Where we say "we", "us", "our", the "Company" or "SMTC", we mean SMTC Corporation or SMTC Corporation and its subsidiaries, as it may apply. Where we refer to the "industry", we mean the electronics manufacturing services industry.

You should read this Management's Discussion and Analysis of Financial Condition and Results of Operation ("MD&A") in combination with the accompanying unaudited interim consolidated financial statements and related notes as well as the audited consolidated financial statements and the accompanying notes to the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") included within the Company's Annual Report on Form 10-K filed on March 31, 2008. The forward-looking statements in this discussion regarding the electronics manufacturing services industry, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion include numerous risks and uncertainties, some of which are as described in the "Risk Factors That May Affect Future Results" section in the Annual Report on Form 10-K filed on March 31, 2008, as updated by Item 1A in Part II of this quarterly report. Certain statements in this MD&A contain words such as "could", "expects", "may", "anticipates", "believes", "intends", "estimates", "plans", "envisions", "seeks" and other similar language and are considered forward looking statements or information under applicable securities laws. These statements are based on our current expectations, estimates, forecasts and projections about the operating environment, economies and markets in which we operate. These statements are subject to important assumptions, risks and uncertainties, which are difficult to predict and the actual outcome may be materially different. Although we believe expectations reflected in such forward-looking statements are reasonable based upon the assumptions in this MD&A, they may prove to be inaccurate and consequently our actual results could differ materially from our expectations set out in this MD&A. We may not update these forward-looking statements after the date of this Form 10-Q, even though our situation may change in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

This MD&A contains discussion in U.S. dollars unless specifically stated otherwise.

Background

SMTC Corporation is a mid-tier provider of end-to-end electronics manufacturing services, or EMS, including product design and sustaining engineering services, printed circuit board assembly, or PCBA, production, enclosure fabrication, systems integration and comprehensive testing services. SMTC facilities span a broad footprint in the United States, Canada, Mexico and China, with approximately 1,000 full-time employees. SMTC's services extend over the entire electronic product life cycle from the development and introduction of new products through to growth, maturity and end-of-life phases. SMTC offers fully integrated contract manufacturing services with a distinctive approach to global original equipment manufacturers, or OEMs, and technology companies primarily within the industrial, computing and networking, and communications, consumer and medical market segments.

Developments in 2008

The first quarter is traditionally a challenging quarter for the Company and the industry. Revenue levels were somewhat lower than expected in the first quarter, the result of lower order levels from several customers and softness in certain customer end markets including semi-conductor capital and construction related equipment. Order levels from certain larger customers came in lower than management's expectations due to several factors including end market softness and product life cycle fluctuations. However, despite lower revenues, the Company remained profitable in the first quarter and continued to generate cash and reduce debt as planned.

In the second quarter, sales increased 20% to $66.3 million over the first quarter of 2008 with growth from both longstanding customers and newer customers. However, operating earnings were adversely affected by sales mix and higher labor and overhead costs in part due to shifting production from the Company's Mexico site to its China facility. Accordingly, the Company initiated several cost reduction initiatives, resulting in a charge of $0.8 million in severance, mainly in Mexico and Boston, and a $4.9 million non-cash asset impairment charge for leasehold improvements in our Boston facility. Cash generation did not meet the expected target as two of our larger customers withheld payments until after the end of the quarter.

In the third quarter, sales increased 11% over the same period of the prior year to $60.1 million, and were 9% lower than sales in the second quarter of 2008. Revenue was expected to be close to the second quarter level; however the quarter was adversely impacted by supply chain challenges as production for a second customer was transferred from Mexico to China and delays were incurred in ramping production of two newer customers. As a result, we entered the fourth quarter with a sizable backlog. Earnings were positively affected by the cost reduction initiatives undertaken in the previous quarter, showing a modest profit despite lower revenue and a $0.6 million charge to earnings as a result of our refinancing. Cash generation was solid in the quarter despite some inventory build up due to delayed production. The Company generated $8.1 million in cash from operations in the quarter, $5.3 million year to date.

Our China facility continues to operate very well with increased production, recording $12.6 million in revenue for the quarter. We continue to operate under a long standing manufacturing arrangement with Alco Electronics, our partner in China; however we expect to finalize a joint venture arrangement in due course.

To improve financial flexibility and reduce interest rates, the Company closed a second amended financing agreement with Wachovia and Export Development Canada ("EDC") on August 7, 2008 (the "Wachovia EDC Facilities"). Under the amendment,

Wachovia improved certain borrowing base conditions based on eligible inventory and accounts receivable of the Company to allow increased borrowing capacity and increased the facility from $40 million to $45 million. Wachovia also provided an $0.8 million term loan, bearing interest based on the U.S. Prime rate. Also under this amendment, EDC replaces Garrison as the primary term debt lender. The proceeds from the EDC term debt of $13 million, together with the increased borrowing capacity, were used to repay the entire Garrison term loan. The interest on the LIBOR based term debt to EDC has been reduced from LIBOR plus 4% to LIBOR plus 3.5%, decreasing at various leverage rates. Covenants were changed and restrictions on certain investments and expenditures were improved. As a result of this refinancing, the Company recorded a non-cash charge to write off the remaining unamortized deferred financing fee asset related with the former term debt of $0.6 million.

Results of Operations

The consolidated financial statements of SMTC are prepared in accordance with U.S. GAAP, which conforms in all material respects to Canadian GAAP, except as disclosed in note 14 of the consolidated financial statements included with the Annual Report on Form 10-K filed on March 31, 2008.

Quarter ended September 28, 2008 compared with the quarter ended September 30, 2007:

The following table sets forth summarized operating results in millions of U.S.$ for the periods indicated:

                                                 Three months ended           Three months ended              Change
                                                 September 28, 2008           September 30, 2007           2008 to 2007
                                                   $             %             $              %            $          %
Revenue                                        $     60.1        100.0 %   $    54.0          100.0 %    $  6.1       11.3 %
Cost of sales                                        55.3         92.0 %        50.6           93.7 %       4.7        9.3 %

Gross profit                                          4.8          8.0 %         3.4            6.3 %       1.4       41.2 %
Selling, general and administrative expenses          3.5          5.8 %         2.7            5.0 %       0.8       29.6 %
Restructuring charges                                  -            -            0.2            0.4 %      (0.2 )   (100.0 )%
Loss on extinguishment of debt                        0.6          1.0 %         0.4            0.7 %       0.2       50.0 %

Operating earnings                                    0.7          1.2 %         0.1            0.2 %       0.6      600.0 %
Interest expense                                      0.6          1.0 %         1.2            2.2 %      (0.6 )    (50.0 )%

Earnings (loss) before income taxes                   0.1          0.2 %        (1.1 )         (2.0 )%      1.2      108.3 %
Income tax expenses
Current                                                -           0.0 %         0.1            0.2 %      (0.1 )   (100.0 )%
Deferred                                               -           0.0 %          -             0.0 %        -          NA

                                                       -           0.0 %         0.1            0.2 %      (0.1 )   (100.0 )%

Net earnings (loss)                            $      0.1          0.2 %   $    (1.2 )         (2.2 )%   $  1.3      108.3 %

Revenue

Revenue of $60.1 million for the third quarter of 2008 increased $6.1 million, or 11.3%, compared with the third quarter of 2007. The third quarter of 2008 compared with the third quarter of 2007 shows positive growth from newer customers of approximately $3.5 million as well as net growth from longstanding customers totaling $4 million. Revenues in 2008 continue to be negatively impacted by demand reductions from certain longstanding customers experiencing end market softness in the semi-conductor equipment sector or product life cycle changes. In addition, we are in the process of disengaging with two smaller customers, resulting in a revenue reduction of approximately $2 million year over year for the third quarter. The disengagements were the consequence of one customer insourcing production after being recently acquired and the other customer consolidating small volume production into a single source. The growth of newer customers as well as solid growth from several of our longstanding customers more than offset these declines.

During the third quarter of 2008, revenue from the industrial sector increased compared with the same quarter of 2007, $46.1 million for the third quarter of 2008 compared with $37.7 million for the same period in 2007, a result of the growth referred to above being generated largely by our industrial customers. Accordingly, revenue from the industrial sector represented an increased share of our business at 76.8% of revenue in the third quarter of 2008, compared with 69.8% of revenue in the third quarter of 2007.

Revenue from the communications sector decreased compared with the same quarter of 2007, $6.6 million for the third quarter of 2008 compared with $8.3 million in 2007, which represented 11.0% of revenue in the third quarter of 2008, compared with 15.4% of revenue in the third quarter of 2007 largely due to disengagement of a customer in this sector.

Revenue from the networking and enterprise computing sector decreased compared with the same quarter of 2007, $7.4 million for the third quarter of 2008 compared with $8.0 million in 2007, which represented 12.2% of revenue in the third quarter of 2008, down from 14.8% of revenue in the third quarter of 2007, largely due to a customer experiencing product life cycle changes.

During the third quarter of 2008, we recorded approximately $0.9 million of sales of raw materials inventory to customers, which carried no margin, compared with $0.6 million in the third quarter of 2007. The Company purchases raw materials based on customer purchase orders. When a customer requires an order to be altered or changed, the customer is generally obligated to purchase the original on-order raw material at cost, to the extent the materials are not consumed within a specified period.

Due to changes in market conditions, the life cycle of products, the nature of specific programs and other factors, revenues from a particular customer typically varies from quarter to quarter and year to year. The Company's ten largest customers represented 86.7% of revenue during the third quarter of 2008, compared with 82.8% in the third quarter of 2007. Revenue from our three largest customers during the third quarter of 2008 were $12.6 million from Ingenico S.
A. ("Ingenico"), $11.4 million from MEI, Inc. (formerly MEI Electronics) ("MEI"), and $11.1 million from Harris Broadcast Infrastructure and Digital Media (a subsidiary of Harris Corporation) ("Harris"), representing 21.0%, 18.9% and 18.5% of total revenue for the third quarter of 2008, respectively. This compares with revenue of $9.8 million from Ingenico, $8.8 million from Harris, and $8.6 million from MEI, representing 18.2%, 16.2% and 15.9% of total revenue for the third quarter of 2007, respectively. No other customers represented more than 10% of revenue in either period.

Approximately one third of our revenue in the third quarter of 2008 was attributable to our operations in Mexico, 19.1% in the U.S., 26.0% in Canada, and 21.0% in Asia. During the third quarter of 2007, 43.4% of our revenue was attributable to our operations in the Mexico, 34.4% in the United States and 22.2% in Canada. The Company operates in a highly competitive and dynamic marketplace in which current and prospective customers from time to time seek to lower their costs through a competitive bidding process among EMS providers. This process creates an opportunity to increase revenue to the extent we are successful in the bidding process, however, there is also the potential for revenue to decline to the extent we are unsuccessful in this process. Furthermore, even if we are successful, there is potential for our margins to decline. If we lose any of our larger product lines manufactured for any one of our customers, we could experience declines in revenue.

Gross Profit

Gross profit for the third quarter of 2008 increased by $1.4 million, or 41.2%, to $4.8 million compared with the same period in 2007. Gross profit as a percent of revenues was 8.0% compared to 6.3% in the same period in 2007. This improvement is largely due to the increased revenue level and reduced costs resulting from our cost reduction initiatives in the second quarter of 2008. While improved, profit continues to be negatively impacted by reduced revenues in our Enclosures Systems division in Boston and the resulting effect on fixed costs.

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

Selling, General & Administrative Expenses

Selling, general and administrative expenses increased by $0.8 million, or 29.6%, during the third quarter of 2008 to $3.5 million, from $2.7 million in the third quarter of 2007. The third quarter of 2007 included a $1.1 million recovery for the revaluation of deferred stock units which are marked to market each quarter end and the resulting change in value is recorded as either a charge or a recovery. In the third quarter of 2008, a $0.4 million recovery was recorded, a net change of $0.7 million over the comparative period last year.

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

Restructuring Charges

During the third quarter of 2007, the Company recorded termination payments of $0.2 million, which were primarily related to restructured operations in Mexico.

Loss on Extinguishment of Debt

Upon the early repayment of the Company's existing term debt during the third quarter of 2008, the Company recorded a non-cash charge to expense the remaining unamortized deferred financing fee assets related to the extinguished term debt of $0.6 million. In the third quarter of 2007, the Company repaid its existing senior term and subordinated debts and recorded a non-cash charge to expense the unamortized deferred financing fee assets relating to these extinguished debt instruments, net of a recovery from the remaining unamortized balance of cancelled warrants, of $0.3 million. The Company also paid $0.1 million in early repayment fees and costs in the third quarter of 2007.

Interest Expense

Interest expense decreased from $1.2 million in the third quarter of 2007 to $0.6 million for the third quarter of 2008, a decrease of $0.6 million primarily resulting from reduced debt levels and lower interest rates due to market rate reductions as well as the refinancing completed in the third quarter of 2008. Interest expense in the third quarter of 2008 included the amortization of deferred financing fees of $0.1 million, compared with $0.2 million in the third quarter of 2007. Interest expense in the third quarter of 2007 also included a reduction in interest expense of $0.1 million related to amortization of the value of cancelled warrants. Excluding the amortization of deferred financing fees, and the reduction in interest expense related to the amortization of cancelled warrants in the prior year, interest expense was $0.7 million for the third quarter of 2008 and $1.1 million for the third quarter of 2007. The weighted average interest rates with respect to the debt were 6.5% and 10.0% for each of the third quarters of 2008 and 2007, respectively.

Income Tax Expense

During the third quarters of 2007 and 2008, the Company recorded no material income tax expense.

At December 31, 2007, the Company had total net operating loss carry-forwards of approximately $84.9 million, of which $2.5 million will expire in 2010, $1.3 million will expire in 2012, $10.3 million will expire in 2014, $4.2 million will expire in 2015, $1.1 million will expire in 2018, $0.1 million will expire in 2019, $40.8 million will expire in 2021, and the remainder will expire between 2022 and 2027.

The Company had $0.3 million of gross unrecognized tax benefits at January 1, 2008 and September 28, 2008, which if recognized, would favorably impact the Company's effective rate in future periods. The Company does not expect that any of the unrecognized tax benefits, which relate to uncertain tax positions, will decrease during the next twelve months.

Tax years 2000 to 2007 remain open for review by the tax authorities in Canada. Tax years 2003 to 2007 remain open in the United States. In addition, 2001 contains an NOL that could potentially be carried forward and therefore remains open to the extent of the NOL.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management considers the scheduled reversal of deferred tax liabilities, change of control limitations, projected future taxable income and tax planning strategies in making this assessment. FASB Statement No. 109, Accounting for Income Taxes, states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence, such as cumulative losses in recent years in the jurisdictions to which the deferred tax assets relate. At the end of the second quarter of 2003, the Company concluded that given the weakness and uncertainly in the economic environment at that time, it was appropriate to establish a full valuation allowance for the deferred tax assets. Commencing in 2004, it was determined by management that it was more likely than not that the deferred tax assets associated with the Mexican jurisdiction would be realized and no valuation allowance has been recorded against these deferred tax assets since 2004. The U.S. and Canadian jurisdictions continue to have a full valuation allowance recorded against the deferred tax assets in those jurisdictions.

Nine months ended September 28, 2008 compared with nine months ended September 30, 2007

The following table sets forth summarized operating results in millions of U.S. $ for the periods ended:

                                                 Nine months ended           Nine months ended               Change
                                                 September 28, 2008          September 30, 2007           2008 to 2007
                                                   $              %            $              %          $           %
Revenue                                        $    181.5       100.0 %    $    189.6       100.0 %    $ (8.1 )      (4.3 )%
Cost of sales                                       167.8        92.0 %         173.9        91.7 %      (6.1 )      (3.5 )%

Gross profit                                         13.7         8.0 %          15.7         8.3 %      (2.0 )     (12.7 )%
Selling, general and administrative expenses         11.0         6.1 %          10.4         5.5 %       0.6         5.8 %
Restructuring charges                                 5.5         3.0 %           0.2         0.1 %       5.3      2650.0 %
Loss on extinguishment of debt                        0.6         0.3 %           0.4         0.2 %       0.2        50.0 %

Operating (loss) earnings                            (3.4 )      (1.9 )%          4.7         2.5 %      (8.1 )    (168.1 )%
Interest expense                                      2.2         1.2 %           4.5         2.4 %      (2.3 )     (51.1 )%

(Loss) earnings before income taxes                  (5.6 )      (3.1 )%          0.2         0.1 %      (5.8 )   (2800.0 )%
Income tax expense (recovery)
Current                                               0.2         0.1 %          (1.4 )      (0.7 )%      1.6       114.3 %
Deferred                                               -          0.0 %          (0.1 )      (0.1 )%      0.1       100.0 %

                                                      0.2         0.1 %          (1.5 )      (0.8 )%      1.7       113.3 %

Net (loss) earnings                            $     (5.8 )      (3.2 )%   $      1.7         0.9 %    $ (7.5 )    (429.4 )%

Revenue

Revenue decreased $8.1 million, or 4.3%, from $189.6 million for the first nine months of 2007 to $181.5 million for the first nine months of 2008. With second quarter revenues unchanged and third quarter revenues increased by $6.1 million, the decrease in revenue is due to lower first quarter revenues in 2008 compared with the first quarter of 2007. The first quarter of 2007 was particularly strong, led by a record first quarter for one of our larger customers, in what is traditionally a weaker quarter for SMTC and the industry. Overall, the first three quarters of 2008 were negatively impacted by a reduction of revenue from longstanding customers experiencing end market softness in the construction and semi-conductor equipment sectors and a reduction from a longstanding customer experiencing fluctuations due to product life cycle.

During the first nine months of 2008, revenue from the industrial sector represented 71.9% of revenue compared to 67.6% of revenue for the first nine months of 2007. The percentage of sales attributable to the enterprise computing and networking sector and the communications sector were 15.9% and 12.2%, respectively, for the first nine months of 2008 compared with 17.7% and 14.8%, respectively, for the first nine months of 2007.

Revenue generated from the industrial sector increased $2.3 million in the first nine months of 2008 compared to the first nine months of 2007 at $130.5 million and $128.2 million, respectively. The corresponding increase in the percentage of revenue generated from the industrial sector in the first nine months of 2008 compared with the first nine months of 2007 is due largely to the growth in revenue from Ingenico, MEI and Harris.

In both relative and absolute terms, the revenue generated from the communications sector in the first nine months declined. The absolute dollars declined $5.7 million from $27.9 million in the first nine months of 2007 to $22.2 million in the first nine months of 2008 largely due to a decline in revenue from longstanding customers somewhat offset by growth in volume from several newer customers. The percentage of revenue generated from the communications sector in the first nine months of 2008 compared with the same period last year declined due in part to a decline from longstanding customers, as well as in large part due to the significant increase in growth in the industrial sector.

In absolute terms the revenue generated from the enterprise computing and networking sector in the first nine months of 2008 when compared with the first nine months of 2007 decreased $4.7 million, from $33.5 million to $28.8 million largely due to a customer experiencing reductions due to product life cycle changes. In relative terms, the percentage of revenue generated from the enterprise computing and networking sector in the first nine months of 2008 compared with the first nine months of 2007 decreased largely due to the significant increase in growth in the industrial sector.

During the first nine months of 2008, we recorded approximately $3.1 million of sales of raw materials inventory to customers, which carried no margin, compared to $2.7 million in the first nine months of 2007. The Company purchases raw materials based on customer purchase orders. To the extent the customer requires these orders to be altered or changed, the customer is generally obligated to purchase the original on-order raw material.

Due to changes in market conditions, the life cycle of products, the nature of specific programs and other factors, customer volumes produced by the Company typically vary from year to year. For the first nine months of 2008, the Company's ten largest customers represented 83.2% of revenue compared with 81.0% for the same period last year. Revenue from our largest customers during the first nine months of 2008 was $39.6 million from Ingenico, $33.9 million from Harris and $29.4 million from MEI representing 21.8%, 18.7%, and 16.2%, respectively, of total revenue for the period. This compares with revenue of $34.6 million from Ingenico, $30.2 million from Harris and $25.5 million from MEI, representing 18.3%, 15.9%, and 13.5%, respectively, of total revenue for the same period last year. No other customers represented more than 10% of revenue in either period.

. . .