---

Page 54 of 104

EXHIBIT 2

Managements
Responsibility for Consolidated Financial Statements

Management of ATI Technologies Inc.
is responsible for the integrity of the accompanying consolidated financial statements
and all other information in this Annual Report. The consolidated financial statements
have been prepared by Management in accordance with accounting principles generally
accepted in Canada. The preparation of the consolidated financial statements necessarily
involves the use of estimates and careful judgment, particularly in those circumstances
where transactions affecting a current period are dependent upon future events. All
financial information presented in this Annual Report is consistent with the consolidated
financial statements.

To discharge its responsibilities
for financial reporting and safeguarding of assets, Management believes that it has
established appropriate systems of internal accounting controls that provide reasonable
assurance that the financial records are reliable and form a proper basis for the timely
and accurate preparation of financial statements. Consistent with the concept of
reasonable assurance, Management recognizes that the relative cost of maintaining these
controls should not exceed their expected benefits. Management further ensures the
quality of the financial records through careful selection and training of personnel and
the adoption and communication of financial and other relevant policies.

The Board of Directors discharges
its responsibilities with respect to the consolidated financial statements primarily
through the activities of its Audit Committee, which is composed entirely of directors
who are not employees of the Company. This committee meets quarterly with Management and
at least twice annually with the Companys independent auditors to review the Companys
reported financial performance and to discuss audit, internal control, accounting policy
and financial reporting matters. The consolidated financial statements were reviewed by
the Audit Committee and approved by the Board of Directors.

The consolidated financial
statements have been audited by KPMG LLP, who were appointed by the shareholders at the
last Annual General Meeting of Shareholders. Their report is presented herein.

September 30, 2004

Auditors Report to
the Shareholders

We have audited the consolidated
balance sheets of ATI Technologies Inc. as at August 31, 2004 and 2003 and the
consolidated statements of operations and retained earnings and cash flows for each of
the years in the three-year period ended August 31, 2004. These financial statements are
the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in
accordance with Canadian generally accepted auditing standards. Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated
financial statements present fairly, in all material respects, the financial position of
the Company as at August 31, 2004 and 2003 and the results of its operations and its cash
flows for each of the years in the three-year period ended August 31, 2004 in
accordance with Canadian generally accepted accounting principles.

# Comments by Auditors
for U.S. Readers on Canada-U.S. Reporting Difference

In the United States, reporting
standards for auditors require the addition of an explanatory paragraph (following the
opinion paragraph) when there is a change in accounting principles that has a material
effect on the comparability of the companys financial statements, such as the
changes described in note 2(f) and (o) to the financial statements. Our report to the
shareholders dated September 30, 2004 is expressed in accordance with Canadian reporting
standards which do not require a reference to such changes in accounting principles in the
auditors report when the change is properly accounted for and adequately disclosed
in the financial statements.

//KPMG LLP//

Toronto, Canada
September 30, 2004

---

Page 55 of 104

Consolidated Statements
of Operations and Retained Earnings

2

---

Page 56 of 104

Consolidated Balance Sheets

3

---

Page 57 of 104

Consolidated Statements
of Cash Flows

4

---

Page 58 of 104

Notes to Consolidated
Financial Statements

Years ended August 31, 2004, 2003 and
2002 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

The principal business activities of
ATI Technologies Inc. (the Company) are the design, manufacture and sale of
innovative 3D graphics and digital media silicon solutions. The Company markets its
products to original equipment manufacturers, system builders, distributors and retailers
primarily in North America, Europe and the Asia-Pacific region.

NOTE 1.
Significant accounting
policies

(a) Basis of presentation

These consolidated financial
statements have been prepared in accordance with Canadian generally accepted accounting
principles (Canadian GAAP) and are presented in U.S. dollars. No material
differences would result if these consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States (U.S.
GAAP) and the rules and regulations of the Securities and Exchange Commission,
except as disclosed in note 21.

(b) Principles
of consolidation

These consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries, as well
as the Companys 50.0% ownership in a joint venture formed to own an office building
in Markham, Ontario. All significant intercompany transactions and balances have been
eliminated upon consolidation.

(c) Cash and cash equivalents and short-term investments

Cash and cash equivalents include
highly liquid instruments with a maturity of less than 90 days from the acquisition date.
The carrying amounts of cash and cash equivalents are stated at cost, which approximates
their fair values. The Companys short-term investments include: (i) highly liquid
instruments with a maturity date of 90 days or more but less than one year from the
acquisition date that are carried at cost, which approximates their fair values; (ii)
portfolio investments consisting of government and corporate obligations, agency discount
notes, money market funds and commercial paper; and (iii) corporate bonds. Both portfolio
investments and corporate bonds are carried at amortized cost plus accrued interest and,
are included in short-term investments as it is managements intention to sell such
investments in the short term. The Company regularly reviews the carrying value of its
investments. Should there be a decline in value that is other than a temporary decline,
the Company measures the amount of the write-down based on the quoted market value of the
investments and charges such write-down to the consolidated statements of operations and
retained earnings.

(d)
Inventories

Raw materials are stated at the
lower of cost and replacement cost. Finished goods and work in process are stated at the
lower of cost and net realizable value. Cost is determined on a first-in, first-out
basis.

(e)
Capital assets

Capital assets are recorded at cost,
net of related investment tax credits, and are depreciated over their estimated useful
lives. Estimated useful lives for principal asset categories are as follows:

(f) Goodwill
from business combinations

For business combinations prior to
July 1, 2001, goodwill was amortized on a straight-line basis over five to seven years.
Prior to September 1, 2002, the Company assessed the recoverability of goodwill based on
undiscounted expected future cash flows. Goodwill acquired in business combinations
subsequent to June 30, 2001 has not been amortized.

5

---

Page 59 of 104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2004, 2003 and
2002 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Effective September 1, 2002, the
Company adopted The Canadian Institute of Chartered Accountants (CICA)
Handbook Sections 1581, Business Combinations, and 3062, Goodwill and
Other Intangible Assets. From that date, the Company discontinued amortization of
all existing goodwill. The Company reviewed existing intangible assets, including
estimates of remaining lives, and reclassified $2.3 million from workforce to goodwill as
of September 1, 2002 to conform with the new accounting standards.

In connection with Handbook Section
3062s transitional goodwill impairment evaluation, the Company was required to
assess whether goodwill was impaired as of September 1, 2002. The Company completed the
transitional goodwill impairment assessment and determined that no impairment existed as
of September 1, 2002.

Upon adopting these standards on
September 1, 2002, the Company is required to evaluate goodwill annually or whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. Impairment is tested at the reporting unit level by comparing the reporting
units carrying value to its fair value. The fair values of the reporting units are
estimated using a discounted cash flow approach. To the extent a reporting units
carrying amount exceeds its fair value, an impairment of goodwill exists. Impairment is
measured by comparing the fair value of goodwill, determined in a manner similar to a
purchase price allocation, to its carrying amount. During the fourth quarter of fiscal
2004, the Company performed its annual goodwill impairment test in accordance with the
goodwill standards of Handbook Section 3062 and determined that there was no goodwill
impairment in fiscal 2004.

Effective September 1, 2002, the
Company had unamortized goodwill of $190.1 million, which is no longer being amortized.
This change in accounting policy is not applied retroactively and the amounts presented
for prior periods have not been restated for this change. The impact of this change is as
follows:

(g)
Intangible assets

Intangible
assets are recorded at cost and are amortized on a straight-line basis over their
estimated useful lives as follows:

(h) Impairment
of long-lived assets

The Company reviews capital and
intangible assets for impairment on a regular basis or whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. Recoverability is
assessed by comparing the carrying amount to the projected future net cash flows the
long-lived assets are expected to generate.

(i) Long-term
investments

Investees
over which the Company does not have control or significant influence are accounted for by
the cost method.

The Company regularly reviews the
carrying values of its long-term investments. Should there be a decline in value of the
Companys long-term investments that is other than a temporary decline, the Company
measures the amount of the write-down based on the fair value of the shares of the
investee and charges such write-down to the consolidated statements of operations and
retained earnings.

6

---

Page 60 of 104

(j)
Revenue recognition

Revenue is recognized when evidence
of an arrangement exists, risks and rewards of ownership have been transferred to
customers, selling price is fixed and determinable and collectibility is reasonably
assured. Estimated returns and allowances, price protection and sales rebates are
recorded as a reduction of revenue at the time of revenue recognition. In addition, the
Company provides for the estimated cost of product warranties at the time of revenue
recognition.

The Company primarily uses a binding
purchase order as evidence of its sales arrangements and, in certain cases, uses
contractual agreements. The Company considers delivery to occur upon shipment, provided
risk and rewards of ownership, including transfer of title have passed to the customer.
At the point of sale, the Company assesses whether collection is reasonably assured. If
the Company determines that collection is not reasonably assured, the Company defers
recognition of the revenue until collection becomes reasonably assured, which is
generally upon receipt of cash.

The Company follows the
percentage-of-completion method of accounting for contracts requiring the Company to
develop customized technology to meet a customers specifications. Under such
contracts, revenue is recognized based on the ratio of total costs incurred to date to
overall estimated costs. Provisions for estimated losses on contracts are recognized when
identified. Where estimating the final outcome of a contract is impractical, except to
ensure that no loss will be incurred, the Company uses a zero estimate of profit until
results can be estimated more precisely. Under this method, the portion of total contract
revenue earned to-date is determined by measuring total costs incurred. The Company then
records an equal amount of revenue against costs. Cost of revenue is adjusted to
recognize the profit element from the arrangement once the Company is able to estimate
total revenue and total costs.

(k) Foreign
currency translation

The Companys functional
currency and that of its subsidiaries is the U.S. dollar. The Companys subsidiaries
are accounted for as integrated foreign operations. Transactions of the Company and its
subsidiaries originating in foreign currencies are translated into U.S. dollars at the
prevailing rates approximating those at the dates of the transactions. Monetary assets
and liabilities are translated at the year-end rates of exchange and non-monetary items
are translated at historical exchange rates. The resulting net gain or loss is included
in the consolidated statements of operations and retained earnings.

(l) Research and
development (R&D) expenditures

Research costs, other than capital
expenditures, are expensed as incurred. Development costs are expensed as incurred unless
they meet the criteria under Canadian GAAP for deferral and amortization.The Company has
not deferred any such development costs to date. R&D costs are reduced by related
investment tax credits. The total investment tax credits for fiscal 2004 amounted to
$29.0 million (2003  $21.7 million; 2002  $17.7 million).

(m)
Income taxes

The Company uses the asset and
liability method of accounting for income taxes. Future income tax assets and liabilities
are recognized for future income tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their
respective tax bases, net operating loss carryforwards and undeducted R&D pools.
Future income tax assets and liabilities are measured using enacted or substantively
enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect of a change in
tax rates is recognized in the year that includes the enactment or substantive enactment
date. A valuation allowance is recorded against any future income tax asset if it is more
likely than not that the asset will not be realized. Income tax expense or recovery is
the sum of the Companys provision for current income taxes and the difference
between opening and ending balances of future income tax assets and liabilities.

(n) Net income (loss) per
share

Basic net income (loss) per share
has been calculated by dividing the net income (loss) for the year by the weighted
average number of common shares outstanding during the year. The Company uses the
treasury stock method for calculating diluted net income (loss) per share. Diluted net
income (loss) per share is computed similar to basic net income (loss) per share, except
that the weighted average number of common shares outstanding is increased to include
additional shares from the assumed exercise of stock options, if dilutive. The number of
additional shares is calculated by assuming that outstanding stock options were exercised
and that the proceeds from such exercises were used to acquire shares of common stock at
the average market price during the reporting year.

7

---

Page 61 of 104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2004, 2003 and
2002 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

(o) Stock-based awards

(i) Stock options

The Company has share option plans,
which are described in note 12. No compensation expense is recognized for these plans
when stock options are issued to employees. Any consideration paid by employees on
exercise of stock options or purchase of stock is credited to share capital.

Effective September 1, 2002, the
Company adopted the CICA Handbook Section 3870, Stock-based Compensation and Other
Stock-based Payments, which establishes standards for the recognition, measurement
and disclosure of stock-based compensation and other stock-based payments made in
exchange for goods and services provided by employees and non-employees. The standard
requires that a fair value-based method of accounting be applied to all stock-based
payments to non-employees and to employee awards that are direct awards of stock, that
call for settlement in cash or other assets or are stock appreciation rights that call
for settlement by the issuance of equity instruments. However, the new standard permits
the Company to continue its existing policy of recording no compensation cost on the
grant of stock options to employees. The Company has applied the pro forma disclosure
provisions of the standard to awards granted on or after September 1, 2002. No
restatement of prior periods was required as a result of the adoption of the new
standard. Consideration paid by employees on the exercise of stock options is recorded as
share capital. See note 12 for the pro forma disclosure, as required by this standard.

(ii) Restricted Share Units and Deferred Share Units:

The Company has restricted share
unit (RSU) and deferred share unit (DSU) plans, which are
described in note 12. RSU and DSU plans that are settled in cash are recorded as
liabilities. The measurement of the liability and compensation cost for these awards is
based on the intrinsic value of the award, and is recorded as a charge to operating
income over the vesting period of the award. Changes in the Companys payment
obligation subsequent to vesting of the award and prior to the settlement date are
recorded as a charge to operating income in the period incurred. The payment amount is
established for RSUs on the vesting date of the award and for DSUs on the later of the
date of termination of employment or directorship.

(p) Use of estimates

The preparation of consolidated
financial statements requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting years presented. Significant
estimates are used in determining the allowance for doubtful accounts, provision for
inventory obsolescence, useful lives of long-lived assets, goodwill and long-lived asset
impairment testing, valuation of long-term investments, realization of future tax assets,
and estimates for sales returns and allowances, price protection and sales rebates.
Actual results could differ from those estimates.

(q) Accounting changes

(i) During
fiscal 2004, the Company adopted CICA Accounting Guideline No. 13,
                    Hedging Relationships, for its derivative instruments.
The Company                     engaged in activities to purchase certain derivative
financial instruments,                     principally forward foreign exchange
contracts, to manage its foreign currency                     exposures. The Companys
policy is not to utilize derivative financial                     instruments for trading
or speculative purposes.

The Company formally documents all
relationships between hedging instruments and hedged items, as well as its risk
management objective and strategy for undertaking various hedge transactions. This
process includes linking all derivatives to specific assets and liabilities on the
balance sheet or to specific firm commitments or anticipated transactions. The Company
also formally assesses, both at the hedges inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items.

The Company purchases forward
foreign exchange contracts to hedge anticipated Canadian dollar expenses pertaining to
its operations in Canada. These instruments are not recognized in the consolidated
financial statements at inception. Foreign exchange gains and losses on these contracts
are deferred off-balance sheet and recognized as an adjustment to the operating expenses
when the operating expenses are incurred.

Realized and unrealized gains or
losses associated with derivative instruments, which have been terminated or cease to be
effective prior to maturity, are deferred under other current, or non-current, assets or
liabilities on the balance sheet and recognized in income in the period in which the
underlying hedged transaction is recognized. In the event a designated hedged item is
sold, extinguished or matures prior to the termination of the related derivative
instrument, any realized or unrealized gain or loss on such derivative instrument is
recognized in income.

8

---

Page 62 of 104

(ii) Revenue recognition:

In December 2003, the Emerging
Issues Committee issued EIC-141, Revenue Recognition and EIC-142, Revenue
Arrangements with Multiple Deliverables. EIC-141 incorporates the principles and
guidance under the SECs Staff Accounting Bulletin No. 101 and U.S. GAAP and EIC-142
addresses how to identify whether goods or services or both that are delivered separately
in a bundled sales arrangement should be accounted for separately. The primary purpose of
EIC-142 is to determine if separation is necessary, and, if so, how to measure and
allocate the arrangement consideration.

The Company fully adopted EIC-141
and EIC-142 on a prospective basis on March 1, 2004. The Company was not impacted by
these standards.

(r) Recently issued
accounting pronouncements

(i) Generally accepted accounting
principles:

In July 2003, the CICA issued
Handbook Section 1100, Generally Accepted Accounting Principles. This Section
establishes standards for financial reporting in accordance with Canadian GAAP. It
describes what constitutes Canadian GAAP and its sources. This Section also provides
guidance on sources to consult when selecting accounting policies and determining
appropriate disclosures when a matter is not dealt with explicitly in the primary sources
of Canadian GAAP. This guideline is effective for the Companys 2005 fiscal year,
with early adoption encouraged. The Company expects that the adoption of this standard
will have no material impact on its financial position, results of operations or cash
flows.

(ii) Asset retirement obligations:

In March 2003, the CICA issued
Handbook Section 3110, Asset Retirement Obligations. This Section establishes
standards for the recognition, measurement and disclosure of liabilities for asset
retirement obligations and the associated retirement costs. This Section applies to legal
obligations associated with the retirement of a tangible long-lived asset that result
from its acquisition, construction, development or normal operation. This guideline is
effective for the Companys 2005 fiscal year, with early adoption encouraged. The
Company is currently evaluating the impact of adoption on the consolidated financial
statements.

(iii) Consolidation of variable interest entities:

In June 2003, the CICA approved
Accounting Guideline No. 15, Consolidation of Variable Interest Entities, which
provides guidance for determining when an enterprise includes the assets, liabilities and
results of activities of entities that are subject to control on a basis other than
ownership of voting interests (a variable interest entity). This guideline is
effective for the Companys 2005 second quarter. Early adoption is encouraged. The
Company expects that the adoption of this standard will have no material impact on its
financial position, results of operations or cash flows.

(iv) Liabilities and equity:

In November 2003, the CICA approved
amendments to Handbook Section 3860, Financial InstrumentsPresentation and
Disclosure, to require obligations that may be settled, at the issuers
option, by a variable number of the issuers own equity instruments to be presented
as liabilities. Thus securities issued by an enterprise that give the issuer unrestricted
rights to settle the principal amount in cash or in the equivalent value of its own
equity instruments will no longer be presented as equity.

The CICA concluded that not all such
obligations establish the type of relationship that exists between an entity and its
owners, but rather they convey more of a debtor/creditor relationship because they
require the issuer to convey a fixed amount of value to the holder that does not vary
with changes in the fair value of the issuers equity instruments. Therefore, these
instruments should be presented as liabilities. The standard will be effective for the
Companys 2006 fiscal year. The Company expects that the adoption of this standard
will have no material impact on its financial position, results of operations or cash
flows.

NOTE
2. Financial instruments

Financial instruments, which
potentially subject the Company to concentrations of credit risk, consist primarily of
cash and cash equivalents, short-term investments, accounts receivable and sundry
receivables. The Company invests only in high-quality cash and cash equivalents and
short-term investments. A majority of the Companys accounts receivable is derived
from sales to original equipment manufacturers, add-in-board manufacturers, original
design manufacturers, distributors and retailers in the personal computer, cellular
phone, and digital television industries. The Company performs ongoing credit evaluations
of its customers financial condition and limits the amount of credit extended when
deemed necessary. In addition, a significant portion of the total accounts receivable is
insured against possible losses. The Company maintains adequate reserves for potential
credit losses as estimated by management.

9

---

Page 63 of 104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONT.)

Years ended August 31, 2004, 2003 and
2002 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

The joint venture, Commerce Valley
Realty Holdings Inc. (CVRH), in which the Company has a 50.0% ownership,
entered into an interest rate swap contract in fiscal 2001, to hedge its exposure to the
interest rate risk applicable to its mortgage for the building facility in Markham,
Ontario (Building Facility). This interest rate swap contract closed on
September 10, 2002, resulting in a proportionate loss of $1.4 million to the Company. The
loss is treated as a deferred expense item in the consolidated balance sheets and is
charged to the consolidated statements of operations and retained earnings as a yield
adjustment to the interest expense over the term of the mortgage (note 19).

The carrying amounts of cash
equivalents, short-term investments, accounts receivable, sundry receivables and accounts
payable and accrued liabilities approximate their fair market values because of the
short-term nature of these instruments.

The fair values of the obligation
under capital lease and mortgage payable approximate their carrying values.

The financial condition, operating
results and cash flows of the Company may be materially and adversely impacted by a
substantial weakening of the U.S. dollar against local currencies as the Companys
long-term debt and a significant amount of its operating expenses are paid in local
currencies other than the U.S. dollar.

The Company enters into forward
foreign exchange contracts (Forwards) to hedge its foreign currency exposure
on expenses incurred for its Canadian operations. The Forwards obligate the Company to
sell U.S. dollars for Canadian dollars in the future at predetermined exchange rates and
are matched with anticipated future operating expenses in Canada. The Forwards do not
subject the Company to risk from exchange rate movements because gains and losses on such
contracts offset losses and gains on exposures being hedged. The counterparties to the
Forwards are multinational commercial banks and, therefore, the credit risk of
counterparty non-performance is low.

During the fourth quarter of fiscal
2004, the Company purchased Forwards to buy Cdn. $35.0 million in the next three months
at an average exchange rate of 1.3793. All of the Forwards have become favourable to the
Company since their inception and have an unrealized fair value of $1.3 million at August
31, 2004.

NOTE 3. Short-term investments

At
August 31, 2004 and 2003, the carrying value of short-term investments approximated their
quoted market value.

NOTE
4. Inventories

At August 31, 2004, the Company had
non-cancellable inventory purchase commitments totalling $7.1 million (2003  $23.3
million).

10

---

Page 64 of 104

NOTE 5. Capital assets

Depreciation expense related to capital assets amounted
to $19.9 million in fiscal 2004 (2003  $23.9 million; 2002  $22.9 million).

NOTE 6. Acquisitions

(a) Acquisition of AMI Technologies
Corp.

On September 2, 2003, the Company
acquired certain assets from AMI Technologies Corp., its exclusive sales organization for
Taiwan and China since 1992, for cash consideration of $3.1 million. The purchase price
was allocated to the net assets acquired, including intangible assets of $2.9 million,
based on their relative fair values at the date of acquisition. The useful life of the
intangible assets acquired is approximately one year.

(b) Acquisition of NxtWave
Communications Inc.

On June 28, 2002, the Company
acquired NxtWave Communications Inc. (NxtWave) for cash consideration of
$20.2 million. NxtWave is in the business of delivering broadband communications silicon
using proprietary digital signal processing technologies adapted for applications in
digital terrestrial and cable receivers. The acquisition was accounted for using the
purchase method, whereby the results of operations of NxtWave have been included in the
consolidated statements of operations and retained earnings and cash flows from the date
of acquisition.

The fair values of the net assets
acquired were as follows:

11

---

Page 65 of 104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONT.)

Years ended August 31, 2004, 2003 and
2002 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

Purchased in-process R&D and
core technology are being amortized as follows:

NOTE 7. Intangible assets and
goodwill

The net
book values of intangible assets and goodwill acquired are as follows:

Amortization
expense and write-downs of intangible assets and goodwill are as follows:

During fiscal 2002, the Company
conducted a comprehensive review of the carrying values of the core technology and
goodwill arising from the acquisitions of Chromatic Research Inc. (Chromatic)
and ArtX, Inc. (ArtX) and concluded that there was a permanent impairment in
these values. As a result, the Company wrote off the remaining balances of the core
technology and goodwill of Chromatic totaling $4.8 million, and $4.2 million of core
technology and $6.4 million goodwill related to ArtX.

NOTE 8. Long-term investments

12

---

Page 66 of 104

Share investments consist of
investments in other companies in which the Company has ownership interests ranging from
approximately 0.8% to 13.2%.

(a)During fiscal 2004, the Company
acquired an additional 130,027 shares in one of its private
technology-based companies for cash consideration of $0.1 million
that was part of a round of financing that reduced the Companys
ownership in the investment from 1.0% to 0.8%. The Company
subsequently wrote down the entire investment by the amount of $1.3
million to reflect an other than temporary decline in its value.

During fiscal 2003, the Company
acquired a 13.2% interest in a private technology-based company, in the amount of $2.5
million.

(b)During fiscal 2002, the
Company disposed of a certain long-term investment in a publicly
traded company and realized a loss of $0.3 million. In addition, the
Company wrote down the remaining balance of this investment by the
amount of $0.5 million to reflect an other than temporary decline in
its value. The entire balance of the above-mentioned investment,
which had a net book value of $0.2 million, was then reclassified as
short-term investments as the Company no longer intended to hold the
investment for long-term purposes. The Company sold the investment in
2003.

During fiscal 2002, the Company
received an additional 107,387 shares of Broadcom Corporation (Broadcom),
valued at $2.1 million, as a result of the release of escrow shares pursuant to the terms
of the agreement to purchase the Companys share investment in SiByte Inc. by
Broadcom in the preceding fiscal year. On August 31, 2002, the Company wrote down its
total investment in Broadcom by $4.7 million to reflect the other than temporary decline
in its value. During fiscal 2003, the Company disposed of all its remaining shares in
Broadcom, realizing a gain in the aggregate amount of $3.8 million.

Gains and losses from long-term
investments are included in interest and other income, net, in the consolidated
statements of operations and retained earnings.

NOTE 9. Credit facilities

At August 31, 2004, the Company had
available bank credit facilities of $43.0 million (2003  $25.4 million). The credit
facilities are secured by way of general security agreements and personal property,
covering the cash, credit balances and deposit instruments of the Company. Interest rates
on the credit facilities vary and are based on the banks U.S. base rate, Canadian
bank prime rate, U.S. dollar best lending rate or the LIBOR rate. At August 31, 2004 and
2003, there were no borrowings outstanding under these facilities.

Standby fees are calculated at rates
of 0.125% to 0.15% per annum on the unused portion of the facilities.

NOTE
10. Deferred revenue

Deferred revenue, at August 31,
2004, includes $28.8 million (2003  $37.5 million), which represents milestone
payments made by or owing from certain customers in connection with custom development
arrangements entered into by the Company.

NOTE
11. Long-term debt

(a) Obligation under
capital lease

The Companys obligation under
capital lease represents the lease on the Building Facility occupied by the Company in
Markham, Ontario. The capital lease is denominated in Canadian dollars. As at August 31,
2004, the remaining amount outstanding on the capital lease was $18.0 million (Cdn. $23.7
million).

13

---

Page 67 of 104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONT.)

Years ended August 31, 2004, 2003 and
2002 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

(b)
Mortgage payable

On September 10, 2002, CVRH, the
joint venture in which the Company has a 50.0% ownership interest, entered into a
mortgage agreement with a lender to finance the Building Facility. The Companys
proportionate share of the mortgage as at August 31, 2004 amounted to $11.6 million (Cdn.
$15.2 million). The mortgage has a repayment term of 12 years and is denominated in
Canadian dollars.

(c)The Companys
obligations under this mortgage and capital lease are as follows:

Interest of $1.1 million and $0.9
million relating to capital lease obligation and mortgage payable, respectively, is
included in interest expense for fiscal 2004 (2003  $1.1 million and $0.7 million,
2002  $0.4 million and nil).

NOTE 12. Shareholders equity

(a) Common shares issued and
outstanding

(b)
Preferred shares

An unlimited number of preferred
shares, ranking in priority upon distribution of assets over common shares, may be issued
in series with additional provisions as fixed by the Board of Directors.

No preferred shares have been issued
to date.

(c) Common share option plans

(i) The Company maintains a share
option plan (the                     ATI Plan) for the benefit of directors,
officers and employees. The                     ATI Plan, as amended, provides that the
aggregate number of common shares                     available for issuance pursuant to
options granted under the ATI Plan and all                     other share compensation
arrangements are limited to 47,000,000 common shares.                     In general, the
maximum number of common shares reserved for issuance in respect                     of
any one individual may not exceed 5.0%, and in respect of insiders of the
                    Company, may not exceed 10.0% of the number of common shares issued
and                     outstanding.

Options are granted under the ATI
Plan at the discretion of the Board of Directors at exercise prices determined as the
weighted average of the trading prices of the Companys common shares on The Toronto
Stock Exchange or NASDAQ for the five trading days preceding the effective date of the
grant. In general, options granted under the ATI Plan vest over a period of up to four
years from the grant date and expire by no later than the seventh anniversary of the date
of grant.

14

---

Page 68 of 104

(ii)  When the Company acquired
ArtX, on April 4, 2000, it assumed the ArtX common                     shares options
plan (the ArtX Plan). The Company maintains the ArtX                     Plan
for the benefit of former directors, officers, employees and consultants of
                    ArtX. The ArtX Plan provides that the aggregate number of common
shares                     available for issuance pursuant to options granted under the
ArtX Plan and all                     other share compensation arrangements are limited
to 8,007,599 common shares for                     both incentive stock options (ISO)
and non-qualified stock options.

In general, options granted under
the ArtX Plan vest immediately or within specified times or events, as was determined by
the Board of Directors of ArtX, which is normally over a five-year period, and expire by
the tenth anniversary of the date of grant. If the person obtaining the options owns more
than 10.0% of the total combined voting power of all classes of stock (10.0%
shareholder), then the options will be exercisable after the expiration of five years
from the date of grant.

Options were granted under the ArtX
Plan at the discretion of the Board of Directors of ArtX at exercise prices determined as
no less than 85.0% of the fair market value of the shares on the date of grant provided
that the exercise price of an ISO will not be less than 100.0% of the fair market value
of the shares on the date of grant and the exercise price of any option granted to a
10.0% shareholder is no less than 110.0% of the fair market value of the shares on the
date of grant.

(iii) Under an incentive plan
entered into in June 2002, the Company provided certain                     employees
with a performance incentive, consisting of a combination of cash and
                    options, the receipt of which was conditional upon the Company
entering into a                     specified business arrangement with a third party by
April 2003, later extended                     to July 28, 2003. The cash portion of the
incentive consisted of three equal                     payments of $2.7 million, with
each payment to be made upon achievement of                     specified milestones
under the arrangement with the third party. Under the plan,                     the
employees were also granted options to purchase 2.6 million common shares at
                    an exercise price of $6.96 per share. The options vest 25.0% on the
first                     anniversary of the grant date and thereafter at 6.25% per
quarter and are only                     exercisable in the event the Company is
successful in entering into the                     aforementioned arrangement. In
February 2003, the Company successfully entered                     into the business
arrangement with the third party and all the conditions under                     the
plan were determined to have been met in July 2003. As a result, the first
                    payment of the cash portion of the incentive, in the amount of $2.7
million, was                     paid and included as compensation expense during 2003.
The remaining two                     payments aggregating $5.4 million were accrued at
August 31, 2003 and are being                     amortized over 18 months. During fiscal
2004, the amount recorded as                     compensation expense was $3.5 million.
No payments were made in fiscal 2004,                     relating to the two remaining
milestones.

The following is a summary of the
maximum number of common shares issuable pursuant to outstanding stock options:

As at August 31, 2004, the range of
exercise prices for options outstanding and exercisable (vested) are as follows:

15

---

Page 69 of 104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2004, 2003 and
2002 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

As at August 31, 2004, the price
range of $0.09 to $0.93, as noted above, represents all of the options relating to the
ArtX Plan. All other options outstanding or exercisable relate to the ATI Plan. During
the year ended August 31, 2004, 1,094,117 options relating to the ArtX Plan were
exercised at a weighted average price of $0.31 and 13,101 options were cancelled at a
weighted average price of $0.31.

For stock options granted to
employees after September 1, 2002, had the Company determined compensation costs based on
the fair value of the stock options at grant dates consistent with the method prescribed
under CICA Handbook Section 3870, the Companys income per share would have been
reported as the pro forma amounts indicated below:

The weighted average estimated fair
values at the date of grant for the options granted for fiscal 2004 was $8.96 per share
(2003  $2.65). The fair value of each option granted was estimated on the date of
the grant using the Black-Scholes option pricing model with the following assumptions:

For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense on a
straight-line basis over the options vesting period.

(d) Restricted share units

During 2004, the Company adopted a
plan to grant Restricted Share Units (RSUs) as part of its overall
stock-based compensation plan. Under this plan, certain employees received an award in
the form of an RSU. Each RSU entitles the holder to receive one common share on the
vesting date of the RSUs. The RSUs vest on each anniversary of the grant in equal
one-third instalments over a vesting period of three years. Stock-based compensation,
representing the underlying value of $14.17 per common share of the Company at the date
of grant of the RSUs, is being recognized evenly over the three-year vesting period. On
the vesting dates, the RSUs are settled by the delivery of common shares of the Company
to the participants, except for the participants residing outside of North America who
will receive cash equivalent market value of the shares. Grants of RSUs to participants
residing outside of North America are accounted for using variable plan accounting
whereby the value of the RSUs and its related amortization are adjusted based on the
underlying value of the Companys common shares at the end of each fiscal quarter.
As at August 31, 2004, there were 1,514,450 RSUs awarded and outstanding of which none
were vested.

The issuance of RSUs replaced the
annual grant of options for the 2003 calendar year. In addition, a one-time cash payment
of $7.8 million was also awarded to the non-executive employees who were eligible for the
RSU plan during 2004. The full amount of the cash payment was expensed in 2004. The total
expenses by functional areas incurred for 2004 pertaining to the cash payment and
amortization of RSUs are as follows:

16

---

Page 70 of 104

During 2004, the Company advanced
$22.1 million to the trustee of the RSU plan to enable the trustee to purchase the Companys
common shares in the open market. At August 31, 2004, 1,467,304 shares are being held by
the trustee in order to deliver such shares to the participants on the vesting dates of
the RSUs.

The cost of the purchase of these
shares is classified as treasury stock and presented as a reduction of shareholders equity
in the Companys consolidated balance sheet.

(e) Deferred share units

During 2004, the Company established
a plan to grant Deferred Share Units (DSUs) to its non-management directors.
Under this plan, the directors will receive DSUs, in addition to cash payments, as part
of their annual compensation package. A DSU is a unit equivalent in value to one common
share of the Company based on the five-day average trading price of the Companys
common shares on the NASDAQ (the Weighted Average Price) immediately prior to
the date on which the value of the DSU is determined. DSUs may be redeemed following
termination of Board service, and prior to the end of the year following departure from
the Board based on the Weighted Average Price at the time of redemption. Alternatively, a
director may elect to receive RSUs in lieu of DSUs provided the market value of his
holdings in the Companys common stock equity is greater than $350,000. As at August
31, 2004, there were 92,082 DSUs outstanding, of which 75,155 were vested.

As of the date of the grant, the
fair value of the DSUs outstanding, being the fair market value of the Companys
common shares at that date, are recorded as a liability on the Companys
consolidated balance sheet and are amortized over the one-year vesting period of the DSU.
The value of the DSU liability is adjusted to reflect changes in the market value of the
Companys common shares. The expense for fiscal 2004 related to DSUs granted to the
directors for services rendered was $1.2 million.

(f)
Contributed surplus

During 2004, a total of $5.8 million
was added to contributed surplus relating to the amortization of RSU expenses for the
employees residing in North America.

During 2003, an employee reimbursed
$0.2 million (2002  $0.4 million) to the Company for a loan receivable the Company
assumed when it acquired ArtX. This transaction was recorded as contributed surplus.

During 2002, the Company cancelled
for no consideration 134,200 options and 76,125 common shares with a total carrying value
of $2.2 million. This transaction was recorded as contributed surplus.

NOTE
13. Income taxes

Income
(loss) before income taxes consist of the following:

The income tax expense consists of
the following:

17

---

Page 71 of 104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2004, 2003 and
2002 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

The
following is a summary of the components of the future tax assets and liabilities:

Income tax expense (recovery) in the
consolidated statements of operations and retained earnings varies from the amount that
would be computed by applying the basic Canadian federal and provincial income tax rates
to income before income taxes, as shown in the following table:

Canadian income taxes were not
provided for on undistributed income for certain non-Canadian subsidiaries. The Company
intends to reinvest this income indefinitely in operations outside Canada.

As at August 31, 2004, the Company
had $44.6 million of net operating losses for income tax purposes. Income tax benefits
have not been recognized in these financial statements for a significant portion of these
losses. These losses will begin to expire commencing in 2010.

18

---

Page 72 of 104

NOTE 14. Net income (loss) per share

The following table presents a
reconciliation of the numerators and denominators used in the calculations of the basic
and diluted net income (loss) per share:

As at August 31, 2004, options to
purchase 5,167,670 (2003  16,154,211; 2002 32,813,005) shares of common stock
were outstanding but were not included in the calculation of diluted net income (loss)
per share because to do so would have been anti-dilutive.

NOTE
15. Guarantees

The Company and other owners of CVRH
have jointly and severally provided a guarantee for the mortgage payment on the Building
Facility. In the event that CVRH is unable to meet the underlying mortgage payment to the
lender, the Company and other owners of CVRH will be jointly and severally responsible
under this guarantee. The monthly mortgage interest and principal payment amounts to
approximately $0.2 million. The mortgage has a repayment term of 12 years with a maturity
date on November 1, 2014. As of August 31, 2004, the outstanding amount of the mortgage
stood at $23.1 million (Cdn. $30.4 million).

In addition, the Company posted a
letter of credit in the amount of $2.3 million (Cdn. $3.0 million) in favour of CVRH.
CVRH has assigned this letter of credit to the exclusive benefit of the lender as
additional security of the mortgage. The letter of credit has a term of five years and
will expire on November 5, 2007. In the event of a lease default by the Company, the
proceeds of the letter of credit will be paid to the lender.

NOTE 16. Other charges (recoveries)

Other charges (recoveries) include
the following items:

19

---

Page 73 of 104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2004, 2003 and
2002 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

(a) Settlement of class
action lawsuits

On February 7, 2003, the Company
announced that it had reached an agreement for the full and complete settlement of all
remaining claims alleged in the shareholder class action lawsuits filed in May 2001 in
the United States District Court for the Eastern District of Pennsylvania for a cash
payment of $8.0 million. This litigation relates to alleged misrepresentations and
omissions made by the Company and certain directors and officers during a period
preceding its May 2000 earnings warning. The terms of the Stipulation and Agreement of
Settlement received final Court approval on April 28, 2003 and included no admission of
liability or wrongdoing by the Company or other defendants. No party timely appealed the
Courts order.

During fiscal 2003, the Company
received $3.3 million from its insurer as its contribution towards the settlement.

(b)
Regulatory matters

In January 2003, the Company
announced that Staff of the Ontario Securities Commission (OSC) had filed a
Notice to Hearing and Statement of Allegations (Notice) in relation to the
Company and others. The Notice alleged that the Company failed to disclose information
concerning the shortfall in revenues and earnings that occurred in the third quarter of
fiscal 2000, as required by the listing rules of The Toronto Stock Exchange. The Notice
also alleged that the Company made a misleading statement to Staff of the OSC in August
2000 regarding the events leading up to the disclosure on May 24, 2000 of the shortfall.
Seven individuals were also named in the Notice. The Notice alleged that six individuals,
including K.Y. Ho, the then Chairman and Chief Executive Officer of the Company, engaged
in insider trading contrary to the Securities Act. The hearing originally set for
February  March 2004 has been rescheduled to March  June 2005.

(c) Restructuring charge
(recovery)  European operations

The
following table details the activity through the restructuring liabilities accrual:

(i)  During the second quarter of
fiscal 2003, the Company announced the closure of                     ATI Technologies
(Europe) Limited (ATEL), its subsidiary in Dublin,
                    Ireland, and recorded a pre-tax charge of $2.8 million. The charge
included a                     $1.4 million write-down of ATELs building facility
to estimated fair value                     less cost to sell. The Company completed the
major components of the exit plan                     for ATEL in July 2003.

During fiscal 2004, the Company was
able to sell ATELs building facility at a higher price than originally estimated
resulting in a recovery of $0.5 million from the restructuring charge. The Company also
paid out the remaining cash portion of the restructuring charge of $0.5 million during
the year.

(ii) During
the fourth quarter of fiscal 2003, the Company decided to discontinue
                    the operations of ATI Research GmbH, its FireGL product division
located in                     Starnberg, Germany, in order to consolidate its research
and development                     activities. As a result, the Company recorded a
pre-tax charge of $3.8 million                     for the quarter pertaining to the
closure of ATI Research GmbH.

During fiscal 2004, the Company
recovered $0.2 million related to the restructuring charge of ATI Research GmbH.

During fiscal 2004, the Company made
a cash payment of $3.5 million relating to the pre-tax charge setup in fiscal 2003. The
Company completed the major components of its exit plan for ATI Research GmbH in December
2003. The remaining balance relates to unpaid facility costs and legal fees.

(d) Lease exit charge
(recovery)

During the second quarter of fiscal
2003, the Company determined that it would exit the two leased properties located in
Markham, Ontario. As a result, the Company recognized the fair value of the future net
costs related to the leases in the amount of $2.4 million as a charge for the second
quarter.

20

---

Page 74 of 104

During the fourth quarter of fiscal
2003, the Company recorded an additional charge of $0.3 million related to the exit costs
of the above-mentioned lease properties due to a change in estimate of the fair value of
the future net costs.

During fiscal 2004, the Company
determined that it would re-occupy the two leased properties, due to an expansion of
business. This resulted in a reduction of the previously accrued exit charge liability in
the amount of $1.5 million.

(e) Settlement of patent
litigation with Cirrus Logic, Inc.

Subsequent to the year end of fiscal
2003, the Company and Cirrus announced that they had entered into a cross-license
agreement and had settled all outstanding litigation between the companies related to
certain patent infringement lawsuits.

Under the settlement agreement, all
outstanding claims and counterclaims in the lawsuits between the Company and Cirrus were
dismissed. In connection with the settlement, Cirrus would transfer to the Company a
portion of its patent portfolio relating to the former graphics products group of its PC
products division, a business that Cirrus exited several years ago, for a cash payment of
$9.0 million from the Company.

NOTE
17. Segmented information

The Company operates in one primary
operating segment, that being the design, manufacture and sale of innovative 3D graphics
and digital media silicon solutions.

At August 31, 2004, none of the
Companys customers accounted for 10.0% or more of consolidated accounts receivable
balance (2003  one customer accounted for 17.6%). In fiscal 2004, one customer
accounted for 10.6% of consolidated revenues (2003  three customers accounted for
16.2%, 13.0% and 10.6%; 2002  one customer accounted for 21.2%).

21

---

Page 75 of 104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2004, 2003 and
2002 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

NOTE
18. Commitments

The Company is committed to the
following minimum payments related to office premises and licence and royalty agreements:

NOTE
19. Joint venture

In February 1999, the Company
entered into a 50.0% ownership joint venture agreement for the purpose of constructing a
new Building Facility in Markham, Ontario. The facility was completed in April 2002 and
is fully occupied by the Company. The completed cost of this facility amounted to $33.3
million.

The following amounts represent the
Companys proportionate interest in the joint venture:

On May 23, 2001, the joint venture
entered into an interest rate swap contract to hedge its exposure to the interest rate
risk applicable to its expected future mortgage requirement. This contract was a forward
start pay fixed derivative agreement for a notional amount of Cdn. $38.0 million. The
agreement provided for the joint venture to pay a fixed rate of 6.42% in exchange for a
floating rate equivalent to one-month Canadian bankersacceptances. The Company and
the other joint venture partners are guarantors of the credit facility. This interest
rate swap contract closed on September 10, 2002, resulting in a proportionate loss of
$1.4 million to the Company. The loss is treated as a deferred expense item in the
consolidated balance sheets and is charged to the consolidated statements of operations
and retained earnings as a yield adjustment to the interest expense over the term of the
mortgage.

NOTE 20. Supplemental cash flow
information

During
fiscal 2002, the Company acquired $16.3 million of capital assets by means of a capital
lease.

22

---

Page 76 of 104

NOTE 21. Canadian and United States
accounting policies differences

(a)The following table reconciles
net income (loss) for the year as reported on the consolidated
statements of operations and retained earnings prepared in accordance
with Canadian GAAP to the consolidated net income (loss) for the year
that would have been reported had the financial statements been
prepared in accordance with U.S. GAAP:

(i)  Under Canadian GAAP, purchased
in-process R&D is capitalized and amortized                     over its estimated
useful life. Asset recoverability is reviewed on an ongoing                     basis.
Under U.S. GAAP, purchased in-process R&D is written off at the time
                    of acquisition.

(ii)  Under Canadian GAAP, the
aggregate purchase price of ArtX was approximately                     $453.0 million,
which was based on the average closing market price of the                     Companys
common shares around April 4, 2000 (the closing date of the
                    transaction) and merger-related costs. Under U.S. GAAP, the aggregate
purchase                     price of ArtX was approximately $414.0 million, which was
based on the average                     closing market price of the Companys
common shares around February 16,                     2000 (the date of the announcement
of the transaction) and merger-related costs.                     As a result, the
recorded amount of goodwill and related amount of amortization
                    expense differ. Pursuant to the adoption of new accounting standards,
effective                     September 1, 2002, the Company discontinued amortization of
all existing                     goodwill under both Canadian and U.S. GAAP.

(iii)  Under U.S. GAAP, options
granted after January 18, 2001, with an exercise price                     denominated in
a currency other than the currency of the primary economic
                    environment of either the employer or the employee, should be
accounted for                     under the variable accounting method. Under Canadian
GAAP, there is no                     equivalent requirement. There were no such options
granted after February 28,                     2002.

(iv)  Under U.S. GAAP, the intrinsic
value of the stock options issued under the                     incentive plan entered
into in July 2002 (note 12) is calculated as the increase                     in the
Companys stock price between the grant date and the date on which
                    all the conditions of the specified business arrangement were
determined to have                     been met. The compensation expense is recognized
over the vesting period of the                     options. Under Canadian GAAP, there is
no equivalent requirement.

(v)  Under Canadian GAAP, loss on a
hedging transaction is allowed to be amortized                     over the term of the
mortgage. Under U.S. GAAP, loss on a hedging transaction is                     written
off when the hedge is determined to be ineffective.

23

---

Page 77 of 104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2004, 2003 and
2002 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

(vi)  The Company accounts for its
share options under the provisions of the                     Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to                     Employees (APB
25), and related interpretations. Accordingly,                     compensation
expense for its share options plans, based on the intrinsic value,
                    has been recorded in the consolidated statements of operations and
retained                     earnings for the years ended August 31, 2004, 2003 and 2002.
Had compensation                     expense for the Companys share option plans
been determined based on the                     fair value at the grant dates for awards
under the plans consistent with the                     method prescribed under Financial
Accounting Standards Board (FASB)                     Statement of Financial
Accounting Standards No. 123, Accounting for                     Stock-based
Compensation (SFAS 123), the Companys net
                    income (loss) and net income (loss) per share would have been
reported as the                     pro forma amounts indicated in the table below:

The weighted average estimated fair
values at the date of the grant, as defined by SFAS 123, for options granted in fiscal
2004, 2003 and 2002 were $8.96, $2.65 and $9.15 per share option, respectively.

The fair value of each option grant
was estimated on the date of the grant using the Black-Scholes fair value option pricing
model with the following assumptions:

For the purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense on a
straight-line basis over the options vesting period.

For the purposes of reporting under
U.S. GAAP, the tax benefit associated with deductible stock option compensation is
treated as an increase in share capital. For reporting under Canadian GAAP, if
compensation costs are not recorded, the income tax benefit is treated as a reduction to
the income tax provision.

24

---

Page 78 of 104

(b)The following table indicates
the differences between the amounts of certain balance sheet items
determined in accordance with Canadian and U.S. GAAP:

(i)  Canadian GAAP requires the
proportionate consolidation of interests in joint                     ventures.
Proportionate consolidation is not permitted under U.S. GAAP and
                    interests in joint ventures are accounted for in accordance with the
equity                     basis of accounting.

Although the adoption of
proportionate consolidation has no impact on net income (loss) or shareholders equity,
it does increase assets, liabilities, revenue, expenses and cash flows from operations
from those amounts otherwise reported under U.S. GAAP. This is not reflected in the table
of certain balance sheet items disclosed above.

(ii)  Additional disclosures as
required in accordance with U.S. GAAP:

(a)  As at August 31, 2004, the
consolidated accounts receivable provision for                     returns and doubtful
accounts was approximately $17.1 million (2003  $12.3                     million).

(b)  As at August 31, 2004, sales
rebates payable represents 23.0% of total                     consolidated current
liabilities (2003  17.0%).

(c)  For the year ended August 31,
2004, the net foreign exchange gain was                     approximately $0.5 million
(2003  gain of $0.8 million; 2002  loss                     of $0.4 million).

(iii) Comprehensive income (loss):

FASB Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130),
requires disclosure of comprehensive income, which includes reported net income (loss)
adjusted for other comprehensive income. Other comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. The following table presents
comprehensive income (loss) and its components:

25

---

Page 79 of 104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2004, 2003 and
2002 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

(iv)  During the fourth quarter of
fiscal 2004, the Company had purchased forward                     foreign exchange
contracts to buy Cdn. $35.0 million in the next three months at                     an
average exchange rate of 1.3793. All of the forward foreign exchange
                    contracts have become favourable to the Company since their inception
and have a                     fair value of $1.3 million at August 31, 2004.

(c) New United States accounting
pronouncements

(i) In January 2003, FASB issued
                    Interpretation No. 46, Consolidation of Variable Interest
Entities                    (FIN 46), which is effective for the Company commencing
with its 2004 fiscal                     year. In December 2003, the FASB issued FIN 46R
which superseded FIN 46 and                     contains numerous exemptions. FIN 46R
applies to financial statements of public                     entities that have or
potentially have interests in entities considered special                     purpose
entities for periods ended after December 15, 2003 and otherwise to
                    interests in VIEs for periods ending after March 15, 2004. VIEs are
entities                     that have insufficient equity and/or their equity investors
lack one or more                     specified essential characteristics of a controlling
financial interest. The                     guideline provides specific guidance for
determining when an entity is a VIE and                     who, if anyone, should
consolidate the VIE. The Company was not impacted by                     these standards.

(ii)  In April 2003, FASB issued
SFAS No. 149, Amendment of Statement 133 on                     Derivative
Instruments and Hedging Activities, which amends and clarifies
                    the accounting and reporting for derivative instruments, including
those                     embedded in other contracts and for hedging activities under
SFAS No. 133. SFAS                     No. 149 is effective as of July 1, 2003. The
adoption of this standard did not                     have a material impact on the
Companys financial position, results of                     operations or cash
flows.

(iii) In May 2003, FASB issued SFAS
No. 150, Accounting for Certain Financial                     Instruments with
Characteristics of Both Liabilities and Equity, which
                    establishes standards for the classification and measurement of these
financial                     instruments. SFAS No. 150 is effective as of the Companys
first quarter                     beginning September 1, 2003. The Company was not
impacted by this standard.

NOTE
22. Litigation

The Company is subject to legal
proceedings and claims that arise in the ordinary course of its business. While
management currently believes the amount of ultimate liability, if any, with respect to
these actions will not materially affect the financial position, results of operations,
or liquidity of the Company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to the Company.

NOTE
23. Subsequent events

(i) On September 1, 2004, the
Company acquired certain assets of RT&C                     International, its sales
organization for South Korea, for cash consideration of                     $2.6 million,
plus acquisition-related costs.

(ii)  In September 2004, ATI signed
an agreement to purchase all of the shares of a                     company for cash
consideration of up to $3.6 million, plus acquisition-related                     costs.
The Company, a high technology embedded solutions provider, is located in
                    India. The acquisition is subject to regulatory approval and is
expected to                     close by December 31, 2004.

26