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 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 ("US GAAP") included within this Annual Report on Form 10-K. 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 above. 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 Annual Report, 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 US dollars unless specifically stated otherwise.

Overview

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 the period ended January 4, 2009

For the fiscal period, SMTC had revenue of $242.6 million, approximately 5% lower than 2007, and earnings before tax of $264 thousand excluding one-time items (which comprise of restructuring charges of $5.6 million, a loss on extinguishment of debt of $0.6 million, and other recoveries of $0.2 million) in the face of a challenging economic environment. Earnings were largely affected by the performance of our Enclosures business located in Boston, Massachusetts that we recently announced will be closed by the end of the second quarter of 2009 with production moved to other facilities including our recently expanded Enclosures operation in Mexico. Our Enclosures business was negatively impacted by the challenging economy and the resulting impact on our customers' end markets, primarily in the semi-conductor capital sector, as well as a customer disengagement that was the result of being acquired and production in sourced.

Cash generation and debt reduction, key goals for the Company, were strong with the Company generating $7.1 million in cash from operations and reducing net long-term debt by $4.7 million. Net debt at $16.1 million is the lowest debt level for the Company in the past 10 years. Debt has been reduced by $24.9 million in the past two years. During the year, the Company refinanced its debt with long-standing lender, Wachovia Capital, and a new term lender, Export Development Canada. In 2008, the Company successfully strengthened its footprint with a manufacturing partnership with its long-standing partner Alco Electronics Ltd. in China with the establishment of a new dedicated manufacturing facility in Chang An, China.

Subsequent to January 4, 2009, the Company received a waiver from its lenders with respect to what would have otherwise been a covenant violation at the time of filing of the Company's fiscal 2008 financial statements in April 2009. In addition, the Company and its lenders have amended the lending agreements to revise the EBITDA and leverage covenants and eliminate the fixed charge coverage ratio for the next five quarters including the fiscal period beginning January 5, 2009 and for the first quarter of the 2010 fiscal period. The interest rate has also been increased by 200 basis points. The revised covenants reflect the decline in revenues expected as a result of the current challenging business environment. Management believes that the Company will be in compliance with these covenants for the foreseeable future. Accordingly, the outstanding balances under the lending agreements continue to be classified as long-term. Continued compliance with its covenants, however, is dependent on the Company achieving certain forecasts. While management is confident in its plans, market conditions have been difficult to predict and there is no assurance that the Company will achieve its forecasts.

Results of Operations

Continuing Operations

Our contractual arrangements with our key customers generally provide a framework for our overall relationship with our customers. Revenue from the sale of products is recognized when goods are shipped to customers and title has passed to the customer, persuasive evidence of an arrangement exists, performance has occurred, all customer-specified test criteria have been met and the earnings process is complete. Actual production volumes are based on purchase orders for the delivery of products. Typically, these orders do not

commit to firm production schedules for more than 30 to 90 days in advance. To minimize inventory risk, generally we order materials and components only to the extent necessary to satisfy existing customer forecasts or purchase orders. Fluctuations in material costs typically are passed through to customers. We may agree, upon request from our customers, to temporarily delay shipments, which causes a corresponding delay in our revenue recognition. The Company also derives revenue from engineering and design services. Service revenue is recognized as services are performed.

The consolidated financial statements of SMTC are prepared in accordance with
US GAAP.

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

                                            December 31,          December 31,          January 4,
                                                2006                  2007                 2009
Revenue                                            100.0 %               100.0 %             100.0 %
Cost of sales                                       89.9 %                91.4 %              92.7 %

Gross profit                                        10.1 %                 8.6 %               7.3 %
Selling, general and administrative
expenses                                             5.8 %                 5.7 %               6.0 %
Restructuring charges (recoveries)                  (0.5 )%                0.1 %               2.3 %
Gain on sale of assets                              (0.5 )%                 -                   -
Loss on extinguishment of debt                        -                    0.1 %               0.3 %
Other expenses (recoveries)                          0.3 %                  -                 (0.1 )%

Operating earnings (loss)                            5.0 %                 2.7 %              (1.2 )%
Interest expense                                     2.1 %                 2.2 %               1.2 %

Earnings (loss) from continuing
operations before income taxes                       2.9 %                 0.5 %              (2.4 )%
Income tax (recovery) expense
Current                                             (0.8 )%               (0.5 )%              0.0 %
Deferred                                              -                     -                   -

                                                    (0.8 )%               (0.5 )%             (0.0 )%

Net earnings from continuing
operations                                           3.7 %                 1.0 %              (2.4 )%

Fiscal period ended January 4, 2009 compared to the year ended December 31, 2007

Revenue

Revenue decreased $13.8 million, or 5.4%, from $256.4 million for the year ended December 31, 2007 to $242.6 million for the period ended January 4, 2009 ("fiscal 2008"). The decrease in revenue was primarily due to a reduction in customer demand in our Boston, Massachusetts based Enclosures division, largely end market based. The Boston facility will be closing at the end of the second quarter of 2009. While not as significant, revenue was also negatively impacted by several small customer disengagements largely in 2007 and two longstanding customers experiencing end market softness related to the construction industry and product lifecycle changes. Somewhat offsetting these reductions, new customers introduced in the past several quarters generated an increase of over $10 million in revenue for fiscal 2008 and three of our larger customers generated year over year increases. The increases experienced with these larger customers was due to a mix of improved end market penetration, end market growth and an increase in our share of business, somewhat offset by reductions in pricing as production for certain of these customers moved to lower cost regions.

During fiscal 2008, revenue from the industrial sector represented 72.1% of revenue compared to 68.1% of revenue in 2007. All segments were negatively impacted by the reduction in revenues from the Enclosures division. The increase in the percentage of revenue generated from the industrial sector in fiscal 2008 compared to 2007 is due to the growth in revenue from three of our larger customers, somewhat offset by a customer negatively impacted by the downturn in the semi conductor capital equipment sector. The percentage of sales

attributable to the networking and enterprise computing sector was 16.1% during fiscal 2008, largely unchanged compared to 16.8% during 2007 however a reduction in absolute dollars was experienced as the segment was impacted by the reduction of revenue in the Enclosures division and our customer experiencing product lifecycle changes, somewhat offset by new customer revenue. The percentage of sales attributable to the communications sector decreased to 11.9% during fiscal 2008 from 15.1% during 2007 due to various reductions including customers in our Enclosures division, our customer experiencing end market challenges relating to the construction segment and 2007 disengagements, somewhat offset by new customer revenue.

During fiscal 2008, we recorded approximately $5.0 million of sales of raw materials inventory to customers, which carried no margin, compared to $3.0 million in 2007. The Company purchases raw materials based on customer purchase orders. To the extent 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.

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 vary from year to year. The Company's ten largest customers represented 82.8% of revenue during fiscal 2008, compared to 81.2% in 2007. Revenue from our three largest customers during fiscal 2008 was $48.2 million from Ingenico, $45.4 million from Harris and $40.7 million from MEI, Inc. ("MEI"), representing 19.9%, 18.7% and 16.8%, respectively, of total revenue for fiscal 2008. This compares with revenue of $48.8 million from Ingenico, $39.1 million from Harris and $36.4 million from MEI, representing 19.0%, 15.2% and 14.2%, respectively, of total revenue for 2007. No other customers represented more than 10% of revenue in either year.

During 2008, 35.1% of our revenue was attributable to our operations in Mexico, 27.9% in Canada, 21.8% in the US and 15.2% in Asia. During 2007, 42.5% of our revenue was attributable to our operations in Mexico, 33.9% in the US and 23.6% in Canada. The decrease in Mexico and increase in Asia was a result of production transferring to our lower cost new Asian operation.

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 a decline in revenue 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 decreased from $22.1 million, or 8.6% of revenue, for 2007 to $17.6 million, or 7.3% of revenue, for fiscal 2008. This decrease in gross profit is largely due to losses incurred in our Enclosures division, and, to a lesser degree, higher factory overhead, higher parts sales with no margin and the impact on margins of production transferred to Asia, all somewhat offset by improved direct labour efficiency over 2007, including improved foreign exchange.

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 remained essentially unchanged decreasing by $0.1 million during fiscal 2008 to $14.5 million from $14.6 million in 2007, but increased as a percentage of revenue to 6.0% for fiscal 2008 from 5.7% of revenue for 2007; the result of the reduction in revenue.

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

Restructuring and Other Charges

During fiscal 2008, the Company implemented restructuring activities as a result of the transfer of production from the Chihuahua facility to the Company's China facility and the reduced revenue in the Boston facility. Termination payments of $0.9 million were recorded as restructuring charges and were paid during the year. The Company also recorded a non-cash asset impairment charge of $4.9 million primarily relating to leasehold improvements at the Boston facility. In addition, the Company recorded a restructuring recovery of $0.2 million consisting of a dividend from the liquidation of the Company's Donegal, Ireland facility, which was initiated under the Company's restructuring plan of 2002.

During 2007, the Company put into place changes related primarily to manufacturing operations in Mexico. Termination payments of $0.2 million were recorded as restructuring charges and were paid during the year.

Loss on extinguishment of debt

Upon the early repayment of the Company's pre-existing term debt with Garrison during the third quarter of 2008, the Company recorded a non-cash charge of $0.6 million for the remaining unamortized deferred financing assets related to this extinguished debt.

Upon the early repayment of the Company's pre-existing senior term and subordinated debt during the third quarter of 2007, the Company recorded a non-cash charge to remove the remaining unamortized deferred financing assets related to these extinguished debts, 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.

Other Income

During the period ended January 4, 2009, the Company entered into forward foreign exchange contracts to reduce our exposure to foreign exchange currency rate changes related to forecast Canadian dollar denominated payroll, rent and utility cash flows in the first quarter of fiscal 2009. These contracts were effective as hedges from an economic perspective, but were not designated as hedges for accounting purposes. Accordingly, changes in the fair value of these contracts were recognized in the consolidated statement of operations and comprehensive income. The Company does not enter into forward foreign exchange contracts for trading or speculative purposes.

As of January 4, 2009, forward foreign exchange contracts with an aggregate exercise value of $3.6 million were outstanding, and are to be settled between January 9, 2009 and April 3, 2009 at a forward rate of USD $1.00 = CAD $1.268. The unrealized gain recognized into earnings as a result of revaluing the instruments to fair value on January 4, 2009 was $0.2 million which was included in other expense (recovery) in the statement of operations and comprehensive income and accounts receivable on the balance sheet. Fair value was determined using the market approach by reference to quoted prices in active markets for identical assets.

Interest Expense

Interest expense decreased by $2.7 million in fiscal 2008 from $5.6 million to $2.9 million. Included in interest expense is amortization of deferred financing fees of $0.4 million in fiscal 2008, which decreased by $0.9 million from 2007 as a result of the write off of financing fees related to the previous senior term and subordinated term debt incurred upon debt restructuring during fiscal 2007. Interest expense in 2007 was also offset by a reduction in interest expense of $0.2 million for amortization of the value of the cancelled warrants.

Interest expense directly related to debt, excluding the amortization of deferred financing fees and the reduction in interest expense relating to the amortization of the value of cancelled warrants, decreased by $2.0 million, from $4.5 million for 2007, to $2.5 million for 2008 due to lower average debt balances outstanding and lower interest rates in fiscal 2008 as compared to 2007 due to the general decrease in applicable interest rates and reduced rates at the time of the August 2008 refinancing. The weighted average interest rates with respect to the debt were 9.9% and 6.7%, for the year ended December 31, 2007 and the period ended January 4, 2009 respectively.

Income Tax Expense

The net tax expense for 2008 of $0.1 million related to minimum taxes in certain jurisdictions, compared with a net income tax recovery of $1.3 million in 2007, resulting primarily from the release of previously recorded tax reserves.

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.

At January 4, 2009, the Company had total net operating loss carry forwards of $88.2 million, of which $2.0 million will expire in 2010, $1.3 million will expire in 2012, $8.4 million will expire in 2014, $3.4 million will expire in 2015, $1.1 million will expire in 2018, $0.1 million will expire in 2019, $42.0 million will expire in 2021, and the remainder will expire between 2023 and 2028.

During fiscal 2008, the Company reviewed if its tax position related to the Recapitalization Transaction would result in an ownership change for purposes of
Section 382 of the Internal Revenue Code ("Section 382"), which imposes a limitation on a corporation's use of net operating loss carry forwards following an "ownership change." The Company has concluded that the recapitalization transactions did not result in an ownership change, nor has there been an ownership since that time and as such the use of the net operating loss carry-forwards has not been limited.

Year ended December 31, 2007 compared to the year ended December 31, 2006

Revenue

Revenue decreased $6.4 million, or 2.4%, from $262.8 million for the year ended December 31, 2006 to $256.4 million for the year ended December 31, 2007. The decrease in revenue was largely due to the expected reduction in revenue from EMC Corporation ("EMC˛") as one of their products moved to end of life, a slowing in end markets of some customers with demand linked to the construction and semiconductor businesses and typical product life cycle patterns with other long standing customers. These declines were almost entirely offset by growth in revenue from Harris Broadcast Infrastructure and Digital Media (a subsidiary of Harris Corporation) ("Harris"), Ingenico S.A. ("Ingenico") and $12 million in revenue from some of our newer customers. The growth in Harris and Ingenico revenues is primarily the result of success in their respective end markets, in addition to the impact of the ramping up of Harris in 2006, a new customer added in the later part of 2005.

During 2007, revenue from the industrial sector represented 68.1% of revenue compared to 64.1% of revenue in 2006. The increase in the percentage of revenue generated from the industrial sector in 2007 compared to 2006 is due to the growth in revenue from Harris and Ingenico. The percentage of sales attributable to the networking and enterprise computing sector was 16.8% during 2007 compared to 16.9% during 2006 resulting from the expected decline in revenue from EMC˛ and another customer with typical product life cycle oscillations, offset by the increase in revenue from other enterprise computing and networking sector customers during 2007. The percentage of sales attributable to the communications sector decreased to 15.1% during 2007 from 18.9% during 2006 due to various reductions including end market economic slowdowns experienced by a customer.

During 2007, we recorded approximately $3.0 million of sales of raw materials inventory to customers, which carried no margin, compared to $7.7 million in 2006. The Company purchases raw materials based on customer purchase orders. To the extent 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.

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 vary from year to year. The Company's ten largest customers represented 81.2% of revenue during 2007, compared to 83.6% in 2006. Revenue from our three largest customers during 2007 was $48.8 million from Ingenico, $39.1 million from Harris and $36.4 million from MEI, Inc. ("MEI"), representing 19.0%, 15.2% and 14.2%, respectively, of total revenue for 2007. This compares with revenue of $43.4 million from Ingenico, $35.9 million from MEI and $29.4 million from Harris, representing 16.5%, 13.7% and 11.2%, respectively, of total revenue for 2006. No other customers represented more than 10% of revenue in either year.

During 2007, 42.5% of our revenue was attributable to our operations in Mexico, 33.9% in the US and 23.6% in Canada. During 2006, 41.6% of our revenue was attributable to our operations in Mexico, 39.1% in the US and 19.3% in Canada. The increase in Canada was the result of increased revenue from Harris, and the reduction in the US was the result of slowdowns in the construction and semi-conductor industries and EMC2's reduced demand.

Gross Profit

Gross profit decreased from $26.4 million, or 10.1% of revenue, for 2006 to $22.1 million, or 8.6% of revenue, for 2007. This decrease in gross profit is largely due to decreased sales and higher labor costs, largely the result of the weakening of the US dollar.

Selling, General & Administrative Expenses

Selling, general and administrative expenses decreased by $0.6 million during 2007 to $14.6 million from $15.2 million in 2006, and declined as a percentage of revenue to 5.7% for 2007 from 5.8% of revenue for 2006. The decrease in selling, general and administrative expenses largely reflects reductions in variable performance based compensation costs which offset the higher cost of labor due to the strengthening of the Canadian dollar.

Restructuring and Other Charges

During 2007, the Company put into place changes related primarily to manufacturing operations in Mexico (the "2007 Plan"). Termination payments of $0.2 million were recorded as restructuring charges under the 2007 Plan and were paid during the year.

During 2006, we restructured our management to control operating costs (the "2006 Plan"). The net recovery for 2006 included a recovery of $1.8 million related to the reduction of a liability recorded as part of the 2002 Plan, and . . .