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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q

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

For the quarterly period ended September 28, 2003

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



SMTC CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



|DELAWARE                                                       |  | 98-0197680                         
|-------------------------------------------------------------- |  | -----------------------------------
|(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) |  | (I.R.S. EMPLOYERIDENTIFICATION 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)



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 November 7, 2003, SMTC Corporation had 24,095,968 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 November 7, 2003, SMTC
Corporations subsidiary, SMTC Manufacturing Corporation of Canada, had 4,593,811 exchangeable shares outstanding, each of which is exchangeable into one share of common stock of SMTC Corporation.





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##### Table of Contents

SMTC Corporation

Form 10-Q



Table of Contents



|           |  |                                                                                                                                 |  | Page No.
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | --------
|PART I     |  | Financial Information                                                                                                           |  |         
|           |  |                                                                                                                                
|Item 1.    |  | Financial Statements                                                                                                            |  | 3       
|           |  |                                                                                                                                
|           |  | Consolidated Balance Sheets as of December 31, 2002 and September 28, 2003 (unaudited)                                          |  | 3       
|           |  |                                                                                                                                
|           |  | Consolidated Statements of Operations for the three and nine months ended September 28, 2003 and September 29, 2002 (unaudited) |  | 4       
|           |  |                                                                                                                                
|           |  | Consolidated Statement of Changes in Shareholders Equity (Deficit) for the nine months ended September 28, 2003 (unaudited)    |  | 6       
|           |  |                                                                                                                                
|           |  | Consolidated Statements of Cash Flows for the three and nine months ended September 28, 2003 and September 29, 2002 (unaudited) |  | 7       
|           |  |                                                                                                                                
|           |  | Notes to Consolidated Financial Statements                                                                                      |  | 9       
|           |  |                                                                                                                                
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                           |  | 25      
|           |  |                                                                                                                                
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                                                      |  | 53      
|           |  |                                                                                                                                
|Item 4.    |  | Controls and Procedures                                                                                                         |  | 53      
|           |  |                                                                                                                                
|PART II    |  | Other Information                                                                                                               |  |         
|           |  |                                                                                                                                
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                                                       |  | 54      
|           |  |                                                                                                                                
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                                |  | 54      
|           |  |                                                                                                                                
|Signatures |  |                                                                                                                                 |  | 55      





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SMTC CORPORATION



Consolidated Balance Sheets

(expressed in thousands of U.S. dollars)



PART I FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



---

|                                                                                                    |  | September 28,2003 |          |   | December 31,2002 |  
|--------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | -
|                                                                                                    |  | (unaudited)       |          |   |                  |  
|Assets                                                                                              |  |                   |          |   |                  |  
|Current assets:                                                                                     |  |                   |          |   |                  |  
|Cash                                                                                                |  | $                 | 621      |   |                  | $
|Accounts receivable, net of an allowance for doubtful accounts of $2,094 (December 31, 2002$2,097) |  |                   | 51,000   |   |                  |  
|Inventories (note 3)                                                                                |  |                   | 35,163   |   |                  |  
|Prepaid expenses                                                                                    |  |                   | 1,438    |   |                  |  
|Income taxes recoverable                                                                            |  |                   |         |   |                  |  
|                                                                                                    |  |                   |          |   |                  |  
|                                                                                                    |  |                   | 88,222   |   |                  |  
|Capital assets                                                                                      |  |                   | 32,331   |   |                  |  
|Other assets                                                                                        |  |                   | 6,129    |   |                  |  
|Deferred income taxes (note 6)                                                                      |  |                   |         |   |                  |  
|                                                                                                    |  |                   |          |   |                  |  
|                                                                                                    |  | $                 | 126,682  |   |                  | $
|                                                                                                    |  |                   |          |   |                  |  
|Liabilities and Shareholders Equity (Deficit)                                                      |  |                   |          |   |                  |  
|Current liabilities:                                                                                |  |                   |          |   |                  |  
|Accounts payable                                                                                    |  | $                 | 47,008   |   |                  | $
|Accrued liabilities                                                                                 |  |                   | 23,168   |   |                  |  
|Income taxes payable                                                                                |  |                   | 266      |   |                  |  
|Current portion of long-term debt (note 4)                                                          |  |                   | 11,942   |   |                  |  
|Current portion of capital lease obligations                                                        |  |                   | 266      |   |                  |  
|                                                                                                    |  |                   |          |   |                  |  
|                                                                                                    |  |                   | 82,650   |   |                  |  
|Long-term debt (note 4)                                                                             |  |                   | 62,980   |   |                  |  
|Capital lease obligations                                                                           |  |                   | 15       |   |                  |  
|Shareholders equity (deficit):                                                                     |  |                   |          |   |                  |  
|Capital stock                                                                                       |  |                   | 64,266   |   |                  |  
|Warrants                                                                                            |  |                   | 1,523    |   |                  |  
|Loans receivable                                                                                    |  |                   | (5       | ) |                  |  
|Additional paid-in-capital                                                                          |  |                   | 165,896  |   |                  |  
|Deficit                                                                                             |  |                   | (250,643 | ) |                  |  
|                                                                                                    |  |                   |          |   |                  |  
|                                                                                                    |  |                   | (18,963  | ) |                  |  
|Guarantees (note 11)                                                                                |  |                   |          |   |                  |  
|                                                                                                    |  |                   |          |   |                  |  
|                                                                                                    |  | $                 | 126,682  |   |                  | $
|                                                                                                    |  |                   |          |   |                  |  



See accompanying notes to consolidated
financial statements.





3



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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  |        |                   | Nine months ended   |        
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------ | ----------------- | ------------------- | -------
|                                                                                                                        |  | September 28,2003   |        | September 29,2002 |                     |        
|                                                                                                                        |  | (restated  note 9) |        |                   | (restated  note 9) |        
|Revenue                                                                                                                 |  | $                   | 76,973 |                   | $                   | 143,520
|Cost of sales, including restructuring and other charges (note 8)                                                       |  |                     | 68,828 |                   |                     | 142,532
|                                                                                                                        |  |                     |        |                   |                     |        
|Gross profit                                                                                                            |  |                     | 8,145  |                   |                     | 988    
|Selling, general and administrative expenses                                                                            |  |                     | 4,562  |                   |                     | 6,015  
|Amortization                                                                                                            |  |                     | 997    |                   |                     | 639    
|Restructuring and other charges (recoveries) (note 8)                                                                   |  |                     | 8      |                   |                     | 6,441  
|                                                                                                                        |  |                     |        |                   |                     |        
|Operating income (loss)                                                                                                 |  |                     | 2,578  |                   |                     | (12,107
|Interest                                                                                                                |  |                     | 1,072  |                   |                     | 1,928  
|                                                                                                                        |  |                     |        |                   |                     |        
|Earnings (loss) before income taxes, discontinued operations and the cumulative effect of a change in accounting
policy |  |                     | 1,506  |                   |                     | (14,035
|Income tax expense (recovery) (note 6)                                                                                  |  |                     | 204    |                   |                     | (36    
|                                                                                                                        |  |                     |        |                   |                     |        
|Earnings (loss) from continuing operations                                                                              |  |                     | 1,302  |                   |                     | (13,999
|Earnings (loss) from discontinued operations (note 9)                                                                   |  |                     | 1,329  |                   |                     | 583    
|Cumulative effect of a change in accounting policy (note 10)                                                            |  |                     |       |                   |                     |       
|                                                                                                                        |  |                     |        |                   |                     |        
|Net earnings (loss)                                                                                                     |  | $                   | 2,631  |                   | $                   | (13,416
|                                                                                                                        |  |                     |        |                   |                     |        



See accompanying notes to consolidated
financial statements.



4



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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  |            |                   | Nine months ended   |           
|------------------------------------------------------------------------------------------------- |  | ------------------- | ---------- | ----------------- | ------------------- | ----------
|                                                                                                  |  | September 28,2003   |            | September 29,2002 |                     |           
|                                                                                                  |  | (restated  note 9) |            |                   | (restated  note 9) |           
|Earnings (loss) per share:                                                                        |  |                     |            |                   |                     |           
|Basic earnings (loss) per share from continuing operations                                        |  | $                   | 0.04       |                   | $                   | (0.49     
|Earnings (loss) from discontinued operations per share                                            |  |                     | 0.05       |                   |                     | 0.02      
|Loss from the cumulative effect of a change in accounting policy per share                        |  |                     |           |                   |                     |          
|                                                                                                  |  |                     |            |                   |                     |           
|Basic earnings (loss) per share                                                                   |  | $                   | 0.09       |                   | $                   | (0.47     
|                                                                                                  |  |                     |            |                   |                     |           
|Diluted earnings (loss) per share                                                                 |  | $                   | 0.09       |                   | $                   | (0.47     
|                                                                                                  |  |                     |            |                   |                     |           
|Weighted average number of shares used in the calculations of earnings (loss) per share (note 5): |  |                     |            |                   |                     |           
|Basic                                                                                             |  |                     | 28,689,779 |                   |                     | 28,689,779
|Diluted                                                                                           |  |                     | 28,697,555 |                   |                     | 28,689,779



See accompanying notes to consolidated
financial statements.



5



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SMTC CORPORATION



Consolidated Statement of Changes in Shareholders Equity (Deficit)

(Expressed in thousands of U.S. dollars)



Nine months ended September 28, 2003

(Unaudited)



---



|                                                       |  | Capitalstock |        |   | Warrants |   | Additionalpaid-incapital |  | Loansreceivable |         |  | Deficit |    |   | Shareholdersequity (deficit) |  
|------------------------------------------------------ |  | ------------ | ------ | - | -------- | - | ------------------------ |  | --------------- | ------- |  | ------- | -- | - | ----------------------------- | -
|Balance, December 31, 2002                             |  | $            | 66,802 |   |          | $ | 1,255                    |  | $               | 163,360 |  | $       | (5 | ) |                               | $
|Conversion of shares from exchangeable to common stock |  |              | (2,536 | ) |          |   |                         |  |                 | 2,536   |  |         |   |   |                               |  
|Warrants issued                                        |  |              |       |   |          |   | 110                      |  |                 |        |  |         |   |   |                               |  
|Warrants to be issued                                  |  |              |       |   |          |   | 158                      |  |                 |        |  |         |   |   |                               |  
|Net loss for the period                                |  |              |       |   |          |   |                         |  |                 |        |  |         |   |   |                               |  
|                                                       |  |              |        |   |          |   |                          |  |                 |         |  |         |    |   |                               |  
|Balance, September 28, 2003                            |  | $            | 64,266 |   |          | $ | 1,523                    |  | $               | 165,896 |  | $       | (5 | ) |                               | $
|                                                       |  |              |        |   |          |   |                          |  |                 |         |  |         |    |   |                               |  



See accompanying notes to consolidated
financial statements.







6



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SMTC CORPORATION



Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. dollars)



(Unaudited)



---



|                                                            |  | Three months ended |         |   | Nine months ended |  
|----------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | -
|                                                            |  | September 28,2003  |         |   | September 29,2002 |  
|Cash provided by (used in):                                 |  |                    |         |   |                   |  
|Operations:                                                 |  |                    |         |   |                   |  
|Net earnings (loss)                                         |  | $                  | 2,631   |   |                   |  
|Items not involving cash:                                   |  |                    |         |   |                   |  
|Amortization                                                |  |                    | 997     |   |                   |  
|Depreciation                                                |  |                    | 1,735   |   |                   |  
|Deferred income tax expense (benefit)                       |  |                    |        |   |                   |  
|Gain on disposition of assets                               |  |                    |        |   |                   |  
|Impairment of assets (note 8)                               |  |                    | 37      |   |                   |  
|Loss on disposition of discontinued operation (note 9)      |  |                    | 235     |   |                   |  
|Gain on disposal of assets previously written down (note 8) |  |                    | (69     | ) |                   |  
|Discount on prepayment of shareholder loans (note 8)        |  |                    |        |   |                   |  
|Write-down of goodwill (note 10)                            |  |                    |        |   |                   |  
|Change in non-cash operating working capital:               |  |                    |         |   |                   |  
|Accounts receivable                                         |  |                    | (8,354  | ) |                   |  
|Inventories                                                 |  |                    | (5,468  | ) |                   |  
|Prepaid expenses                                            |  |                    | 166     |   |                   |  
|Income taxes recoverable                                    |  |                    | 517     |   |                   |  
|Accounts payable                                            |  |                    | (414    | ) |                   |  
|Accrued liabilities                                         |  |                    | (2,525  | ) |                   |  
|                                                            |  |                    |         |   |                   |  
|                                                            |  |                    | (10,512 | ) |                   |  
|Financing:                                                  |  |                    |         |   |                   |  
|Increase in long-term debt                                  |  |                    | 15,820  |   |                   |  
|Repayment of long-term debt                                 |  |                    | (8,058  | ) |                   |  
|Principal payments on capital lease obligations             |  |                    | (57     | ) |                   |  
|Repayment of shareholder loans                              |  |                    |        |   |                   |  
|Debt issuance costs                                         |  |                    |        |   |                   |  
|                                                            |  |                    |         |   |                   |  
|                                                            |  |                    | 7,705   |   |                   |  
|Investments:                                                |  |                    |         |   |                   |  
|Purchase of capital assets                                  |  |                    | (49     | ) |                   |  
|Proceeds from sale of capital assets                        |  |                    | 102     |   |                   |  
|Proceeds from sale of discontinued operation (note 9)       |  |                    | 3,058   |   |                   |  
|Other                                                       |  |                    |        |   |                   |  
|                                                            |  |                    |         |   |                   |  
|                                                            |  |                    | 3,111   |   |                   |  
|                                                            |  |                    |         |   |                   |  
|Increase (decrease) in cash                                 |  |                    | 304     |   |                   |  
|Cash, beginning of period                                   |  |                    | 317     |   |                   |  
|                                                            |  |                    |         |   |                   |  
|Cash, end of period                                         |  | $                  | 621     |   |                   | $
|                                                            |  |                    |         |   |                   |  



See accompanying notes to consolidated
financial statements.



7



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SMTC CORPORATION



Consolidated Statements of Cash Flows (continued)

(Expressed in thousands of
U.S. dollars)



(Unaudited)



---



|                               |  | Three months ended |       | Nine months ended
|------------------------------ |  | ------------------ | ----- | -----------------
|                               |  | September 28,2003  |       | September 29,2002
|Supplemental disclosures:      |  |                    |       |                  
|Cash paid during the period:   |  |                    |       |                  
|Income taxes                   |  | $                  |      |                  
|Interest                       |  |                    | 1,278 |                  
|Non-cash financing activities: |  |                    |       |                  
|Issuance of warrants           |  | $                  | 268   |                  



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 nine months ended September 28, 2003 and September 29, 2002

(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 consolidated balance sheet as at September 28, 2003, unaudited
consolidated statements of operations for the three and nine month periods ended September 28, 2003 and September 29, 2002, unaudited consolidated statement of changes in shareholders equity (deficit) for the nine month period ended September
28, 2003, and unaudited consolidated statements of cash flows for the three and nine month periods ended September 28, 2003 and September 29, 2002 have been prepared on substantially the same basis as the annual consolidated financial statements,
except as described below. Management believes the 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 nine month periods ended September 28, 2003 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, 2002.



The unaudited interim consolidated financial statements are based upon accounting principles
consistent with those described in the December 31, 2002 audited consolidated financial statements except as follows:



In August 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 143, Accounting for Asset Retirement Obligations, which requires that the
fair value of an asset retirement obligation be recorded as a liability, at fair value, in the period in which the Company incurs the obligation. The Statement is effective for fiscal 2003 and there was no material effect as a result of the adoption
of this Statement on January 1, 2003.



In July 2002, the FASB issued Statement
No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146), which nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (EITF 94-3). Statement 146 provides for the recognition of a liability for an exit or disposal activity only when a liability is incurred and can be measured at fair value. Under EITF 94-3, a commitment to
an exit or disposal plan was sufficient to record the majority of the costs. Statement 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company adopted this Statement on January 1, 2003 and accordingly, the
restructuring charges recorded in the three and nine months ended September 28, 2003 were made in accordance with the new standard.



9



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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 nine months ended September 28, 2003 and September 29, 2002

(Unaudited)



---



1. Basis of presentation (continued):



In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees and Indebtedness of Others, which requires certain disclosures of obligations under guarantees. The disclosure requirements of FIN 45 were effective for the Companys year ended December 31, 2002.
Effective for 2003, FIN 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees entered into or modified after December 31, 2002, based on the fair value of the guarantee. The Company adopted the
disclosure requirements in its 2002 consolidated financial statements. The Company has not entered into or modified any guarantees after December 31, 2002. See note 11 for disclosure related to guarantees.



In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities,
which requires variable interest entities, previously referred to as special-purpose entities or off-balance sheet structures, to be consolidated by a company if that company is subject to a majority of the risk of loss from the entitys
activities or is entitled to receive a majority of the entitys returns or both. The consolidation provisions of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003 and to existing entities in the first
fiscal year or interim period ending after December 15, 2003. Certain disclosure provisions apply in financial statements issued after January 31, 2003. The consolidation requirements of FIN No. 46 are not expected to have a material effect on the
Companys consolidated financial statements.



In April 2003, the FASB
issued Statement No. 149, Amendments of Statement 133 on Derivative Instruments and Hedging Activities (Statement 149), which amends and clarifies financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities under Statement 133. This statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships
designated after June 30, 2003. There was no material effect as a result of the adoption of this statement on July 1, 2003.



In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (Statement
150), which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Financial instruments that are within the scope of the statement, which previously
were often classified as equity, must now be classified as liabilities. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period
after June 15, 2003. There was no material effect as a result of the adoption of this statement in the third quarter of 2003.



10



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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 nine months ended September 28, 2003 and September 29, 2002

(Unaudited)



---



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 FASB Statement No. 123,
Accounting for Stock-Based Compensation (Statement 123) as amended by Statement 148.



The table below sets out the pro forma amounts of net earnings (loss) and net earnings (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 |       |   | Nine months ended |  
|---------------------------------------------- |  | ------------------ | ----- | - | ----------------- | -
|                                               |  | September 28,2003  |       |   | September 29,2002 |  
|Net earnings (loss), as reported               |  | $                  | 2,631 |   |                   | $
|Stock-based compensation expense               |  |                    | (274  | ) |                   |  
|                                               |  |                    |       |   |                   |  
|Pro forma earnings (loss)                      |  |                    | 2,357 |   |                   |  
|                                               |  |                    |       |   |                   |  
|Basic earnings (loss) per share, as reported   |  | $                  | 0.09  |   |                   | $
|Stock-based compensation expense               |  |                    | (0.01 | ) |                   |  
|                                               |  |                    |       |   |                   |  
|Pro forma basic earnings (loss) per share      |  |                    | 0.08  |   |                   |  
|                                               |  |                    |       |   |                   |  
|Diluted earnings (loss) per share, as reported |  | $                  | 0.09  |   |                   | $
|Stock-based compensation expense               |  |                    | (0.01 | ) |                   |  
|                                               |  |                    |       |   |                   |  
|Pro forma diluted earnings (loss) per share    |  |                    | 0.08  |   |                   |  
|                                               |  |                    |       |   |                   |  



No compensation expense related to
stock options has been recorded in the statement of operations for the three and nine months ended September 28, 2003 and September 29, 2002.



The weighted average estimated fair value at the date of the grant for the options granted during the nine months ended September 28, 2003 was $0.59 per share
(2002$1.00).



11



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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 nine months ended September 28, 2003 and September 29, 2002

(Unaudited)



---



2. Stock-based compensation (continued):



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 using the following assumptions:





|                        |  | Nine months ended
|----------------------- |  | -----------------
|                        |  | September 28,2003
|Risk-free interest rate |  | 4.0%             
|Dividend yield          |  |                 
|Expected life           |  | 4 years          
|Volatility              |  | 120.0%           



During the second quarter of 2003, the
Company granted 40,000 options to purchase common stock at an exercise price of $0.75 per share, the fair market value on the date of grant. No options to purchase common stock were granted during the third quarter of 2003.



3. Inventories:



|                |  | September 29,2003 |        | December 31,2002
|--------------- |  | ----------------- | ------ | ----------------
|Raw materials   |  | $                 | 18,681 |                 
|Work in process |  |                   | 8,133  |                 
|Finished goods  |  |                   | 7,705  |                 
|Other           |  |                   | 644    |                 
|                |  |                   |        |                 
|                |  | $                 | 35,163 |                 
|                |  |                   |        |                 



4. Long-term debt:



During November, 2003, the Company and its lending group executed an amendment to the
credit agreement with an effective date of November 17, 2003 (the Effective Date), providing for a waiver of certain events of default, if any, arising prior to the Effective Date. The Company and its lending group also amended the
credit facility to provide for term loans of $11,942 and revolving credit loans, swing-line loans and letters of credit of $80,000 with an extension of the maturity date to October 1, 2004 and amendments of certain financial and other covenants
based on the Companys current business plan. During the amendment period, the facility bears interest at the U.S. base rate plus 0.25% to 2.5%.



12



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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 nine months ended September 28, 2003 and September 29, 2002

(Unaudited)



---



4. Long-term debt (continued):



The Company was in compliance with the financial covenants at September 28, 2003. Continued compliance with the amended financial covenants
through to October 1, 2004 is dependent on the Company achieving the forecasts inherent in its current business plan. The Company believes the forecasts are based on reasonable assumptions; however, the forecasts are dependent on a number of
factors, some of which are outside the control of the Company. These include, but are not limited to, general economic conditions and specifically the strength of the electronics industry and the related demand for the products and services by the
Companys customers. In the event of non-compliance, the Companys lenders have the right to demand repayment of all outstanding amounts under the amended credit facility. If the Company was unable to repay such amounts, the lenders could
proceed against any collateral granted to them to secure the indebtedness. Substantially all of the Companys assets have been pledged to the lenders as collateral for the Companys obligations under the senior credit facility.



The Companys revolving credit facility matures on October 1, 2004 and accordingly as
at September 28, 2003, this amount has been classified as a long-term liability. The Company has initiatives underway to refinance its bank indebtedness including discussions with current and potential lenders and investors. A transaction resulting
from these discussions is likely to involve significant dilution to existing shareholders. To date no agreements have been reached and there can be no assurances that any agreement will be reached. Should the Company not be able to refinance the
debt prior to October 1, 2004, the Company expects that it will be unable to repay the full amount of the debt upon maturity. In that event, or the event of any earlier default under the credit agreement, the Company would attempt to negotiate with
its current lenders to modify the terms of the credit agreement. There can be no assurances that the Company will be able to negotiate or reach an agreement with its current lenders to modify the terms of the credit agreement.



Warrants:



In connection with the December 31, 2002 amendment to the credit agreement, the Company
agreed to issue to the lenders warrants to purchase common stock of the Company at an exercise price equal to the fair market value (defined as average of the last reported sales price of the common stock of the company for twenty consecutive
trading days commencing 22 trading days before the date in question) at the date of the grant for (a) 4.0% of the total outstanding shares on December 31, 2002, (b) 1.0% of the total outstanding shares on December 31, 2002, (c) 0.75% of the total
outstanding shares on the date that is 45 days after the end of the Companys first fiscal quarter of 2003, (d) 0.75% of the total outstanding shares on the date that is 45 days after the end of the Companys second fiscal quarter of 2003
(the Series D warrants), (e) 0.75% of the total outstanding shares on the date that is 45 days after the end of the Companys third fiscal quarter of 2003 (the Series E warrants, (f) 0.75% of the total outstanding shares
on the date that is 90 days after the end of the Companys fourth fiscal quarter of 2003, (g) 1.0% of the total outstanding shares on the date that is 45 days after the



13



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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 nine months ended September 28, 2003 and September 29, 2002

(Unaudited)



---





4. Long-term debt (continued):



end of the Companys first fiscal quarter of 2004 and (h) 1.0% of
the total outstanding shares on the date that is 45 days after the end of the Companys second fiscal quarter of 2004; provided, however that if the Company meets certain EBITDA targets on the dates identified in (c) through (h) above, it will
not issue warrants corresponding to such date. The Company met its EBITDA target as at March 30, 2003. The Company did not meet its EBITDA target at June 29, 2003 and 228,210 warrants were issued in the third quarter of 2003 with an effective date
of August 13, 2003 at an exercise price of $0.61 per share. Also, the Company did not meet its EBITDA target at September 28, 2003 and will issue 229,934 warrants in the fourth quarter of 2003 with an effective date of November 12, 2003 at an
exercise price of $1.04 per share.



The estimated fair value of the Series D
and Series E warrants were measured using a Black-Scholes model at the respective issuance dates using the following assumptions:



|Risk-free interest rate |  | 4.0%   
|----------------------- |  | -------
|Dividend yield          |  |       
|Expected life           |  | 5 years
|Volatility              |  | 125.0% 



The estimated fair values of the
Series D warrants of $110 and the Series E warrants to be issued of $158 have been classified in shareholders equity.





14



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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 nine months ended September 28, 2003 and September 29, 2002

(Unaudited)



---



5. Earnings (loss) per share:



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



|                                                   |  | Three months ended |            |                   | Nine months ended |           
|-------------------------------------------------- |  | ------------------ | ---------- | ----------------- | ----------------- | ----------
|                                                   |  | September 28,2003  |            | September 29,2002 |                   |           
|Numerator:                                         |  |                    |            |                   |                   |           
|Net earnings (loss) from continuing operations     |  | $                  | 1,302      |                   | $                 | (13,999   
|Net earnings (loss)                                |  |                    | 2,631      |                   |                   | (13,416   
|                                                   |  |                    |            |                   |                   |           
|Denominator:                                       |  |                    |            |                   |                   |           
|Weighted average sharesbasic                      |  |                    | 28,689,779 |                   |                   | 28,689,779
|Effect of dilutive securities:                     |  |                    |            |                   |                   |           
|Employee stock options                             |  |                    |           |                   |                   |          
|Warrants                                           |  |                    | 7,776      |                   |                   |          
|                                                   |  |                    |            |                   |                   |           
|Weighted-average sharesdiluted                    |  |                    | 28,697,555 |                   |                   | 28,689,779
|                                                   |  |                    |            |                   |                   |           
|Earnings (loss) per share:                         |  |                    |            |                   |                   |           
|Basic and diluted, from from continuing operations |  | $                  | 0.04       |                   | $                 | (0.49     
|Basic and diluted                                  |  |                    | 0.09       |                   |                   | (0.47     
|                                                   |  |                    |            |                   |                   |           



Options and warrants to purchase
common stock were outstanding during the nine month period ended September 28, 2003 and the three and nine month periods ended September 29, 2002 but were not included in the computation of diluted loss per share because their effect would be
anti-dilutive on the earnings (loss) per share for the period.



15



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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 nine months ended September 28, 2003 and September 29, 2002

(Unaudited)



---



6. Income taxes:



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. FAS 109 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, 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 $35,000 at December 31, 2002 to approximately $71,000 at June 29, 2003, resulting in income tax expense during the quarter ended June 29, 2003, of approximately $34,200. In addition, the valuation
allowance at September 28, 2003 remained at approximately $71,000. 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.





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 nine months ended September 28, 2003 and September 29, 2002

(Unaudited)



---



7. Segmented information:



The Company derives its revenue from one dominant industry segment, the electronics manufacturing services industry. The Company is operated
and managed geographically and has four 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 changes in accounting policies. Discontinued operations relate to the Cork, Ireland facility, which was previously included in the results of the European segment and the sale of the
Appleton manufacturing operations, previously included in the results of the United States segment (note 9). 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 September 28, 2003 |         |                     | Nine months ended September 28, 2003 |        
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | ------------------- | ------------------------------------ | -------
|                                                                                                                          |  | Totalrevenue                          |         | Intersegmentrevenue |                                      |        
|United States                                                                                                             |  | $                                     | 22,680  |                     | $                                    | (7,775 
|Canada                                                                                                                    |  |                                       | 65,553  |                     |                                      | (3,508 
|Europe                                                                                                                    |  |                                       |        |                     |                                      |       
|Mexico                                                                                                                    |  |                                       | 51,767  |                     |                                      | (51,744
|                                                                                                                          |  |                                       |         |                     |                                      |        
|                                                                                                                          |  | $                                     | 140,000 |                     | $                                    | (63,027
|                                                                                                                          |  |                                       |         |                     |                                      |        
|                                                                                                                         
|EBITA (before discontinued operations, restructuring charges and the cumulative effect of a change in accounting policy):
|                                                                                                                          |  |                                       |         |                     |                                      |        
|United States                                                                                                             |  |                                       |         |                     |                                      |        
|Canada                                                                                                                    |  |                                       |         |                     |                                      |        
|Europe                                                                                                                    |  |                                       |         |                     |                                      |        
|Mexico                                                                                                                    |  |                                       |         |                     |                                      |        
|                                                                                                                          |  |                                       |         |                     |                                      |        
|                                                                                                                          |  |                                       |         |                     |                                      |        
|Interest                                                                                                                  |  |                                       |         |                     |                                      |        
|Amortization                                                                                                              |  |                                       |         |                     |                                      |        
|Restructuring charges (recoveries) (note 8)                                                                               |  |                                       |         |                     |                                      |        
|                                                                                                                          |  |                                       |         |                     |                                      |        
|Earnings before income taxes, discontinued operations and the cumulative effect of a change in accounting policy          |  |                                       |         |                     |                                      |        
|                                                                                                                          |  |                                       |         |                     |                                      |        
|Capital expenditures:                                                                                                     |  |                                       |         |                     |                                      |        
|United States                                                                                                             |  |                                       |         |                     |                                      |        
|Canada                                                                                                                    |  |                                       |         |                     |                                      |        
|Mexico                                                                                                                    |  |                                       |         |                     |                                      |        
|                                                                                                                          |  |                                       |         |                     |                                      |        
|                                                                                                                          |  |                                       |         |                     |                                      |        
|                                                                                                                          |  |                                       |         |                     |                                      |        



17



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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 nine months ended September 28, 2003 and September 29, 2002

(Unaudited)



---



7. Segmented information (continued):



(restated  note 9)



|                                                                                                                          |  | Three months ended September 29, 2002 |         |                     | Nine months ended September 29, 2002 |        
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | ------------------- | ------------------------------------ | -------
|                                                                                                                          |  | Totalrevenue                          |         | Intersegmentrevenue |                                      |        
|                                                                                                                          |  |                                       |         |                     |                                      |        
|United States                                                                                                             |  | $                                     | 117,405 |                     | $                                    | (2,044 
|Canada                                                                                                                    |  |                                       | 30,184  |                     |                                      | (3,289 
|Europe                                                                                                                    |  |                                       | 1,090   |                     |                                      |       
|Mexico                                                                                                                    |  |                                       | 53,582  |                     |                                      | (53,408
|                                                                                                                          |  |                                       |         |                     |                                      |        
|                                                                                                                          |  | $                                     | 202,261 |                     | $                                    | (58,741
|                                                                                                                          |  |                                       |         |                     |                                      |        
|                                                                                                                         
|EBITA (before discontinued operations, restructuring charges and the cumulative effect of a change in accounting
policy):
|                                                                                                                          |  |                                       |         |                     |                                      |        
|United States                                                                                                             |  |                                       |         |                     |                                      |        
|Canada                                                                                                                    |  |                                       |         |                     |                                      |        
|Europe                                                                                                                    |  |                                       |         |                     |                                      |        
|Mexico                                                                                                                    |  |                                       |         |                     |                                      |        
|                                                                                                                          |  |                                       |         |                     |                                      |        
|                                                                                                                          |  |                                       |         |                     |                                      |        
|Interest                                                                                                                  |  |                                       |         |                     |                                      |        
|Amortization                                                                                                              |  |                                       |         |                     |                                      |        
|Restructuring charges                                                                                                     |  |                                       |         |                     |                                      |        
|                                                                                                                          |  |                                       |         |                     |                                      |        
|Loss before income taxes, discontinued operations and the cumulative effect of a change in accounting policy              |  |                                       |         |                     |                                      |        
|                                                                                                                          |  |                                       |         |                     |                                      |        
|Capital expenditures:                                                                                                     |  |                                       |         |                     |                                      |        
|United States                                                                                                             |  |                                       |         |                     |                                      |        
|Canada                                                                                                                    |  |                                       |         |                     |                                      |        
|Europe                                                                                                                    |  |                                       |         |                     |                                      |        
|Mexico                                                                                                                    |  |                                       |         |                     |                                      |        
|                                                                                                                          |  |                                       |         |                     |                                      |        
|                                                                                                                          |  |                                       |         |                     |                                      |        
|                                                                                                                          |  |                                       |         |                     |                                      |        



18



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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 nine months ended September 28, 2003 and September 29, 2002

(Unaudited)



---





7. 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  |        | Nine months ended  
|------------------- |  | ------------------- | ------ | -------------------
|                    |  | September 28,2003   |        | September 29,2002  
|                    |  | (restated  note 9) |        | (restated  note 9)
|Geographic revenue: |  |                     |        |                    
|United States       |  | $                   | 64,910 |                    
|Canada              |  |                     | 11,967 |                    
|Europe              |  |                     |       |                    
|Asia                |  |                     |       |                    
|Mexico              |  |                     | 96     |                    
|                    |  |                     |        |                    
|                    |  | $                   | 76,973 |                    
|                    |  |                     |        |                    
|                    |  |                     |        |                    
|                    |  |                     |        |                    
|Long-lived assets:  |  |                     |        |                    
|United States       |  |                     |        |                    
|Canada              |  |                     |        |                    
|Mexico              |  |                     |        |                    
|                    |  |                     |        |                    
|                    |  |                     |        |                    
|                    |  |                     |        |                    



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.



19



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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 nine months ended September 28, 2003 and September 29, 2002

(Unaudited)



---



8. Restructuring and other charges:



The following table relates to the components of the restructuring and other charges for the three and nine months ended September 28, 2003
and September 29, 2002:



|                                                                        |  | Three months ended |        |   | Nine months ended |  
|----------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|                                                                        |  | September 28,2003  |        |   | September 29,2002 |  
|Inventory write-downs included in cost of sales                         |  | $                  |       |   |                   | $
|Lease and other contract obligations                                    |  |                    | 2,382  |   |                   |  
|Adjustments of previously recorded lease and other contract obligations |  |                    | (3,462 | ) |                   |  
|Severance                                                               |  |                    | 1,121  |   |                   |  
|Other facility exit costs                                               |  |                    | 52     |   |                   |  
|Adjustments to other facility exit costs                                |  |                    | (617   | ) |                   |  
|Asset impairment                                                        |  |                    | 37     |   |                   |  
|Proceeds on assets previously written down                              |  |                    | (69    | ) |                   |  
|                                                                        |  |                    |        |   |                   |  
|                                                                        |  |                    | (556   | ) |                   |  
|                                                                        |  |                    |        |   |                   |  
|                                                                        |  |                    | (556   | ) |                   |  
|Other charges included in restructuring and other charges               |  |                    | 564    |   |                   |  
|Other charges included in cost of sales                                 |  |                    |       |   |                   |  
|                                                                        |  |                    |        |   |                   |  
|                                                                        |  | $                  | 8      |   |                   | $
|                                                                        |  |                    |        |   |                   |  



2001
Restructuring Plan:



During fiscal year 2001, in response to excess capacity
caused by slowing technology end markets, the Company commenced a restructuring program aimed at reducing its cost structure. During the third quarter of 2003, the Company recorded lease and other contract obligations of $2,178 related to additional
costs associated with the facility lease in Monterrey, Mexico. Also, during the third quarter of 2003 the Company recorded an adjustment to its initial 2001 restructuring plan of $219 due to the Company settling certain obligations for less than the
original estimated amounts.



The following table details the related amounts
included in accrued liabilities as at September 28, 2003 relating to the 2001 plan:



|                                     |  | Accrual atJune 29,2003 |       | 2003charges |   | 2003adjustments |  |   | Cashpayments |   |  | Accrual atSeptember 28,2003
|------------------------------------ |  | ---------------------- | ----- | ----------- | - | --------------- |  | - | ------------ | - |  | ---------------------------
|Lease and other contract obligations |  | $                      | 1,071 |             | $ | 2,178           |  | $ |             |   |  | $                          
|Other facility exit costs            |  |                        | 283   |             |   |                |  |   | (219         | ) |  |                            
|                                     |  |                        |       |             |   |                 |  |   |              |   |  |                            
|                                     |  | $                      | 1,354 |             | $ | 2,178           |  | $ | (219         | ) |  | $                          
|                                     |  |                        |       |             |   |                 |  |   |              |   |  |                            





20



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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 nine months ended September 28, 2003 and September 29, 2002

(Unaudited)



---



8. Restructuring and other charges (continued):



2002 Restructuring Plan:



In response to the continuing industry economic downturn, the Company took further steps to realign its cost structure and plant capacity
and in the third and fourth quarters of 2002 recorded restructuring charges of $37,444 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.



The Company recorded further charges related to the 2002 plan during the three and nine months ended September 28, 2003 of $1,414 and $2,092, respectively. Lease and
other contract obligations of $204 recorded in the third quarter of 2003 relate largely to additional costs associated with idling equipment leases at the Donegal facility. Severance costs of $1,121 recorded during the third quarter of 2003 include
$891 related to the closure of the Charlotte facility and resizing of other facilities. The severance costs related to 96 plant and operational employees, primarily at the Charlotte facility. Other facility exit costs of $52 recorded in the third
quarter of 2003 relate largely to costs associated with closing the Charlotte facility. The Company recorded adjustments to its initial 2002 restructuring plan for the three and nine months ended September 28, 2003 of $3,929 and $5,117,
respectively. Adjustments to previously recorded lease and other contract obligations of $3,462 and other facility exit costs of $398 recorded during the third quarter of 2003 relate to the Company revising its original estimates associated with the
costs of closing the Austin and Charlotte facilities, based on the settlement of certain liabilities for less than previously estimated and the effects of ongoing negotiations. The Company also recorded an asset impairment charge of $37 related to
the write-down of assets at the Charlotte facility and a gain of $69 related to the disposal of assets previously written down at the Donegal facility.



The following table details the related amounts included in accrued liabilities as at September 28, 2003 related to the 2002 plan:



|                                     |  | Accrual atJune 29,2003 |        | 2003charges |   | 2003adjustments |  |   | Cashpayments |   |  | Accrual atSeptember28, 2003
|------------------------------------ |  | ---------------------- | ------ | ----------- | - | --------------- |  | - | ------------ | - |  | ---------------------------
|Lease and other contract obligations |  | $                      | 12,960 |             | $ | 204             |  | $ | (3,462       | ) |  | $                          
|Severance                            |  |                        | 96     |             |   | 1,121           |  |   |             |   |  |                            
|Other facility exit costs            |  |                        | 1,021  |             |   | 52              |  |   | (398         | ) |  |                            
|                                     |  |                        |        |             |   |                 |  |   |              |   |  |                            
|                                     |  | $                      | 14,077 |             | $ | 1,377           |  | $ | (3,860       | ) |  | $                          
|                                     |  |                        |        |             |   |                 |  |   |              |   |  |                            



Other charges recorded during the
third quarter of 2003 of $564 relate to professional fees associated with the Companys refinancing negotiations with current and potential lenders and investors.



21



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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 nine months ended September 28, 2003 and September 29, 2002

(Unaudited)



---



9. 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. The Appleton facility has
historically been included in the results of the United States segment (note 7). The Company recorded a loss on disposal of discontinued operation of $235 which has been included in the loss from discontinued operations. Details of the net assets
disposed of are as follows:



|Proceeds on disposal of discontinued operation |  | $ | 3,058  |  
|---------------------------------------------- |  | - | ------ | -
|Accounts receivable                            |  |   | 1,902  |  
|Inventory                                      |  |   | 1,042  |  
|Prepaid expenses                               |  |   | 56     |  
|Capital assets                                 |  |   | 1,722  |  
|Accounts payable                               |  |   | (1,400 | )
|Accrued liabilities                            |  |   | (476   | )
|                                               |  |   |        |  
|Net assets disposed of                         |  |   | 2,846  |  
|Costs of disposal                              |  |   | 447    |  
|                                               |  |   |        |  
|Loss on disposal of discontinued operation     |  | $ | 235    |  
|                                               |  |   |        |  



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



|                                             |  | Three months ended |       | Nine months ended
|-------------------------------------------- |  | ------------------ | ----- | -----------------
|                                             |  | September 28,2003  |       |                  
|Revenue                                      |  | $                  | 2,485 |                  
|                                             |  |                    |       |                  
|Earnings (loss) from discontinued operations |  | $                  | (235  | )                
|                                             |  |                    |       |                  



Included in the earnings (loss) from
discontinued operations for the nine months ended September 28, 2003 is the loss on disposition of discontinued operation of $235, 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 of $525.



The
Company recorded an accrual for closing costs related to the disposition of the Appleton manufacturing operations of $447. The remaining accrual at September 28, 2003 relating to the disposition is $264.



22



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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 nine months ended September 28, 2003 and September 29, 2002

(Unaudited)



---



9. Discontinued Operations (continued):



|(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. During the first quarter of 2002, the Company recorded a charge of $9,717 related to the closure of the facility. During the third quarter of
2003 the Company received a distribution from the proceeds of the liquidation of $2,304 and recorded additional charges of $740 related to the wind-down of the facility and related operations.



The following information included in discontinued operations relates to the closure of the
Cork facility:



|                                             |  | Three months ended |       | Nine months ended |  
|-------------------------------------------- |  | ------------------ | ----- | ----------------- | -
|                                             |  | September 28,2003  |       | September 29,2002 |  
|Revenue                                      |  | $                  |      |                   | $
|                                             |  |                    |       |                   |  
|Earnings (loss) from discontinued operations |  | $                  | 1,564 |                   | $
|                                             |  |                    |       |                   |  



In 2002, the loss from discontinued
operations includes the costs of closing the facility of $9,717. Included in this amount are the write-off of the net assets of $6,717 (comprised of capital assets of $1,129 and net working capital of $5,588) and other costs associated with exiting
the facility of $3,000. Included in the other costs is severance of $1,350 related to the termination of all employees. In 2003, the earnings from discontinued operations include the distribution from the proceeds of the liquidation of $2,304, less
additional charges of $740 related to the wind-down of the facility and related operations.



The following table details the amounts included in accrued liabilities as at September 28, 2003 related to the closure of the Cork facility:



|          |  | Accrual atJune 29,2003 |     | 2003charge |   | Cashpayments |  |   | Accrual atSeptember 28,2003
|--------- |  | ---------------------- | --- | ---------- | - | ------------ |  | - | ---------------------------
|Severance |  | $                      | 188 |            | $ |             |  | $ | (188                       
|Other     |  |                        |    |            |   | 740          |  |   | (8                         
|          |  |                        |     |            |   |              |  |   |                            
|          |  | $                      | 188 |            | $ | 740          |  | $ | (196                       
|          |  |                        |     |            |   |              |  |   |                            







23



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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 nine months ended September 28, 2003 and September 29, 2002

(Unaudited)



---



10. Goodwill and Intangible Assets:



In July 2001, the FASB issued Statement No. 141, Business Combinations (Statement 141), and Statement No. 142, Goodwill and
Other Intangible Assets (Statement 142). Statement 141 requires that the purchase method of accounting be used for all business combinations. Statement 141 also specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment
in accordance with Statement 144. Upon adoption of Statements 141 and 142 in their entirety on January 1, 2002, the Company determined that there were no intangible assets relating to previous acquisitions that need to be reclassified and accounted
for apart from goodwill under the provisions of those Statements.



In
connection with the transitional goodwill impairment evaluation, Statement 142 required the Company to perform an assessment of whether there was an indication that goodwill was impaired as of January 1, 2002. To accomplish this, the Company was
required to identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill to those reporting units as of January 1, 2002. The Company identified its
reporting units to be consistent with its business units, as defined in note 7, with the exception of the Boston, Massachusetts facility. This facility is not economically similar to the other U.S. facilities and as a result, is a separate reporting
unit. In connection with the implementation of the new accounting standards, the Company completed the transitional goodwill impairment test, resulting in a goodwill impairment charge of $55,560, which comprises the goodwill in the Canadian, U.S.
and Boston reporting units of $15,482, $26,698 and $13,380, respectively. The fair value of each reporting unit was determined using a discounted cash flow method. The transitional impairment loss was recognized as the cumulative effect of a change
in accounting principle in the Companys statements of operations as at January 1, 2002.



11. Guarantees:



Contingent liabilities
in the form of letters of credit and letters of guarantee are provided to certain third parties, which cover payments for certain purchases. The total amount of future payments to be made under these guarantees is $858.



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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 |      |                    | Nine months ended |      
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---- | ------------------ | ----------------- | -----
|                                                                                                                        |  | September 28, 2003 |      | September 29, 2002 |                   |      
|                                                                                                                        |  |                    |      | (Restated)         |                   |      
|Revenue                                                                                                                 |  | $                  | 77.0 |                    | $                 | 143.5
|Cost of sales, including restructuring and other charges (a)                                                            |  |                    | 68.8 |                    |                   | 142.6
|                                                                                                                        |  |                    |      |                    |                   |      
|Gross profit                                                                                                            |  |                    | 8.2  |                    |                   | 0.9  
|Selling, general and administrative expenses                                                                            |  |                    | 4.6  |                    |                   | 6.0  
|Amortization                                                                                                            |  |                    | 1.0  |                    |                   | 0.6  
|Restructuring and other charges (recoveries) (a)                                                                        |  |                    |     |                    |                   | 6.4  
|                                                                                                                        |  |                    |      |                    |                   |      
|Operating income (loss)                                                                                                 |  |                    | 2.6  |                    |                   | (12.1
|Interest                                                                                                                |  |                    | 1.1  |                    |                   | 1.9  
|                                                                                                                        |  |                    |      |                    |                   |      
|Earnings (loss) before income taxes, discontinued operations and the cumulative effect of a change in accounting
policy |  |                    | 1.5  |                    |                   | (14.0
|Income tax expense (recovery) (b)                                                                                       |  |                    | 0.2  |                    |                   | 0.0  
|                                                                                                                        |  |                    |      |                    |                   |      
|Earnings (loss) from continuing operations                                                                              |  |                    | 1.3  |                    |                   | (14.0
|Earnings (loss) from discontinued operations (c)                                                                        |  |                    | 1.3  |                    |                   | 0.6  
|Cumulative effect of a change in accounting policy (d)                                                                  |  |                    |     |                    |                   |     
|                                                                                                                        |  |                    |      |                    |                   |      
|Net earnings (loss)                                                                                                     |  | $                  | 2.6  |                    | $                 | (13.4
|                                                                                                                        |  |                    |      |                    |                   |      
|Net earnings (loss) per share: Basic earnings (loss) per share from continuing operations                               |  | $                  | 0.04 |                    | $                 | (0.49
|Earnings (loss) from discontinued operations per share                                                                  |  |                    | 0.05 |                    |                   | 0.02 
|Loss from the cumulative effect of a change in accounting policy per share                                              |  |                    |     |                    |                   |     
|                                                                                                                        |  |                    |      |                    |                   |      
|Basic earnings (loss) per share                                                                                         |  | $                  | 0.09 |                    | $                 | (0.47
|Diluted earnings (loss) per share                                                                                       |  | $                  | 0.09 |                    | $                 | (0.47
|                                                                                                                        |  |                    |      |                    |                   |      
|Weighted average number of shares used in the calculation of earnings (loss) per share:                                 |  |                    |      |                    |                   |      
|Basic                                                                                                                   |  |                    | 28.7 |                    |                   | 28.7 
|Diluted                                                                                                                 |  |                    | 28.7 |                    |                   | 28.7 
|                                                                                                                        |  |                    |      |                    |                   |      





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##### Table of Contents

Consolidated Statement of Operations Data (continued):

(in millions, except per share amounts)



|(a) | During fiscal years 2001 and 2002, in response to excess capacity caused by slowing technology end markets, the Company commenced restructuring programs aimed at reducing its cost
structure. During the three and nine months ended September 28, 2003, the Company recorded additional restructuring charges resulting from the 2001 and 2002 restructuring programs of $3.6 million and $4.3 million, respectively, related to lease and
other contract obligations, severance, asset impairment charges and other facility exit costs and other charges of $0.6 million and $0.9 million, respectively, related to professional fees of $0.6 million associated with the Companys
refinancing negotiations with current and potential lenders and investors and a discount of $0.3 million on the settlement of shareholder loans. Also, during the three and nine months ended September 28, 2003, the Company recorded adjustments to its
initial 2001 and 2002 restructuring plans of $4.2 million and $5.3 million, respectively, due to the Company settling certain obligations for less than the original estimated amounts and due to the Company receiving proceeds on assets previously
written off. Refer to note 8 to our consolidated financial statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | 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 of for its deferred tax assets. Refer to note 6 to our consolidated financial statements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | During the third quarter of 2003 the Company sold the manufacturing operations of the Appleton facility for proceeds of $3.1 million. The Company recorded a restructuring charge of
$3.2 million reflecting the write-down of the Appleton assets to the estimated realizable value during the second quarter of 2003 and a loss on disposition of $0.2 million in the third quarter of 2003. Refer to note 9 to our consolidated financial
statements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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 third quarter of 2003, the Company received a distribution from the
proceeds of the liquidation of $2.3 million and recorded additional changes of $0.7 million related to the wind-down of the facility and related operations. Refer to note 9 to our consolidated financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) | During 2002, the Company completed its transitional goodwill impairment test resulting in a goodwill impairment charge of $55.6 million. Prior to January 1, 2002, goodwill was
amortized on a straight-line basis over 10 years. Effective January 1, 2002, the Company discontinued amortization of all existing goodwill as a result of a new accounting standard issued in 2001. Refer to note 10 to our consolidated financial
statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Consolidated Balance Sheet Data:

(in millions)



|                                         |  | September 28, 2003 |       |   | December 31, 2002 |  
|---------------------------------------- |  | ------------------ | ----- | - | ----------------- | -
|                                         |  | (Unaudited)        |       |   |                   |  
|Cash                                     |  | $                  | 0.6   |   |                   | $
|Working capital (deficiency)             |  |                    | 5.6   |   |                   |  
|Total assets                             |  |                    | 126.7 |   |                   |  
|Total debt, including current maturities |  |                    | 74.9  |   |                   |  
|Shareholders equity (deficit)           |  |                    | (19.0 | ) |                   |  



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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 networking, industrial and communications market segments. We currently service our customers through four 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.



During fiscal year 2001, in response to excess capacity caused by slowing technology end markets, we commenced a restructuring program aimed at reducing
our cost structure. Actions taken by management to improve capacity utilization included closing our Denver, Colorado assembly facility and our Haverhill, Massachusetts interconnect facility, re-sizing our Mexico and Ireland facilities and
addressing our excess equipment capacity. Accordingly, we recorded restructuring charges of $67.2 million pre-tax (consisting of a write-down of goodwill and other intangible assets and the costs associated with exiting or re-sizing facilities) and
other charges of $27.2 million pre-tax (consisting of accounts receivable, inventory and asset impairment charges).



In response to the continuing industry economic downturn in 2002, the Company took further steps to realign its cost structure and plant capacity. 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 operated that facility in voluntary administration. During the first quarter of 2002, we recorded a charge of $9.7 million related to the closure of the Cork facility, which is included in the loss for discontinued
operations. Prior to taking steps to place the subsidiary that operated the Cork facility in voluntary liquidation, we and our lending group executed an amendment to our credit facility to waive the default that would have been caused by this action
and amend the agreement to permit such facility closure. During the third quarter of 2003, the Company received a distribution from the proceeds of the liquidation of $2.3 million and recorded additional charges of $0.7 million related to the
wind-down of the facility and related operations.



In early
2003, we concluded that operations at our Austin, Texas location were not cost competitive and we ceased manufacturing at our Austin site during the first quarter of 2003. We also made the decision to close our interconnect facility in Donegal,
Ireland, primarily due to customer losses and reduced volume with existing customers. We ceased manufacturing at our Donegal site during the second quarter of 2003. The Company also initiated the closure of its Charlotte, North Carolina facility
during the second quarter of 2003, which corresponded to the expiration of the facility lease and ceased manufacturing at the site at the end of the second quarter of 2003.



During the third and fourth quarters of 2002, the Company recorded restructuring charges of $37.4 million related the cost
of exiting the Donegal and Austin facilities and right-sizing the San Jose, California, Charlotte, North Carolina, Chihuahua, Mexico and Markham, Ontario facilities, including the cost of exiting equipment leases and facility leases, severance
costs, asset impairment charges and inventory exposures. Other charges of $2.1 million were incurred during the third and fourth quarter of 2002 related to inventory charges resulting from the disengagement of a major customer, coupled with the
effects of the continued downturn in the technology sector.



The Company recorded additional restructuring and other charges related to the 2001 and 2002 restructuring programs of $4.3 million during the first nine months of 2003, related to lease and other contract obligations, severance and other
facility exit costs as it completes the final stages of the restructuring initiatives and recorded adjustments to its initial 2001 and 2002 restructuring plans of $5.3 million as it settles certain obligations for less than the original estimated
amounts. The Company recorded other charges of $0.9 million related to the settlement of shareholder loans of $0.3 million and professional fees of $0.6 million associated with the current and potential lenders and investors. Also during the third
quarter of 2003, the Company sold the manufacturing operations of the Appleton facility for proceeds of $3.1 million,



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##### Table of Contents

Management has been reviewing the valuation of its assets, and in particular, 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. FAS 109 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 asset relate. As a result of the quarterly review undertaken at
the end of the second quarter, 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. 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 is jurisdictions to which the assets relate.



As a result of restructuring actions and market conditions we incurred a significant operating loss during 2001, which resulted in our non-compliance with certain financial covenants contained in our credit agreement as at September 30,
2001. The Company and its lenders entered into a term sheet under which the Company operated until February 2002, when we and our lending group executed an amendment to our credit facility to waive the September 30, 2001 defaults and to revise the
covenant tests to be consistent with both then-current revenues and the forecast for 2002.



The Company and its lending group agreed in April 2002 to further amend the credit agreement to increase the Companys permitted loan balances to correspond to its higher working capital needs.



The Company and its lending group further amended the credit agreement
effective as of December 31, 2002, which was prior to the date on which the Company was to revert back to the covenants under the original credit agreement, to revise certain covenants and waive certain defaults under the credit agreement. The
revised terms of the credit agreement establish amended financial and other covenants covering the period up to June 30, 2004, based on the Companys December 2002 business plan.



During November, 2003, the Company and its lending group executed a further amendment to the credit agreement with an
effective date of November 17, 2003 (the Effective Date) providing for a waiver of certain events of default, if any, arising prior to the Effective Date. The Company and its lending group also amended the credit facility to provide for
term loans of $11.9 million and revolving credit loans, swing-line loans and letters of credit of $80.0 million with an extension of the maturity date to October 1, 2004 and amendments of certain financial and other covenants based on the
Companys current business plan. The Company was in compliance with the financial covenants at September 28, 2003. Continued compliance with the amended financial covenants through to October 1, 2004 is dependent on the Company achieving the
forecasts inherent in its current business plan. The Company believes the forecasts are based on reasonable assumptions; however, the forecasts are dependent on a number of factors, some of which are outside the control of the Company. These
include, but are not limited to, general economic conditions and specifically the strength of the electronics industry and the related demand for the products and services by the Companys customers. In the event of non-compliance, the
Companys lenders have the right to demand repayment of all outstanding amounts under the amended credit facility. If we were unable to repay such amounts, the lenders could proceed against any collateral granted to them to secure the
indebtedness. Substantially all of the Companys assets have been pledged to the lenders as collateral for the Companys obligations under the senior credit facility.



The Companys revolving credit facility matures on October 1, 2004 and accordingly as at September 28, 2003, this
amount has been classified as a long-term liability. The Company has initiatives underway to refinance its bank indebtedness including discussions with current and potential lenders and investors. A transaction resulting from these discussions is
likely to involve significant dilution to existing shareholders. To date no agreements have been reached and there can be no assurances that any agreement will be reached. Should the Company not be able to refinance the debt prior to October 1,
2004, the Company expects that it will be unable to repay the full amount of the debt upon maturity. In that event, or in the event of any earlier default under the credit agreement, the Company would attempt to negotiate with its current lenders to
modify the terms of the credit agreement. There can be no assurances that the Company will be able to negotiate or reach an agreement with its current lenders to modify the terms of the credit agreement. (See Liquidity and Capital
Resources)



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##### Table of Contents

Corporate History



SMTC Corporation is the result of the July 1999 combination of the former SMTC Corporation, or Surface Mount, and HTM Holdings, Inc., or 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. 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.



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.



Results of Operations



We currently provide turnkey manufacturing services to the majority of our customers. Turnkey manufacturing services typically result in higher revenue
and higher gross profits but lower gross profit margins when compared to consignment services.



Our contractual arrangements with our key customers generally provide a framework for our overall relationship with our customer. Revenue is recognized upon shipment to the customer as performance has occurred, all
customer specified acceptance criteria have been tested and met, and the earnings process is considered complete. 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. In order to minimize inventory risk, we generally 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.





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##### Table of Contents

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



(Unaudited)



|                                                                                                                        |  | Three months ended |   |  | Nine months ended  |   
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------ | - |  | ------------------ | --
|                                                                                                                        |  | September 28, 2003 |   |  | September 29, 2002 |   
|                                                                                                                        |  |                    |   |  | (Restated)         |   
|Revenue                                                                                                                 |  | 100.0              | % |  | 100.0              | % 
|Cost of sales, including restructuring and other charges                                                                |  | 89.4               |   |  | 99.3               |   
|                                                                                                                        |  |                    |   |  |                    |   
|Gross profit                                                                                                            |  | 10.6               |   |  | 0.7                |   
|Selling, general and administrative expenses                                                                            |  | 6.0                |   |  | 4.2                |   
|Amortization                                                                                                            |  | 1.2                |   |  | 0.5                |   
|Restructuring and other charges                                                                                         |  |                   |   |  | 4.4                |   
|                                                                                                                        |  |                    |   |  |                    |   
|Operating income (loss)                                                                                                 |  | 3.4                |   |  | (8.4               | ) 
|Interest                                                                                                                |  | 1.4                |   |  | 1.3                |   
|                                                                                                                        |  |                    |   |  |                    |   
|Earnings (loss) before income taxes, discontinued operations and the cumulative effect of a change in accounting
policy |  | 2.0                |   |  | (9.7               | ) 
|Income tax expense (recovery)                                                                                           |  | 0.3                |   |  | 0.0                |   
|                                                                                                                        |  |                    |   |  |                    |   
|Earnings (loss) from continuing operations                                                                              |  | 1.7                |   |  | (9.7               | ) 
|Earnings (loss) from discontinued operations                                                                            |  | 1.7                |   |  | 0.4                |   
|Cumulative effect of a change in accounting policy                                                                      |  |                   |   |  |                   |   
|                                                                                                                        |  |                    |   |  |                    |   
|Net earnings (loss)                                                                                                     |  | 3.4                | % |  | (9.3               | )%
|                                                                                                                        |  |                    |   |  |                    |   



Quarter ended September 28, 2003
compared to the quarter ended September 29, 2002



Revenue



Revenue decreased $66.5 million, or 46.3%, from $143.5
million in the third quarter of 2002 to $77.0 million in the third quarter of 2003 due to the Companys decision to terminate its supply agreement with Dell during 2002 and to a reduction in revenue earned from IBM, Alcatel and other customers
due to the continued economic slowdown in the technology sector. During the second quarter of 2002, the Company informed Dell of its intention to terminate its supply agreement and to end production over the third quarter of 2002. The Companys
decision was taken after a review of the Companys return on capital requirements indicated that the customers programs were not generating sufficient returns and, at the same time, were utilizing a disproportionate amount of working
capital.



During the third quarter of 2003, we recorded
approximately $2.0 million of sales of raw materials inventory to customers, which carried no margin, compared to $8.3 million of such sales for the same period in 2002.



Revenue from the IBM program of $20.7 million, Ingenico of $15.3 million and Square D (a division of Schneider Electric) of
$8.1 million for the third quarter of 2003 was 26.9%, 19.8% and 10.6%, respectively, of total revenue for the period. Revenue from Dell of $32.6 million, IBM of $28.8 million and Alcatel of $17.2 million for the third quarter of 2002 was 22.7%,
20.0% and 12.0%, respectively, of total revenue for the period. No other customers represented more than 10% of revenue in either period.



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##### Table of Contents

In the third quarter of 2003, 58.7% of our revenue was generated from operations in Mexico, 22.0% from
the United States and 19.3% from Canada. In the third quarter of 2002, 47.6% of our revenue was generated from operations in the United States, 36.0% from Mexico, 15.7% from Canada, and 0.7% from Europe. We expect to continue to increase the portion
of revenue attributable to our Chihuahua and Markham facilities, with the transfer of certain production from other facilities. We terminated manufacturing in Europe during the second quarter of 2003.



Gross Profit



Gross profit increased $7.3 million from $0.9 million, or 0.7% of revenue, for the third quarter of 2002 to $8.2 million, or
10.6% of revenue, for the third quarter of 2003. Gross profit for the third quarter of 2002 includes the effect of restructuring charges of $6.3 million related to an additional write-down of inventory in connection with the closure of the Denver
facility and other inventory related charges of $0.9 million resulting from the costs associated with the disengagement of Dell. Excluding restructuring and other charges, gross profit increased $0.1 million from $8.1 million, or 5.6 % of revenue,
for the third quarter of 2002 to $8.2 million, or 10.6% of revenue, for the third quarter of 2003. The improvement of gross profit margin, excluding restructuring and other charges, is due to a change in customer mix as the Company continues to
diversify its customer base coupled with improved manufacturing and supply chain effeciencies resulting from the operational restructuring and rationalization programs inititated in 2001 and 2002.



The Company writes down estimated obsolete or excess inventory for the
difference between the cost of inventory and estimated market 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 $1.4 million from $6.0 million, or 4.2% of revenue, for the third quarter of 2002 to $4.6 million, or 6.0% of revenue, for the third quarter of 2003. The reduction in selling, general
and administrative expenses is due to the closure of our Donegal, Austin and Charlotte facilities and to our continued focus on reducing selling, general and administrative expenses at each operating site. The increase in selling, general and
administrative expenses as a percentage of revenue is a result of the lower sales base.



Amortization



Amortization of intangible
assets of $1.0 million for the third quarter of 2003 represents the amortization of deferred finance costs related to the establishment of our senior credit facility in July 2000 and subsequent amendments. The costs associated with our amended and
restated senior credit facility are being amortized over the remaining term of the debt.



Amortization of intangible assets of $0.6 million for the third quarter of 2002 included the amortization of $0.5 million of deferred finance costs related to the establishment of our senior credit facility in July
2000 and subsequent amendments, and $0.1 million of deferred equipment lease costs.



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Restructuring and Other Charges



The following table relates to the components of the restructuring and other charges for the three months ended September
28, 2003 and September 29, 2002:



|                                                                        |  | Three months ended |     
|----------------------------------------------------------------------- |  | ------------------ | ----
|(in millions)                                                           |  | September 28,2003  |     
|Inventory write-downs included in cost of sales                         |  | $                  |    
|Lease and other contract obligations                                    |  |                    | 2.4 
|Adjustments of previously recorded lease and other contract obligations |  |                    | (3.5
|Severance                                                               |  |                    | 1.1 
|Other facility exit costs                                               |  |                    | 0.1 
|Adjustments to other facility exit costs                                |  |                    | (0.6
|Asset impairment                                                        |  |                    | 0.0 
|Proceeds on assets previously written down                              |  |                    | (0.1
|                                                                        |  |                    |     
|                                                                        |  |                    | (0.6
|                                                                        |  |                    |     
|                                                                        |  |                    | (0.6
|Other charges included in restructuring and other charges               |  |                    | 0.6 
|Other charges included in cost of sales                                 |  |                    |    
|                                                                        |  |                    |     
|                                                                        |  | $                  | 0.0 
|                                                                        |  |                    |     



2001 Restructuring Plan:



During fiscal year
2001, in response to excess capacity caused by slowing technology end markets, the Company commenced a restructuring program aimed at reducing its cost structure.



During the third quarter of 2003, the Company recorded additional lease and other contract obligations of $2.2 million
related to the costs associated the facility lease in Monterrey, Mexico. Also, during the third quarter of 2003, the Company recorded an adjustment to its initial 2001 restructuring plan of $0.2 million due to the Company settling certain
obligations for less than the original estimated amounts.



2002 Restructuring Plan:



In response to the continuing industry economic downturn, the Company took further steps to realign its cost structure and plant capacity and in the third and fourth quarter of 2002 recorded restructuring charges of $37.4 million 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 $2.1 million primarily related to the costs associated with the disengagement of a
customer and the continued downturn.



During the third quarter
of 2003, the Company recorded additional restructuring charges of $1.4 million related to the 2002 restructuring plan. Lease and other contract obligations of $0.2 million relate to additional costs associated with idling equipment leases at the
Donegal facility. Severance costs of $1.1 million recorded during the third quarter of 2003 include $0.9 million related to the closure of the Charlotte facility and the resizing of other facilities. The severance costs relate to 96 plant and
operational employees, primarily at the



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Charlotte facility. Other facility costs of $0.1 million relate largely to costs associated with closing the Charlotte
facility



Also during the third quarter of 2003, the Company
recorded adjustments to its initial 2002 restructuring plan of $4.0 million. Adjustments to previously recorded lease and other contract obligations of $3.5 million and other facility exit costs of $0.4 million recorded during the third quarter of
2003 relate to the Company revising its original estimates associated with the costs of closing the Austin and Charlotte facilities, based on the settlement of certain liabilities for less than previously estimated and the effects of ongoing
negotiations. The Company also recorded a gain of $0.1 million related to the disposal of assets previously written down at the Donegal facility.



The Company expects the majority of the remaining restructuring accruals as at September 28, 2003 of $3.1 million relating to the 2001 restructuring
program and $8.5 million relating to the 2002 restructuring program to be paid by the end of fiscal year 2004, with the exception of the accrual related to the Monterray, Mexico facility, which extends to 2007.



Other charges recorded during the third quarter of 2003 of $0.6 million
relate to professional fees associated with the Companys refinancing negotiations with current and potential lenders and investors.



Interest Expense



Interest expense decreased $0.8 million from $1.9 million for the third quarter of 2002 to $1.1 million, for the third quarter of 2003 due to lower
average debt outstanding during the third quarter of 2003 and coupled with lower interest rates. The weighted average interest rates with respect to the debt for the third quarter of 2003 and 2002 were 6.6% and 7.4%, respectively.



Income Tax Expense



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. FAS 109 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, 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 $35.0 million at December 31, 2002 to approximately $71.0 million at June 29, 2003, resulting in income tax expense during the quarter ended June 29, 2003, of
approximately $34.2 million. In addition, the valuation allowance as at September 28, 2003 remained at approximately $71.0 million. 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.



For the third quarter of 2002, an income tax expense of $nil was recorded on a pre-tax loss before discontinued operations and the cumulative effect of a
change in accounting policy of $14.0 million, as losses in certain jurisdictions were not tax effected due to the uncertainty of our ability to utilize such losses and the effects of the valuation reserve for the loss carryforwards.



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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. The Appleton
facility has historically been included in the results of the United States segment. The Company recorded a restructuring charge of $3.2 million in the second quarter of 2003 reflecting the write-down of the assets to the estimated realizable value
and a loss on disposal of discontinued operation of $0.2 million in the third quarter of 2003, which has been included in the loss from discontinued operations. Details of the net assets disposed of are as follows:



|(in millions)                              |  |   |     
|------------------------------------------ |  | - | ----
|Proceeds on disposal                       |  | $ | 3.1 
|                                           |  |   |     
|Accounts receivable                        |  |   | 1.9 
|Inventory                                  |  |   | 1.1 
|Prepaid expenses                           |  |   | 0.1 
|Capital assets                             |  |   | 1.7 
|Accounts payable                           |  |   | (1.4
|Accrued liabilities                        |  |   | (0.5
|                                           |  |   |     
|Net assets disposed of                     |  |   | 2.9 
|Costs of disposal                          |  |   | 0.4 
|                                           |  |   |     
|Loss on disposal of discontinued operation |  | $ | 0.2 
|                                           |  |   |     



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



|                                             |  | Three months ended
|-------------------------------------------- |  | ------------------
|(in millions)                                |  | September 28,2003 
|Revenue                                      |  | $                 
|                                             |  |                   
|Earnings (loss) from discontinued operations |  | $                 
|                                             |  |                   



Included in the
earnings (loss) from discontinued operations for the three months ended September 28, 2003 is the loss on disposition of discontinued operation of $0.2 million.



The Company recorded an accrual for closing costs related to the disposition of the Appleton manufacturing operations of $0.4 million. The remaining
accrual at September 28, 2003 relating to the disposition is $0.3 million.



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Cork:



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 operated that facility in voluntary administration. During the first quarter of
2002, we recorded a charge of $9.7 million related to the closure of the facility. During the third quarter of 2003 the Company received a distribution from the proceeds of the liquidation of $2.3 million and recorded additional charges of $0.7
million related to the wind-down of the facility and related operations.



The following information relates to the Cork discontinued operations:



|                                      |  | Three months ended
|------------------------------------- |  | ------------------
|(in millions)                         |  | September 28,2003 
|Revenue                               |  | $                 
|                                      |  |                   
|Earnings from discontinued operations |  | $                 
|                                      |  |                   



In 2003, the earnings
from discontinued operations include the distribution from the proceeds of the liquidation of $2.3 million less additional charges of $0.7 million related to the wind-down of the facility and related operations.



Nine months ended September 28, 2003 compared to the nine months ended September 29, 2002



Revenue



Revenue decreased $186.9 million, or 44.9%, from $416.1 million for the
first nine months of 2002 to $229.2 million for the same period in 2003 due to the Companys decision to terminate its supply agreement with Dell during 2002 and to a reduction in revenue earned from IBM, Alcatel and other customers due to the
continued economic slowdown in the technology sector. During the second quarter of 2002, the Company informed Dell of its intention to terminate its supply agreement and to end production over the third quarter of 2002. The Companys decision
was taken after a review of the Companys return on capital requirements indicated that the customers programs were not generating sufficient returns and, at the same time, were utilizing a disproportionate amount of working capital.



During the first nine months of 2003, we recorded
approximately $6.3 million of sales of raw materials inventory to customers, which carried no margin, compared to $25.9 million of such sales for the same period in 2002.



Revenue from the IBM program of $60.7 million, Ingenico of $34.0 million and Alcatel of $23.4 million for first nine months
of 2003 was 26.5%, 14.8% and 10.2%, respectively, of total revenue for the period. Revenue from IBM of $90.7 million, Dell of $85.0 million and Alcatel of $53.1 million for the first nine months of 2002 was 21.8%, 20.4% and 12.8%, respectively, of
total revenue for the period. No other customers represented more than 10% of revenue in either period.



In the first nine months of 2003, 44.7% of our revenue was generated from operations in Mexico, 32.2% from the United States, 22.1% from Canada and 1.0%
from Europe. In the first nine months of 2002, 50.1% of our revenue was generated from operations in the United States, 33.6% from Mexico, 15.4% from Canada, and 0.9% from Europe. We expect to continue to increase the portion of revenue attributable
to our Chihuahua and Markham facilities, with the transfer of certain production from other facilities. We terminated manufacturing in Europe during the second quarter of 2003.



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Gross Profit



Gross profit increased $8.9 million from $11.9 million, or 2.9% of revenue, for the first nine months of 2002 to $20.8 million, or 9.1% of revenue, for
the same period in 2003. Gross profit for the first nine months of 2002 includes the effect of restructuring charges of $6.3 million related to an additional write-down of inventory in connection with the closure of the Denver facility and other
inventory related charges of $0.9 million resulting from the costs associated with the disengagement of Dell. Excluding restructuring and other charges, gross profit increased $1.7 million from $19.1 million, or 4.6 % of revenue, for the first nine
months of 2002 to $20.8 million, or 9.1% of revenue, for the third quarter of 2003. The improvement of gross profit margin, excluding restructuring and other charges, is due to a change in customer mix as the Company continues to diversify its
customer base coupled with improved manufacturing and supply chain efficiencies resulting from the operational restructuring and rationalization programs initiated in 2001 and 2002.



The Company writes down estimated obsolete or excess inventory for the difference between the cost of inventory and
estimated market 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 $4.0 million from $18.0 million, or 4.3% of revenue, for the first nine months of 2002 to $14.0 million, or 6.1% of revenue, for the same period in 2003. The reduction in selling, general and administrative expenses
is a result of closing our Austin, Charlotte and Donegal facilities and our continued focus on reducing selling, general and administrative expenses at each operating site. The increase in selling, general and administrative expenses as a percentage
of revenue is a result of the lower sales base.



Amortization



Amortization of intangible assets of $2.9 million for the
first nine months of 2003 represents the amortization of deferred finance costs related to the establishment of our senior credit facility in July 2000 and subsequent amendments. The costs associated with our amended and restated senior credit
facility are being amortized over the remaining term of the debt.



Amortization of intangible assets of $1.7 million for the first nine months of 2002 included the amortization of $1.5 million of deferred finance costs related to the establishment of our senior credit facility in July 2000 and subsequent
amendments, and $0.2 million of deferred equipment lease costs.





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Restructuring and Other Charges



The following table relates to the components of the restructuring and other charges for the nine months ended September 28,
2003 and September 29, 2002:



|                                                                        |  | Nine months ended |     
|----------------------------------------------------------------------- |  | ----------------- | ----
|(in millions)                                                           |  | September 28,2003 |     
|Inventory write-downs included in cost of sales                         |  | $                 |    
|Lease and other contract obligations                                    |  |                   | 2.5 
|Adjustments of previously recorded lease and other contract obligations |  |                   | (4.1
|Severance                                                               |  |                   | 1.7 
|Other facility exit costs                                               |  |                   | 0.1 
|Adjustments to other facility exit costs                                |  |                   | (0.9
|Asset impairment                                                        |  |                   | 0.0 
|Proceeds on assets previously written down                              |  |                   | (0.3
|                                                                        |  |                   |     
|                                                                        |  |                   | (1.0
|                                                                        |  |                   |     
|                                                                        |  |                   | (1.0
|Other charges included in restructuring and other charges               |  |                   | 0.9 
|Other charges included in cost of sales                                 |  |                   |    
|                                                                        |  |                   |     
|                                                                        |  | $                 | (0.1
|                                                                        |  |                   |     



2001 Restructuring Plan:



During fiscal year
2001, in response to excess capacity caused by slowing technology end markets, the Company commenced a restructuring program aimed at reducing its cost structure.



During the first nine months of 2003, the Company recorded additional lease and other contract obligations of $2.2 million
related to the costs associated with the facility lease in Monterrey, Mexico. Also, during the first nine months of 2003, the Company recorded an adjustment to its initial 2001 restructuring plan of $0.2 million due to the Company settling certain
obligations for less than the original estimated amounts.



2002 Restructuring Plan:



In response to the continuing industry economic downturn, the Company took further steps to realign its cost structure and plant capacity and in the third and fourth quarter of 2002 recorded restructuring charges of $37.4 million 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 $2.1 million primarily related to the costs associated with the disengagement of a
customer and the continued downturn.



During the first nine
months of 2003, the Company recorded additional restructuring charges of $2.1 million and other charges of $0.9 million related to the 2002 restructuring plan. Lease and other contract obligations of $0.3 million relate to additional costs
associated with idling equipment leases at the Donegal facility. Severance costs of $1.7 million recorded during the nine months include $1.4 million related to the closure of the Austin and Charlotte facilities and the resizing of other facilities.
The severance costs relate to 206 plant and operational employees, primarily at the Austin, Charlotte and Mexico facilities. Other facility costs of $0.1 million relate largely to costs associated with closing the Charlotte facility.



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Also during the first nine months of 2003, the Company recorded adjustments to its initial 2002
restructuring plan of $5.1 million. Adjustments to previously recorded lease and other contract obligations of $4.1 million and other facility exit costs of $0.7 million recorded during the first nine months of 2003 relate to the Company revising
its original estimates associated with the costs of closing the Austin and Charlotte facilities, based on the settlement of certain liabilities for less than previously estimated and the effects of ongoing negotiations. The Company also recorded a
gain of $0.3 million related to the disposal of assets previously written down at the Donegal and Austin facilities.



The Company expects the majority of the remaining restructuring accruals as at September 28, 2003 of $3.1 million relating to the 2001 restructuring
program and $8.5 million relating to the 2002 restructuring program to be paid by the end of fiscal year 2004, with the exception of the accrual related to the Monterray, Mexico facility, which extends to 2007.



Other charges recorded during the first nine months of 2003 of $1.0 million
include $0.6 million related to professional fees associated with the Companys refinancing negotiations with current and potential lenders and investors. 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.



Interest Expense



Interest expense decreased $2.7 million from $6.6 million for the first
nine months of 2002 to $3.9 million for the same period in 2003 due to lower average debt outstanding during the first nine months of 2003, coupled with lower interest rates. The weighted average interest rates with respect to the debt for the first
nine months of 2003 and 2002 were 6.6% and 7.2%, respectively.



Income Tax
Expense



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. FAS 109 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, 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 $35.0 million at December 31, 2002 to approximately $71.0 million at June 29, 2003,
resulting in income tax expense during the quarter ended June 29, 2003, of approximately $34.2 million. In addition, the valuation allowance at September 28, 2003 remained at approximately $71.0 million. 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.



For the nine months ended September 29, 2002, an income tax recovery of $1.3
million was recorded on a pre-tax loss before discontinued operations of $5.3 million resulting in an effective tax recovery rate of 18.9%, as losses in certain jurisdictions were not tax effected due to the uncertainty of our ability to utilize
such losses.



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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. The Appleton
facility has historically been included in the results of the United States segment. The Company recorded a restructuring charge of $3.2 million in the second quarter of 2003 reflecting the write-down of the assets to the estimated realizable value
and a loss on disposal of discontinued operation of $0.2 million in the third quarter of 2003, which has been included in the loss from discontinued operations. Details of the net assets disposed of are as follows:



|(in millions)                              |  |   |     
|------------------------------------------ |  | - | ----
|Proceeds on disposal                       |  | $ | 3.1 
|                                           |  |   |     
|Accounts receivable                        |  |   | 1.9 
|Inventory                                  |  |   | 1.1 
|Prepaid expenses                           |  |   | 0.1 
|Capital assets                             |  |   | 1.7 
|Accounts payable                           |  |   | (1.4
|Accrued liabilities                        |  |   | (0.5
|                                           |  |   |     
|Net assets disposed of                     |  |   | 2.9 
|Costs of disposal                          |  |   | 0.4 
|                                           |  |   |     
|Loss on disposal of discontinued operation |  | $ | 0.2 
|                                           |  |   |     



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



|                                             |  | Nine months ended
|-------------------------------------------- |  | -----------------
|(in millions)                                |  | September 28,2003
|Revenue                                      |  | $                
|                                             |  |                  
|Earnings (loss) from discontinued operations |  | $                
|                                             |  |                  



Included in the
earnings (loss) from discontinued operations for the nine months ended September 28, 2003 is the loss on disposition of discontinued operation of $0.2 million, a restructuring charge of $3.2 million reflecting the write-down of the Appleton assets
to the estimated realizable value and the loss from operations of $0.5 million.



The Company recorded an accrual for closing costs related to the disposition of the Appleton manufacturing operations of $0.4 million. The remaining accrual at September 28, 2003 relating to the disposition is $0.3
million.



Cork:



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 operated that facility in voluntary
administration. During the first quarter of 2002, we recorded a charge of $9.7 million related to the closure of the facility. During the third quarter of 2003 the Company received a distribution from the proceeds of the



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liquidation of $2.3 million and recorded additional charges of $0.7 million related to the wind-down of the facility and
related operations. The following information relates to the discontinued operations:



|                                             |  | Nine months ended |    
|-------------------------------------------- |  | ----------------- | ---
|(in millions)                                |  | September 28,2003 |    
|Revenue                                      |  | $                 |   
|                                             |  |                   |    
|Earnings (loss) from discontinued operations |  | $                 | 1.6
|                                             |  |                   |    



For the nine months
ended September 28, 2003, the earnings from discontinued operations include the distribution from the proceeds of the liquidation of $2.3 million less additional charges of $0.7 million related to the wind-down of the facility and related
operations.



For the nine months ended September 29, 2002, the
loss from discontinued operations includes the cost of closing the Cork facility of $9.7 million. Within this amount are the write-off of the net assets of $6.7 million (comprised of capital assets of $1.1 million and net working capital of $5.6
million) and other costs associated with exiting the facility of $3.0 million. Included in the other costs is severance of $1.3 million related to the termination of all employees at that site.



Costs of $2.7 million were paid out during 2002 and costs of $0.2 million
were paid out during the nine months ended September 28, 2003, leaving an accrual of $0.7 million at the end of the third quarter of 2003.



Liquidity and Capital Resources



Our principal sources of liquidity are cash provided from operations and borrowings under our senior credit facility. 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, to finance capital expenditures and working capital requirements and to fund operating losses in certain periods. 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.



During November, 2003, the Company and its lending group executed an amendment to the credit agreement with an effective date of November 17, 2003 (the
Effective Date), providing for a waiver of certain events of default, if any, arising prior to the Effective Date. The Company and its lending group also amended the credit facility to provide for term loans of $11.9 million and
revolving credit loans, swing-line loans and letters of credit of $80.0 million with an extension of the maturity date to October 1, 2004 and amendments of certain financial and other covenants based on the Companys current business plan. The
Company was in compliance with the financial covenants at September 28, 2003. Continued compliance with the amended financial covenants through to October 1, 2004 is dependent on the Company achieving the forecasts inherent in its current business
plan. The Company believes the forecasts are based on reasonable assumptions and are achievable; however, the forecasts are dependent on a number of factors, some of which are outside the control of the Company. These include, but are not limited
to, general economic conditions and specifically the strength of the electronics industry and the related demand for the products and services by the Companys customers. In the event of non-compliance, the Companys lenders will have the
right to demand repayment of all outstanding amounts under the amended credit facility. If we were unable to repay such amounts, the lenders could proceed against any collateral granted to them to secure the indebtedness. Substantially all of the
Companys assets have been pledged to the lenders as collateral for the Companys obligations under the senior credit facility.



The Companys revolving credit facility matures on October 1, 2004 and accordingly as at September 28, 2003, this amount has been classified as a
long-term liability. The Company has initiatives underway to refinance its bank indebtedness including discussions with current and potential lenders and investors. A transaction resulting from these discussions is likely to involve significant
dilution to existing shareholders. To date no agreements have been reached and there can be no assurances that any agreement will be reached. Should the Company not be able to refinance the debt prior to October 1, 2004, the Company expects that it
will



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be unable to repay the full amount of the debt upon maturity. In that event, or in the event of any earlier default under
the credit agreements, the Company would attempt to negotiate with its current lenders to modify the terms of the credit agreement. There can be no assurances that the Company will be able to negotiate or reach an agreement with its current lenders
to modify the terms of the credit agreement.



During the second
quarter of 2002, the Company informed Dell of its intention to terminate its supply agreement with Dell and to end production over the third quarter of 2002. The Companys decision was taken after a review of the Companys return on
capital requirements indicated that the customers programs were not generating sufficient returns and, at the same time, were utilizing a disproportionate amount of working capital.



Nine months ended September 28, 2003 Liquidity:



Net cash provided by operating activities for the first nine months of 2003 was $1.0 million. Cash was generated largely
from the operating loss of $37.2 million, after adjusting for non cash items of $47.3 million, the collection of accounts receivable and a reduction in inventory, partially offset by a decline in accounts payable and accrued liabilities.



Net cash used in financing activities for the first nine months of 2003
was $4.0 million due to the net repayment of long-term debt of $7.7 million and the repayment of capital leases of $0.1 million, partially offset by the repayment of shareholder loans of $3.8 million.



Net cash provided by investing activities for the first nine months of 2003
was $3.3 million, largely the result of proceeds from the disposition of the Appleton facility and manufacturing operations of $3.1 million and from the sale of capital assets of $0.3 million, offset by the purchase of capital assets of $0.1
million.



Nine months ended September 29, 2002
Liquidity:



Net cash provided by operating activities
for the first nine months of 2002 was $25.4 million. Cash was generated largely by collections of accounts receivable and a reduction in inventory.



Net cash used in financing activities for the nine months ended September 29, 2002 was $34.8 million due to the repayment of long-term debt of $32.7
million, the repayment of capital leases of $0.1 million and the costs associated with the amendment to our credit agreement of $2.0 million.



Net cash used in investing activities for the nine months ended September 29, 2002 was $2.1 million due to the purchase of capital assets of $2.5 million,
offset by proceeds from the sale of capital assets of $0.2 million and other assets of $0.2 million.



Capital Resources



As a
result of restructuring actions and market conditions, we incurred a significant operating loss during 2001, which resulted in our non-compliance with certain financial covenants contained in our credit agreement as at September 30, 2001. The
Company and its lenders entered into a term sheet under which the Company operated until February 2002 when we and our lending group executed an amendment to our credit facility to waive the September 30, 2001 defaults and to revise the covenant
tests to be consistent with both then-current revenues and the forecast for 2002.



In connection with the February 2002 amendment, the Company agreed to issue to the lenders warrants to purchase common stock of the Company for 1.5% of the total outstanding shares on February 11, 2002 and 0.5% of the
total outstanding shares on December 31, 2002. All of these warrants were cancelled in exchange for warrants issued in connection with the December 31, 2002 amendment, as described below.



The Company paid amendment fees of $1.5 million comprised of $0.7 million, representing 0.5% of the lenders
commitments under the revolving credit facilities and term loans outstanding at February 11, 2002, and other amendment related fees of $0.8 million.



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In March 2002, we and our lenders executed an amendment to our credit facility to waive the default that
would have been caused by placing the subsidiary that operated the Cork, Ireland facility in voluntary liquidation. We paid $0.1 million in amendment fees in connection with such amendment.



The Company and its lending group agreed in April 2002 to further amend the
credit agreement to increase the Companys permitted loan balances to correspond to its higher working capital needs. In connection with such amendment, we paid approximately $0.1 million in amendment fees.



The Company and its lending group further amended the credit agreement
effective December 31, 2002, which was prior to the date on which the Company was to revert back to the covenants under the original credit agreement, to revise certain covenants and waive certain defaults under the credit agreement. The revised
terms of the credit agreement established amended financial and other covenants covering the period up to June 30, 2004, based on the Companys December 2002 business plan. The amended facility provided for $27.5 million in term loans and $90.0
million in revolving credit loans, swing-line loans and letters of credit.



During November, 2003 the Company and its lending group executed a further amendment to the credit agreement with an effective date of November 17, 2003 (the Effective Date), providing for a waiver of
certain events of default, if any, arising prior to the Effective Date. The Company and its lending group also amended the credit facility to provide for term loans of $11.9 million and revolving credit loans, swing-line loans and letters of credit
of $80.0 million with an extension of the maturity date to October 1, 2004 and amendments of certain financial and other covenants based on the Companys current business plan. The Company was in compliance with the financial covenants at
September 28, 2003. Continued compliance with the amended financial covenants through to October 1, 2004 is dependent on the Company achieving the forecasts inherent in its current business plan. The Company believes the forecasts are based on
reasonable assumptions; however, the forecasts are dependent on a number of factors, some of which are outside the control of the Company. These include, but are not limited to, general economic conditions and specifically the strength of the
electronics industry and the related demand for the products and services by the Companys customers. In the event of non-compliance, the Companys lenders have the right to demand repayment of all outstanding amounts under the amended
credit facility. If we were unable to repay such amounts, the lenders could proceed against any collateral granted to them to secure the indebtedness. Substantially all of the Companys assets have been pledged to the lenders as collateral for
the Companys obligations under the senior credit facility.



The Companys revolving credit facility matures on October 1, 2004 and accordingly as at September 28, 2003, this amount has been classified as a long-term liability. The Company has initiatives underway to refinance its bank
indebtedness including discussions with current and potential lenders and investors. A transaction resulting from these discussions is likely to involve significant dilution to existing shareholders. To date no agreements have been reached and there
can be no assurances that any agreement will be reached. Should the Company not be able to refinance the debt prior to October 1, 2004, the Company expects that it will be unable to repay the full amount of the debt upon maturity. In that event, or
in the event of any earlier default under the credit agreement, the Company would attempt to negotiate with its current lenders to modify the terms of the credit agreement. There can be no assurances that the Company will be able to negotiate or
reach an agreement with its current lenders to modify the terms of the credit agreement.



During the amendment period, the facility bears interest at the U.S. base rate as defined in the credit agreement plus 0.25% to 2.5%. As at September 28, 2003 we had borrowed $74.9 million under this facility.



If the Company is able to achieve its current business plan,
management believes that cash generated from operations, available cash and amounts available under our senior credit facility 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 October 2004, although no assurance can be given in this regard, particularly with respect to amounts available under our credit facility, as discussed above. If the Company is unable to achieve its
current business plan and does not comply with its financial covenants, we would not have sufficient resources to meet our debt service requirements, capital expenditures and working capitals needs unless such default is cured or waived. 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.



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In connection with the December 31, 2002 amendment, the lenders returned to the Company for cancellation
the existing warrants they held, and the Company agreed to issue to the lenders warrants to purchase common stock of the Company at an exercise price equal to the fair market value (defined as average of the last reported sales price of the common
stock of the company for twenty consecutive trading days commencing 22 trading days before the date in question) at the date of the grant for (a) 4.0% of the total outstanding shares on December 31, 2002, (b) 1.0% of the total outstanding shares on
December 31, 2002, (c) 0.75% of the total outstanding shares on the date that is 45 days after the end of the Companys first fiscal quarter of 2003, (d) 0.75% of the total outstanding shares on the date that is 45 days after the end of the
Companys second fiscal quarter of 2003, (e) 0.75% of the total outstanding shares on the date that is 45 days after the end of the Companys third fiscal quarter of 2003, (f) 0.75% of the total outstanding shares on the date that is 90
days after the end of the Companys fourth fiscal quarter of 2003, (g) 1.0% of the total outstanding shares on the date that is 45 days after the end of the Companys first fiscal quarter of 2004 and (h) 1.0% of the total outstanding
shares on the date that is 45 days after the end of the Companys second fiscal quarter of 2004; provided, however that if the Company meets certain EBITDA targets on the dates identified in (c) through (h) above, it will not issue warrants
corresponding to such date. The Company met its EBITDA target as at March 30, 2003. As such, the warrants referred to in (c) above were not issued. The Company did not meet its EBITDA target at June 29, 2003 and 228,210 warrants were issued in the
third quarter of 2003 with an effective date of August 13, 2003 at an exercise price of $0.61 per share. Also, the Company did not meet its EBITDA target at September 28, 2003 and will issue 229,934 warrants in the fourth quarter of 2003 with an
effective date of November 12, 2003 at an exercise price of $1.04 per share. If all amounts outstanding under the credit agreement are repaid in full on or before December 31, 2003, all warrants referred to in (b) through (e) above and received by
the lenders shall be returned to the Company and cancelled. The warrants will not be tradable separate from the related debt until the later of December 31, 2003 or nine months after the issuance of the warrants being transferred.



In connection with the December 31, 2002 amendment, we paid approximately
$1.7 million in amendment fees. The amendment fees and the fair value of the warrants to be issued in connection with the December 31, 2002 amendment have been accounted for as deferred financing fees included in other assets in the financial
statements.



Recently Issued Accounting Standards



In August 2001, the Financial Accounting Standard Board (FASB)
issued Statement No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of an asset retirement obligation be recorded as a liability, at fair value, in the period in which the Company incurs the obligation. The
Statement is effective for fiscal 2003 and there was no material effect as a result of the adoption of this Statement on January 1, 2003.



In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146), which
nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (EITF 94-3). Statement 146 recognizes the liability for an exit or
disposal activity only when a liability is incurred and can be measured at fair value. Under EITF 94-3 a commitment to an exit or disposal plan was sufficient to record the majority of the costs. Statement 146 is effective for exit or disposal
activities initiated after December 31, 2002. The Company adopted this Statement on January 1, 2003 and accordingly, the restructuring charges recorded in the first three quarters of 2003 were made in accordance with the new standard.



In November 2002, the FASB issued Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others, which requires certain disclosures of obligations under guarantees. The disclosure requirements of FIN 45 were
effective for the Companys year ended December 31, 2002. Effective for 2003, FIN 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees entered into or modified after December 31, 2002, based on
the fair value of the guarantee. The Company adopted the disclosure requirements in its 2002 consolidated financial statements. See note 11 for disclosure related to guarantees.



In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, which requires variable interest
entities, previously referred to as special-purpose entities or off-balance sheet structures, to be consolidated by a company if that company is subject to a majority of the risk of loss from the entitys activities or is entitled to receive a
majority of the entitys returns or both. The consolidation provisions of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003 and to existing entities in the



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first fiscal year or interim period ending after December 15, 2003. Certain disclosure provisions apply in financial
statements issued after January 31, 2003. The consolidation requirements of FIN No. 46 are not expected to have a material effect on the Companys consolidated financial statements.



In April 2003, the FASB issued Statement No. 149, Amendments of Statement 133 on Derivative Instruments and Hedging
Activities (Statement 149), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under Statement 133.
This statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003. The was no material effect as a result of the adoption of this statement
on July 1, 2003



In May 2003, the FASB issued Statement No.
150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (Statement 150), which establishes standards for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. Financial instruments that are within the scope of the statement, which previously were often classified as equity, must now be classified as liabilities. This statement shall be effective for
financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period after June 15, 2003. There was no material effect as a result of the adoption of this statement in the
third quarter of 2003.



Critical Accounting Policies



The preparation of financial statements in conformity with generally
accepted accounting principles 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 2 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 describes the significant
accounting policies and methods used in the preparation of our consolidated financial statements. The following critical accounting policies are impacted 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.



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. FAS 109 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, 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, in the second quarter of 2003, the total valuation allowance for
deferred tax assets in all jurisdictions worldwide increased from approximately $35.0 million at December 31, 2002 to approximately $71.0 million at June 29, 2003, resulting in income tax expense during the quarter ended June 29, 2003, of
approximately $34.2 million. In addition, the valuation allowance at September 28, 2003 remained at approximately $71.0 million. 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.



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 receivables 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 receivables have been outstanding, customer and industry concentrations, current business environment and historical experience. Unanticipated
changes in the liquidity or financial position of our customers may require additional provisions for doubtful accounts.



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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. Our industry is characterized by rapid technological change, short-term customer commitments and rapid changes in demand. The Company
writes down estimated obsolete or excess inventory for the difference between the cost of inventory and estimated market value based on 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 actual market conditions or our customers product demands are less favorable than those projected, additional provisions may be required.



Restructuring and Other Charges



In response to excess capacity caused by slowing technology end markets, 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. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset (or asset groupings) to future net cash flows
expected to be generated by the asset. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Effective January 1, 2002, the
Company adopted the new accounting standard issued in 2001, which is summarized in note 2(q(ii)), changes in accounting policies, to the December 31, 2002 consolidated financial statements contained in our Annual Report on Form 10-K for the year
ended December 31, 2002 filed with the Securities and Exchange Commission on March 27, 2003. The adoption of this new accounting standard did not affect the Companys financial statements as at the date of adoption.



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) inability to refinance long-term debt; (2) increased competition; (3) increased costs; (4) the inability to implement our business plan and maintain covenant compliance
under our credit agreement; (5) the loss or retirement of key members of management; (6) increases in SMTCs cost of borrowings or lack of availability of debt or equity capital on terms considered reasonable by management; (7) adverse state,
federal or foreign legislation or regulation or adverse determinations by regulators; (8) changes in general economic conditions in the markets in which SMTC may compete and fluctuations in demand in the electronics industry; (9) the inability to
manage inventory levels efficiently in light of changes in market conditions; and (10) 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,



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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.





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FACTORS THAT MAY AFFECT FUTURE RESULTS



RISKS RELATED TO OUR CAPITAL STRUCTURE



We need to refinance our credit facility.



The Companys revolving credit facility matures on October 1, 2004. Should the Company not be able to refinance the debt, at the earlier of a
covenant violation or the maturity date, the Company expects that it will not be able to satisfy its indebtedness and other obligations. In the event of non-compliance, the Companys lenders have the ability to demand repayment of all
outstanding amounts under the credit facility. If the Company was unable to repay such amounts, the lenders could proceed against any collateral granted to them to secure the indebtedness. Substantially all of the Companys assets have been
pledged to the lenders as collateral for the Companys obligations under the senior credit facility.



The Company is in the process of pursuing various options with current and potential lenders and investors, however, no agreements with current or
potential lenders or investors have been reached yet and there can be no assurance that any agreement will be reached. Any such agreement is likely to involve significant dilution to existing stockholders, which may negatively affect the
Companys share price.



We are highly leveraged.



We carry substantially more debt than our competitors. Concerns about our
level of debt may adversely affect customers and suppliers willingness to do business with us. Furthermore, our level of debt may adversely affect our ability to participate in future growth of the EMS industry and may adversely affect
our ability to meet our business plan.



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



At September 28, 2003, we had $74.9 million of indebtedness under our senior credit facility. This debt 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 financial and other restrictive covenants in our credit arrangements in our borrowing of additional funds; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------



| |  | We may fail to comply with the 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, the lenders could proceed against any collateral granted to them to secure that
indebtedness. Substantially all of the Companys assets have been pledged to the lenders as collateral for the Companys obligations under the senior credit facility. In November 2003, the credit agreement was amended to provide financial
covenants through October 1, 2004 consistent with our November 2003 business plan. However, there can be no assurance that we will maintain compliance with the covenants under our credit agreement. Continued compliance with the financial covenants
is dependent on the Company achieving the forecasts inherent in our business plan. The forecasts are dependent on a number of factors, many of which are outside the control of the Company. These include, but are not limited to, general economic
conditions and, specifically, the strength of the electronics industry and the related demand for products and services by the Companys customers. If the
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | Company does not comply with its financial covenants and such default is not cured or waived, it could result in all amounts outstanding, together with
accrued interest, becoming immediately due and payable.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Companys revolving credit facility matures in October 2004 and accordingly as at September 28, 2003, this amount has been classified as a long-term liability. The Company has initiatives underway to
refinance its bank indebtedness including discussions with current and potential lenders and investors. A transaction resulting from these discussions is likely to involve significant dilution to existing shareholders, which may negatively affect
the share price. To date no agreements have been reached and there can be no assurances that any agreement will be reached. Should the Company not be able to refinance the debt prior to October 1, 2004, the Company expects that it will be unable to
repay the full amount of the debt upon maturity. In that event, or in the event of any earlier default under the credit agreement, the Company would attempt to negotiate with its current lenders to modify the terms of the credit agreement. There can
be no assurances that the Company will be able to negotiate or reach an agreement with its current lenders to modify the terms of the credit agreement.



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 our senior credit
facility or successor facilities.



The terms of our credit agreement impose
significant restrictions on our ability to operate.



The
terms of our current credit agreement 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, incur cash restructuring costs, make timely payments to our suppliers, which may cause credit hold issues, enter into certain transactions with affiliates, merge, consolidate or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of our assets. We are also required to maintain specified financial ratios and satisfy certain monthly and quarterly financial condition tests, which further restrict our ability to operate as we choose. During
the fourth quarter of 2002, we were in violation of certain covenants contained in our credit agreement. Such violation was waived and the credit agreement was amended to provide financial covenants through June 2004 consistent with our December
2002 business plan. In November 2003, the credit agreement was further amended to provide financial covenants through October 2004 consistent with our November 2003 business plan. As a result of our non-compliance, 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 senior credit facility.



Institutional investors have significant 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
such stock ownership and board representation, certain of our institutional investors have a significant influence over all matters submitted to our stockholders, including the election of our directors, and exercise significant control over our
business policies and affairs. Such concentration of voting power could have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to our stockholders.



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



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beneficial. If a change of control or change in management is delayed or prevented, the market price of our shares could
suffer.



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 and reduced capital spending, our sales have declined from 2001 to 2002 and the first three quarters of 2003. In particular, sales to OEMs in the telecommunications and networking
industries worldwide were impacted during 2002 and the first three quarters of 2003. If 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.



Our three largest customers during the third quarter of 2003 were IBM, Ingenico and Square D (a division of Schneider Electric), which represented approximately 26.9%, 19.8% and 10.6%, respectively, of our total
revenue for that period. Our top ten largest customers (including IBM, Ingenico and Square D) collectively represented approximately 91.1% of our total revenue during the third quarter of 2003. During the second quarter of 2002, the Company informed
Dell of its intention to terminate its supply agreement with Dell and to end production over the third quarter of 2002. The Companys decision was taken after a review of the Companys return on capital requirements indicated that the
customers programs were not generating sufficient returns and, at the same time, were utilizing a disproportionate amount of working capital. We expect to continue to depend 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 and Plexus. 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 may have
substantially greater manufacturing, financial, research and development and marketing resources and lower cost structures than we do. 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;
| | - | ---------------------------------------------------------------



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| |  | 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;
| | - | --------------------------------------------------------------------------------------



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



| |  | difficulty in acquiring and retaining customers and obtaining competitive credit terms from suppliers due to weakened financial results.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



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 and 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 sometimes 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 largest 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.



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.



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



Substantially all 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 needs 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



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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 have been forced to allocate available quantities among their customers and we
have not been able to obtain all of the materials desired. Our inability to obtain these needed 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 a 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. We have also closed our interconnect facility in Donegal, Ireland and our sites in Austin, Texas and Charlotte, North
Carolina. Manufacturing ceased in Austin, Texas during the first quarter of 2003, and we ceased operations at Donegal, Ireland and Charlotte, North Carolina during the second quarter of 2003.The Company sold its Appleton, Wisconsin
manufacturing operations while retaining its Appleton design and engineering capabilities during the third quarter of 2003.



Retrenchment has caused, and is expected to continue to cause, strain on our infrastructure, including our managerial, technical and other resources. We
may experience inefficiencies as we integrate operations from closed facilities to currently operating facilities and may experience delays in meeting the needs of transferred customers. In addition, we are reducing the geographic dispersion of our
operations, which may make it harder for us to compete and may cause us to lose customers. The loss of customers could have a material adverse effect on our business, financial condition and results of operations.



Our rapid growth and subsequent retrenchment has placed and will continue to
place a significant strain on management, on our financial resources, and on our information, operating and financial systems. If we are unable to manage effectively, it may 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 products and services that meet



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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. In addition, our
ability to successfully implement our business plan depends in part on our ability to retain key management and existing employees. There can be no assurance that we will be able to retain our 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 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



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with any violation, which could have a material adverse effect on our business, financial condition and results of
operations.



Item 3: Quantitative and Qualitative Disclosure about Market Risk



Interest Rate Risk



Our
senior credit facility bears interest at a floating rate. The weighted average interest rate on our senior credit facility for the quarter ended September 28, 2003 was 6.6%. Our debt of $74.0 million bore interest at 5.3% on September 28, 2003 based
on the U.S. base rate. If the U.S. base rate increased by 10% our interest rate would have risen to 5.7 % and our interest expense would have increased by approximately $0.1 million for the third quarter of 2003.



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



| | (a) | Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this quarterly report, the Companys Chief Executive Officer and Principal
Financial Officer have conducted an evaluation of the Companys disclosure controls and procedures. 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.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Changes in Internal Controls and Procedures. There were no significant changes in the Companys internal controls or in other factors that could significantly affect
these controls subsequent to the date of the most recent evaluation of these controls by the Companys Chief Executive Officer and Principal Financial Officer.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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PART II OTHER INFORMATION



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.



(c) The terms of the Companys credit agreement require that the Company issue warrants to its lenders if it does not meet certain EBITDA targets as of each fiscal quarter end on the dates falling 45 days after
the end of each fiscal quarter in 2003 and the first two fiscal quarters of 2004. The Company did not meet the applicable EBITDA target for the second fiscal quarter of 2003. Accordingly, the Company issued warrants as of August 13, 2003,
certificated in the form included in Exhibit 10.44 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2002 filed with the Securities and Exchange Commission on March 27, 2003, for an aggregate of 228,210 shares
of its common stock to its lenders in consideration for their extension of and continued performance under the credit facility. The warrants are immediately exercisable, have an exercise price per share of $0.61 and expire on August 13, 2008. The
issuance of 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 6. EXHIBITS AND REPORTS ON FORM 8-K.



(a) List of Exhibits:



|     | 
|---- | 
|10.1 | 
|     | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32.1 | 
|     | 
|32.2 | 



(b) Reports on Form
8-K:



On August 13, 2003, the Company furnished a Current
Report on Form 8-K regarding the issuance of a press release announcing the Companys financial results for the three months ended June 29, 2003.



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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 CEO




By:

/s/    MARWAN KUBURSIName: Marwan KubursiTitle: Principal Financial Officer




Date: November 17, 2003



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EXHIBIT INDEX



|ExhibitNumber |  | Document                                                                                                                                                                                             
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | 
|10.1          |  | Separation Agreement dated as of July 23, 2003 by and between SMTC Corporation and Frank Burke.                                                                                                      
|              | 
|31.1          |  | Certification of John Caldwell pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 17, 2003.                                                                                   
|              | 
|31.2          |  | Certification of Marwan Kubursi pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 17, 2003.                                                                                  
|              | 
|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 17, 2003. 
|              | 
|32.2          |  | Certification of Marwan Kubursi, 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 17, 2003.



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