructuring charges of $36.9 million related to the cost of exiting equipment and facility leases, severance costs asset impairment charges, inventory exposures
and other facility exit costs. During fiscal year 2003, the Company recorded an additional charge for lease and other contract obligations of $0.3 million primarily associated with the idling of equipment leases at the Donegal facility and recorded
an adjustment to lease and other contract obligations related to the 2002 Plan of $4.1 million for the expected or actual settlement of the amounts, including the Austin facility lease, for less than the originally estimated amounts. Also during
fiscal year 2003, the Company recorded severance costs of $2.4 million related to the additional severance for the closure or resizing of facilities pursuant to the 2002 Plan, and the change in senior management during the year and other facility
exit costs of $0.1 million related to additional costs incurred associated with the closure of the Charlotte facility. The Company also recorded an adjustment to other facility exit costs of $0.7 million during fiscal year 2003 due to the settlement
of certain obligations for less than the original estimated amounts.



There were no restructuring and other charges related to the 2002 Plan recorded during the first six months of 2004. The following table details the components of the restructuring and other charges related to the 2002 Plan recorded during
the first six months of 2003:



|                                                                        |  |                               |      |  
|----------------------------------------------------------------------- |  | ----------------------------- | ---- | -
|(in millions)                                                           |  | Six months endedJune 29, 2003 |     
|Lease and other contract obligations                                    |  | $                             | 0.1  |  
|Adjustments of previously recorded lease and other contract obligations |  |                               | (0.7 | )
|Severance                                                               |  |                               | 0.6  |  
|Adjustments to other facility exit costs                                |  |                               | (0.3 | )
|Proceeds on assets previously written down                              |  |                               | (0.2 | )
|Other charges                                                           |  |                               | 0.4  |  
|                                                                        |  |                               |      |  
|                                                                        |  | $                             | (0.1 | )
|                                                                        |  |                               |      |  



Lease and other
contract obligations of $0.1 million are associated with the cost of idling of equipment leases at the Donegal facility. Adjustments to previously recorded lease and other contract obligations of $0.7 million and to other facility exit costs of $0.3
million relate to the Company settling certain obligations for less than the original estimated amounts. Severance costs of $0.6 million relate to 110 plant and operational employees associated with the closure of the Austin facility and the
resizing of other facilities. The Company also recorded a gain of $0.2 million related to the disposal of assets previously written down at the Donegal and Austin facilities.



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The following table details the related amounts included in accrued liabilities as at July 4, 2004
relating to the 2002 Plan:



|                                     |  |                            |     |              |   |      |                       |  |   |    
|------------------------------------ |  | -------------------------- | --- | ------------ | - | ---- | --------------------- |  | - | ---
|(in millions)                        |  | Accrual atDecember 31,2003 |     | Cashpayments |   |      | Accrual atJuly 4,2004
|Lease and other contract obligations |  | $                          | 6.7 |              | $ | (2.5 | )                     |  | $ | 4.2
|Severance                            |  |                            | 0.6 |              |   | (0.1 | )                     |  |   | 0.5
|Other facility exit costs            |  |                            | 0.3 |              |   | (0.1 | )                     |  |   | 0.2
|                                     |  |                            |     |              |   |      |                       |  |   |    
|                                     |  | $                          | 7.6 |              | $ | (2.7 | )                     |  | $ | 4.9
|                                     |  |                            |     |              |   |      |                       |  |   |    



The following table
discloses the restructuring amounts included in accrued liabilities by segment relating to the 2002 Plan:



|              |  |                             |     |              |   |      |                       |  |   |    
|------------- |  | --------------------------- | --- | ------------ | - | ---- | --------------------- |  | - | ---
|(in millions) |  | Accrual at December 31,2003 |     | Cashpayments |   |      | Accrual atJuly 4,2004
|US            |  | $                           | 4.3 |              | $ | (1.3 | )                     |  | $ | 3.0
|Canada        |  |                             | 1.7 |              |   | (0.6 | )                     |  |   | 1.1
|Mexico        |  |                             | 1.6 |              |   | (0.8 | )                     |  |   | 0.8
|              |  |                             |     |              |   |      |                       |  |   |    
|              |  | $                           | 7.6 |              | $ | (2.7 | )                     |  | $ | 4.9
|              |  |                             |     |              |   |      |                       |  |   |    



We expect the majority
of the remaining restructuring accrual related to severance charges and equipment lease obligations to be paid by the end of fiscal year 2005. We are attempting to negotiate a settlement of the remaining facility lease obligations.



The restructuring charges are based on certain estimates and assumptions
using the best available information at the time and are subject to change.



In light of the Companys plan to lower its bank indebtedness, it requested that certain shareholder loans be repaid prior to the expiration of the term. Accordingly, during the second quarter of 2003, the
Company recorded a discount of $0.4 million on the prepayment of shareholder loans that had a carrying value of $4.2 million, resulting in net proceeds of $3.8 million.



2004 plan:



During the third quarter of 2004, the Company announced changes to its manufacturing operations as it continues to execute its transformation plan, to
provide greater focus on new customer and new product introduction and technical activities, to improve capacity utilization and to align its cost structure to expected revenue. The Companys Markham, Ontario facility will become the technical
centre of excellence, with particular emphasis on assisting current and new customers to develop, prototype and bring new products to full production and will continue to manufacture low volume, high complexity printed circuit board assemblies. The
Companys Chihuahua, Mexico facility will serve as SMTCs primary assembly operation offering customers high quality services in a highly efficient, cost effective site. As the result of operational and administrative changes, in the third
quarter of 2004, the Company recorded severance charges of $1.0 million relating to 99 and 69 employees at the Chihuahua, Mexico and Markham, Ontario facilities, respectively, and expects to incur further restructuring charges of approximately $1.0
million related to a layoff of further employees, and relocation and transition costs during the fourth quarter of 2004. Also, during the third quarter of 2004, the Company settled a claim in its favour for net proceeds of $1.8 million, related to a
four year dispute over obsolete inventory with a former customer.



Interest
Expense



Interest expense decreased $0.3 million from $2.8
million for the first six months of 2003 to $2.5 million for the first six months of 2004 due to lower average debt outstanding during the first six months of 2004. The weighted average interest rates with respect to the debt for first six months of
2003 and 2004 was 7.3%.



Income Tax Expense



The net tax expense recorded by the Company includes $0.5 million related to
an intercompany dividend and $0.1 million related to taxes in certain jurisdictions.



During the quarter ended July 4, 2004, the Company incurred tax on an intercompany dividend payment, of which approximately $9.3 million was offset against tax loss carryforwards. This had the effect of reducing the
deferred tax asset and related valuation allowance by the same amount.



Taxes related to income from discontinued operations were offset against tax loss carryforwards.



In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of its deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management considers the scheduled reversal



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of deferred tax liabilities, change of control limitations, projected future taxable income and tax planning strategies
in making this assessment. FASB Statement No. 109, Accounting for Income Taxes, states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence, such as cumulative losses in recent years in the
jurisdictions to which the deferred tax assets relate. As a result of the quarterly review undertaken at the end of the second quarter of 2003, the Company concluded that given the weakness and uncertainty in the current economic environment, it was
appropriate to establish a full valuation allowance for the deferred tax assets arising from its operations in the jurisdictions to which the deferred tax assets relate. As a result, the total valuation allowance for deferred tax assets in all
jurisdictions worldwide increased from approximately $34.5 million at December 31, 2002 to approximately $68.4 million at December 31, 2003. In addition, the Company expects to provide a full valuation allowance on future tax benefits until it can
demonstrate a sustained level of profitability that establishes its ability to utilize the assets in the jurisdictions to which the assets relate.



At December 31, 2003, the Company had total net operating loss carryforwards of approximately $142.4 million, of which $4.2 million will expire in 2010,
$0.3 million will expire in 2011, $1.3 million will expire in 2012, $1.6 million will expire in 2018, $81.2 million will expire in 2021, $20.2 million will expire in 2022 and $33.6 million will expire in 2023.



Whether or not the recapitalization results in an ownership change for
purposes of Section 382 of the Internal Revenue Code, which imposes a limitation on a corporations use of NOL carryforwards following an ownership change, depends upon whether the exchangeable shares of SMTC Canada are treated as
shares of the Company under U.S. tax principles. Because the tax law governing the exchangeable shares is unclear, it is uncertain whether Section 382 will apply to the recapitalization. If deemed applicable, Section 382 would limit the amount of
NOLs available to offset taxable income in future years and would preclude the full utilization of the Companys NOLs.



Discontinued Operations



During the third quarter of 2003, the Company sold the manufacturing operations of the Appleton facility for cash proceeds of $3.1 million and
recorded a loss on disposal of $0.2 million.



The following
information included in discontinued operations relates to the sale of the Appleton manufacturing operations:



|                                             |  |                  |     |              |   |      |  
|-------------------------------------------- |  | ---------------- | --- | ------------ | - | ---- | -
|                                             |  | Six months ended |    
|(in millions)                                |  | July 4,2004      |     | June 29,2003 |  
|Revenue                                      |  | $                |    |              | $ | 8.6  |  
|                                             |  |                  |     |              |   |      |  
|Earnings (loss) from discontinued operations |  | $                | 0.4 |              | $ | (3.8 | )
|                                             |  |                  |     |              |   |      |  



Included in the
earnings (loss) from discontinued operations for the first six months of 2003 is a restructuring charge of $3.2 million reflecting the write-down of the Appleton assets to the estimated realizable value and loss from operations of $0.6 million.



Included in earnings (loss) from discontinued operations for
the first six months of 2004 the Company recorded proceeds from the settlement of a lawsuit of $0.2 million and an adjustment to the remaining accrual for closing costs of $0.2 million.



Cork:



In February 2002, the main customer of the Cork, Ireland facility was placed into administration as part of a financial restructuring. As a result, on
March 19, 2002, the Company announced that it was closing the



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Cork, Ireland facility and that it was taking steps to place the subsidiary that operated that facility in voluntary
administration. During the first six months of 2004 the Company received a distribution from the proceeds of the liquidation of $0.4 million.



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Liquidity and Capital Resources



Our principal sources of liquidity are cash provided from operations and borrowings under our existing credit facilities. In
the past, we have also relied on our access to the capital markets. Our principal uses of cash have been to meet debt service requirements and to finance capital expenditures and working capital requirements. We anticipate our principal uses of cash
in the future will continue to be to meet debt service requirements and to finance capital expenditures and working capital requirements.



Six months ended July 4, 2004 Liquidity:



Net cash used in operating activities for the first six months of 2004 was $5.0 million. Accounts receivable days sales outstanding improved to 44 days
for the second quarter of 2004 from 57 days for the same period in 2003. Inventory turns declined to 7 times for the second quarter of 2004 from 9 times for the same period in 2003. Accounts payable days outstanding improved to 44 days for the
second quarter of 2004 compared to 67 days for the same period last year. The change in accounts payable days is a result of additional liquidity provided by the recapitalization transactions. During the second quarter of 2004, the Company made $1.7
million of restructuring payments.



Net cash generated from
financing activities for the first six months of 2004 of $5.0 million consists of the repayment of long-term debt of $26.4 million, the payment of deferred financing fees of $3.3 million and the repayment of capital leases of 0.1 million, offset by
the proceeds from the issuance of capital stock and warrants, net of fess, of $25.8 million and 9.0 million, respectively.



Net cash used in investing activities for the first six months of 2004 was negligible.



Six months ended June 29, 2003 Liquidity:



Net cash provided by operating activities for first six months of 2003 was $11.5 million. Cash was generated largely from
net earnings and the collection of accounts receivable, partially offset by a decline in accounts payable and accrued liabilities.



Net cash used in financing activities for the first six months of 2003 was $11.7 million due to the repayment of long-term debt of $15.4 million and the
repayment of capital leases of $0.1 million, offset by a repayment of shareholder loans of $3.8 million.



Net cash used in investing activities for the first six months of 2003 was negligible.



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Capital Resources



As described in greater detail under Managements Discussion and Analysis of Financial Condition and Results of
OperationsOverview, in 2004, the Company effectuated a Recapitalization Transaction through three main components: a private placement of equity securities, a transaction with the Companys Pre-existing Lenders to repay a portion of
and restructure a portion of the Companys existing debt and a new secured credit facility:



| |  | On March 3, 2004, the Company closed in escrow a fully underwritten, committed private placement of 33,350,000 Special Warrants of SMTC Canada to qualified investors at a price of
C$1.20 (approximately US$0.90) per Special Warrant, representing an aggregate amount of issue of C$40.02 million, C$37.3 million net of underwriting expenses, or approximately US $29.9 million, US $27.6 million net of underwriting expenses, based on
the exchange rate on March 3, 2004. The net proceeds were released from escrow on June 1, 2004 and were used for debt reduction and working capital.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company satisfied debt that was owed to the Pre-existing Lenders by repaying $40 million of debt at par, exchanging $10 million of debt for $10 million of the Companys
common stock and warrants valued on the same terms as the private placement, and converting $27.5 million of debt into second lien subordinated debt with maturity ranging from four to five years.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company obtained a new, 3-year $40 million credit facility, subject to certain borrowing base conditions, from Congress.
| | - | ----------------------------------------------------------------------------------------------------------------------------



The Recapitalization Transaction lowered the Companys overall
indebtedness by approximately $37.5 million, extended the term of the majority of the remaining indebtedness and provided additional liquidity. The level of indebtedness under our credit facility at December 31, 2003 was $70.1 million and at May 31,
2004 was $77.5 million. Immediately following the closing of the Recapitalization Transaction on June 1, 2004, we had approximately $40.0 million of indebtedness outstanding under the Credit Facilities. At July 4, 2004, we had $14.5 million of
indebtedness outstanding under the Congress Credit Facility and $27.6 million of indebtedness outstanding under the Pre-existing Facility.



Having successfully completed the Recapitalization Transaction on June 1, 2004, our management believes that cash generated from operations, available
cash and amounts available under our Credit Facilities will be adequate to meet our debt service requirements, capital expenditures and working capital needs at our current level of operations and organic growth through the next twelve months,
although no assurance can be given in this regard, particularly with respect to amounts available under our Credit Facilities. The Company has agreed to a borrowing base formula under which the amount it is permitted to borrow under the Congress
Credit Facility is based on the Companys accounts receivable and inventory. Further, there can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to enable us to
service our indebtedness. Our future operating performance and ability to service or refinance indebtedness will be subject to future economic conditions and to financial, business and other factors, certain of which are beyond our control.



Although the revolving credit facility has a three-year term,
expiring in 2007, and the Company believes it will have the ability to maintain this debt outstanding for more than one year, the Company has classified its borrowings under the facility at July 4, 2004 as a current liability in accordance with the
provisions set forth in Emerging Issues Task Force 95-22 Balance Sheet Classifications, Borrowings Outstanding Under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement (EITF
95-22). EITF 95-22 requires revolving credit agreements with a required lock-box arrangement that include subjective acceleration clauses to be classified as current liabilities. Accordingly, the accompanying balance sheets have been restated
and borrowings under the revolving credit facility previously reported as a long-term liability, amounting to $13,307 at July 4, 2004, have been reclassified to a current liability.



On November 16, 2004, the Company, together with Congress, executed a letter of understanding amending the terms of the
revolving credit facility. The letter of understanding provides that, at the Companys option, it may elect to use a springing lock-box arrangement whereby remittances from customers are forwarded to the Companys general bank
account and the Company is not required to reduce the borrowings under the facility unless certain conditions exist.



Pursuant to the letter of understanding, should the Company elect to change to the springing lock-box arrangement, availability under the facility may be
reduced by the eligible inventory. The Company will be required to revert back to a required lock-box arrangement if (a) availability under the revolving credit facility is less than the greater of (i) $2,500 or (ii) 25% of the outstanding
borrowings under the credit facility or (b) the occurrence of an event of default. Management does not foresee being precluded from exercising the option of converting to a springing lock-box based on its expected financing needs over the next
twelve months however, due to the effective cash management aspect of the current lock-box arrangement, the Company has no plans to move to a springing lock-box arrangement at this time.



The letter of understanding, although signed subsequent to the third quarter of 2004, qualified as a refinancing of the
revolving credit facility in effect at the end of the third quarter of 2004 and as such, the debt was classified as long-term at October 3, 2004. The Company has the option to use a springing lock-box arrangement and based on managements
assessment of the subjective acceleration clauses at the end of the third quarter of 2004, the debt was classified as long-term.



Critical Accounting Policies



The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.



Note 3 to the December 31, 2003 Consolidated Financial Statements describes
the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following critical accounting policies are affected significantly by judgments, assumptions and estimates used in the preparation
of financial statements. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.



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Allowance for Doubtful Accounts



The Company evaluates the collectibility of accounts receivable and records an allowance for doubtful accounts, which
reduces the accounts receivable to the amount management reasonably believes will be collected. A specific allowance is recorded against customer accounts receivable that are considered to be impaired based on the Companys knowledge of the
financial condition of its customers. In determining the amount of the allowance, the Company considers factors, including the length of time the accounts receivable have been outstanding, customer and industry concentrations, the current business
environment and historical experience.



Inventory Valuation



Inventories are valued, on a first-in, first-out basis, at the lower of
cost and replacement cost for raw materials and at the lower of cost and net realizable value for work in progress and finished goods. Inventories include an application of relevant overhead. The Company writes down estimated obsolete or excess
inventory for the difference between the cost of inventory and estimated net realizable value based upon customer forecasts, shrinkage, the aging and future demand of the inventory, past experience with specific customers, and the ability to sell
inventory to customers or on return to suppliers. If these assumptions change, additional write-downs may be required.



Restructuring and Other Charges



In response to excess capacity caused by the slowing technology end market, the Company recorded restructuring and other charges aimed at reducing its
cost structure. In connection with exit activities, the Company recorded charges for inventory write-downs, employee termination costs, lease and other contractual obligations, long-lived asset impairment and other exit-related costs. These charges
were incurred pursuant to formal plans developed by management. The recognition of restructuring and other charges required the Company to make certain judgments and estimates regarding the nature, timing and amount of costs associated with the
planned exit activities. The estimates of future liabilities may change, requiring the recording of additional charges or the reduction of liabilities already recorded. At the end of each reporting period, the Company evaluates the remaining accrued
balances to ensure that no excess accruals are retained and the utilization of the provision are for their intended purposed in accordance with the developed exit plans.



Long-lived Assets



The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable in accordance with FASB Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (Statement 144). Under Statement 144 assets must be classified as either held-for-use or available-for-sale. An impairment
loss is recognized when the carrying amount of an asset that is held and used exceeds the projected undiscounted future net cash flows expected from its use and disposal, and is measured as the amount by which the carrying amount of the asset
exceeds its fair value, which is measured by discounted cash flows when quoted market prices are not available. For assets available-for-sale, an impairment loss is recognized when the carrying amount exceeds the fair value less costs to sell. In
accordance with the provisions of Statement 144, the Company has presented the closure of its Cork facility in 2002 and sale of its Appleton facility in 2003 as discontinued operations.



Income Tax Valuation Allowance



In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of its deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management considers the scheduled reversal of deferred tax liabilities, change of control limitations, projected
future taxable income and tax planning strategies in making this assessment. FASB Statement No. 109, Accounting for Income Taxes, states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence,
such as cumulative losses in recent years in the jurisdictions to which the deferred tax assets relate. Based upon consideration of these factors, management believes the recorded valuation allowance related to all of its loss carryforwards is
appropriate.



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FORWARD-LOOKING STATEMENTS



A number of the matters and subject areas discussed in this Form 10-Q are forward-looking in nature. The discussion of such
matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations generally; these expectations may differ materially from SMTCs actual future experience involving any one or more of such matters
and subject areas. SMTC cautions readers that all statements other than statements of historical facts included in this quarterly Form 10-Q regarding SMTCs financial position and business strategy may constitute forward-looking statements. All
of these forward-looking statements are based upon estimates and assumptions made by SMTCs management, which although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed on such estimates and
statements. No assurance can be given that any of such estimates or statements will be realized, and it is likely that actual results will differ materially from those contemplated by such forward-looking statements. Factors that may cause such
differences include: (1) increased competition; (2) increased costs; (3) the inability to implement our business plan and maintain covenant compliance under our credit agreement; (4) the loss or retirement of key members of management; (5) increases
in SMTCs cost of borrowings or lack of availability of debt or equity capital on terms considered reasonable by management; (6) adverse state, federal or foreign legislation or regulation or adverse determinations by regulators; (7) changes in
general economic conditions in the markets in which SMTC may compete and fluctuations in demand in the electronics industry; (8) the inability to manage inventory levels efficiently in light of changes in market conditions; and (9) the inability to
sustain historical margins as the industry develops. SMTC has attempted to identify certain of the factors that it currently believes may cause actual future experiences to differ from SMTCs current expectations regarding the relevant matter
or subject area. In addition to the items specifically discussed in the foregoing, SMTCs business and results of operations are subject to the risks and uncertainties described under the heading Factors That May Affect Future
Results below. The operations and results of SMTCs business may also be subject to the effect of other risks and uncertainties. Such risks and uncertainties include, but are not limited to, items described from time to time in
SMTCs reports filed with the Securities and Exchange Commission.



FACTORS THAT MAY AFFECT FUTURE RESULTS



RISKS RELATED TO
OUR BUSINESS AND INDUSTRY



We are exposed to general economic
conditions, which could have a material adverse impact on our business, operating results and financial condition.



As a result of recent unfavorable economic conditions, reduced capital spending and changes in our customers manufacturing requirements, our sales
have declined during the first and second quarters of 2004 and from fiscal year 2002 to 2003. In particular, sales to OEMs in the telecommunications and enterprise computing and networking industries worldwide were impacted during 2003. If general
economic conditions worsen or fail to improve, we may experience a material adverse impact on our business, operating results and financial condition.



A majority of our revenue comes from a small number of customers; if we lose any of our larger customers, our revenue could decline significantly.



We operate in a highly competitive and dynamic marketplace in which current
and prospective customers often seek to lower their costs through a competitive bidding process among EMS providers. This process creates an opportunity to increase revenue to the extent we are successful in the bidding process, however, there is
also the potential for revenue decline to the extent we are unsuccessful in the process. Furthermore, even if we are successful, there is the potential for our margins to decrease.



Our largest three customers in the second quarter of 2004 were Ingenico, IBM, and Square D, which represented approximately
18.4%, 16.9% and 11.3%, respectively, of our total revenue in the second quarter of 2004. Through the balance of the current year, we expect the revenue mix from our various customers to change such that Square D is likely not to represent over 10%
of our revenues in the latter half of the year as its major program with SMTC nears completion. Our top ten largest customers (including IBM, Ingenico and Square D) collectively represented approximately 89.5% of our total revenue in 2003. We expect
to continue to depend



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upon a relatively small number of customers for a significant percentage of our revenue. In addition to having a limited
number of customers, we manufacture a limited number of products for each of our customers. If we lose any of our largest customers or any product line manufactured for one of our largest customers, we could experience a significant reduction in our
revenue. Also, the insolvency of one or more of our largest customers or the inability of one or more of our largest customers to pay for its orders could decrease revenue. As many of our costs and operating expenses are relatively fixed, a
reduction in net revenue can decrease our profit margins and adversely affect our business, financial condition and results of operations.



Our industry is very competitive and we may not be successful if we fail to compete effectively.



The electronics manufacturing services (EMS) industry is highly competitive. We compete against numerous domestic and
foreign EMS providers including Celestica Inc., Flextronics International Ltd., Jabil Circuit, Inc., Sanmina-SCI, Inc., Solectron Corporation, Benchmark Electronics Inc., Pemstar Inc. and Plexus Corp. In addition, we may in the future encounter
competition from other large electronics manufacturers that are selling, or may begin to sell, electronics manufacturing services. Many of our competitors have international operations, and some have substantially greater manufacturing, financial,
research and development and marketing resources and lower cost structures than us. We also face competition from the manufacturing operations of current and potential customers, which are continually evaluating the merits of manufacturing products
internally versus the advantages of using external manufacturers.



We may
experience variability in our operating results, which could negatively impact the price of our shares.



Our annual and quarterly results have fluctuated in the past. The reasons for these fluctuations may similarly affect us in the future. Prospective
investors should not rely on results of operations in any past period to indicate what our results will be for any future period. Our operating results may fluctuate in the future as a result of many factors, including:



| |  | variations in the timing and volume of customer orders relative to our manufacturing capacity;
| | - | ----------------------------------------------------------------------------------------------



| |  | variations in the timing of shipments of products to customers;
| | - | ---------------------------------------------------------------



| |  | introduction and market acceptance of our customers new products;
| | - | ------------------------------------------------------------------



| |  | changes in demand for our customers existing products;
| | - | -------------------------------------------------------



| |  | the accuracy of our customers forecasts of future production requirements;
| | - | ---------------------------------------------------------------------------



| |  | effectiveness in managing our manufacturing processes and inventory levels;
| | - | ---------------------------------------------------------------------------



| |  | changes in competitive and economic conditions generally or in our customers markets;
| | - | --------------------------------------------------------------------------------------



| |  | willingness of suppliers to supply the Company on normal credit terms; and
| | - | --------------------------------------------------------------------------



| |  | changes in the cost or availability of components or skilled labor.
| | - | -------------------------------------------------------------------



In addition, most of our customers typically do not commit to firm production schedules more than 30 to 90 days in advance. Accordingly, we cannot
forecast the level of customer orders with certainty. This makes it difficult to schedule production to maximize utilization of our manufacturing capacity. In the past, we have been required to increase staffing, purchase materials and incur other
expenses to meet the anticipated demand of our customers. Sometimes anticipated orders from certain customers have failed to materialize, and at times delivery schedules have been deferred as a result of changes in a customers business needs.
Any material delay, cancellation or reduction of orders from our larger customers could cause our revenue to decline significantly. In addition, as many of our costs and operating expenses are relatively fixed, a reduction in customer demand can
decrease our gross margins and adversely affect our business, financial condition and results of operations. On other occasions, customers have required rapid and unexpected increases in production, which have placed burdens on our manufacturing
capacity and adversely affected costs.



Any of these factors or
a combination of these factors could have a material adverse effect on our business, financial condition and results of operations.



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We are dependent upon the electronics industry, which produces technologically advanced products with short life
cycles.



Many of our customers are in the electronics
industry, which is characterized by intense competition, short product life-cycles and significant fluctuations in product demand. In addition, the electronics industry is generally subject to rapid technological change and product obsolescence. If
our customers are unable to create products that keep pace with the changing technological environment, their products could become obsolete and the demand for our services could significantly decline. Our success is largely dependent on the success
achieved by our customers in developing and marketing their products. Furthermore, this industry is subject to economic cycles and has in the past experienced downturns. A continued recession or a downturn in the electronics industry would likely
have a material adverse effect on our business, financial condition and results of operations.



Shortage or price fluctuation in component parts specified by our customers could delay product shipment and affect our profitability.



A substantial portion of our revenue is derived from turnkey manufacturing. In turnkey manufacturing, we provide
both the materials and the manufacturing services. If we fail to manage our inventory effectively, we may bear the risk of fluctuations in materials costs, scrap and excess inventory, all of which can have a material adverse effect on our business,
financial condition and results of operations. We are required to forecast our future inventory requirements based upon the anticipated demands of our customers. Inaccuracies in making these forecasts or estimates could result in a shortage or an
excess of materials. In addition, delays, cancellations or reductions of orders by our customers could result in an excess of materials. A shortage of materials could lengthen production schedules and increase costs. An excess of materials may
increase the costs of maintaining inventory and may increase the risk of inventory obsolescence, both of which may increase expenses and decrease profit margins and operating income.



Many of the products we manufacture require one or more components that we order from sole-source suppliers. Supply
shortages for a particular component can delay productions of all products using that component or cause cost increases in the services we provide. In addition, in the past, some of the materials we use, such as memory and logic devices, have been
subject to industry-wide shortages. As a result, suppliers allocate available quantities among their customers, and we have not been able to obtain all of the materials required. Our inability to obtain these materials could slow production or
assembly, delay shipments to our customers, increase costs and reduce operating income. Also, we may bear the risk of periodic component price increases. Accordingly, some component price increases could increase costs and reduce operating income.
Also we rely on a variety of common carriers for materials transportation, and we route materials through various world ports. A work stoppage, strike or shutdown of a major port or airport could result in manufacturing and shipping delays or
expediting charges, which could have a material adverse effect on our business, financial condition and results of operations.



We have experienced significant growth and significant retrenchment in a short period of time.



Since 1995, we have completed seven acquisitions. Acquisitions may involve numerous risks, including difficulty in
integrating operations, technologies, systems, and products and services of acquired companies; diversion of managements attention and disruption of operations; increased expenses and working capital requirements; entering markets in which we
have limited or no prior experience and where competitors in such markets have stronger market positions; and the potential loss of key employees and customers of acquired companies. In addition, acquisitions may involve financial risks, such as the
potential liabilities of the acquired businesses, the dilutive effect of the issuance of additional equity securities, the incurrence of additional debt, the financial impact of transaction expenses and the amortization of goodwill and other
intangible assets involved in any transactions that are accounted for using the purchase method of accounting, and possible adverse tax and accounting effects.



In 2001 we implemented an operational restructuring plan that called for significant retrenchment. We closed our Denver and Haverhill facilities and
resized operations in Mexico and Ireland in an effort to reduce our cost structure. In February, 2002 the main customer of our Cork, Ireland facility was placed into administration as part of a financial restructuring. As a result, on March 19,
2002, we announced that we were closing our Cork, Ireland facility and that we were taking steps to place the subsidiary that operates that facility in voluntary administration. During the third quarter of 2002, the Company took further steps to
realign its cost structure and plant capacity. Furthermore, in 2003, we closed our sites in Austin, Texas, Donegal, Ireland and Charlotte, North



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Carolina and sold our manufacturing operations in Appleton, Wisconsin. Retrenchment has caused strain on our
infrastructure, including our managerial, technical and other resources. In addition, we have reduced the geographic dispersion of our operations, which may make it harder for us to compete and could have a material adverse effect on our business,
financial condition and results of operations.



If we are unable to respond
to rapidly changing technology and process development, we may not be able to compete effectively.



The market for our products and services is characterized by rapidly changing technology and continuing process development. The future success of our
business will depend in large part upon our ability to maintain and enhance our technological capabilities, to develop and market services that meet changing customer needs, and to successfully anticipate or respond to technological changes on a
cost-effective and timely basis. In addition, the EMS industry could in the future encounter competition from new or revised technologies that render existing technology less competitive or obsolete or that reduce the demand for our services. There
can be no assurance that we will effectively respond to the technological requirements of the changing market. To the extent we determine that new technologies and equipment are required to remain competitive, the development, acquisition and
implementation of such technologies and equipment may require us to make significant capital investments. There can be no assurance that capital will be available for these purposes in the future or that investments in new technologies will result
in commercially viable technological processes.



Our business will suffer if
we are unable to attract and retain key personnel and skilled employees.



Our business depends on our ability to continue to recruit, train and retain skilled employees, particularly executive management, engineering and sales personnel. Recruiting personnel in our industry is highly
competitive. Our Board of Directors plans to announce the appointment of a President and Chief Executive Officer shortly. Our ability to successfully implement our business plan depends in part on our ability to attract and retain management and
existing employees. There can be no assurance that we will be able to attract and retain executive officers and key personnel or attract qualified management in the future. In connection with our restructuring, we significantly reduced our
workforce. If we receive a significant volume of new orders, we may have difficulty recruiting skilled workers back into our workforce to respond to such orders and accordingly may experience delays that could adversely effect our ability to meet
customers delivery schedules.



Risks particular to our international
manufacturing operations could adversely affect our overall results.



Our international manufacturing operations are subject to inherent risks, including:



| |  | fluctuations in the value of currencies and high levels of inflation;
| | - | ---------------------------------------------------------------------



| |  | longer payment cycles and greater difficulty in collecting amounts receivable;
| | - | ------------------------------------------------------------------------------



| |  | unexpected changes in and the burdens and costs of compliance with a variety of foreign laws;
| | - | ---------------------------------------------------------------------------------------------



| |  | political and economic instability;
| | - | -----------------------------------



| |  | increases in duties and taxation;
| | - | ---------------------------------



| |  | imposition of restrictions on currency conversion or the transfer of funds;
| | - | ---------------------------------------------------------------------------



| |  | trade restrictions; and
| | - | -----------------------



| |  | dependence on key customers.
| | - | ----------------------------



We are subject to a variety of environmental laws, which expose us to potential financial liability.



Our operations are regulated under a number of federal, state, provincial, local and foreign environmental and safety laws and regulations, which govern,
among other things, the discharge of hazardous materials into the air and water as well as the handling, storage and disposal of such materials. Compliance with these environmental laws is a major consideration for us because we use metals and other
hazardous materials in our manufacturing processes. We may be liable under environmental laws for the cost of cleaning up properties we own or operate if they are or become contaminated by the release of hazardous materials, regardless of whether we
caused such release. In addition we, along with any other person who arranges for the disposal of our wastes, may be liable for costs associated with an investigation and remediation of sites at which we have arranged for



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the disposal of hazardous wastes, if such sites become contaminated, even if we fully comply with applicable
environmental laws. In the event of a contamination or violation of environmental laws, we could be held liable for damages including fines, penalties and the costs of remedial actions and could also be subject to revocation of our discharge
permits. Any such revocations could require us to cease or limit production at one or more of our facilities, thereby having a material adverse effect on our operations. Environmental laws could also become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with any violation, which could have a material adverse effect on our business, financial condition and results of operations.



RISKS RELATED TO OUR CAPITAL STRUCTURE



Our indebtedness could adversely affect our financial health and severely limit our
ability to plan for or respond to changes in our business.



At July 4, 2004, we had $14.5 million of indebtedness outstanding under our credit facilities with Congress Financial Corporation and its affiliates, which we refer to in this report as the Congress Credit Facility. The amount
of indebtedness outstanding under the Congress Credit Facility fluctuates based on our operations. Under the Congress Credit Facility, we have a secured revolving credit and term loan facility of up to $40 million. At July 4, 2004, we also had $27.6
million of second lien, subordinated term indebtedness outstanding under our restructured, pre-existing credit facility, which we refer to in this report as the Pre-existing Facility (and together with the Congress Credit Facility, the
Credit Facilities), with our pre-existing lenders, Lehman Commercial Paper Inc., The Bank of Nova Scotia, General Electric Capital Corporation, IBM Credit Corporation, Silver Point Capital L.P., Royal Bank of Canada, Comerica Bank, AMMC
CDO I Limited and AMMC CDO II Limited, which we refer to in this report as the Pre-existing Lenders. Our debt, whether under our Congress Credit Facility or Pre-existing Facility, could have adverse consequences for our business,
including:



| |  | We will be more vulnerable to adverse general economic conditions;
| | - | ------------------------------------------------------------------



| |  | We will be required to dedicate a substantial portion of our cash flow from operations to repayment of debt, limiting the availability of cash for other purposes;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We may have difficulty obtaining financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We may have limited flexibility in planning for, or reacting to, changes in our business and industry;
| | - | ------------------------------------------------------------------------------------------------------



| |  | We could be limited by restrictive covenants and the borrowing base formula in our credit arrangements in our borrowing of additional funds; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We may fail to comply with covenants under which we borrowed our indebtedness which could result in an event of default. If an event of default occurs and is not cured or waived, it
could result in all amounts outstanding, together with accrued interest, becoming immediately due and payable. If we were unable to repay such amounts, our lenders could proceed against any collateral granted to them to secure that indebtedness.
There can be no assurance that we will maintain compliance with the covenants under our Credit Facilities.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



There can be no assurance that our leverage and such restrictions will not materially adversely affect our ability to finance our future operations or
capital needs or to engage in other business activities. In addition, our ability to pay principal and interest on our indebtedness to meet our financial and restrictive covenants and to satisfy our other debt obligations will depend upon our future
operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond our control, as well as the availability of revolving credit borrowings under the Congress Credit
Facility or successor facilities.



We face significant restrictions on our
ability to operate under the terms of our Credit Facilities.



The terms of our Credit Facilities generally restrict, among other things, our ability to incur additional indebtedness, complete acquisitions, pay dividends or make certain other restricted payments, consummate certain asset sales, make
capital expenditures, enter into certain transactions with affiliates, merge, consolidate or sell, assign, transfer, lease, convey or otherwise dispose of our assets (other than in the ordinary course of business). We are also required to maintain
specified EBITDA (earnings before interest expense, income taxes, depreciation and amortization) levels under the Credit Facilities.



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The Congress Credit Facility also has a borrowing base formula that limits our ability to borrow based on
the characteristics of our accounts receivable and inventory.



If we are not able to comply with these covenants and requirements, customers may lose confidence in us and reduce or eliminate their orders with us which may have a material adverse effect on our business, financial condition and results
of operations.



Substantially all of our assets and those of
our subsidiaries are pledged as security under our Credit Facilities.



Institutional investors have influence over our business, and could delay, deter or prevent a change of control or other business combination.



Certain of our institutional investors have representatives on our Board of Directors, including investment funds affiliated with Bain Capital, LLC and
investment funds affiliated with Celerity Partners. By virtue of their stock ownership and Board representation, certain of our institutional investors could have a significant influence over all matters submitted to our stockholders, including the
election of our directors, and could exercise significant control over our business policies and affairs.



Provisions in our charter documents and state law may make it harder for others to obtain control of us even though some stockholders might consider such a development favorable.



Provisions in our charter, by-laws and certain provisions under Delaware law
may have the effect of delaying or preventing a change of control or changes in our management that stockholders consider favorable or beneficial. If a change of control or change in management is delayed or prevented, the market price of our shares
could suffer.



Our Common Stock May Be Delisted From The Nasdaq National
Market.



On April 22, 2004, we received notification from
Nasdaq Listing Qualifications that our common stock failed to maintain a minimum market value of publicly held shares of $15,000,000 and a minimum bid price of $1.00 per share for continued listing on The Nasdaq National Market. Under NASD
Marketplace Rules, Nasdaq provided us with a grace period of 90 calendar days, or until July 21, 2004, to regain compliance with the minimum market value of publicly held shares requirement and a grace period of 180 calendar days, or until October
19, 2004, to comply with the minimum bid price requirement. On July 27, 2004, we received written confirmation from Nasdaq Listing Qualifications that we had regained compliance with the requirement that we maintain a minimum value of publicly held
shares of $15,000,000. If we fail to comply with the minimum bid price requirement by October 19, 2004 and we are not granted an extension to such grace period, as permitted under Marketplace Rules, our common stock may be delisted from trading on
The Nasdaq National Market. We believe that implementation of a reverse stock split of one for three shares, one for four shares, or one for five shares, which was approved at the Companys 2004 Annual Meeting of Stockholders, if our Board
determines it is necessary, will permit us to regain compliance. There can, however, be no assurance that our common stock will regain compliance with the minimum bid price requirement or that we will continue to satisfy the other listing
requirements of The Nasdaq National Market. Our failure to comply with the Marketplace Rules or promptly to cure noncompliance with such Rules could result in our common stock being delisted, and the liquidity of our stock could be materially
impaired.



The Companys ability to use existing net operating losses
to offset future taxable income may be subject to certain limitations.



Section 382 of the Internal Revenue Code imposes a limitation on a corporations use of net operating loss (NOL) carryforwards following an ownership change. Whether or not the
Recapitalization Transaction results in an ownership change for purposes of Section 382 depends upon whether the exchangeable shares of SMTC Canada are treated as shares of the Company under U.S. tax principles. Because the tax law governing the
exchangeable shares is unclear, it is uncertain whether Section 382 will apply to the Recapitalization Transaction. If deemed applicable, Section 382 would limit the amount of NOLs available to offset taxable income in future years and would
preclude the full utilization of the Companys NOLs. As of December 31, 2003, the Company had total net operating loss carryforwards (both U.S. and Canadian) of approximately $142.4 million.



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RISKS ASSOCIATED WITH THE CHARTER AMENDMENTS APPROVED AT OUR 2004 ANNUAL MEETING OF STOCKHOLDERS



The issuance of additional authorized shares of common stock may dilute the voting power
and equity interest of present stockholders and may prevent a hostile takeover of the Company.



We obtained stockholder approval to amend our charter to increase the number of shares of common stock authorized for issuance under our charter. If all
of the authorized shares were issued, current shares outstanding and all shares issuable in connection with the Recapitalization Transaction would be approximately 73% of the total shares outstanding. It is not possible to predict in advance whether
the issuance of additional shares will have a dilutive effect on earnings per share as it depends on the specific events associated with a particular transaction. Shares of authorized but unissued common stock may be issued from time to time by our
Board of Directors without further stockholder action unless such action is required by Delaware law, under which the Company is incorporated, our charter, or the rules of the Nasdaq National Market System. Additional authorized but unissued shares
of common stock might be used in the context of a defense against or response to possible or threatened hostile takeovers.



We cannot predict the effect that a reverse stock split would have on the market value of our common stock and our ability to comply with Nasdaqs maintenance
standards.



We obtained stockholder approval to effect a
reverse stock split, at the discretion of our Board of Directors on or before December 31, 2004. While our Board of Directors believes that the common stock and exchangeable shares would trade at higher prices after the consummation of the reverse
stock split, there can be no assurance that the increase in the trading price will occur, or, if it does occur, that it will equal or exceed the price that is the product of the market price of our common stock and exchangeable shares prior to the
reverse stock split times the selected reverse stock split ratio. In some cases, the total market capitalization of a company following a reverse stock split is lower, and may be substantially lower, than the total market capitalization before the
reverse stock split. In addition, the fewer number of shares that will be available to trade will possibly cause the trading market of our common stock and exchangeable shares to become less liquid, which could have an adverse effect on the price of
our common stock and exchangeable shares.



There can be no
assurance that the reverse stock split will result in us complying with the $1.00 minimum bid requirement for continued listing. Even if we regain compliance with Nasdaqs $1.00 minimum bid price requirement, we must continue to satisfy other
Nasdaq maintenance standards to remain on The Nasdaq National Market. In addition to a minimum bid price of at least $1.00 per share, we are required to have (a) total assets and total revenue of at least $50 million, (b) at least 1,100,000 shares
publicly held by persons other than officers, directors and beneficial owners of greater than 10% of our total outstanding shares; (c) a market value of publicly held shares of at least $15 million; and (d) at least 400 stockholders who own at least
100 shares. We cannot offer any assurance that the common stock will continue to meet The Nasdaq National Market continued listing requirements following the reverse stock split.



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Item 3: Quantitative and Qualitative Disclosure about Market Risk



Interest Rate Risk



Our
credit facilities bear interest at both floating and fixed rates. The weighted average interest rate on our credit facilities for the quarter ended July 4, 20043 was 7.2%. At July 4, 2004, our revolving credit facility of $13.3 million bore interest
at 4.5% based on the U.S. prime rate and our tranche A term debt bore interest at 6.5% based on the U.S. base rate. If the U.S. base rates increased by 10%, our weighted average interest rate would have risen to 7.5% and our interest expense would
have increased by approximately $0.1 million annually.



Foreign Currency
Exchange Risk



Most of our sales are denominated in U.S.
dollars. Most of our purchases are denominated in U.S. dollars, with the exception of Canadian and Mexican payroll and other various expenses denominated in local currencies. As a result we have relatively little exposure to foreign currency
exchange risk.



Item 4. Controls and Procedures



Evaluation of Disclosure Controls and Procedures. The Companys Chief Executive Officer and Chief Financial Officer have conducted an evaluation of the Companys disclosure controls and procedures as of the end of the
period covered by this quarterly report. Based on their evaluation, the Companys Chief Executive Officer and Principal Financial Officer have concluded that the Companys disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the applicable Securities and
Exchange Commission rules and forms.



Changes in Internal
Control Over Financial Reporting. There have been no changes in internal control over financial reporting that occurred during the second quarter of 2004, that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.



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PART II OTHER INFORMATION



ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES.



In connection with the Recapitalization Transaction, we entered into a debt and warrant exchange agreement with our pre-existing lenders on June 1, 2004. Under the terms
of that agreement, we issued to our pre-existing lenders 11,166,947 shares of our common stock and 11,166,947 warrants (each warrant being exercisable for one-tenth of one share of our common stock) in exchange for $10 million of debt we owed to the
pre-existing lenders. The warrants are certificated in the form included in Exhibit 10.44 to Pre-effective Amendment No. 1 to Form S-1 (file no. 333-115400) filed with the SEC on June 25, 2004. The exercise price at which shares of common stock are
purchasable upon the exercise of warrants is $6.90 per share. The warrants are immediately exercisable and expire on March 4, 2009. The issuance of the shares of common stock and the warrants was exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4(2). The recipients of the warrants included only accredited investors.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.



(a) The Company held its annual meeting on May 20, 2004.



(b) At the
annual meeting, stockholders elected Messrs. Blair Hendrix and John Caldwell as directors. Messrs. Mark Benham, William Brock, Stephen Adamson, Thomas Cowan and Ian Loring continued serving their terms of office as directors after the annual
meeting.



(c) Results of annual meeting votes (after giving effect to the
October 4, 2004 one for five reverse stock split):



|         |  |                                                                                                                                                                                                                                            |  |           |  |         |  |         |  |                
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------- |  | ------- |  | ------- |  | ---------------
|         |  |                                                                                                                                                                                                                                            |  | For       |  | Against |  | Abstain |  | BrokerNon-votes
|Proposal |  |                                                                                                                                                                                                                                            |  |           |  |         |  |        
|(1)      |  | To approve a private placement of 33,350,000 Special Warrants of SMTC Canada to qualified investors.                                                                                                                                       |  | 3,165,610 |  | 24,034  |  | 9,335   |  | 1,164,231      
|(2)      |  | To approve an agreement with SMTCs current lenders to repay a portion of SMTCs existing debt and restructure a portion of SMTCs existing debt.                                                                                          |  | 3,163,982 |  | 19,028  |  | 15,969  |  | 1,164,231      
|(3)      |  | To approve an amendment to SMTCs Certificate of Incorporation to increase the number of authorized shares of common stock from 12,000,000 to 26,000,000.                                                                                  |  | 3,151,273 |  | 38,817  |  | 8,889   |  | 1,164,231      
|(4)      |  | To approve an amendment to SMTCs Certificate of Incorporation to effect a reverse stock split of SMTCs outstanding common stock by a ratio within one for three and one for five,
to be set by the Board of Directors in its discretion. |  | 4,291,811 |  | 55,345  |  | 16,054  |  | 0              
|(5)      |  | To approve an amendment to the SMTC Corporation/SMTC Manufacturing Corporation of Canada 2000 Equity Incentive Plan.                                                                                                                       |  | 3,042,088 |  | 142,547 |  | 14,344  |  | 1,164,231      



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|    |  |                                                                                                  |  |           |  |         
|--- |  | ------------------------------------------------------------------------------------------------ |  | --------- |  | --------
|    |  |                                                                                                  |  | For       |  | Withheld
|(6) |  | To elect as director John Caldwell to hold office until the 2007 annual meeting of stockholders. |  | 4,179,274 |  | 183,937 
|(7) |  | To elect as director Blair Hendrix to hold office until the 2007 annual meeting of stockholders. |  | 4,180,084 |  | 183,127 



ITEM 5. OTHER INFORMATION.



On June
1, 2004, we completed the Recapitalization Transaction, which is described under Managements Discussion and Analysis of Financial Condition and Results of Operations.



Jane Todd joined the Company as Senior Vice President, Finance and Chief Financial Officer on July 5, 2004.



On April 22, 2004, SMTC received notification from Nasdaq Listing
Qualifications that SMTCs common stock failed to maintain a minimum market value of publicly held shares of $15,000,000 and a minimum bid price of $1.00 per share for continued listing on The Nasdaq National Market. Under NASD Marketplace
Rules, Nasdaq provided SMTC with a grace period of 90 calendar days, or until July 21, 2004, to regain compliance with the minimum market value of publicly held shares requirement and a grace period of 180 calendar days, or until October 19, 2004,
to comply with the minimum bid price requirement. On July 27, 2004, SMTC received written confirmation from Nasdaq Listing Qualifications that SMTC had regained compliance with the requirement that it maintain a minimum value of publicly held shares
of $15,000,000. If SMTC fails to comply with the minimum bid price requirement by October 19, 2004 and is not granted an extension to such grace period, as permitted under Marketplace Rules, SMTCs common stock may be delisted from trading on
The Nasdaq National Market. See Factors That May Affect Future Results.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



(a) List of Exhibits:



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Execution Copy of Intercreditor and Subordination Agreement dated as of June 1, 2004 by and among Congress Financial Corporation (Canada), Congress Financial Corporation (Central), The Bank
of Nova Scotia, General Electric Capital Corporation, Lehman Commercial Paper Inc., certain subordinated lenders party thereto, and SMTC Corporation, HTM Holdings, Inc., and certain of their subsidiaries.
|     | 
|10.2 |  | Employment Letter dated June 24, 2004 between Jane Todd and SMTC Corporation.                                                                                                                                                                                                                                                                                                                             
|     | 
|31.1 |  | Certification of John Caldwell pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 24, 2004.                                                                                                                                                                                                                                                                                        
|     | 
|31.2 |  | Certification of Jane Todd pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 24, 2004.                                                                                                                                                                                                                                                                                            
|     | 
|32.1 |  | Certification of John Caldwell, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 24,
2004.                                                                                                                                                                                                      
|     | 
|32.2 |  | Certification of Jane Todd, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 24,
2004.                                                                                                                                                                                                          



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(b) Reports on Form 8-K:



| |  | Current Report on Form 8-K dated May 17, 2004 (filed May 19, 2004) furnishing under Items 7 and 12 a press release announcing the Companys financial results for the
Companys first quarter ended April 4, 2004 and a transcript of a teleconference announcing the Companys financial results for the Companys first quarter ended April 4, 2004;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Current Report on Form 8-K dated May 21, 2004 (filed May 26, 2004) furnishing under Items 5 and 7 a press release announcing receipt of approval from the Companys stockholders
for the Recapitalization Transaction;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Current Report on Form 8-K dated June 1, 2004 (filed June 3, 2004) furnishing under Items 5 and 7 a press release announcing the completion of the Recapitalization Transaction; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Current Report on Form 8-K dated June 29, 2004 (filed June 30, 2004) filing under Item 5 updating Note 20 to the Companys consolidated financial statements for the year ended
December 31, 2003, adding Note 11 to the Companys consolidated financial statements for the fiscal quarter ended April 4, 2004 and updating KPMG LLPs audit report covering the December 31, 2003 financial statements, all to reflect the
approval and closing of the Recapitalization Transaction.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, SMTC Corporation has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.



SMTC CORPORATION



By:

/s/ John CaldwellName:

John CaldwellTitle:

President and CEOBy:

/s/ Jane ToddName:

Jane ToddTitle:

Chief Financial Officer




Date: November 24, 2004



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Document                                                                                                                                                                                                                                                                                                                                                                                                  
|10.1          |  | Execution Copy of Intercreditor and Subordination Agreement dated as of June 1, 2004 by and among Congress Financial Corporation (Canada), Congress Financial Corporation (Central), The Bank
of Nova Scotia, General Electric Capital Corporation, Lehman Commercial Paper Inc., certain subordinated lenders party thereto, and SMTC Corporation, HTM Holdings, Inc., and certain of their subsidiaries.
|              | 
|10.2          |  | Employment Letter dated June 24, 2004 between Jane Todd and SMTC Corporation.                                                                                                                                                                                                                                                                                                                             
|              | 
|31.1          |  | Certification of John Caldwell pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 24, 2004.                                                                                                                                                                                                                                                                                        
|              | 
|31.2          |  | Certification of Jane Todd pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 24, 2004.                                                                                                                                                                                                                                                                                            
|              | 
|32.1          |  | Certification of John Caldwell, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 24,
2004.                                                                                                                                                                                                      
|              | 
|32.2          |  | Certification of Jane Todd, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 24,
2004.                                                                                                                                                                                                          



59