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 Operations ("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 April 6, 2009. 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 April 6, 2009, 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 1000 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 2009

As expected, second quarter results were negatively impacted by the global recession as the majority of the Company's customers continued to experience end market contraction causing reduced orders, in addition to reduced production demand to lower inventory levels. The Company's revenues from continuing operations declined 13% sequentially and 28% compared to Q2 of 2008; a function of the global recession as the Company has retained its customer base, with the exception of certain Boston customers requiring local production, and expanded with several newer customers. Industry experience remains consistent with SMTC's experience as the majority of EMS companies are reporting double digit year over year declines. Many are reporting sequential declines consistent with SMTC. SMTC's business is dominated by customers that are dependent on businesses capital budgets, an area that tends to recover last out of a downturn.

In anticipation of lower revenue, the Company launched a capacity and cost reduction plan in the first quarter that contained both strategic and tactical elements. Largely due to customer specific issues, the Enclosures Systems division experienced revenue erosion through the latter part of 2008 that was exacerbated by the economic slowdown. This revenue decline resulted in significant overcapacity at the Boston site and continuing operational losses. It became clear that not only did capacity have to be reduced, from a strategic perspective, the Company needed to house the enclosures and large scale systems integration capability in a single facility in a lower cost region. Accordingly, the Company has built such capability at its largest site in Chihuahua, Mexico. With the economic downturn and unsatisfactory financial results, in the first quarter the Company announced the planned closure of the Boston site, which subsequently closed at the end of June. While certain customers have transitioned to Mexico, the majority of Boston customers had production requirements which were more suited to local supply, and have consequently disengaged with the Company.

In the first quarter of the year, in anticipation of lower production volumes and revenue, the Company implemented a staff reduction plan that lowered overall headcount by 23% and initiated other cost containment measures, bringing its quarterly break-even revenue level to approximately $40 million depending on mix of business, down from approximately $60 million.

For the quarter ended July 5, 2009, the Company recorded a net loss of $3.4 million, including a $3.8 million loss from the closure of the Company's Boston facility. Excluding the loss from discontinued operations, the Company recorded a modest profit of $0.4 million in the quarter.

In the first quarter of 2009, the Company successfully renegotiated 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 five quarters beginning January 5, 2009 and including the first quarter of the 2010 fiscal period. The interest rates have also been increased by 200 basis points. In the second quarter of 2009, the Company signed an amendment with its lenders to extend through the second quarter of 2010 the revised EBITDA and leverage covenants. Management believes that the Company will be in compliance with its covenants for the foreseeable future.

Results of Operations

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

Quarter ended July 5, 2009 compared with the quarter ended June 29, 2008:

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

                                            Three months ended           Three months ended               Change
                                               July 5, 2009                June 29, 2008               2009 to 2008
                                              $              %             $              %            $           %
Revenue                                   $    39.2        100.0 %     $    54.3        100.0 %     $ (15.1 )     (27.8 )%
Cost of sales                                  35.2         89.8 %          49.8         91.7 %       (14.6 )     (29.3 )%

Gross profit                                    4.0         10.2 %           4.5          8.3 %        (0.5 )     (11.1 )%
Selling, general and administrative
expenses                                        3.1          7.9 %           3.7          6.8 %        (0.6 )     (16.2 )%
Restructuring charges                            -            -              0.7          1.3 %        (0.7 )    (100.0 )%

Operating earnings                              0.9          2.3 %           0.1          0.2 %         0.8       800.0 %
Interest expense                                0.5          1.3 %           0.8          1.5 %        (0.3 )     (37.5 )%

Earnings (loss) from continuing
operations before income taxes                  0.4          1.0 %          (0.7 )       (1.3 )%        1.1       157.1 %
Income tax (recovery) expenses
Current                                          -           0.0 %            -           0.0 %          -          0.0 %
Deferred                                         -           0.0 %            -           0.0 %          -          0.0 %

                                                 -                            -           0.0 %          -          0.0 %

Net earnings (loss) from continuing
operations                                $     0.4          1.0 %     $    (0.7 )       (1.3 )%    $   1.1       157.1 %

Loss from discontinued operations              (3.8 )       (9.7 )%         (5.6 )      (10.3 )%        1.8        32.1 %
Net loss, also being comprehensive loss   $    (3.4 )       (8.7 )%    $    (6.3 )      (11.6 )%    $   2.9        46.0 %

Revenue

Revenue from continuing operations decreased $15.1 million, or 27.8%, from $54.3 million for the second quarter of 2008 to $39.2 million for the second quarter of 2009 as many of SMTC's long standing customers' end markets continued to be impacted by the global recession, significant inventory corrections and a ramp up of production to transition to the China operation in the second quarter of 2008. New business from several newer customers has had a positive impact, driven by increases for Crestron Electronics ("Crestron"), as it ramped subsequent to the second quarter of 2008. The decline in revenue was not a result of any loss of customers.

The reclassification of the Boston business as a discontinued operation resulted in the revenues of this business of $2.8 million in the second quarter of 2009 being excluded from reported revenues, compared to $12.0 million in the second quarter of 2008. The Company is disengaging with most customers in Boston whose production requirements are best suited for local supply. Customers continue to be severely impacted by the recession.

During the second quarter of 2009, revenue from the industrial sector decreased compared with the same quarter of 2008; $29.7 million for the second quarter of 2009 compared with $42.3 million for the same period in 2008, a result of the economically based decline referred to by our industrial customers. Accordingly, revenue from the industrial sector represented a decreased share of our business at 75.8% of revenue in the second quarter of 2009, compared with 78.0% of revenue in the second quarter of 2008.

Revenue from the communications sector decreased compared with the same quarter of 2008; $2.9 million for the second quarter of 2009 compared with $5.7 million in 2008, which represented 7.4% of revenue in the second quarter of 2009, compared with 10.5% of revenue in the second quarter of 2008 largely due to economically driven reductions in customer business levels.

Revenue from the networking and enterprise computing sector increased compared with the same quarter of 2008; $6.6 million for the second quarter of 2009 compared with $6.2 million in 2008, which represented 16.8% of revenue in the second quarter of 2009, up from 11.5% of revenue in the second quarter of 2008, largely due to a longstanding customer increasing orders year over year and the addition of one of our new customers to this category.

During the second quarter of 2009, we recorded approximately $0.5 million of sales of raw materials inventory to customers, which carried no margin, compared with $1.5 million in the second quarter of 2008. 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 91.8% of revenue from continuing operations during the second quarter of 2009, compared with 94.8% in the second quarter of 2008. Revenue from our four largest customers during the second quarter of 2009 were $8.0 million from Harris Broadcast Infrastructure and Digital Media (a subsidiary of Harris Corporation) ("Harris"), $7.1 million from Gilbarco Veeder-Root ("Gilbarco"), $6.2 million from Ingenico S. A. ("Ingenico"), and $4.1 million from Crestron, representing 20.6%, 18.2%, 15.9% and 10.4% of total revenue for the second quarter of 2009, respectively. This compares with revenue of $15.5 million from Ingenico, $12.3 million from Harris, and $9.7 million from MEI, Inc. (formerly MEI Electronics) ("MEI"), representing 28.6%, 22.6% and 17.9% of revenue from continuing operations for the second quarter of 2008, respectively. No other customers represented more than 10% of revenue in either period.

During the second quarter of 2009, 32.0% of our revenue from continuing operations was attributable to our operations in Canada, 19.4% in Asia, 40.2% in Mexico, and 8.4% in the U.S. During the second quarter of 2008, 37.4% of our revenue was attributable to our operations in Mexico, 9.9% in the U.S., 31.7% in Canada, and 21.0% in Asia. During the second quarter of 2008, production for a couple of our customers was shifted from our Mexico facility to the China facility.

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 second quarter of 2009 decreased by $0.5 million, or 11.1%, to $4.0 million compared with the same period in 2008. This is largely due to reduced revenue levels, somewhat offset by cost reductions. Gross margin as a percent of sales increased from 8.3% in the second quarter of 2008 to 10.2% in the second quarter of 2009 as a result of cost containment initiatives and mix of business.

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 decreased by $0.6 million, or 16.2%, during the second quarter of 2009 to $3.1 million, from $3.7 million in the second quarter of 2008 as a result of cost containment initiatives undertaken in the first quarter of 2009.

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

The Company recorded nominal restructuring recoveries for the second quarter of 2009, compared with $0.7 million restructuring charge for the same quarter of 2008.

Interest Expense

Interest expense decreased from $0.8 million in the second quarter of 2008 to $0.5 million for the second quarter of 2009, a decrease of $0.3 million primarily resulting from reduced debt levels and lower interest rates due to market rate reductions. Interest expense in the second quarter of both 2009 and 2008 included amortization of deferred financing fees of $0.1 million. The weighted average interest rates with respect to the debt were 5.5% and 6.8% for each of the second quarters of 2009 and 2008, respectively.

Income Tax Expense

The Company recorded nominal income tax expense (recovery) during the second quarters of both 2009 and 2008.

At January 4, 2009, the Company had total net operating loss ("NOL") carry-forwards of approximately $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.

The Company had $0.3 million of gross unrecognized tax benefits at July 5, 2009 and January 5, 2009, 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 2001 to 2009 remain open for review by the tax authorities in Canada. Tax years 2003 to 2009 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.

Discontinued Operations

In June 2009, the Company ceased manufacturing operations at its Boston, Massachusetts facility. The Company entered into an agreement with the landlord to terminate the existing lease and conducted a sale of certain plant equipment. As at July 5, 2009, the Boston facility was classified as a discontinued operation and its results of operations are separately reported for all periods presented.

Loss from discontinued operations before disposal was $1.4 million in the second quarter of 2009, compared with $5.6 million in the same period of 2008, which included a $4.9 million impairment charge on leasehold improvements and $0.2 million in severance costs.

The $2.5 million loss on disposal recorded in the three months ended July 5, 2009 consist largely of the settlement under the lease termination agreement, severance costs and other contracted facility exit costs, somewhat offset by a gain on disposal of fixed assets. The Company expects to record further disposal costs in the remainder of fiscal 2009, consisting of salaries for remaining employees retained beyond July 5, 2009.

Six months ended July 5, 2009 compared with six months ended June 29, 2008

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

                                       Six months ended           Six months ended               Change
                                         July 5, 2009              June 29, 2008              2009 to 2008
                                        $             %            $             %            $           %
Revenue                              $   84.1       100.0 %     $   99.0       100.0 %     $ (14.9 )    (15.1 )%
Cost of sales                            76.2        90.6 %         90.5        91.4 %       (14.3 )    (15.8 )%

Gross profit                              7.9         9.4 %          8.5         8.6 %        (0.6 )     (7.1 )%
Selling, general and
administrative expenses                   6.6         7.8 %          6.5         6.6 %         0.1        1.5 %
Restructuring charges                     0.8         1.0 %          0.5         0.5 %         0.3       60.0 %

Operating earnings                        0.5         0.6 %          1.5         1.5 %        (1.0 )    (66.7 )%
Interest expense                          0.8         1.0 %          1.7         1.7 %        (0.9 )    (52.9 )%

Loss from continuing operations
before income taxes                      (0.3 )      (0.4 )%        (0.2 )      (0.2 )%       (0.1 )     50.0 %
Income tax expenses
Current                                   0.1         0.1 %          0.1         0.1 %         0.0        0.0 %
Deferred                                  0.1         0.1 %           -          0.0 %         0.1      100.0 %

                                          0.2         0.2 %          0.1         0.1 %         0.1      100.0 %

Net loss from continuing
operations                           $   (0.5 )      (0.6 )%    $   (0.3 )      (0.3 )%    $  (0.2 )    (66.7 )%

Loss from discontinued operations        (5.4 )      (6.4 )%        (5.6 )      (5.7 )%        0.2        3.6 %
Net loss, also being comprehensive
loss                                 $   (5.9 )      (7.0 )%    $   (5.9 )      (6.0 )%    $   0.0        0.0 %

Revenue

Revenue from continuing operations decreased $14.9 million, or 15.1%, from $99.0 million for the first six months of 2008 to $84.1 million for the first six months of 2009 as SMTC's long standing customers' end markets continued to be impacted by the global recession, significant inventory corrections and a ramp up of production to transition to the China operation in the second quarter of 2008. These reductions were somewhat offset by new customer business primarily from Crestron as their business began to ramp in the back half of 2008. The decline in revenue was not a result of any loss of customers.

The reclassification of Boston as a discontinued operation resulted in the revenues of this business of $6.3 million in the first two quarters of 2009 being excluded from reported revenues, compared to $22.5 million in the first two quarters of 2008. The Company is disengaging with most customers in Boston whose production requirements are best suited for local supply. Customers continue to be severely impacted by the recession.

During the first six months of 2009, revenue from the industrial sector represented 77.2% of revenue compared to 76.5% of revenue for the first six months of 2008. The percentage of sales attributable to the enterprise computing and networking sector and the communications sector were 13.6% and 9.1%, respectively, for the first six months of 2009 compared with 12.0% and 11.5%, respectively, for the first six months of 2008.

Revenue generated from the industrial sector decreased $10.8 million in the first six months of 2009 compared to the first six months of 2008 at $64.9 million and $75.7 million, respectively for the reasons cited above

In both relative and absolute terms, the revenue generated from the communications sector in the first six months declined. In absolute terms, revenue declined by $3.6 million from $11.4 million in the first six months of 2008 to $7.8 million in the first six months of 2009 largely due to economically driven reductions in customer business levels.

Revenue from the networking and enterprise computing sector decreased slightly compared with the first six months of 2008; $11.5 million for the first six months of 2009 compared with $11.9 million in 2008. The percentage of revenue generated from the networking and enterprise computing sector in the first six months of 2009 compared with the same period last year increased in relative terms due to a longstanding customer increasing orders year over year and the addition of one of our new customers to this category.

During the first six months of 2009, we recorded approximately $0.8 million of sales of raw materials inventory to customers, which carried no margin, compared to $2.1 million in the first six months of 2008. 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 six months of 2009, the Company's ten largest customers represented 88.3% of revenue from continuing operations compared with 93.7% for the same period last year. Revenue from our largest customers during the first six months of 2009 was $16.5 million from Harris, $16.0 million from Ingenico, $10.4 million from MEI, and $9.4 million from Gilbarco representing 19.6%, 19.0%, 12.3%, and 11.2%, respectively, of total revenue for the period. This compares with revenue of $27.0 million from Ingenico, $22.0 million from Harris, and $18.1 million from MEI representing 27.3%, 22.2%, and 18.2%, respectively, of total revenue from continuing operations for the same period last year. No other customers represented more than 10% of revenue in either period.

During the first six months of 2009, 33.9% of our revenue from continuing operations was produced from operations in Mexico, 7.1% from the United States, 34.2% from Canada, and 24.8% from Asia. During the first six months of 2008, 45.3% of our revenue was produced from operations in Mexico, 10.6% from the United States, 32.6% from Canada, and 11.5% from Asia. Operations in Asia were ramping in the first half of 2008 as this business was transitioned from Mexico to Asia.

The Company operates in a highly competitive and dynamic marketplace in which current and prospective customers from time to time seek to lower their costs through a competitive tendering process among EMS providers. This process . . .