40-F

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549

FORM 40-F

[Check one]
[    ]    REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
[X]    ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year ended
August 31, 2005 Commission File Number
029872

ATI TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)

Province of Ontario, Canada	5045, 3575
(Province or other jurisdiction of	(Primary Standard Industrial
incorporation or organization)	Classification Code Number (if applicable))

1 Commerce Valley Drive East	CT Corporation System
Markham, Ontario, Canada L3T 7X6	111 Eighth Avenue
(905) 882-2600	New York, NY 10011
	(212) 894-8700
(Address and telephone number of	(Name, address (including zip code) and
Registrant's principal executive offices)	telephone number (including area code) of agent
	for service in the United States)

Securities registered or to be registered pursuant to Section 12(b) of the Act:   None

Securities registered or to be registered pursuant to Section 12(g) of the Act:    Common Shares

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:    None

For annual reports, indicate by check mark the information filed with this Form:

[X]   Annual information form          [X]   Audited annual financial statements

Indicate the number of outstanding shares of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

As at August 31, 2005 – 251,473,305 Common Shares outstanding.

Indicate by check mark whether the Registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). If “Yes” is marked, indicate the filing number assigned to the Registrant in connection with such Rule.

Yes  ______          No  ___X___

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.

Yes  ___X___          No  ______

The total number of pages in this document is 126.
The exhibit index is located on page 7.

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DISCLOSURE CONTROLS AND PROCEDURES

        As of the end of the fiscal year of ATI Technologies Inc. (the “Registrant”), an evaluation was carried out under the supervision of and with the participation of the Registrant’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Registrant’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the U.S. Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation, the Registrant’s Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of August 31, 2005, the end of the period covered by the annual report, to ensure that material information relating to the Registrant and its consolidated subsidiaries would be made known to them by others within those entities.

        There has been no change in the Registrant’s internal control over financial reporting during the year ended August 31, 2005 that materially affected, or that is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

        As recommended by the Securities and Exchange Commission (the “SEC”) in its adopting release, we will continue to periodically evaluate our disclosure controls and procedures and internal control over financial reporting and we will be making modifications from time to time as deemed necessary to ensure that information is recorded, processed, summarized and reported within the time period’s specified in the SEC rules and forms.

IDENTIFICATION OF THE AUDIT COMMITTEE

        The Registrant has a standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Registrant’s audit committee are Alan D. Horn, James D. Fleck, John E. Caldwell and Robert A. Young.

AUDIT COMMITTEE FINANCIAL EXPERT

        The Registrant’s board of directors has determined that it has at least one audit committee financial expert serving on its audit committee. The board of directors has determined that each of Mr. Alan D. Horn and John E. Caldwell is an audit committee financial expert and is independent, as that term is defined by the National Association of Securities Dealers, Inc.’s corporate governance standards applicable to the Registrant. The SEC has indicated that the designation of a person as an audit committee financial expert does not impose on such person any duties, obligations or liability that are greater than those imposed on such person as a member of the audit committee and the board of directors in the absence of such designation or identification and does not affect the duties, obligations or liability of any other member of the audit committee or board of directors.

CODE OF ETHICS

        The Registrant has adopted a code of ethics entitled “ATI Code of Ethics”. The ATI Code of Ethics applies to all directors, officers and employees of the Registrant, including the Registrant’s principal executive officer, principal financial officer and principal accounting officer. The ATI Code of Ethics was filed as an exhibit to the Registrant’s Form 40-F filed with the SEC on January 20, 2004 and has not been amended since that date.

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PRINCIPAL ACCOUNTANT FEES AND SERVICES

        KPMG LLP billed the following fees in each of the fiscal years ended August 31, 2005 and 2004 for professional services rendered to the Registrant:

Fees	2005	2004
Audit Fees(1)	$     699,000	$     577,000
Audit-Related Fees(2)	169,000	93,000
Tax Fees(3)	357,000	190,000
All Other Fees(4)	9,000	420,000
Total	$1,234,000	$1,280,000

⁽¹⁾ Audit fees comprise professional services for the audit of the Registrant’s annual financial statements, interim review procedures performed in connection with the Registrant’s quarterly reports, and services normally provided in connection with the Registrant’s statutory and regulatory filings which includes the audit of the tax provision and fees for accounting consultation and statutory audits of subsidiaries.

⁽²⁾ Audit-Related Fees include fees associated with other accounting advisory and assistance services such as due diligence assistance, accounting consultation on proposed transactions and SOX advisory services.

⁽³⁾ Tax Fees comprise amounts paid for tax services including tax compliance, tax advice and tax planning.

⁽⁴⁾ All Other Fees comprise amounts paid relating to services other than those reported in the other categories above.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

        The Registrant’s Board of Directors, upon the recommendation of the Audit Committee, has adopted a written policy on auditor independence (the “Policy”). Under the Policy, except in very limited circumstances, all audit and permitted non-audit services are required to be pre-approved by the Audit Committee. The Policy prohibits the auditors from providing the following types of non-audit services:

• bookkeeping or other services related to the accounting records or financial statements of the Registrant;
• financial information systems design and implementation;
• appraisal or valuation services, fairness opinion, or contribution-in-kind reports;
• actuarial services;
• internal audit outsourcing services;
• management functions or human resources services;
• broker or dealer, investment advisor or investment banking services on behalf of the Registrant; and
• legal services and expert services unrelated to the audit.

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The Policy also permits the auditors to provide other types of non-audit services, including tax services, but only if approved in advance by the Audit Committee, subject to limited exceptions.

        None of the services described above under “Principal Accountant Fees and Services” under the captions “Audit-Related Fees”, “Tax Fees” and “All Other Fees” were approved by the Audit Committee pursuant to paragraph(c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

OFF-BALANCE SHEET ARRANGEMENTS

        The disclosure provided under “Note 1(q) – Financial Instruments” and “Note 2 – Financial Instruments” of the “Notes to Consolidated Financial Statements” on pages 71 and 72 of Exhibit 2, Comparative Consolidated Financial Statements, is incorporated by reference herein.

CONTRACTUAL COMMITMENTS

        The disclosure provided under “Liquidity and Capital Resources – Commitments” on page 112 of Exhibit 3, Management’s Discussion and Analysis of Operating Results and Financial Position, is incorporated by reference herein.

OTHER INFORMATION

        Pursuant to Rule 4350(a)(i) of the Nasdaq Stock Market, Inc. (“NASDAQ”) Market Rules, the Registrant relies on the following exemptions:

(1) an exemption from Rule 4350(f) of the Marketplace Rules granted to the Registrant in connection with its initial listing on the NASDAQ in 1998, requiring that each Nasdaq-quoted company have in place a minimum quorum requirement for shareholder meetings of 33 1/3% of the outstanding shares of the company’s voting common stock. In accordance with the provisions of section 139(1) of the Canada Business Corporations Act (the “CBCA”), the Registrant’s by-laws provide that a quorum is met if holders of at least 5% of the votes eligible to be cast at a meeting are present or represented by proxy at a shareholder meeting. The Registrant understands that it is not unusual for a similar quorum requirement to be found in the by-laws of other publicly-traded corporations subject to the CBCA; and

(2) an exemption from Rule 4350(i)(1)(A) of the Marketplace Rules granted to the Registrant on February 18, 2005, requiring that each Nasdaq-quoted company obtain shareholder approval of certain amendments to equity compensation plans. The exemption was granted to the Registrant in connection with the following amendments made to its share option plan (the “Plan”): (i) setting forth additional terms and conditions for the Registrant’s employees in India; (ii) reducing the maximum term of future options to 7 years from 10 years; (iii) allowing unvested options to vest immediately upon the death of a participant; (iv) allowing, in the Registrant’s discretion, continued vesting of a participant’s options upon termination of employment other than for cause; and (v) allowing the Registrant’s board of directors to establish an exercise price for an option that is greater than the then current fair market price for the Registrant’s common shares (collectively, the “Amendments”). Under Canadian law, the Amendments to the Plan do not require shareholder approval. In addition, on November 19, 2004, the Toronto Stock Exchange (the “TSX”) confirmed that there is no requirement under the rules of the TSX that the Registrant’s shareholders approve the Amendments to the Plan. The Registrant understands that it is not unusual for other corporations with securities listed on the TSX to make similar amendments to their share option plans without shareholder approval.

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UNDERTAKING AND CONSENT TO SERVICE OF PROCESS

A. Undertaking

        The Registrant hereby undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the SEC staff, and to furnish promptly, when requested to do so by the SEC staff, information relating to the securities in relation to which the obligation to file an annual report on Form 40-F arises, or to transactions in said securities.

B. Consent to Service of Process

        The Registrant has previously filed with the SEC a Form F-X in connection with the Common Shares.

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SIGNATURES

        Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

ATI TECHNOLOGIES INC.

/s/ David Orton                                              

David Orton

President and Chief Executive Officer

Date: November 22, 2005

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EXHIBIT INDEX

		Sequential  Page No.
1.	Annual Information Form dated as of November 15, 2005.	8
2.	Comparative consolidated financial statements for the three-year period ended August 31, 2005, together with the auditors’ report thereon.	63
3.	Management’s Discussion and Analysis of Operating Results and Financial Position for the three-year period ended August 31, 2005.	93
4.	The information contained in the section titled “Statement of Corporate Governance Practices” and in Schedule F titled “Compliance with TSX Guidelines” in the Registrant’s Management Information Circular, dated December 14, 2004, in connection with the annual meeting of shareholders held on January 25, 2005 (incorporated by reference to the Registrant’s Form 6-K furnished to the SEC on December 23, 2004).*
5.	Consent of KPMG LLP, Chartered Accountants, dated October 4, 2005.	122
6.	Certificate of David Orton required by Rule 13a-14(a) or Rule 15d-14(a), pursuant to Section 302 of Sarbanes-Oxley Act of 2002.	123
7.	Certificate of Patrick Crowley required by Rule 13a-14(a) or Rule 15d-14(a), pursuant to Section 302 of Sarbanes-Oxley Act of 2002.	124
8.	Certificate of David Orton required pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.	125
9.	Certificate of Patrick Crowley required pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.	126
10.	ATI Code of Ethics (incorporated by reference to Exhibit 6 to the Registrant’s Form 40-F (SEC File No. 000-29872) filed with the SEC on January 20, 2004).*

* Previously filed.

EX-99.1

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EXHIBIT 1

ATI TECHNOLOGIES INC.

RENEWAL ANNUAL INFORMATION FORM

For the Fiscal Year Ended August 31, 2005

November 15, 2005

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TABLE OF CONTENTS

		Page
ITEM 1.	CORPORATE STRUCTURE	7
ITEM 2.	GENERAL DEVELOPMENT OF THE BUSINESS	8
	2.1 THREE YEAR HISTORY	8
ITEM 3.	NARRATIVE DESCRIPTION OF THE BUSINESS	13
	3.1 OVERVIEW	13
	3.2 OUR MARKETS	13
	3.3 BUSINESS STRATEGY	15
	3.4 PRODUCTS AND TECHNOLOGY	16
	3.5 RESEARCH AND DEVELOPMENT	19
	3.6 SALES AND MARKETING	20
	3.7 COMPETITION	22
	3.8 MANUFACTURING	23
	3.9 CUSTOMER SERVICE AND SOFTWARE SUPPORT	23
	3.10 HUMAN RESOURCES	24
	3.11 FACILITIES	24
	3.12 RISKS AND UNCERTAINTIES	25
	3.13 LEGAL PROCEEDINGS AND REGULATORY MATTERS	37
ITEM 4.	DIVIDEND POLICY	39
ITEM 5.	DESCRIPTION OF CAPITAL STRUCTURE	39
	5.1 GENERAL DESCRIPTION OF SHARE CAPITAL	39
	5.2 EQUITY PLANS	39
ITEM 6.	MARKET FOR SECURITIES	43
ITEM 7.	DIRECTORS AND EXECUTIVE OFFICERS	44
	7.1 DIRECTORS	44
	7.2 EXECUTIVE OFFICERS	45
ITEM 8.	AUDIT COMMITTEE INFORMATION	47
ITEM 9.	MATERIAL CONTRACTS	48
ITEM 10.	TRANSFER AGENT AND REGISTRAR	48
ITEM 11.	INTERESTS OF EXPERTS	48
	11.1 NAMES OF EXPERTS	48
ITEM 12.	ADDITIONAL INFORMATION	49
	12.1 ANNUAL REPORT AND MANAGEMENT INFORMATION CIRCULAR	49
	12.2 BASE SHELF PROSPECTUS	49

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GLOSSARY OF TECHNICAL TERMS AND OTHER INFORMATION

Certain technical terms used in this Annual Information Form are defined as follows:

“2.5G and 3G” 2.5G means second generation wireless technology (2G) with incomplete third generation (3G) technology added to it. 3G refers to the phase of wireless communications, which is currently becoming more prevalent, and features faster wireless data transfer speeds, enhanced roaming and multimedia capabilities and a feature set including cellular voice, e-mail, paging and internet functionality.

“AGP” means accelerated graphics port. This is a dedicated expansion port located on a motherboard which allows higher throughput from the graphics card to the processor for faster 3D graphics rendering.

“AIB” means add-in board. AIB refers to graphics boards that can be added to a computer at any time, including by an OEM at the time it is manufactured, by a reseller at the time of distribution or by an end-user.

“ASIC” means application-specific integrated circuit. An ASIC is a circuit designated for a very specific purpose, such as the processors used in personal digital assistants or designed for graphics. ASICs contrast with more general-purpose devices, such as memory chips, that can be used in many different applications.

“ASP” means average selling price.

“Blu-ray” is also known as Blu-ray Disc and is the name of a next-generation optical disc format jointly developed by the Blu-ray Disc Association, a group of the world’s consumer electronics, personal computer and media manufacturers.

“chipset” means a set of chips that provides the interfaces between all of the PC’s subsystems. A PC chipset provides all the core logic or primary processing logic on the motherboard except the CPU.

“CPU” means central processing unit, the central unit in a computer which contains the logic circuitry that performs the instructions of a computer’s programs.

“discrete chipset” refers to a stand-alone graphics chip.

“DTV” means digital television (including set-top boxes). Digital television refers to the standard of transmitting and receiving television signals using digital rather than analog transmission. “DVD” means digital versatile disc. DVDs are similar to compact discs, but store up to 12 times as much data.

“GPU” means graphics processing unit, an advanced semiconductor chip that provides greater graphics functionality, such as cinematic rendering in real time.

“HD-DVD” means High Definition-DVD, a generic term for the technology of recording high-definition video on a DVD. HD-DVD is capable of storing between two and four times as much data as standard DVD.

“HDTV” means high definition television, a digital television format providing high-resolution video and digital audio for a high-quality viewing experience.

“iDCR” means interactive digital cable ready television.

“IGP” means integrated graphics processor. An IGP includes both the functionality of a chipset (which controls the functions and features on a motherboard) and graphics.

“inflection point” refers to a dramatic change in the development of a company, industry or market.

“integrated chipset” refers to a chipset containing integrated graphics.

“I/O” means input/output. I/O refers to any operation in a computer where data is transferred either in or out of the computer.

“motherboard” means the main circuit board of a microcomputer.

“MPEG” refers to the digital video and digital audio compression standard formulated by the Moving Picture Experts Group.

“nanometer” is a unit of measurement equal to one-billionth of a meter.

“NRE” means non-recurring engineering and refers to the one-time cost of product development, such as designing a GPU for a specific customer.

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“ODM” means original design manufacturer. ODM typically refers to companies that provide not only manufacturing services but also product designs or design services and may (or may not) sell their own branded products. The use of ODMs has increased among OEMs and other companies.

“OEM” means original equipment manufacturer.

“PC” means personal computer and generally refers to a computer meant for use by one person at a time.

“PCB” means printed circuit board. PCBs are imprinted with one or more layers of circuitry and are used to hold and link together microchips and other components. Examples of common PCBs include motherboards and AGP graphics cards.

“PCI Express” refers to the third-generation, high-speed, general purpose I/O architecture that provides greater bandwidth to support the increasing demands on today’s PCs and facilitates graphically intensive applications such as video editing and high-definition content.

“R&D” means research and development.

“SI” means system integrator, a manufacturer of “whitebox, clone or non-branded” PCs.

“workstation” means a type of computer used for design, engineering or other applications requiring higher-than-normal performance, particularly graphics.

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All dollar amounts referred to in this document are stated in U.S. dollars, unless otherwise indicated. ATI prepares its financial statements in accordance with Canadian generally accepted accounting principles (“GAAP”). Accordingly, financial information in this Annual Information Form is presented in accordance with Canadian GAAP.

The information in this Annual Information Form is presented as at August 31, 2005 unless otherwise indicated.

In this Annual Information Form, “we”, “us”, “our” and “ATI” refer to ATI Technologies Inc. and its subsidiaries. References to “fiscal 2005” refer to ATI’s fiscal year ended August 31, 2005.

“ATI” and the ATI logo are our properties and registered trademarks. Our product names are also our trademarks and/or registered trademarks. This Annual Information Form also includes references to the trademarks, products and company names of other corporations, which are the properties of their respective owners.

FORWARD-LOOKING STATEMENTS

Publicly held companies are encouraged by securities regulations to provide forward-looking information to assist investors in assessing the company’s prospects.

Forward-looking statements look into the future and provide an opinion as to the effect of certain events and trends on the business. Forward-looking statements may include words such as “plans”, “intends”, “anticipates”, “should”, “estimates”, “expects”, “believes”, “indicates”, “targeting”, “suggests” and similar expressions.

This Annual Information Form contains forward-looking statements about our objectives, strategies, financial condition and results, as well as statements with respect to our beliefs, expectations, anticipations, estimates and intentions. These “forward-looking” statements are based on current expectations and various factors and assumptions. Accordingly, these statements entail various risks and uncertainties.

The material factors and assumptions that were applied in making the forward-looking statements in this Annual Information Form are as follows:

• the expected rate of growth of the Personal Computer ("PC") and Consumer markets;

• the expected mix of discrete and integrated chipsets that will be sold in the PC market;

• our expected market share across various customer and product segments;

• our expected future design wins both in the PC and Consumer markets;

• our expected product and production costs;

• the timely introduction of our new products for the PC and Consumer markets;

• the expected product specific average selling prices ("ASP");

• in the digitial television ("DTV") segment, the expected rate of consumer adoption of high definition television ("HDTV"); and

• our overall competitive position and the competitiveness of our current and future products.

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It is important to note that:

• Unless otherwise indicated, forward-looking statements in this Annual information Form describe our expectations as of November 15, 2005.

• We caution readers not to place undue reliance on these statements as our actual results may differ materially from our expectations if known and unknown risks or uncertainties affect our business, or if our estimates or assumptions prove inaccurate. Therefore, we cannot provide any assurance that forward-looking statements will materialize.

• We assume no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or any other reason.

For a description of material factors that could cause our actual results to differ materially from the forward-looking statements in this Annual Information Form, please see Item 3.12 “Narrative Description of the Business — Risks and Uncertainties” at page 25.

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ITEM 1.    CORPORATE STRUCTURE

Name, Address and Incorporation

ATI Technologies Inc. was incorporated on August 20, 1985, as Array Technology Inc. pursuant to the Business Corporations Act (Ontario). The name was subsequently changed to Array Technologies Inc. pursuant to articles of amendment dated September 13, 1985, and then to ATI Technologies Inc. pursuant to articles of amendment dated December 18, 1985.

On December 31, 1987, our articles were amended to divide the 1,000 common shares then outstanding into 1,000,000 common shares. In conjunction with our initial public offering in November 1993, articles of amendment were filed on October 14, 1993, to create an unlimited number of non-voting preference shares and subdivide the 1,100,000 common shares then outstanding into 40,000,000 common shares.

On April 8, 1998, our Board of Directors approved a stock dividend on a four-for-one basis effective for registered common shareholders at the close of business on April 23, 1998. The stock dividend increased the number of common shares then outstanding from approximately 48.9 million to approximately 195.9 million common shares.

ATI was continued under the Canada Business Corporations Act (“CBCA”) effective January 31, 2005 and is currently subject to the jurisdiction of the CBCA. A copy of ATI’s articles of continuance and by-laws are available on SEDAR at www.sedar.com and on EDGAR, under cover of Form 6-K, at www.sec.gov.

Our principal and head office is located at 1 Commerce Valley Drive East, Markham, Ontario, L3T 7X6.

Intercorporate Relationships

Below is a summary of our principal operating subsidiaries as at November 15, 2005, all of which are directly or indirectly wholly owned:

Subsidiary	Incorporation	Activity
ATI Technologies (Europe) GmbH	Germany	Sales and marketing support in Europe
ATI Research, Inc.	California, USA	Research and development (“R&D”)
ATI Technologies Systems Corp.	California, USA	U.S. sales and distribution
ATI Technologies (Japan) Inc.	Japan	Sales and marketing support in Japan
ATI International SRL	Barbados	R&D and sales
ATI Technologies (L) Inc.	Malaysia	Asia-Pacific sales and distribution
ATI Technologies Ltd.	Malaysia	International purchasing
ATI Research Silicon Valley Inc.	California, USA	R&D
ATI Technologies (Hungary) KFT	Hungary	R&D, licensing and inter-company lending
ATI Technologies (Korea) Co., Ltd.	Korea	R&D support
ATI Visual Technologies (Shanghai) Co., Ltd.	Shanghai, China	R&D support
ATI Technologies Distribution Inc.	Ontario, Canada	North American sales and distribution
ATI Technologies (HK) Ltd.	Hong Kong	Sales administration
ATI Technologies India Private Limited	India	R&D

We operate technology centres and sales support offices in Canada, the United States, Europe and the Asia-Pacific region.

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ITEM 2.    GENERAL DEVELOPMENT OF THE BUSINESS

ATI is a world leader in the supply of graphics and multimedia processors and technologies for desktop and notebook PCs and consumer electronic devices such as mobile phones, DTVs and game consoles. Our graphics processors increase the speed and complexity of the images that can be displayed and improve image quality and color definition.

Rich and intuitive visual experiences make digital electronic products such as PCs and consumer electronic devices more accessible and more compelling to end-users. Increasingly, computing, entertainment and communications product platforms rely on graphics or visual processors to deliver an engaging experience and enrich the utility of their products for end-users.

We believe that the visual experience is a key element of differentiation among various digital product platforms. PC users clearly prefer a rich visual experience, particularly in the high-end enthusiast market where consumers seek out the fastest and highest performing visual processing product to deliver the most compelling and immersive gaming experiences. In commercial settings, users also prefer an intuitive and graphical visual experience, which results in enhanced productivity.

Developments in the growing handheld and DTV markets are providing us with increased opportunities to leverage our expertise in graphics and visual processing. The mobile phone market has transitioned towards color visual displays and greater multimedia features to provide users with a richer visual and overall experience. The opportunities for our products are also expanding as a result of growth in DTV, driven in part by the mandate of the U.S. Federal Communications Commission that requires electronics manufacturers to include digital tuners in all new television sets by 2007. With highly integrated solutions, which include demodulation and video processing technologies, we believe that we are well-positioned to continue to capitalize on this transition.

We have also successfully leveraged our core visual processing technology into the game console market. Our graphics processors currently power Nintendo Co., Ltd.‘s (“Nintendo”) GameCube game console and Microsoft Corporation’s (“Microsoft”) Xbox 360 game console. We are also developing the “Hollywood” graphics processor for Nintendo’s next generation game console, currently known in the industry as “Revolution”.

The PC and Consumer markets are more fully described in Item 3.1 “Narrative Description of the Business – Overview”.

2.1  Three Year History

The following outlines a number of the important events in our business over the course of the last three fiscal years:

Fiscal 2005

• We achieved record revenues of approximately $2.2 billion and shipped record volumes of more than 115 million units.

• We continued development of our next-generation architecture and subsequent to fiscal year-end, launched a family of graphics processing units (“GPUs”) for the PC discrete graphics market based on 90 nanometer process technology.

• We introduced the GPU for Microsoft’s Xbox 360, which incorporates highly innovative graphics technologies, including ATI’s unified shader architecture, to drive new levels of performance for game console graphics.

• We significantly expanded our desktop integrated chipset business with strong sales of the Radeon Xpress 200 family of products for the Advanced Micro Devices, Inc. (“AMD”) and Intel Corporation (“Intel”) platforms.

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• We developed and introduced Crossfire, our multi-graphics platform for PC enthusiasts. Crossfire, which began shipping subsequent to fiscal year-end, enables the use of two graphics cards in the same system for improved performance.

• We continued to build momentum in the digital consumer markets. In the handheld arena, we secured additional design wins with Motorola Inc. (“Motorola”) and announced our first design wins with major mobile phone manufacturers LG Electronics, Samsung and Siemens. In DTV, we increased revenues and positioned ourselves to capitalize further on the analog-to-digital television transition.

• In September 2004, we acquired additional assets from AMI Technologies Corp. (“AMI”) following on from an acquisition from AMI in September 2003.

• In September 2004, we acquired certain assets of RT&C International to form our sales organization for South Korea. This acquisition provided us with valuable direct access to our important customers in Korea and provides a base from which to grow our presence in this important market.

• In January 2005, we established a wholly foreign-owned enterprise in China, ATI Visual Technologies (Shanghai) Co., Ltd., as our R&D support centre in China.

• In February 2005, we completed the acquisition of CuTe Solutions Private Limited, whose expertise in audio and digital media solutions will broaden our offerings for consumer electronics devices and personal computers. The company has since been renamed ATI Technologies India Private Limited and has formed the basis of our new R&D centre in India.

• In March 2005, we acquired certain cable modem silicon intellectual property and employees from Terayon Communication Systems, Inc. The acquisition is expected to enhance our strategic position in the DTV market, particularly in the area of interactive digital cable ready (“iDCR”) television.

• We strengthened our management team in several key areas, including the appointment of Patrick Crowley as our new Senior Vice President, Finance and Chief Financial Officer and John Docherty as our Senior Vice President, Operations of ATI Technologies Singapore Pte. Ltd.

• We implemented a normal course issuer bid and repurchased a total of two million common shares for a total consideration of $23.9 million during fiscal 2005.

Fiscal 2004

• We demonstrated our technology leadership position by introducing the industry’s first top-to-bottom family of PCI Express graphics cards for consumer and commercial desktop systems. We also introduced a range of PCI Express products for the professional workstation market, as well as the industry’s first mobile PCI Express graphics processor. We shipped more than one million native PCI Express GPUs in fiscal 2004.

• We continued to introduce innovative and high-performance products to the markets we serve. These included the Radeon X800, HDTV Wonder, Imageon 2300, Xilleon 210VC and Theater 550 PRO, among others.

• We introduced the Radeon Xpress 200 family of chipsets for the AMD desktop platform incorporating industry-leading features and performance, which addressed the value segment of the desktop PC market.

• We continued to build momentum in fast-growing digital consumer markets such as handheld devices, mobile phones and DTVs.

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• We enhanced our position as a global leader in mobile phone graphics, announcing a strategic collaboration with QUALCOMM Incorporated and continued to broaden our relationships with tier one mobile phone manufacturers. We also introduced the Imageon 2300 family of co-processors, the first of their kind, to enable 3D gaming performance on mobile phones.

• We enhanced our position in the DTV market, shipping more than five million chips for HDTVs and cable and terrestrial set-top boxes in 2004. We secured design wins with most major DTV manufacturers, including Funai (Sylvania), Hitachi, JVC, Mitsubishi, Matsushita (Panasonic), Philips, Scientific-Atlanta, Samsung, Sanyo, Sony, TiVo, Toshiba, Thomson/TTE (RCA) and others.

• In September 2003, we acquired certain assets of AMI, our exclusive sales organization for Taiwan and China since 1992. This strategic acquisition strengthened our presence in these critical and rapidly growing markets. The majority of AMI’s sales, marketing and field application engineering staff were transferred to ATI as part of the acquisition.

• David E. Orton, previously President and Chief Operating Officer of ATI, became President and Chief Executive Officer.

• We were added to the NASDAQ-100 Index and our common shares were included in the NASDAQ-100 Index Tracking Stock.

• We posted record financial performance with revenues up 44% from fiscal 2003 to approximately $2.0 billion and diluted earnings per share of $0.80, up from $0.14 in fiscal 2003.

Fiscal 2003

• We delivered new product line-ups for both the spring and fall original equipment manufacturer (“OEM”) design cycles.

• We introduced the FireGL X2-256 and FireGL T2-128 graphics boards into the workstation segment.

• We launched the All-in-Wonder 9800 graphics board to lead our home media PC product offerings.

• We introduced the Imageon 3200, an advanced multimedia co-processor for handheld devices, including color mobile phones.

• We were the first company to introduce a broad range of visual processors compatible with Microsoft’s DirectX 9.0 multimedia application programming interface.

• We captured new OEM design wins and established new channel partnerships with original design manufacturers (“ODMs”) such as Asustek and Micro-Star International.

• We introduced a new generation of integrated graphics processors (“IGPs”) with the launch in June 2003 of the Mobility Radeon 9100 IGP and the Radeon 9100 IGP for the notebook and desktop markets, respectively.

• We commenced volume shipments of our Imageon multimedia co-processor products to Motorola for their V300, V500 and V600 color and feature mobile phones.

• We secured design wins for our DTV products from television, projector and set-top box manufacturers including Sony, Samsung, Epson, Scientific Atlanta, Funai Electric (Sylvania brand) and Changhong Electric (Apex brand).

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• We signed agreements with Nintendo and Microsoft with respect to the development of new technology to be used in their future products.

Business Outlook for Fiscal 2006

The following contains forward-looking statements about our business outlook for fiscal 2006. Reference should be made to “Forward-Looking Statements” on page 5 and for a description of material factors that could cause our actual results to differ materially from the forward-looking statements in the following, please see Item 3.12 “Narrative Description of the Business – Risks and Uncertainties” at page 25.

PC

• Our success in the PC segment in fiscal 2006 will depend on our ability to introduce and deliver new products in a timely fashion, improve operational efficiencies, manage the ongoing PCI Express and lead-free transitions, and transition to advanced process technologies.

• We are further working to ensure that we are well-positioned to capitalize on future industry inflection points, including the introduction of Microsoft’s next operating system, Windows Vista, expected by the industry to launch in 2006.

• Subsequent to our 2005 fiscal year-end, we launched a family of desktop discrete products based on 90 nanometer process technology that targets the enthusiast, performance and mainstream segments of the market. We also began volume shipments of Crossfire, our high-performance multi-GPU chipset platform.

• In the first half of fiscal 2006, we expect to introduce new 90 nanometer discrete products for the notebook market. One of our key priorities in the PC segment for the coming year is to successfully roll out these new products and reassert broad-based technology leadership in PC graphics.

• We expect our sales from integrated chipsets in fiscal 2006 will continue to grow. We remain intently focused on increasing chipset gross margins through aggressive cost reductions including product and packaging redesign and manufacturing and yield improvements.

Consumer

• Handheld, DTV and game console revenues are expected to remain key growth and profit drivers for us.

• We expect Consumer revenues in fiscal 2006 to increase both on an absolute basis and as a percentage of consolidated revenues.

• Handheld revenue is expected to grow on increased sales of Imageon processors to meet the growing consumer demand for feature-rich multimedia mobile phones. According to Display Search, a market research firm, the mobile phone market is expected to grow from approximately 817.9 million units in 2005 to approximately 1,071.9 million units by 2008, with nearly 98% of mobile phones having color display.

• We expect sales of our DTV products to increase in fiscal 2006 with the continued roll-out of DTVs in the North American market. In addition, we are beginning to focus our development on products for the European and Asian markets to fuel future growth. According to Strategy Analytics, a market research firm, worldwide DTV shipments are predicted to be 73.7 million units in 2005, climbing to an estimated 134.5 million units by 2008.

• We expect a stronger contribution from our game console segment in fiscal 2006 due to the incremental royalties that are expected from sales of Microsoft’s Xbox 360. Nintendo’s Revolution console, the successor to the GameCube, will also contain our graphics technology and is widely expected by the industry to launch sometime in 2006.

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Consolidated

• We continue to work aggressively to improve our operational capabilities and achieve a higher level of overall efficiency.

• While we believe gross margins will remain under some pressure in the near-term due to the growing contribution from integrated chipsets, we expect gross margins to improve modestly as the year progresses.

• We also expect fiscal 2006 to yield both revenue and earnings growth relative to fiscal 2005.

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ITEM 3.    NARRATIVE DESCRIPTION OF THE BUSINESS

3.1  Overview

Founded in 1985, ATI is a world leader in the supply of graphics and multimedia processing products and technologies for desktop and notebook PCs, and consumer electronic devices such as handheld mobile phones, DTVs and game consoles. We apply our proprietary technologies, design capabilities and software to provide graphics solutions for customers in all our target markets.

In the first quarter of fiscal 2005, we began to report our financial and operating performance in two segments – PC and Consumer – reflecting the two primary markets for our semiconductor graphics products.

The PC market includes all 3D graphics, video and multimedia products and chipsets which are developed for use in desktop and notebook PCs, including professional workstations, servers and home media PCs. The Consumer market includes products used in mobile phones and DTVs. The Consumer market also includes royalties and contract engineering services derived from mobile phone and game console products.

Our Radeon brand is a recognized leader in the PC graphics market. We cater to all market segments with products and features that address the specific needs of their end-users. Mobility Radeon is our brand for our notebook PC market and Radeon Xpress is our brand for integrated chipset products.

We believe that the Consumer market represents a key area for the future growth of our business. Sales in this area have increased from less than 5% of our consolidated revenues in fiscal 2003 to approximately 15% of our consolidated revenues in fiscal 2005. Our Imageon products for mobile phones and handheld devices, and our Xilleon and Nxtwave products for DTV markets have achieved significant design wins with customers in their respective segments. In the game console market, we currently provide the graphics technology in the Nintendo GameCube and Microsoft Xbox 360 game consoles. We are also developing technology for Nintendo’s next generation game console, Revolution.

During the fiscal year ended August 31, 2005, our business generated consolidated revenues of approximately $2.2 billion. We have more than 3,300 employees worldwide. Our ten largest customers accounted for approximately 61% of our consolidated revenues in fiscal 2005. A significant portion of PCs and consumer electronic devices are currently built in the Asia-Pacific region; regardless of where the products are sold. Approximately 84% of our sales during fiscal 2005 were in the Asia-Pacific region.

We believe that our continued commitment to innovation and technology leadership will position ATI to capitalize upon growth opportunities in the markets for our products in the future.

3.2  Our Markets

The following contains forward-looking statements about ATI’s markets. Reference should be made to “Forward-looking Statements” on page 5 and for a description of material factors that could cause our actual results to differ materially from the forward-looking statements in the following, please see Item 3.12 “Narrative Description of the Business – Risks and Uncertainties” at page 25.

The semiconductor graphics market addresses the need for visual processing for various computing and entertainment platforms such as desktop and notebook PCs, workstations, DTVs, handheld devices and game consoles. The primary product of a semiconductor graphics supplier is the GPU, a semiconductor chip that increases the speed and complexity of images that can be displayed on a graphical interface, as well as improving image resolution and color definition. The GPU off-loads the burden of graphics processing from the PC or electronic devices’ microprocessor or central processing unit (“CPU”). In this way, the dedicated graphics or visual processor and CPU work in tandem to increase overall speed and performance.

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During the past few years, the PC industry has been marked by consolidation among the large PC OEMs and the emergence of PC system integrators (“SIs”) or “white box, clone or non-branded” PC manufacturers. We therefore believe that it is important for PC graphics suppliers to have their technology incorporated into board-level products, which are available to and accepted by the SI channel.

The strength of the semiconductor graphics market is heavily dependent upon the PC graphics market and the consumer electronics market.

PC

Desktop and notebook products represent the two major segments of the PC market. According to International Data Corporation (“IDC”), a market research firm, the worldwide desktop PC and notebook market segments were estimated to be 132.7 million units and 60.1 million units, respectively, in 2005 and are forecast to be 139.5 million and 70.5 million units, respectively, in 2006. While the desktop PC segment has traditionally been the largest sector within the PC market by volume, the notebook PC segment continues to expand at a more rapid pace driven by the availability of lower power and high performance notebook PCs at affordable prices. According to the most recent IDC data, the desktop and notebook PC market segments are estimated to grow to 152.1 million units and 95.7 million units, respectively, by 2008.

The graphics solution for both the desktop and notebook PC market segments is addressed by adding a discrete graphics processor, which is a stand-alone graphics chip, or by integrating the graphics hardware into the motherboard chipset. Discrete graphics chips tend to provide higher levels of performance and speed, while integrating graphics into the chipset caters to the value segment of the market. The demand for integrated graphics solutions has grown in recent years as the PC market has developed and the performance of integrated chipsets has advanced. OEMs and SIs, who have been continually pressured to meet lower price and power consumption targets while still maintaining reasonable profit margins, are increasingly using integrated chipsets over discrete chipsets in their products given the “value” or low-cost characteristics of integrated graphics solutions. Based on data from Mercury Research, a market research company, it is estimated that for 2005, integrated graphics chipsets account for approximately 60% of the desktop 3D chips and approximately 68% of the notebook 3D chips sold worldwide. Customers in the PC market include: OEMs and SIs, who build GPUs into their PC products; ODMs, who build GPUs into their PC motherboard and graphics board products; and add-in-board (“AIB”) manufacturers who incorporate GPUs into their graphics board products.

Consumer

The market for graphics has grown beyond its PC roots as technology in other electronic devices has developed. Newer avenues of growth for the graphics market include DTVs, handheld devices, such as multimedia-enabled mobile phones, and game consoles. Similar to the development of the PC market, users in the Consumer market are demanding enhanced imagery for improved utility and a richer visual experience for their digital electronic devices.

The growth in the DTV market is being driven by the conversion of analog television signals to digital transmissions by television broadcasters. This conversion is supported by a U.S. Federal Communications Commission mandate that requires the integration of digital tuners into TV sets and receiver devices by 2007. As this transition takes place, semiconductor graphics suppliers will have the opportunity to leverage their multimedia technology developed for the PC market into new products for DTVs. According to Strategy Analytics, worldwide DTV shipments are predicted to be 73.7 million units in 2005, climbing to an estimated 134.5 million units by 2008.

The market for color, feature rich (including camera) and smart phones will increasingly require that mobile phones provide rich colorful visual displays as well as 2D and 3D graphics technology. The transition to next generation 2.5G and 3G mobile phone technologies will drive this trend as users demand an enhanced experience with their mobile phones, including advanced audio and video features, as well as power management (battery life). As this market develops, semiconductor graphics suppliers will have opportunities to work with mobile phone manufacturers and supply advanced multimedia processors for their mobile phone products. According to Display Search, the size of the mobile phone market is estimated to reach approximately 817.9 million units in 2005, is currently estimated to grow to 1,071.9 million units by 2008, with nearly 98% of mobile phones having color display.

Game consoles are also an important segment of the Consumer market. In this market, semiconductor graphics suppliers work alongside game console manufacturers to enhance the visual experience for the users of sophisticated video games. Semiconductor graphics suppliers have the opportunity to leverage their core visual and graphics processing technologies by providing solutions to this market. According to Strategy Analytics, the game console market is expected to sell 17.0 million units in 2005, is forecast to be 26.5 million units in 2006 and is currently estimated to grow to 42.3 million units by 2008.

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3.3  Business Strategy

The following contains forward-looking statements about ATI’s business strategy. Reference should be made to “Forward-looking Statements” on page 5 and for a description of material factors that could cause our actual results to differ materially from the forward-looking statements in the following, please see Item 3.12 “Narrative Description of the Business – Risks and Uncertainties” at page 25.

We anticipate that future PC systems and certain consumer electronic devices will continue to require advanced visual processing technology to support 3D gaming and digital video technologies based on emerging standards such as Blu-ray and HD-DVD.

We intend to expand our presence in the PC market by closely following and capitalizing on market trends and inflection points in the industry, such as the recent transition to the PCI Express interface standard.

Another key element of our business strategy has been to expand beyond the traditional PC market into emerging Consumer market segments such as DTV and handheld devices, including color mobile phones. We experienced considerable success in each of these markets in fiscal 2005 and are poised to grow further in fiscal 2006 by virtue of our strong momentum, customer relationships and technology leadership.

We intend to execute our business plan through the following strategies:

Sustained product and technology leadership in our GPU products

Enabling the most compelling visual experience irrespective of platform is central to our business strategies. Our goal is to consistently raise the technology and performance standard in all segments of the PC and Consumer markets in which we operate. In the PC market, we are focused on capturing performance and technology leadership at the high-end enthusiast level and then propagating this technology throughout all market segments. In the Consumer market, we are focused on the innovation and delivery of advanced graphics performance and other key features and capabilities that our customers desire and market to their end-users.

We expect to continue to focus our research efforts to allow us to bring new and innovative products and technologies to the market. We continue to focus on key graphics technologies relating to 2D, 3D and video acceleration for desktop, notebook and workstation PCs. Due to the rapidly changing and expanding technologies in the PC market and the convergence of this market with other media, we continue to internally develop and pursue opportunities to acquire or license complementary leading-edge technologies when appropriate.

Build a strong and sustainable franchise in the integrated chipset market

The market for integrated chipsets has grown rapidly and based on data from Mercury Research, integrated chipsets are estimated to represent approximately 60% of desktop 3D chips and approximately 68% of notebook 3D chips sold worldwide for 2005. Bringing our core visual processing technology and integration expertise to the integrated chipset market segment is a natural extension of our PC market strategy. We have invested in R&D, cultivated distribution channels and anticipated certain inflection points to stage our entry in this market to maximize our opportunities.

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Our chipset platform technology includes a top-to-bottom line up of products targeted to motherboard manufacturers. We have partnered with key motherboard manufacturers including Asus, Gigabyte, Micro-Star International, PC Partner, Sapphire and TUL Corporation, which we expect will help us further grow this market in fiscal 2006.

Expand in select Consumer market segments

We leverage our core graphics technologies from our PC products into related markets that reach beyond the PC and address the Consumer markets that include handheld devices such as color mobile phones, DTVs and game consoles. We continue to refine our approach to these markets and are currently focusing on color mobile phones in the handheld segment and North American DTV in our DTV business. We are also beginning to explore DTV growth opportunities in the European and Asian markets.

Innovate cost-effectively and improve operating and financial performance

We seek to innovate efficiently. This means targeting new channels and new customers by leveraging our core technologies. It also means introducing our products into new markets at key inflection points and capitalizing on the momentum of changes in the market. We strive to make continuous improvements in development processes and technologies, manufacturing efficiencies and inventory management.

We continually review our business to ensure that expenses correspond with their opportunity and return profile.

3.4  Products and Technology

3.4.1  PC Products

Desktop Products

Our discrete desktop GPUs address desktop PC markets where customers expect high levels of performance, speed and a compelling visual experience. We offer a complete line of discrete GPU products for all market segments. Our most recent generation of desktop GPUs, launched subsequent to fiscal year-end, are the Radeon X1800, Radeon X1600 and Radeon X1300.

Although the percentage of PCs that rely on integrated chipsets for graphics is large, we believe that discrete graphic chipsets will continue to offer higher performance and will be the preferred solution for workstation, multimedia and gaming platforms.

In order for OEMs to meet continually lower pricing targets while still maintaining reasonable profit margins, there is a growing trend for OEMs to use integrated chipsets rather than discrete graphics solutions in their “value” or low-cost PCs as well as in commercial platforms. The value and commercial markets represent a significant portion of PCs that are sold today. Mercury Research estimates that integrated graphics chipsets are used in approximately 60% of the desktop 3D systems sold worldwide for 2005.

Our desktop integrated graphics products address the value and commercial segments of the PC market. We bring advanced features, low cost and an excellent visual experience to these segments. We offer a full line of integrated products for Intel and AMD based computer platforms. The Radeon Xpress 200 is the most recent generation of our integrated graphics chipsets.

In order to sell integrated products, we secure license agreements with manufacturers of CPUs on which the motherboard is based. We have entered into licensing arrangements with Intel, which permit us, subject to certain requirements, restrictions and limitations, to develop and sell integrated chipsets that are compatible with Intel’s current Pentium 4 desktop and notebook microprocessor platforms. We have also entered into the necessary licensing arrangements that are required for our integrated products to be compatible with CPUs manufactured by AMD.

We offer a complete line of products for the desktop market, including products that support the accelerated graphics port (“AGP”) and PCI Express interface standards for both Intel and AMD platforms, targeting all market segments. The transition by the industry to the PCI Express standard, which began in 2004, gained momentum in 2005 and is expected to continue into 2006.

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Notebook Products

The notebook or mobile PC market continues to be a growing segment in the PC industry, as notebook computers now incorporate richer features such as improved 3D performance, DVD support, and power management technology to reduce battery drain from the graphics subsystem. We developed the Mobility Radeon family of mobile graphics accelerators to target this growing market and to provide the performance, features and flexibility to work in a variety of notebook classes. In this category, speed, low power consumption and visual performance are the uppermost considerations of our customers. We focus on designing notebook GPUs that meet and exceed these expectations in the thin and light, performance desktop replacement and value categories.

As in the desktop PC market, the integration of discrete notebook PC semiconductor components may allow for reduced costs, faster design times and more available space for other features within the notebook PC.

As the trend towards lower cost notebook PCs continues, we believe the market will also require graphics chip suppliers to provide cost effective and low-power ways of delivering high performance graphics, including the use of integrated chipsets. Mercury Research estimates that integrated graphics chipsets account for approximately 68% of the notebook 3D chips sold worldwide for 2005. Our notebook integrated products target the value and mainstream segments of the notebook PC market. Our products for this category combine excellent visual performance, powerful features and low power consumption. Our most recent generation of integrated notebook products is the Radeon Xpress 200M.

Chipsets

Our chipset platform technology, also know as core logic on the motherboard, includes a top-to-bottom line up of products in the Radeon Xpress 200 family targeted to motherboard manufacturers. Radeon Xpress 200 series chipsets include both discrete variants (without integrated graphics) targeting the higher end markets that use add-in graphics, as well as integrated graphics variants targeting the mainstream and commercial segments. As outlined previously, Mercury Research estimates that in 2005, integrated graphics chipsets represent a significant portion of desktop and notebook PC markets at approximately 60% and 68%, respectively. Mercury Research estimates that in 2004, chipsets represented a $5.4 billion market encompassing both integrated and discrete variants.

Our Radeon Xpress 200 series chipsets are PCI Express-based with support for both AMD and Intel platforms. Additionally, Radeon Xpress 200 chipsets with integrated graphics support Microsoft’s DirectX 9 application programming interface to ensure the highest integrated graphics performance and visual quality, along with support of all 3D applications, games and operating systems.

Radeon Xpress 200P CrossFire Edition is our most recent dual PCI Express-based chipset without integrated graphics and is designed for our dual-GPU solution known as CrossFire. Radeon Xpress 200 CrossFire Edition (available for both Intel and AMD-based platforms) includes an integrated Radeon graphics processor built for DirectX 9 and OpenGL technology.

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Home Media PCs

The market for digital home media PCs with multimedia capability continues to expand. PC manufacturers are offering consumers even more choices for home theatre and entertainment applications. With these powerful PC systems, consumers can easily access digital photos, TV broadcasts, computer games, DVD movies and more all through one platform.

We continue to offer products for the digital home media PC market which provide PC/TV convergence, combining PC technology with TV, audio and high quality digital video technology. In fiscal 2005, we unveiled innovative multimedia products such as the All-in-Wonder X800 XL and TV Wonder Elite. We offer both notebook and desktop home media PC products. We also offer MPEG encoding software solutions.

Workstation Products

Our FireGL family of workstation graphics boards brings high performance to the digital content creation, visualization and computer-aided design workstation PC markets. Performance and stability are key requirements for workstation graphics. We offer both desktop and notebook workstation solutions. Our most recent product introductions in this segment include our FireGL X3-256 for AGP and the FireGL V7100, V5100, V5000, V3200 and V3100 for PCI Express and the Mobility FireGL V5000, V3200, V3100 and T2-128 for mobile workstations. These products offer a competitive price/performance combination in their respective segments.

3.4.2  Consumer Products

Many consumer electronic devices today rely on some form of digital processor to increase functionality, improve reliability, decrease size and lower costs. An easy-to-use display is also a consumer priority. We continue to leverage our core technology, visual processing expertise and power management know-how to meet these demands and create growth opportunities in certain consumer electronics markets. We have initially targeted three markets: (i) DTVs, including set-top boxes; (ii) handheld devices, including color mobile phones; and (iii) game consoles.

DTV

As television broadcasters in North America and the rest of the world convert their analog television signals to DTV transmissions over the next decade, increased consumer interest in DTV will spur demand for more advanced DTVs. The U.S. Federal Communications Commission issued a mandate in 2002 requiring the integration of digital tuners into TV sets and receiver devices by 2007. Digital transmission standards provide significant advantages compared to analog standards, including greater picture clarity and resolution as well as opportunities for more channels, e-commerce and enhanced TV viewing.

We are leveraging our core technology in visual processors by offering visual and signal processing technologies to DTV manufacturers. Our Xilleon 240 and Theater 311, 312 and 314 products are cost-effective and highly-integrated solutions for this market. We also provide software and support infrastructure to our customers in this segment.

Handheld devices

The latest generation of handheld devices, particularly color mobile phones, are driving demand for more advanced visual processors. Higher resolution panels, higher performing embedded processors and increased internal and removable storage are all contributing to rapid changes in handheld and mobile communication devices.

Our Imageon product line contributes market leading visual processing, high quality audio and power saving technology as well as a high level of integration. For example, our Imageon 2282 is an advanced multimedia co-processor for handheld electronic devices. It provides fully self-contained audio and video processing for 3 mega-pixel digital camera, DV camcorder and digital audio player applications.

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Game consoles

We have also successfully leveraged our core visual processing technology into the game console market. Our customized GPUs process the graphics in Nintendo’s GameCube and Microsoft’s Xbox 360 game consoles. We are also developing technology for Nintendo’s next generation game console, Revolution.

3.5  Research and Development

A strong commitment to R&D is fundamental to our success. Due to the rapid pace of technological change in the graphics industry, it is critical that we meet each market window with the newest generation of products that meet market and customer requirements. Ongoing R&D efforts enable us to participate in establishing industry standards as well as to design and create new products based on these standards. We continue to strengthen our R&D base through internal R&D efforts, licensing arrangements with third parties and acquisitions of technology companies, when appropriate.

Our primary R&D objective is to develop products and technologies that meet the ever-changing demands of the PC graphics and multimedia industry. Our dedication to R&D has also allowed us to expand our addressable market beyond the PC discrete graphics market to the integrated graphics market and to consumer electronics markets including DTVs, color mobile phones and game consoles.

Our net current R&D expenses increased from $265.5 million in fiscal 2004 to $327.0 million in fiscal 2005. Our net capital R&D expenditures increased from $15.5 million in fiscal 2004 to $24.5 million in fiscal 2005. Our engineering resources increased from approximately 1,700 to more than 2,100 employees during that time.

The following table summarizes our net investment in R&D over the past three years. R&D expenditures include current expenses, such as salaries and certain materials, as well as depreciation of capital assets that were acquired for R&D purposes and used as prototype and design tools. For R&D activities carried out in Canada, we qualify for Canadian federal investment tax credits at the rate of 20% of all eligible current and capital R&D expenditures. We also qualify for tax credits based on R&D activities carried on in the United States. These tax credits are used to reduce current expenses, capital expenditures and tax otherwise payable.

Net Investment in R&D
(Thousands of U.S. dollars)
	Years ended August 31
	2005		2004		2003
Gross current R&D expenses	$372,542		$294,516		$234,719
Less related R&D tax credits	45,525		29,025		21,743
Net current R&D expenses	$327,017		$265,491		$212,976
Net current R&D expenses as a percentage of revenues	13.3	%	13.5	%	15.4	%
Capital R&D expenditures, net of R&D tax credits	$  24,542		$  15,479		$    9,237

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3.6  Sales and Marketing

PC Market

We sell our products through five major sales channels: PC OEMs (often through ODMs or other contract manufacturers), AIB manufacturers, SIs, retail stores and consumer electronics manufacturers.

Our PC OEM customers include Acer, Apple, Dell, Founder, Fujitsu, Fujitsu-Siemens, Gateway, Hewlett-Packard, Hitachi, IBM, Lenovo, NEC, Packard Bell, Panasonic, Samsung, Sony, Toshiba and Trigem.

In the PC OEM market, it is critical to time the introduction of our graphics products to reflect industry transitions or inflection points and meet the schedules associated with qualifying and shipping products for seasonal buy cycles, typically in the spring and fall. Sales to PC OEM customers often involve a direct relationship between the customer and our R&D personnel to ensure that the products we are developing meet the needs and specifications of the PC OEM. We offer a full range of products to PC OEMs, including products for PCs as well as digital consumer products. This results in sales channel efficiency, an ability to grow with our customers, and enables our PC OEM customers to enter new market segments. A significant portion of product manufacturing for PC OEMs is handled by ODMs, particularly in the notebook market. Our current notebook ODM customers include Arima, Asustek, Compal, First International Computer, Inventec, Quanta, Uniwill and Wistron.

Over the past several years we have worked to establish and broaden our relationships with major AIB manufacturers. We deliver component-level products to these manufacturers who in turn build and sell board-level products using our technology to SIs. Our AIB customers include Asustek, Connect 3D, TUL Corporation, Gigabyte, Hightech Information Systems, Micro-Star International, Sapphire, Palit and Info-Tec Corp.

We also work directly with our SI customers including Actebis, Alienware, Evesham Technology, Falcon Northwest, Kraftway, MaxData Systeme, Medion, Mesh, Unika and Voodoo. SIs typically sell from positions of regional or product-based strength in the market. They usually operate on short design cycles and can respond quickly with new technologies. The SI channel often uses discrete graphics solutions as a means to differentiate their products and add value to their customers.

ODMs also build motherboard products which include integrated graphics products. We currently have strategic alliances with the world’s leading motherboard, notebook and PC design manufacturers to develop systems that feature our products.

We also sell our PC products to consumers through major retailers including Best Buy, CompUSA, Circuit City, Dixons, Future Shop, MediaMarkt and Fry’s. Our major e-commerce retailers include Newegg.com, CDW.com and Buy.com. The retail market is characterized by significant price sensitivity requiring clear feature and performance differentiation at multiple price points.

Consumer Market

In our Consumer market, we are focused on selling to the top-tier consumer electronics manufacturers. We have strengthened our sales organization in this segment in the Americas and the Asia-Pacific region.

In our handheld segment, our customers include Motorola, LG Electronics, Samsung and Siemens.

In our DTV segment, our customers include Hitachi, Panasonic, Samsung, Sharp, Sony, Thomson and Toshiba.

In our view, ATI brand awareness increases the efficiency of our reach into each of our sales channels. We have increased our brand awareness programs over the last few years through high profile product launches, targeted event sponsorship and point-of-sale promotion kits.

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General

Our ten largest customers accounted for approximately 61% of our consolidated revenues in fiscal 2005, with two customers representing 21%. In fiscal 2004, one customer accounted for approximately 10.6% of our consolidated revenues and our top ten customers accounted for approximately 62% of our consolidated revenues.

The following table summarizes the breakdown of our consolidated revenues by territory as a percentage of total consolidated revenues. Our geographical segmentation reflects the locations where we delivered products to our customers, not where the end customer purchased the PC or consumer electronic device. A significant portion of PCs and consumer electronics devices are currently built in Asia-Pacific, regardless of where the products are sold. Accordingly, the majority of our sales in fiscal 2005 were in the Asia-Pacific region.

	Years ended August 31
	2005		2004		2003
Canada	1	%	1	%	1	%
United States	11	%	13	%	19	%
Europe	4	%	5	%	8	%
Asia-Pacific	84	%	81	%	72	%
	100	%	100	%	100	%

We maintain a regional sales presence in each of the key industrialized areas of the world. As noted above, however, OEMs, AIB manufacturers and consumer electronics companies are locating their manufacturing operations in the Asia-Pacific region. Our sales organization reflects this geographic weighting.

Our sales arrangements with OEMs, AIBs, distributors and key retail customers generally operate on the basis of product forecasts provided by the particular customer, but do not include any commitment or requirement for minimum product purchases. Purchase orders are also typically cancellable by the customer without consequence on 60 days notice to us.

We recognize revenue 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. Sales made to distributors and retailers under agreements allowing for price protection and/or rights of return are recognized at the time of sale to these customers. Estimated returns and allowances, price protection and sales rebates are recorded as a reduction of revenue at the time of revenue recognition. Estimates are based on historical experience, planned customer incentive programs and other relevant factors. If estimates of future market conditions and changing product life cycles in the market place are inaccurate, it may be necessary to increase customer incentive offerings, which could necessitate a further reduction of revenue. Such increases are recorded as a reduction of revenue at the time the program is introduced or enhanced. We also provide for the estimated cost of product warranties at the time of revenue recognition.

We primarily use a binding purchase order as evidence of our sales arrangements and, in certain cases, use contractual agreements. We consider 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, we assess whether collection is reasonably assured. If we determine that collection is not reasonably assured, we defer recognition of the revenue until collection becomes reasonably assured, which is generally upon the receipt of cash.

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We follow the percentage-of-completion method of accounting for contracts requiring us 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 project is impractical, except to ensure that no loss will be incurred, we use 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. We then record an equal amount of revenue against costs. Cost of revenue is adjusted to recognize the profit element from the arrangement once we are able to estimate total revenue and total costs.

Cash received from customers in advance of meeting our applicable revenue recognition criteria is recorded as deferred revenue.

3.7  Competition

Our markets are highly competitive and characterized by rapid changes in technology. We provide graphics and multimedia products in all market segments of the PC desktop, notebook, workstation and server markets through OEMs, SIs, AIB manufacturers, distributors and retailers. As a result, we compete with every PC graphics and multimedia company that serves one or all of these distinct market segments. In addition, by integrating new functionality into the GPU and expanding our product lines, we continually face new competitors in converging markets, some of whom may be substantial and well-established in those markets. Key competitive factors in the PC and Consumer markets are outlined below.

Key Competitive Factors by Market

PC		Consumer
(including desktop, notebook and chipset)		Mobile Phones		DTV
•	Visual performance, features	•	Power consumption	•	Visual performance
	and speed	•	Cost	•	Scalability across platforms
•	Cost	•	Size	•	Cost
•	Brand awareness	•	Graphics performance	•	Customer differentiation
•	Comprehensive product line	•	Scalability across platforms		and support
•	Timely product introductions	•	Customer differentiation	•	Timely product introductions
•	Product quality, including		and support
	image quality and software	•	Timely product introductions
	stability

In the PC market our competitors include: (i) discrete component suppliers; (ii) AIB manufacturers; (iii) fully-integrated graphics suppliers; and (iv) suppliers of integrated graphics. These include Intel, Matrox Electronic Systems, Nvidia, SiS, Via Technologies and XGI Technology. Other competitors also include a number of smaller companies which may have greater flexibility to address specific market needs. The growing complexity of visual processors and the associated R&D costs, however, represent an increasingly higher barrier to entry in this market.

In the Consumer market we have different competitors in each of our market segments.

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In the handheld segment, we have three categories of competitors. Baseband processor vendors have traditionally provided the voice processing functionality in mobile phones. Many of these vendors are expanding their product offerings to encompass the graphics processing required by color and feature mobile phones. These include ADI, Agere, Broadcom, Freescale, Infineon, Philips, QUALCOMM, STMicroelectronics and Texas Instruments. Another category of competitor, application processor vendors, has emerged to serve the high-end feature and smart phones that require large amounts of general purpose processing capability. These include Intel, Nvidia, QUALCOMM, Samsung, STMicroelectronics and Texas Instruments. The third category of competitor, media co-processor vendors, is most comparable to our strategy in the color and mobile phone market. Media co-processor competitors include Core Logic, Epson, MTEK Vision, Nvidia and Renesas.

In the DTV segment, our primary competitors include Broadcom, Conexant Systems, Genesis Microchip, LSI Logic, Philips, STMicroelectronics, Trident Microsystems and Zoran, as well as in-house semiconductor development divisions at companies such as LG, Matsushita Electric (Panasonic brand), Samsung and Toshiba.

In the game console segment, we compete primarily against Nvidia.

3.8  Manufacturing

Semiconductor Manufacturing

We have strategic relationships with three leading semiconductor foundries, Taiwan Semiconductor Manufacturing Company, United Microelectronics Corp. and Chartered Semiconductor Manufacturing to manufacture our processors. From the foundry, wafers are delivered to our test, assembly and packaging partners including Advanced Semiconductor Engineering Group, King Yuan Electronics, Siliconware Precision Industries and STATS-Chippac, who package and test the final application-specific integrated circuit (“ASIC”). It is a flexible production system that enables us to balance capacity based upon technology and expertise. In this way we maintain control over the manufacturing process, reduce delivery times and component costs and increase product quality.

Board Manufacturing

Board-level product manufacturing is outsourced to third party manufacturers. These include Celestica, Fairway and PC Partner with locations in China. Our manufacturing facility in Markham, Ontario, Canada is primarily devoted to prototyping and trial runs for new product introductions.

3.9  Customer Service and Software Support

As service and support is critical to the success of our customers, it is critical to our success. We work closely with our customers by committing R&D resources to achieving optimal compatibility and integration with their products. We also work closely with our customers on demand generation programs aimed at their key markets. We deliver fast and accurate responses to hardware and software developers to ensure that their products, games and applications maximize the potential of our visual processor technology.

With each of our graphics and video accelerator products, we provide drivers and supporting software packages that enable the effective use of our products under a variety of operating systems and applications. In addition to the Microsoft Windows family of operating systems, we support Apple’s Mac OS X as well as Linux-based applications. Our software provides optimized performance for a variety of CPU platforms (including Intel and AMD based systems), motherboards and chipsets.

We develop our software drivers in many different languages and formats to conform to international user requirements. Our software engineers, scientists and test professionals engage in large scale development of drivers and related software applications in support of OEM, retail and AIB customers. On-time delivery of optimized, unified and reliable software that supports the latest technology enables our customers to market leading-edge and cost-effective ATI-based products.

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We enable all our PC-based products (discrete and integrated, desktop and notebook, graphics and multimedia) with a unified driver – a single driver product currently supporting all of our Radeon products and executing under all of Microsoft’s supported PC operating systems. In fiscal 2005, we announced a major upgrade to our Catalyst software suite as well as broad graphics driver support for the beta 1 release of the upcoming Microsoft Windows Vista operating system.

3.10  Human Resources

We employed the following number of individuals, including non-permanent and short-term employees, at August 31 in each of the years noted below:

	2005	2004	2003
R&D	2,191	1,704	1,422
Operations and administration	547	490	461
Sales and marketing	731	593	410
Total number of ATI personnel	3,469	2,787	2,293

We believe that our ability to attract and retain highly skilled engineering, marketing and management personnel is one of the key factors in our success. None of our employees are governed by collective bargaining agreements. We have never experienced a material work stoppage or strike and believe that our relationship with our employees is good.

3.11  Facilities

Our head office facilities are located in Markham, Ontario, Canada at 1 Commerce Valley Drive East. This facility comprises approximately 240,000 square feet of office and R&D space. We have a 50% interest in the joint venture company that owns this facility. We have four other locations in Markham, Ontario. At 33 Commerce Valley Drive East, we own 100% of a facility that comprises approximately 123,000 square feet, including approximately 65,000 square-feet of manufacturing and warehouse space. We also lease space in three other facilities in Markham amounting to approximately 165,000 square feet.

We lease engineering facilities in the United States including approximately 75,000 square feet in Marlborough, Massachusetts and approximately 104,000 square feet in Santa Clara, California. We also lease a number of smaller regional offices in the United States, Europe and the Asia-Pacific region. As a result of the change in our business model over the past several years where we transitioned to primarily supplying component level products rather than board products to our customers, we closed our European board manufacturing facility located in Dublin, Ireland in fiscal 2003.

Our operations are subject to a variety of federal, provincial and local environmental laws and regulations. These laws and regulations relate to, among other things, the discharge of contaminants into water and air and onto land, the disposal of waste, and the handling, storage and transportation of hazardous materials. We believe that we are currently in compliance with all applicable environmental laws in all material respects.

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3.12  Risks and Uncertainties

Our operations and financial results are subject to various risks and uncertainties which are outlined below. These risks are in addition to those outlined elsewhere in this Annual Information Form and in our filings with Canadian and United States securities regulatory authorities, including Management’s Discussion and Analysis contained in the 2005 Annual Report.

As a result of any or any combination of these risks and uncertainties, our operating results and common share price may be subject to a significant level of volatility, particularly on a quarterly basis.

Our operating results can fluctuate and are unpredictable

Our operating results have been and will continue to be subject to quarterly and other fluctuations due to changing market and economic conditions and various other factors set out below. As a result, our revenues can fluctuate from quarter to quarter, and, within a quarter, revenues may vary from month to month. In addition, because our operating expenses are largely independent of revenues in any particular period, we may be unable to rapidly adjust our spending to compensate for an unexpected revenue shortfall, which could harm quarterly operating results. As a result, it is difficult to accurately predict revenues and profits or losses.

Our reported operating results may vary from prior periods or may be adversely impacted in periods when we are undergoing a product line transition during which sales of new products may be ramped up to replace sales of our older products. These older products often come under significant pricing and margin pressure as a result of competitors’ actions in the marketplace. Product transitions expose us to inventory risk and potential inventory write-downs. In addition, newer products may be more costly to produce in the early stages of their introduction, which may adversely affect margins and our results of operations.

Should our products not offer the features and performance required by our customers or fail to achieve meaningful market share, our operating results will be negatively impacted. Our ability to continue to sell and develop our products is dependent upon our ability to obtain licenses to industry technology or other intellectual property rights, which may not be readily available on commercially reasonable terms. As a result of any combination of these or other issues referred to below, our operating results and common share price may be subject to a significant level of volatility, particularly on a quarterly basis. Factors that have affected our operating results in the past or could affect them in the future include, among other things:

• demand for and acceptance of our products and those of our customers, including integrated graphics components and consumer electronic devices;

• successful and timely development and production of next-generation products, including products for the consumer electronics market;

• levels of growth or decline in the PC industry;

• introduction of new products by our competitors;

• rapid and frequent technological change in the PC graphics industry;

• the relative demand in the PC industry for discrete solutions as compared with integrated chipsets;

• availability of licenses for industry technology or other intellectual property rights necessary for the continued sale or development of our products;

• changes to ASPs resulting from competitive pressures;

• ability to achieve new design wins;

• the rescheduling or cancellation of customer orders;

• volume of orders received that can be filled in the quarter;

• addition or loss of significant customers;

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• delays or early introduction of new microprocessors or their related chipsets;

• changes to our overall product mix or the geographic regions where our products are sold;

• supply constraints and disruptions for other components incorporated into our products and those of our customers;

• R&D costs associated with the development of new products;

• increasing product line complexity and the related management of inventory;

• unexpected variances in the cost or availability of materials, especially silicon wafer, memory, printed circuit boards (“PCBs”) and packaging costs;

• changes to the expected yield of our component products;

• excess or shortage of manufacturing capacity;

• seasonal and variable demand associated with the PC industry;

• changes in the rate of exchange of Canadian currency to U.S. dollars;

• sales levels of game console and other products from which we generate royalty income;

• legal and other costs related to defending intellectual property and other types of lawsuits, claims or proceedings; and

• new laws that require us to undertake an evaluation of our internal controls through which we may identify internal control weaknesses which may require correction.

As a result of the factors listed above, some of which are discussed elsewhere in this section, period-to-period comparisons of our operating results should not be relied upon as an indication of future performance. The results of any quarterly period are not indicative of results to be expected for a full fiscal year. Accordingly, our operating results may be below the expectations of securities analysts and investors. Our failure to meet these expectations could adversely affect the market price of our common shares.

Design wins are critical to our future success

Our future success and ultimate sales achievements will depend in large part on our retaining and/or achieving design wins, which occurs when PC OEMs, ODMs, AIB manufacturers or manufacturers of consumer electronics devices choose to use our existing and future products in their various product offerings. These selection processes can be lengthy and require us to incur significant design and development expenditures, with no guarantee of winning designs or generating revenues. Our major customers typically introduce new product offerings as often as twice a year. Accordingly, our products must have competitive performance ratings, adequate feature-sets, consistent quality levels and appropriate prices within the limited time frames of our customers to be included in new system configurations. The failure to win new or retain existing design wins of sufficient volume, sales and profitability could have an adverse effect on our business and operating results. Even if we achieve a significant number of design wins, there can be no assurance that our customers will actually take the designs to production or that the designs will be commercially successful.

Our gross margins fluctuate and are difficult to predict

Our overall gross margin is dependent on a number of factors, the principal items being the cost of input materials (mainly silicon, memory, device packaging and PCBs), the manufacturing yield of wafers received from foundries, packaging costs and yields, the ASPs of our products and the actual product mix of our revenues. The continuous change in these factors may cause our overall gross margin to fluctuate from quarter to quarter and make it difficult for us to predict our overall gross margin. In terms of product mix, our business model involves the development and marketing of component and board-level graphics products and technology for desktop and notebook PC, DTV, mobile phone, game console and multimedia applications. Each of these products or product categories has dissimilar gross margins at any particular time. Consequently, many of our gross margin components fluctuate and the overall corporate gross margin is difficult to predict. Should any of the factors influencing gross margin change substantially, our gross margins could be adversely affected. In addition, we offer price protection programs which are intended to protect our channel partners if we reduce the prices in the future for the same products which they have purchased. Although we use an estimation methodology to determine price protection reserves and book these reserves at the time of sales to our channel partners, future price reductions which are either greater or more sudden than estimated will require an additional charge to be taken and therefore can have a negative impact on gross margin in subsequent quarters.

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We do not have minimum purchase requirements under our sales arrangements with customers

Our sales arrangements with our customers do not include any requirement or commitment for minimum purchases of our products. As a result, we often commit resources to develop products without having received advance purchase commitments from customers. In particular, sales of our component products to customers other than OEMs are subject to volatility on a regular basis as demand is often unpredictable and is susceptible to price competition on a short-term basis. Any inability to sell products to which we have devoted significant resources or the cancellation or deferral of product orders could result in excess inventory. This could result in future inventory write-downs, which could have an adverse effect on our profit margins and financial results and restrict our ability to fund our operations. We may build memory and component inventories during periods of anticipated growth and in connection with selling workstation boards directly to major OEMs. We could be subject to excess or obsolete inventories and be required to take corresponding write-downs if growth slows or if we incorrectly forecast product demand. A reduction in demand could negatively impact our gross margins and financial results.

The success of our business is dependent on the timely introduction of new products that do not contain errors or defects

The graphics industry is characterized by frequent product introductions and short product life cycles based on constantly improving technologies and new industry standards. In the PC market, it is increasingly important to be among the first to market with new or enhanced products to replace existing products in order to coincide with the introduction of new products by PC OEMs, particularly during the late summer and fall that are the traditional periods in which PC OEMs introduce new products. The consumer electronics markets also have similar design cycles in which new product offerings are traditionally introduced in the fall. This means that we must commit resources to the development and manufacturing of our products without having commitments to purchase from customers. We must also take advantage of new technologies to maintain our competitive edge. If we fail to identify new product opportunities or develop or bring to market these new products or enhancements within the time frame required by customers, if our new products or enhancements are not selected by our customers to be included in their products, or if the products or technologies developed by competitors render our products or technologies non-competitive or obsolete, we may experience reduced demand for our products and loss of market share and our operating results could be adversely affected.

Our business depends to a significant extent on our ability to continually introduce new and enhanced generations of graphics products in order to retain or win customer contracts and maintain ASPs. The life cycles of our products typically range from six to eighteen months. Market demand requires graphics products to incorporate new features and performance standards on an industry-wide basis. Over the life of a specific graphics component, the ASP undergoes regular price reductions. The introduction of new products and enhancements to existing products is necessary to maintain overall corporate ASPs. If we are unable to introduce new products or launch new products without sufficient increases in ASP or increased unit sales volumes capable of offsetting these reductions in ASPs, our revenues, inventories, gross margins and operating results could be adversely affected.

Our business and operating results could be adversely affected if we incur delays in developing new products or enhancements, or if such products or technologies developed by others render our products or technologies non-competitive or obsolete. Products as complex as those we offer may contain defects or failures when introduced or when new versions or enhancements to existing products are released. There can be no assurance that, despite our testing procedures, errors will not be found in new products or releases after commencement of commercial shipments in the future, which could result in loss of or delay in market acceptance of our products, material recall and replacement costs, delay in recognition or loss of revenues, the diversion of the attention of our engineering personnel from product development efforts and damage to our reputation in the industry and could adversely affect our relationships with our customers. Correcting such errors and failures in our products could require significant expenditures. Any such circumstances could have an adverse effect on our business, financial condition or operating results.

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The success of our business is dependent upon our ability to introduce products with required features and performance levels that support and coincide with significant industry transitions

The PC industry is characterized by frequent new product introductions typically centred around hardware and software changes made by Intel and Microsoft. For instance, new PCs are commonly introduced to coincide with new processor, chipset or memory products launched by Intel or new operating systems launched by Microsoft. It is therefore increasingly important that we maintain our ability to introduce new products that take advantage of these industry transitions. In the past, these industry transitions have included the shift to the AGP standard, which underwent a further transition in 2003 with the adoption of the new AGP 8X standard. A new bus standard, PCI Express, is currently being adopted within the PC industry and the transition to this new standard is expected to continue through 2005 and into 2006. Our products must be able to support the new features and performance levels being required by PC manufacturers at the beginning of these transitions and be priced competitively, otherwise, we may lose business as well as the opportunity to retain and obtain design wins until the next product transition. Failing to develop products with required features and performance levels or a delay as short as a few months in bringing a new product to market could adversely affect our revenues. As well, there can be no assurance that the industry will continue to innovate or improve standards or that the industry will introduce these changes when expected or that we will be able to take advantage of these changes. In the event that such occurrences fail to materialize, our business and operating results could be adversely affected.

To stay competitive, we may have to invest more resources in R&D

If new competitors, technological advances by existing competitors or other competitive factors require us to invest significantly greater resources than anticipated in R&D efforts, our operating expenses would increase. Our net current R&D expenditures increased from $265.5 million in fiscal 2004 to $327.0 million in fiscal 2005. Our net capital R&D expenditures increased from $15.5 million in fiscal 2004 to $24.5 million in fiscal 2005. Our engineering resources increased from approximately 1,700 to more than 2,100 employees during that time. If we are required to invest significantly greater resources than anticipated in R&D efforts without an increase in revenue, our operating results would decline. We anticipate that we will continue to devote substantial resources to R&D, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development. R&D expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in R&D and these investments may be independent of our level of revenue.

A substantial portion of our revenues and our financial performance are dependent upon the PC industry which is cyclical in nature

We currently derive a substantial portion of our revenue from the sale of graphics and multimedia products for use in PCs. Although the PC industry grew significantly during the late 1990s, since 2001 PC sales have not experienced similar levels of growth. Historically, the PC and semiconductor industries have been characterized by rapid technological change, cyclical market patterns, significant ASP erosion, fluctuating inventory levels, periods of overcapacity and capacity constraints, variations in manufacturing costs and yields and significant expenditures for capital equipment and product development. Growth in PC sales at levels experienced in the past may not occur in the future. Reductions in the sales of PCs reduce the overall demand for our products. Moreover, such changes in demand could be large and sudden, as experienced in fiscal 2001 and in previous years when PC manufacturers built-up inventories in anticipation of a period of significant growth that did not materialize. In such cases, PC manufacturers may abruptly suspend all purchases of additional inventory from their suppliers. In addition, declines in spending by corporations and/or consumers, for example, due to an economic downturn, may negatively affect the PC industry. Any sustained reduction in the demand for PCs could adversely affect our operating results.

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The success of our business will be dependent upon the success of our integrated graphics component products

Low-cost desktop PCs account for a significant percentage of PCs sold in the market and are driving the demand for integrated graphics and core logic functions in one chipset. In order for PC OEMs to offer these computers at low prices, overall system costs must be reduced. The costs of integrated graphics components are significantly less than the costs of traditional discrete graphics components, in part due to their reduced functionality and because they do not require separate graphics memory devices. Mercury Research estimates that integrated chipsets are used in approximately 60% of the desktop 3D graphics chips sold worldwide for 2005.

In the notebook market, integrated chipsets offer a similar ability to reduce costs as in the desktop market, as well as provide additional benefits such as lower power consumption and reduced space for ultraportable designs. As mentioned previously, Mercury Research estimates that integrated graphics account for approximately 68% of the notebook 3D graphics chips sold worldwide for 2005.

We currently have a full product line of integrated products to address the desktop and mobile integrated market for Intel and AMD-based platforms. If our products do not successfully address this market segment or we cannot produce products on a cost-effective basis, or if we are unable to obtain required licences for future Intel-based products, our business, financial condition and operating results could be adversely affected.

Our sales and earnings are subject to foreign currency risks

A substantial amount of our operating expenses are denominated in Canadian dollars. However, our results are reported in U.S. dollars. As a result, an appreciation in the value of the Canadian dollar relative to the U.S. dollar will have a negative impact on our earnings. The rise of the Canadian dollar relative to the U.S. dollar from an average rate of 67 cents in fiscal 2003 to an average rate of 75 cents in fiscal 2004 had an approximate $18.0 million negative impact on our operating earnings in fiscal 2004 and the rise to an average of 80 cents in fiscal 2005, had an approximate $13 million negative impact on our operating earnings in fiscal 2005 as compared to fiscal 2004. During the third quarter of fiscal 2005, we purchased forward foreign exchange contracts to buy $94.5 million Canadian dollars over the next nine months at an average exchange rate of $1.2579 Canadian dollars per U.S. dollar. While we may, in the future, enter into additional forward foreign exchange contracts to hedge our currency exposure on expenses incurred in Canadian dollars, continued strength in the Canadian dollar relative to the U.S. dollar may result in upward pressure on our operating expenses if we do not have appropriate or adequate hedging arrangements or policies in place.

The majority of our product sales are denominated in U.S. dollars. Fluctuations in the exchange rate between the U.S. dollar and the local currency can cause increases or decreases in the cost of our products in the local currency of such customers. An appreciation of the U.S. dollar relative to the local currency could reduce sales of our products.

Our royalty revenues, which can compromise a significant part of our earnings, are dependent upon the success of third-party products

Our graphics technology for the game console market is being used in the Nintendo GameCube and Microsoft Xbox 360 game consoles. The only revenues that we receive from these technologies are in the form of non-recurring engineering (“NRE”) revenues, as well as royalties paid to us by Nintendo and Microsoft based upon the market success of their products. Accordingly, our royalty revenues will be directly related to the sales of these products. We have no control over the marketing efforts of Nintendo and Microsoft and there can be no assurance that sales of those products will achieve expected levels in the current or future fiscal years. Consequently, the revenues expected by us from this technology may not be fully realized and our operating results may be adversely affected. In past fiscal years, a significant amount of our net earnings were derived from Nintendo royalties. Royalties are expected to become a more significant share of our net earnings in the future, as we anticipate royalties in future years resulting from our agreements with Nintendo, Microsoft and QUALCOMM. Anything that negatively affects the royalties paid to us by these or other entities with whom we maintain or enter into royalty agreements, may adversely affect our operating and financial results.

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Our entry into new emerging product markets is subject to a number of uncertainties

We have recently developed graphics and integrated products for the emerging consumer electronics market including DTVs and color mobile phones. Although this is a relatively new market, there are already a significant number of competitors targeting it. The delay in acceptance of DTV technology has also provided further opportunities for competitors to enter this market. In addition, as the telecommunications, cable and consumer electronics industries and their suppliers undergo a period of convergence, we expect that competition will increase in these markets. Our ability to succeed in these new consumer markets is subject to a number of uncertainties, including acceptance of our products, the development of new technologies sufficient to meet market demand, the need to develop customer relationships, different sales strategies and channels, new and different industry standards from those in the PC market and changing strategic alliances. There can be no assurance that we will be able to successfully compete in these new emerging markets. If we are unable to successfully introduce products in these new markets as they expand, our business, financial condition and operating results could be adversely affected.

The markets in which we carry on business are highly competitive

The markets in which our products are sold are very competitive and are expected to remain so due to rapid technological changes, frequent product introductions and declining selling prices. Furthermore, the consolidation of our competitors has increased the level of competition in the graphics industry. We believe that the consolidation of our competitors in the PC graphics market segment of the PC market has stabilized and that there are now three main players in the PC market. We believe that the main factors that will determine our competitiveness in the PC market are technical product performance, price, product features, time-to-market, conformity to industry standard application programming interfaces, the ability to deliver consistent volume and quality of products, quality and stability of software drivers as well as technical support. We expect that competition will intensify in these areas and there can be no assurances that our competitors’ products will not be less costly, provide better performance or include additional features that render our products uncompetitive. Increased competition may require us to reduce our prices and/or invest further in R&D and sales and marketing efforts, which may negatively affect our operating results.

Like us, many of our competitors offer a large variety of products. Some of our competitors, in particular Intel, have greater financial and other resources than we do and may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. Further, some competitors have greater access or rights to companion technologies, including interface, processor and memory technical information. They may also be able to undertake more extensive marketing efforts and adopt more aggressive pricing policies. If these competitors substantially increase the resources they devote to developing and marketing products that compete with ours, we may not be able to compete effectively. Any consolidation among our competitors could enhance their product offerings, manufacturing efficiency and financial resources, further strengthening their competitive position. In addition, some of our competitors operate in narrow business areas relative to us, allowing them to concentrate their R&D efforts directly on products and services for those areas, which may constitute a competitive advantage. Several of our smaller competitors may have greater flexibility within niche markets and better name recognition in connection with specific market needs. There can be no assurance that we will be able to maintain our competitive position and market share against current or future competitors. If we do not remain competitive, our business and operating results could be adversely affected.

Intel has a dominant position in the PC industry and has greater resources than we do. Our success is dependent upon our ability to continue to develop products that are both compatible and competitive with Intel’s technology

In 1999, Intel began shipping integrated graphics component products that were targeted at the low-cost PC market. Intel is the world’s largest manufacturer of PC processors and has significantly greater resources than we do. Given its significant leadership position and the large cost of the microprocessor relative to other components within the PC, it is possible that Intel could combine graphics components or functionality with its microprocessors on a cost-effective basis. Our integrated chipset products may not be able to successfully compete with Intel’s products on the basis of price or performance. We expect Intel to invest heavily in R&D and in marketing and selling campaigns to engender brand loyalty with PC manufacturers and users. We also expect Intel to maintain its dominance of the PC platform. These and other selling advantages could render our integrated chipset products uncompetitive on a cost basis.

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Due to the widespread adoption of Intel’s microprocessor architecture and interface architecture, including the current AGP and PCI Express interfaces, Intel has the ability to create and influence key industry standards in the PC industry. We rely on our ability to obtain and maintain licenses from Intel in order to use certain proprietary Intel technology in our products. Any significant modifications by Intel to the AGP or PCI Express standards, the microprocessor, core logic components or other aspects of the PC microprocessor architecture or any delay in the public release of such modifications could result in incompatibility with our technology. Any such incompatibility, or the inability to obtain or the termination of any required license to use such technology, could have an adverse effect on our business, financial condition and operating results.

We currently have a full line of integrated graphics products for the Intel-based platform intended to compete with and complement Intel’s family of integrated products. Currently, integrated graphics components interface with Intel microprocessors through an Intel bus. There can be no assurance that our products will compete effectively against Intel’s current or future integrated products, that Intel will not aggressively use its industry position to undercut prices or otherwise prejudice ATI, or that Intel will not introduce additional products that are directly competitive with our products.

Intel spokespeople have previously stated that Intel has exited the discrete graphics business. There can be no assurance, however, that Intel will not re-enter the discrete graphics market, that Intel will not leverage their graphics investment in the integrated segment and move into the discrete segment, that Intel will not license a graphics core from competitors or that Intel will not acquire a graphics accelerator company and again compete with us in the discrete graphics component market.

Our revenues are dependent upon a small number of customers

A significant portion of our revenues are derived from sales made to a small number of customers. In fiscal 2005, our top ten customers accounted for approximately 61% of our consolidated revenues, with two customers representing 21% of our consolidated revenues. We expect that a small number of customers will continue to account for a substantial part of our revenues in the future. Continued sales to these customers, however, are dependent on us continuing to achieve design wins with these customers. The loss of business or failure to achieve design wins from one or more of such customers without adding new sources of revenues would have an adverse effect on our financial condition and operating results.

Other risks associated with our dependence on a small number of customers include: unexpected delays in the introduction of our customers’ products, resulting in a change in the timing of their orders, extended accounts receivable, cancellation of customer orders resulting in excess inventory and unexpected inventory write-downs and the inability to secure alternative purchasers for our products. Furthermore, if any one of our customers experiences financial difficulty, the risk exists that we may be required to write-off the bad debts of such customer. Any of these events could have an adverse effect on our financial condition and operating results.

We rely on third party foundries and other contractors to manufacture our products

We are a “fabless” semiconductor company and therefore rely on independent foundries or “fabs” (currently, Taiwan Semiconductor Manufacturing Company, United Microelectronics Corp. and Chartered Semiconductor Manufacturing) to manufacture our component products. We also use independent contractors to perform the assembly, testing and packaging of our products. As is typical in the graphics industry, we obtain manufacturing services on a purchase order basis and our fabs are under no obligation to provide us with any specified minimum quantity of product. We depend on these suppliers to allocate to us a portion of their manufacturing capacity sufficient to meet our needs, to produce products of acceptable quality and at acceptable manufacturing yields and to deliver those products to us on a timely basis at acceptable prices. There can be no assurance that these manufacturers will be able to meet our near-term or long-term manufacturing requirements. The manufacturers we use fabricate wafers for other companies, including certain of our competitors, and could choose to prioritize capacity for other users, reduce or eliminate deliveries to us, or increase the prices that they charge us on short notice, such that we may not be able to pass cost increases onto our customers.

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Continued market acceptance of our products will depend on reliable relationships with our wafer manufacturers and subcontractors to ensure adequate product supply to respond to customer demand. Because it could take several quarters to establish a strategic relationship with a new manufacturing partner, we may be unable to secure an alternative supply for any specific product in a short time frame. Other risks associated with our dependence on third-party manufacturers include: reduced control over delivery schedules, quality assurance, manufacturing yields and cost, lack of capacity in periods of excess demand, misappropriation of our intellectual property, dependence on several small undercapitalized subcontractors, reduced ability to manage inventory and parts, and exposure to foreign countries and operations, including exposure to political instability and natural disasters.

Currently, the third party wafer plants used to manufacture our products are located in Hsin Chiu and Tainan, Taiwan. Many of our assembly, testing and packaging suppliers are also located in southern Taiwan. On September 22, 1999, Taiwan suffered a major earthquake that measured 7.6 on the Richter scale and disrupted the operations of our manufacturing suppliers and contributed to a temporary shortage of graphics processors. On May 1, 2005, Advanced Semiconductor Engineering, Inc. reported a fire at one of its facilities in Taiwan, causing minimal disruption to our substrate supply. Additional earthquakes, fires or other occurrences (for example, an outbreak of a contagious disease such as avian flu or the SARS virus) that disrupt our manufacturing suppliers may occur in the future. To the extent that the supply from our fabs or other suppliers is interrupted for a prolonged period of time or terminated for any reason, we may not have sufficient time to replace our supply of products manufactured by those fabs.

As well, each wafer manufacturer has unique design rules and proprietary process technology to which we must adapt our products. If we move production of our products to new manufacturers or if current manufacturers implement new process technology or design rules, any transition difficulties may result in lower yields or poorer performance of our products. If we are unable to secure sufficient or reliable supplies of wafers, our ability to meet customer demand for our component and board products may be adversely affected and this could have an adverse effect on our revenues and operating results.

Our business is dependent upon an adequate supply of component parts from a limited number of suppliers

Certain non-proprietary materials or components (such as memory, PCBs, substrate and capacitors) used in the manufacture of our products and by OEMs in the manufacture of desktop and notebook PCs and by AIBs and SIs in the manufacture of their products are currently available from only a limited number of sources and are often subject to rapid changes in price and availability. If these suppliers fail to deliver these components or increase prices, alternative sources of supply may not be available. This would result in increased costs, delays or reductions in product shipments, and adversely impact upon orders for our component products and our operating results. Any inability to manage fluctuations in component prices may adversely affect our gross margins and operating results.

Our business and operating results are dependent upon achieving planned semiconductor manufacturing yields

The fabrication of semiconductors is a complex process. Contaminants, defects in masks used to print circuits on wafers, difficulties in the fabrication process and other factors can cause a substantial percentage of wafers to be rejected or a significant number of die on each wafer to be non-functional. These problems are difficult to diagnose and time-consuming and expensive to remedy. As a result, semiconductor companies frequently encounter difficulties in achieving acceptable production yields from processing wafers. In addition, more complex manufacturing processes, such as the 90 nanometer process technology that we adopted in the second half of 2005, often initially result in lower and unstable yields. As a consequence of our move to a customer-owned tooling manufacturing process where we have the responsibility for the design and performance of the tooling required for manufacturing, we bear the financial risks and benefits associated with product yields. As such, our profitability is significantly affected by the manufacturing yield that we achieve in the production of our component products. Our inability, in cooperation with our wafer manufacturers, to achieve or maintain planned production yields could have an adverse effect on our business and operating results.

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Semiconductor manufacturing yields are a function both of product design, which is developed largely by us, and process technology, which is typically proprietary to the manufacturer. Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists and can be analyzed and tested to identify process sensitivities relating to the design rules that are used. Furthermore, some defects cannot be identified until tested on a customer’s board design. We face the risk of product recalls resulting from design or manufacturing defects that are not discovered during the manufacturing and testing process. In the event of a significant number of product returns due to a defect or recall, our net revenues and profitability could be adversely affected. In addition, yield problems require cooperation by and communication between us and the manufacturer and sometimes the customer as well. The offshore location of our principal manufacturers compounds these risks, due to the increased effort and time required to identify, communicate and resolve manufacturing yield problems. There can be no assurance that we or our fabs will identify and fix problems in a timely manner, and achieve acceptable manufacturing yields in the future. Failure to reach planned production yields over time could result in us not having sufficient product supply to meet demand, and/or higher production costs and lower gross margins. This would adversely affect our operating results.

To remain competitive, we must transition to new manufacturing process technologies, however, this transition may result in reduced manufacturing yields and delay the introduction of new products

Process technology defines the minimum transistor size used to design semiconductors. The finer the process technology, the greater the number of transistors a chip designer is able to build into a semiconductor. Our strategy is to use the most advanced process technology appropriate for our products and available from our fabs. We continually assess the benefits of migrating to smaller process technologies in order to improve performance and lower costs. However, the use of more advanced processes may have a greater risk of initial yield problems. We believe that the transition of our products to increasingly smaller process technologies will be important to maintain our competitive position and we intend to migrate to smaller process technologies with our future products as these technologies become viable. In fiscal 2006, we expect to transition a material portion of our manufacturing to the 90 nanometer process technology. Due to the inherent risk of transitioning to new technologies, however, there can be no assurance that we will not experience reduced yields or delays in product delivery dates which in turn could adversely affect relationships with our customers. Moreover, we are dependent on our third-party fabs to successfully migrate to new manufacturing processes. Any such failure by us or our fabs could have an adverse effect on our business, financial condition and operating results.

Transitioning to lead-free process technologies may have an adverse effect on our operations

We have been working to shift our chip packaging technologies to be a lead-free process. The ultimate impact of this shift is uncertain. The transition to lead-free processes may produce sudden changes in demand, which may result in excess inventory. This may have an adverse effect on our results of operations. There is a risk that the cost, quality and manufacturing yields of our lead-free products may be less favourable compared to our traditional lead-based products.

Our ability to design and introduce new products in a timely manner is dependent upon third party development tools

In the design and development of new products and product enhancements, we rely on third-party software development tools. While we are not currently dependent on any one vendor for the supply of these tools, some or all of these tools may not be readily available in the future. For example, we have experienced delays in the introduction of products in the past as a result of the inability of then available software development tools to fully simulate the complex features and functionalities of our products. The design requirements necessary to meet consumer demands for more features and greater functionality from graphics products in the future may exceed the capabilities of the software development tools available to us. If the software development tools that we use become unavailable or fail to produce designs that meet consumer demands, our business could suffer.

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Our operating earnings will be negatively affected by the expensing of stock options

Since our inception, we have used stock options and other long-term equity incentives as a fundamental component of our employee compensation packages. We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to remain with us. Changes to Canadian GAAP implemented by the Canadian Institute of Chartered Accountants require us to record a charge against earnings for stock options granted to our employees. We began to expense employee stock options effective September 1, 2004. As a result, we now estimate the fair value of the stock options granted by using the Black-Scholes option pricing model and expense the fair value over the service period of the stock options. This change has a negative impact on our earnings determined in accordance with Canadian GAAP as compared to previous fiscal years. The amount of the charge against earnings is dependent upon a number of factors, including the number of stock options granted in any fiscal year, our stock price at the time of the grant and exercise, the risk-free interest rate, the dividend yield, the volatility factor of the expected price of our common shares and the expected life of the stock options. To the extent that new regulations adopted in Canada or the U.S. make it more difficult or expensive to grant options to employees, we may incur increased cash compensation costs and we may find it difficult to attract, retain and motivate employees; either factor could materially adversely affect our business and operating results.

Our business is subject to operational and financial risks associated with our international operations

We maintain operations in a number of other countries including the United States, Germany, Japan, Taiwan, Hong Kong, Malaysia, China, India and Barbados. In addition, a substantial portion of our products are manufactured, assembled and tested by independent third parties in the Asia-Pacific region. We sell the majority of our products in the United States, Europe and the Asia-Pacific region. Accordingly, we are subject to various geopolitical risks in connection with our international sales and operations. These risks include political and economic instability, terrorism, civil unrest, war, outbreaks of contagious diseases such as avian flu and the SARS virus, changes in diplomatic and trade relationships, natural disasters and unexpected changes in legislative or regulatory requirements. These risks could result in an increase in the cost of components, production delays, general business interruptions, delays from difficulties in obtaining export licenses for certain technology, tariffs and other barriers and restrictions, potentially longer payment cycles, potentially adverse taxes, restrictions on the repatriation of funds and the burdens of complying with a variety of foreign laws, any of which could ultimately have an adverse effect on our revenues and operating results.

Any legal or regulatory proceedings brought against us may be time-consuming and costly to defend and, if we are unsuccessful in defending against them, may be detrimental to our business and financial condition

We are subject to legal proceedings and claims that arise in the ordinary course of business. In addition, several U.S. securities class action lawsuits and a shareholder complaint have been recently filed against us and certain officers and directors and on our behalf (see Item 3.13 “Narrative Description of the Business – Legal Proceedings and Regulatory Matters”). While we currently believe the amount of ultimate liability, if any, with respect to these actions will not materially affect our financial position, results of operations, or liquidity, the ultimate outcome of any litigation is uncertain. We and the named directors and officers believe these actions are without merit and intend to defend ourselves vigorously. Should any of these actions or proceedings against us be successful, we may be subject to significant damages awards which could have a material adverse effect on our financial condition.

We may be subject to claims of infringement of third-party intellectual property rights or demands that we license third-party technology

The industries in which we compete are characterized by frequent claims and related litigation regarding patent and other intellectual property rights. There is a risk that our current or future products may infringe third-party intellectual property rights. Any claim, whether or not with merit, could be time-consuming to evaluate, result in costly litigation, cause product shipment delays or stoppages or require us to enter into licensing agreements that may require the payment of a license fee and/or royalties to the owner of the intellectual property. In the event that a third party were to sustain a valid claim against us or our customers and we are not able to procure a license to permit the continued use of the third party’s intellectual property, our operating results could be adversely affected. We may also be required to pay damages or lost profits, modify our products, discontinue products and/or indemnify our customers. Should any such claims or proceedings against us be successful, our business, financial condition and operating results may be adversely affected.

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Please see Item 3.13 “Narrative Description of the Business – Legal Proceedings and Regulatory Matters” for a description of a past patent suit brought against us.

Our success is dependent on proprietary technology, however, there can be no assurances that applicable laws will be adequate to prevent misappropriation of our technology

Our success is heavily dependent upon proprietary technology. We rely principally upon a combination of copyright, trademark, patent and trade secret laws, and contractual provisions to protect our proprietary and intellectual property rights. There can be no assurance, however, that these laws and procedures will be adequate to prevent misappropriation of our technology or independent third party development of the same or similar technology. Unauthorized parties may attempt to copy or otherwise obtain and use our technology, which could weaken our competitive position. In addition, there can be no assurance that the protection provided to our proprietary technology by the laws of foreign jurisdictions will be substantially similar to the remedies available to us under the laws of Canada or the United States. Any claims or litigation that we initiate to protect our proprietary technology could be time consuming and costly and divert the attention of our technical and management resources whether or not the claims or litigation are determined in our favour.

Our inability to maintain adequate levels of insurance, particularly in Taiwan, could adversely affect our operating results in the event of a significant loss

To the extent available on commercially reasonable terms and subject to underwriting conditions, exclusions and deductibles, we maintain insurance coverage with recognized, licensed insurers against loss or damage to our assets, including losses as a result of unforeseen business interruptions. Property and business interruption insurance coverage is only available on a limited basis with respect to assets and property located in certain geographical areas, particularly Taiwan. A significant amount of our inventories are produced and stored in Taiwan, prior to delivery to customers. Damage to the inventories held in Taiwan, as a result of a natural disaster or other cause, could result in a significant loss for which no insurance coverage would be available. In the event insurance coverage is not available or is subject to limits or significant deductibles or is denied in respect of any losses or claims, our business, financial condition and operating results could be adversely affected.

Our business is dependant on our head office remaining free from a major shut down

Our international operations depend on the availability of administrative support in areas such as finance, human resources and sales in order to operate efficiently in their local markets and complete transactions with our customers. Our international offices, particularly those in the Asia-Pacific region, where a majority of our sales take place, do not have local administrative support in a number of these areas. In August 2003, our head office in Markham, Ontario experienced a temporary shut down due to a widespread power blackout in Ontario and the northeastern United States. In the spring of 2003, the outbreak of the SARS virus in the Toronto area also impacted employees at our head office. The reoccurrence of the SARS virus or an outbreak of avian flu or other contagious disease could have an adverse impact on our business operations. Any unexpected and prolonged shut down of our head office in the future for any reason whatsoever could hinder our ability to effectively and efficiently manage our international business operations and could adversely affect our revenues and operating results.

Future acquisitions may have a significant impact on our business and financial condition and could result in dilution of the current common shareholders

We may pursue product or business acquisitions or joint ventures in order to complement or expand our business. However, we may not be able to identify appropriate acquisition candidates in the future. If an acquisition candidate is identified, we may not be able to successfully negotiate the terms of any such acquisition, finance such acquisition or integrate such acquired product or business into our existing products and business. The negotiation of potential acquisitions could divert management’s time and resources and require significant funds to consummate. The process of combining with another company or integrating an acquired product may be disruptive to our business and may result in unforeseen operating difficulties requiring significant financial resources that would otherwise be available for the ongoing development or expansion of our existing operations. Possible future acquisitions could result in us incurring contingent liabilities and amortization expenses related to intangible assets, all of which could have an adverse effect on our financial condition and operating results.

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Further, we may finance future acquisitions through borrowings or otherwise incur indebtedness in connection with acquisitions. We may be required to generate cash flow from operations to service that indebtedness and may not be able to do so. We may also be required to refinance this indebtedness upon its maturity and we may not be able to do so on acceptable terms. In addition, if we consummate one or more significant acquisitions through the issuance of common shares, holders of common shares could suffer significant dilution of their ownership interests.

The success of our business is dependent upon our ability to recruit and retain key employees

Our success is dependent on the performance and continued service of our executive officers and certain key employees. None of our officers or employees are bound by an employment contract nor do we have “key person” life insurance policies on any of our employees. Competition for high-level engineering, marketing, sales and executive personnel is intense. Key employees may pursue equity opportunities elsewhere. Start-up companies generally offer greater equity opportunities to attract individuals from more established companies. There can be no assurance that we will be able to retain existing personnel or attract, hire and retain additional qualified personnel. The loss of service of certain key managers and executives or the failure to attract, hire and retain additional key employees could restrict our ability to develop new products or enhance existing products in a timely manner, sell products to our customers and potential customers, or manage our business effectively.

Our business and products are subject to government regulation

Canadian federal, provincial and local authorities as well as foreign authorities in applicable jurisdictions regulate our business. Our board-level graphics accelerator products are required to meet the standards set by Industry Canada, the U.S. Federal Communications Commission and the European Economic Community in order to ensure that they do not interfere with the operation of other consumer electronics products. Any significant delays in meeting the standards applicable to our products in the future could adversely affect our competitive and financial position.

We are exposed to increased costs and risks associated with complying with increasing and new regulation of corporate governance and disclosure standards

We are subject to new laws, regulations and standards relating to corporate governance and public disclosure in the United States and Canada. Our efforts to comply with such requirements have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from revenue-generating activities to compliance activities. In particular, securities regulatory authorities in the United States have introduced, pursuant to Section 404 of the United States Sarbanes-Oxley Act of 2002, and securities regulators in Canada are in the process of introducing, new laws that require us to undertake an evaluation of our internal control over financial reporting, and attestations of the effectiveness of our internal control over financial reporting by our independent registered public accounting firm. Internal control over financial reporting are procedures designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use, and transactions are properly recorded and reported. However, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance with respect to the reliability of financial reporting and financial statement preparation. We have invested and will continue to invest financial and human resources to document and analyze our system of internal control over financial reporting and we are continuing our evaluation of such internal control. In the course of our ongoing evaluation, we may identify areas of our internal control over financial reporting requiring improvement. To the extent that we identify internal control weaknesses which require correction, we may be required to incur expenditures or costs which, if significant, could adversely affect our operating results. In the event that, due to the complexity of certain internal control systems, the procedures, certification and attestation required by Section 404 of the Sarbanes-Oxley Act of 2002 are not completed by the required deadline in respect of our 2006 fiscal year, or our chief executive officer, chief financial officer or our independent registered public accounting firm determines that our internal control over financial reporting are not effective as defined under Section 404, our reputation, financial condition and the value of our securities could be adversely affected.

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Our business is subject to potential tax liabilities

We are subject to income taxes in both Canada and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, there is no assurance that the final determination of any tax audits and litigation will not be materially different from that which is reflected in historical income tax provisions and accruals. Should additional taxes be assessed as a result of an audit or litigation, there could be a material effect on our income tax provision and net income in the period or periods for which that determination is made.

3.13  Legal Proceedings and Regulatory Matters

From time to time, we are involved in legal proceedings and claims that arise in the ordinary course of business. In particular, the industries in which we compete are characterized by frequent claims and related litigation regarding patent and other intellectual property rights. Certain of these claims and proceedings have not progressed sufficiently to determine whether they may become significant in the future. Significant claims and proceedings currently affecting ATI, or which have affected ATI in the past three fiscal years, are set out below. See also “Narrative Description of the Business – Risks and Uncertainties”.

In May and June 2001, certain holders of our securities commenced four class action lawsuits in the United States District Court for the Eastern District of Pennsylvania (the “Court”) alleging that we and certain of our directors and officers violated the Securities Exchange Act of 1934 and common law by making material misstatements of, or omitting to state, material facts related to our business operations, prospects and financial conditions. These lawsuits were filed on behalf of shareholders who acquired our common shares between January 13, 2000 and May 24, 2000. The plaintiffs were seeking compensatory and punitive damages in each of the class actions. The Court consolidated all four actions and permitted the plaintiffs to file a consolidated amended complaint. On July 23, 2002, the Court granted in part and denied in part the defendants’ motion to dismiss the consolidated amended complaint, and the parties thereafter engaged in fact discovery concerning the claims remaining in the lawsuit. On November 1, 2002, the Court granted the plaintiffs’ motion for class certification and certified a class of all persons or entities who purchased our common shares on the NASDAQ Stock Market during the period of January 13, 2000 through May 24, 2000. Following a Court ordered mediation, the parties reached an agreement providing for the full and complete settlement of all claims asserted in the consolidated lawsuits for a cash payment by us of $8.0 million. The terms of the Stipulation and Agreement of Settlement, which received court approval on April 28, 2003, included no admission of liability or wrongdoing by us or other defendants. During the fourth quarter of fiscal 2003, we received $3.3 million from our insurer as its contribution toward the settlement payment.

On December 16, 2002, we disclosed that staff of the Ontario Securities Commission (the “OSC”) had raised concerns regarding the timeliness of our announcement on May 24, 2000 of a shortfall in our revenues and earnings for the third quarter of our 2000 fiscal year. We also reported that we were aware that OSC staff had raised concerns about trading that took place prior to the announcement by certain of our insiders and others, including certain directors and officers. On January 16, 2003, OSC staff filed a notice of hearing and statement of allegations (the “Notice”) in relation to us and others. The Notice alleged that we 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 we made a misleading statement to OSC staff in August 2000 regarding the events leading up to the disclosure on May 24, 2000 of the shortfall. Seven individuals were named in the Notice. The Notice alleged that six of these individuals, including K.Y. Ho, Chairman and then Chief Executive Officer of ATI, engaged in insider trading contrary to the Securities Act (Ontario). On March 29, 2005, a panel of the OSC approved a settlement agreement reached between us and OSC staff. As part of the settlement, we agreed to pay CAD $900,000 in costs and settlement payments and agreed to provide a letter of comfort confirming our practices and procedures related to trading and corporate governance. The individuals named in the Notice, other than Mr. Ho and his wife, also entered into settlement agreements with the OSC. In October 2005, a panel of three commissioners of the OSC (including the Vice-Chair of the OSC) dismissed all allegations of insider trading against Mr. Ho and his wife. The panel’s decision completely exonerated Mr. Ho and his wife. The decision was made following a hearing which was held in the Spring of 2005.

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In May 2003, Cirrus Logic (“Cirrus”) brought suit against us in the United States District Court for the Western District of Texas, Austin Division, for infringement of a Cirrus patent relating to graphics processor technology. In addition, a separate patent infringement suit relating to a different Cirrus patent had been pending in the United States District Court for the Northern District of California, San Francisco Division, since July 1998. In September 2003, ATI and Cirrus announced that we had entered into a cross-license agreement and had settled all outstanding litigation. Under the settlement agreement, all outstanding claims and counterclaims in both lawsuits between Cirrus and ATI were dismissed. In connection with the settlement, Cirrus transferred to us 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, and we paid Cirrus $9.0 million.

American Video Graphics LLP filed a series of suits in the Eastern District of Texas alleging infringement of several patents against various PC manufacturers, game console manufacturers and videogame publishers. After some reconfiguration of the suits, there are a total of six suits pending. Of these six suits, there are two suits pending against the entire group of PC manufacturers and two suits pending against the entire group of game console manufacturers. We voluntarily intervened in these four suits. We have participated in two distinct court ordered mediations for these matters. Neither mediation resulted in settlement. The first trial involving the PC manufacturers is currently scheduled for September 2006 and the first trial involving the game console manufacturers is scheduled for December 2006.

In August and September 2005, five class action lawsuits were filed in the United States District Court for the Eastern District of Pennsylvania against us and certain of our directors and officers on behalf of shareholders who purchased our common shares between October 7, 2004 and on or about June 23, 2005. The claims allege that we and certain of our directors and officers violated U.S. securities laws by failing to disclose material facts and making statements that contained misrepresentations about our business and future outlook.  It is alleged that as a result of the failure to disclose material facts and the alleged misrepresentations, our stock traded at artificially inflated prices until the stock price dropped on the news of our third quarter results in June 2005. The claims further allege that while in possession of material undisclosed information, certain directors and officers sold a portion of their common shares at inflated prices. These claims are at a very preliminary stage.

In August 2005, a shareholder complaint was filed in the Superior Court of the State of California for the County of Santa Clara by a shareholder on behalf of ATI. The defendants to the complaint include us, members of the Board of Directors and certain officers. The complaint alleges breach of California Law, including breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment and violation of the California Corporations Code during the period between October 2004 and August 26, 2005. We have been served with the complaint. This complaint is at a very preliminary stage.

We currently believe the amount of ultimate liability, if any, with respect to these legal proceedings, including the class action lawsuits and the shareholder complaint, will not materially affect our financial position, results of operations, or liquidity. We and the named directors and officers intend to defend ourselves vigorously. However, the ultimate outcome of any litigation is uncertain and should any of these actions or proceedings against us be successful, we may be subject to significant damages awards, which could have a material adverse effect on our financial condition.

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ITEM 4.    DIVIDEND POLICY

We have neither declared nor paid any cash dividends to date on our outstanding shares. We intend to retain our future earnings to finance the development of our business and general corporate purposes. We currently do not anticipate paying any cash dividends on our common shares.

ITEM 5.    DESCRIPTION OF CAPITAL STRUCTURE

5.1  General Description of Share Capital

Our authorized capital consists of an unlimited number of common shares and an unlimited number of preferred shares, issuable in series. As of November 15, 2005, there were 251,443,624 common shares and no preferred shares issued and outstanding. The material provisions of the common shares and the preferred shares are summarized below.

5.1.1  Common Shares

The common shares entitle holders to one vote per share at all shareholder meetings except meetings at which only the holders of another class or series of shares are entitled to vote. Subject to the prior rights of the holders of the preferred shares, the common shares also entitle holders to receive any dividends declared by the Board of Directors and our remaining property after ATI is dissolved.

5.1.2  Preferred Shares

The preferred shares are issuable in one or more series. Subject to our articles, the Board of Directors is authorized to fix, before issuance, the designation, rights, privileges, restrictions and conditions attaching to the preferred shares of each series. The preferred shares rank prior to the common shares with respect to the payment of dividends and the return of capital on dissolution. Except with respect to matters as to which the holders of preferred shares are entitled by law to vote as a class, the holders of preferred shares will not be entitled to vote at meetings of shareholders unless, with respect to any series of preferred shares, the payment of dividends is in arrears. The holders of the preferred shares are not entitled to vote separately as a class or series or to dissent with respect to any proposal to amend the articles to create a new class of shares ranking in priority to or on a parity with the preferred shares, to effect an exchange or a reclassification or cancellation of the preferred shares or to increase the maximum number of authorized shares of a class ranking in priority to or on a parity with the preferred shares.

5.2  Equity Plans

We have established a share option plan (the “Option Plan”), three restricted share unit plans (the “RSU Plans”) and a share purchase plan (the “Share Purchase Plan”) which are designed to encourage all eligible employees, executive officers and management directors to align their interests directly to those of shareholders and allows us to maintain competitive compensation programs that enable us to attract and retain employees in the high-tech sector where such compensation programs are standard. The material terms of each of the Option Plan, RSU Plans and Share Purchase Plan are described below.

5.2.1  Share Option Plan

Under the Option Plan, employees and executive officers of ATI are eligible to receive stock options. Approximately 2,900 employees of ATI have been awarded stock options pursuant to the Option Plan (representing approximately 85% of ATI’s employees). Non-management directors are no longer permitted to receive options and no options have been granted to non-management directors in the past three years. Three non-management directors currently hold an aggregate of 225,000 previously granted options. Non-management directors are eligible to receive deferred share units. For information regarding our deferred share unit plan, please see “Compensation of Directors” in our 2005 Management Information Circular.

Subject to the requirements of the Option Plan, the Board of Directors has the authority to select those employees and executive officers to whom options are granted, the number of options granted to each individual and the price at which the common shares may be purchased. The exercise price for purchasing common shares under the Option Plan is not less than the weighted average of the trading prices of the common shares on the Toronto Stock Exchange or the NASDAQ Stock Market for the five trading days preceding the date on which the Board of Directors determines that the grant of the option is to be effective. Options vest in accordance with terms determined by the Board of Directors. Currently, the Board of Directors grants options under the Option Plan that vest as to 25% of the award on the first anniversary of the date of grant, with the remainder vesting on a pro-rata basis quarterly over the ensuing three years. The options granted pursuant to the Option Plan are not transferable and have a maximum term of seven years. Options may not be repriced downward without shareholder approval.

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At last year’s annual meeting, shareholders approved an amendment to the Option Plan that provided the Board of Directors with the discretion to award tandem stock appreciation rights (“SARs”) in connection with all or a portion of the existing and future options granted under the Option Plan. Tandem SARs provide an optionee with the right to surrender vested options for termination in return for common shares with a market value equal to the net proceeds that the optionee would have otherwise received had such optionee exercised the vested options and immediately sold the underlying common shares.

For example, if awarded tandem SARs, an employee could realize value on 100 options having an exercise price of $20.00 at a time when the market price of ATI’s common shares is $25.00 by either (a) paying ATI $2,000 to exercise the options, receiving 100 common shares and immediately selling these shares for gross proceeds of $2,500, thereby realizing a profit of $500; or (b) exercising the corresponding tandem SAR and receiving (and immediately selling ) 20 common shares with a market value of $500. In both circumstances, the employee would receive $500, however, by exercising tandem SARs, only 20 shares are issued from treasury rather than the 100 shares that would be issued upon exercise of the option. The awarding of tandem SARs is expected to reduce the dilutive effect of the Option Plan, as most optionees who are awarded tandem SARs are expected to exercise tandem SARs in lieu of their options.

When tandem SARs are exercised, the corresponding options are terminated and the underlying common shares, less the number of common shares issued upon the exercise of the tandem SARs, will be available for issuance upon the exercise of future options, tandem SARs or RSUs granted under ATI’s share incentive plans, as is currently the case for options which expire or are otherwise surrendered or terminated without having been exercised.

The Option Plan also provides that the number of common shares reserved for issuance and which may be issued within a one-year period, pursuant to options granted to insiders (as defined in the Securities Act (Ontario)) pursuant to the Option Plan and all other share compensation arrangements established by ATI is limited to 10% of the number of common shares issued and outstanding, excluding any common shares issued pursuant to share compensation arrangements during the immediately preceding one-year period. Furthermore, the number of common shares which may be issued within a one-year period to any one insider and such insider’s associates (as defined in the Securities Act (Ontario)) pursuant to the Option Plan and all other share compensation arrangements is limited to 5% of the number of common shares issued and outstanding, excluding any common shares issued pursuant to share compensation arrangements during the immediately preceding one-year period.

On termination of employment, for any reason except involuntary termination without cause, all unvested options are forfeited and vested options may be exercised for a period of 60 days following termination. Upon involuntary termination without cause, ATI may, at its discretion, permit a participant’s options to continue to vest during any statutory or common law severance period or any period of reasonable notice required by law. Vested options may be exercised up to 60 days following such severance or notice period. Upon the death of a participant, all options immediately vest and may be exercised by the deceased participant’s estate for a period of six months following death.

There are 47,000,000 common shares (currently representing 18.69% of ATI’s issued and outstanding common shares) available under the Option Plan, of which 25,914,533 are reserved to be issued pursuant to options that have already been granted (currently representing 10.31% of ATI’s issued and outstanding common shares). 21,085,467 common shares (currently representing 8.39% of ATI’s issued and outstanding common shares) will be available to be issued pursuant to the exercise of options that may be granted under the Option Plan in the future or, in certain circumstances, pursuant to the vesting of RSUs as described below.

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Tandem SARs were awarded in connection with 3,169,015 options granted in fiscal 2005. It is currently intended that tandem SARs will be awarded in connection with all other options granted since September 1, 2002. Once this occurs, tandem SARs will have been awarded in connection with a total of 13,812,685 of ATI’s outstanding options and, as explained above, this is expected to reduce the dilutive effect that would otherwise result from the exercise of these options.

The Option Plan is of particular importance to us in providing competitive compensation within the North American high-tech industry. If we cannot attract and retain top high-tech talent in North America, we may be “at risk” in delivering on our business strategy, which could have a negative impact on our share price and shareholder value. Like other North American high-tech companies, share option awards are provided to a large proportion of our employees and such options represent a significant portion of most of our employees’ total compensation. A total of 5,354,205 options were granted in fiscal 2005, of which 4,608,205 options were granted to employees (currently representing 1.83% of ATI’s issued and outstanding common shares) and 746,000 options were granted to executive officers (currently representing 0.30% of ATI’s issued and outstanding common shares). Overall, 25,914,533 options were outstanding as of November 15, 2005 of which 23,132,172 are held by employees (currently representing 9.20% of ATI’s issued and outstanding common shares) and 2,557,361 are held by executive officers (currently representing 1.02% of ATI’s issued and outstanding common shares).

The Option Plan is the only share compensation arrangement under which we may grant options. In connection with our acquisition of ArtX, Inc. in April of 2000, as part of the acquisition terms, we assumed all options outstanding under ArtX, Inc.’s 1997 Equity Incentive Plan (the “ArtX Plan”). As at November15, 2005, under the ArtX Plan, options to purchase 734,566 common shares of ATI were outstanding. No further options may be granted under the ArtX Plan.

5.2.2  Restricted Share Unit Plans

In October 2003, we announced the adoption of three plans to grant RSUs as part of ATI’s overall stock-based compensation plan. The RSU Plans allow participants to earn actual shares (or, for non-North American participants, the cash equivalent) of ATI over time, rather than options that give employees the right to purchase stock at a set price.

The RSU Plans include: a plan for Canadian employees and directors (the “Canadian Plan”), a plan for U.S. employees and directors (the “U.S. Plan”), and a plan for all other employees and directors (the “Global Plan”). In accordance with the terms of the RSU Plans, the Board of Directors approves which employees and directors are entitled to participate in the respective plan (the “participants”) and the number of RSUs to be awarded to each participant. RSUs awarded to participants are credited to an account that is established on their behalf and maintained in accordance with the respective RSU Plan. Each RSU awarded conditionally entitles the participant to the delivery of one common share (or cash in lieu of such share under the Global Plan) upon attainment of the RSU vesting period. RSUs awarded to participants vest in accordance with terms determined by the Board of Directors, which terms may include certain performance criteria in which the number of common shares (or cash in lieu of such common shares under the Global Plan) to be delivered to a participant in respect of each RSU awarded is dependent upon the ATI’s performance and/or market price of the common shares, as determined by the Board of Directors.  The performance terms that the Board of Directors may apply to RSUs are intended to strengthen the link between the ATI’s performance and the value of the RSUs at the time that they are paid out. RSUs are non-transferable.

At the time that any RSUs are granted under the Canadian Plan and the U.S. Plan, the Board of Directors must determine whether the common shares to be delivered to participants upon the vesting of such RSUs will be purchased on the open market, issued from treasury or obtained from a combination of market purchases and treasury issuances. Under the Global Plan, the Board of Directors must determine whether participants will receive cash or treasury shares (or a combination of both) upon the vesting of RSUs. Shares from treasury are issued from the pool of common shares that are available to be issued under both the Option Plan and the RSU Plans. Although a maximum of 47,000,000 common shares are available to be issued pursuant to the Option Plan, only a maximum of 3,000,000 common shares may be issued from treasury under the RSU Plans (currently representing 1.19% of ATI’s issued and outstanding common shares). Therefore, each common share issued from treasury upon vesting of an RSU reduces the total number of common shares available for issuance under the Option Plan. RSUs that are satisfied through the purchase of common shares on the market vest over a maximum period ending on December 31 of the third calendar year after the date of grant.

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The RSU Plans also provide that the number of common shares reserved for issuance and which may be issued within a one-year period, pursuant to RSUs granted to insiders (as defined in the Securities Act (Ontario)) pursuant to the RSU Plans and all other share compensation arrangements established by ATI is limited to 10% of the number of common shares issued and outstanding, excluding any common shares issued pursuant to share compensation arrangements during the immediately preceding one-year period. Furthermore, the number of common shares which may be issued within a one-year period to any one insider and such insider’s associates (as defined in the Securities Act (Ontario)) pursuant to the RSU Plans and all other share compensation arrangements is limited to 5% of the number of common shares issued and outstanding, excluding any common shares issued pursuant to share compensation arrangements during the immediately preceding one-year period.

On termination of employment for any reason, all unvested RSUs are forfeited. At ATI’s discretion, upon involuntary termination without cause, a participant’s RSUs may be permitted to continue to vest, in accordance with their terms, during any statutory or common law severance period or any period of reasonable notice required by law. Upon the death of a participant, all unvested RSUs are immediately vested and distributed to the participant’s estate.

If the common shares to be delivered upon the vesting of RSUs are purchased in the market instead of issued from treasury, under the Canadian Plan, after RSUs are awarded to participants and prior to vesting, we will provide funds to a trust established for the purpose of purchasing on the market, and holding in trust, common shares to be delivered to Canadian participants in exchange for RSUs once the applicable vesting criteria have been met. Similarly, under the U.S. Plan, ATI will provide funds to a U.S. broker, who will purchase common shares for delivery to a custodian to be held on behalf of U.S. participants pending satisfaction of the applicable RSU vesting criteria. Under the Global Plan, once an RSU vests, if common shares are not to be issued from treasury, the participant under the Global Plan is only entitled to receive a cash payment from ATI equal to the number of RSUs awarded to such participant multiplied by the value of the common shares on the NASDAQ Stock Market at the relevant vesting date.

In fiscal 2005, we awarded a total of 1,183,488 RSUs to approximately 2,000 employees of which 30,000 RSUs will be satisfied with common shares previously purchased on the market, the remainder being satisfied with shares to be issued from treasury.  All of the RSUs awarded to employees and executive officers in fiscal 2005 vest over a period of three years. For 1,084,723 of these RSUs, the number of common shares to be delivered to a participant (or cash in lieu of common shares for 71,105 of 1,084,723 RSUs for participants under the Global Plan) for each such RSU that vests may fluctuate from 50% to 150% of the vested RSUs awarded based upon ATI’s performance relative to a combination of predetermined corporate performance measures and the market price of the common shares.  No performance criteria attach to any RSUs awarded prior to fiscal 2005. Overall, 1,642,909 RSUs are currently outstanding (representing less than 0.65 of 1% of the current issued capital of ATI) of which 481,633 RSUs will be satisfied with common shares purchased on the market, 1,070,184 RSUs will be satisfied with common shares issued from treasury and 91,092 RSUs will be paid out in cash. Of the 3,000,000 common shares available for issuance from treasury under the RSU Plans, a maximum of 1,563,719 common shares have been reserved for issuance pursuant to RSUs that have been granted, although not all of these common shares may be issued depending on ATI’s performance or if any of the RSUs are terminated. At least 1,436,281 common shares remain available to be issued pursuant to RSUs that may be granted in the future, although more common shares may become available depending on ATI’s performance or if any of the RSUs are terminated. Of the total number of RSUs outstanding, 987,713 RSUs have been awarded under the Canadian Plan, 564,104 RSUs have been awarded under the U.S. Plan and 91,092 RSUs have been awarded under the Global Plan. An aggregate of 1,517,910 outstanding RSUs have been awarded to employees (excluding executive officers) and 124,999 outstanding RSUs have been awarded to executive officers. No RSUs have been awarded to members of the Board of Directors.

RSUs are accounted for as a compensation expense under the fair value method of accounting.

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5.2.3  Share Purchase Plan

We have established the Share Purchase Plan to provide employees with an opportunity to purchase common shares of ATI, furthering participants’ alignment with the interests of shareholders and allowing them to share in the financial success to which they contribute. Under this plan, ATI contributes $1.50 for every $9.00 contributed by an employee to acquire common shares of ATI. The Share Purchase Plan is currently available to employees in Canada and the United States.

ITEM 6. MARKET FOR SECURITIES

Our common shares are listed and posted for trading on the Toronto Stock Exchange under the symbol “ATY” and are quoted for trading on the NASDAQ Stock Market under the symbol “ATYT”.

Information concerning the trading prices and volumes during fiscal 2005 is set out below:

	The Toronto Stock Exchange								NASDAQ Stock Market
	Share Price Trading Range								Share Price Trading Range
Month	High		Low		Close		Share Volume		High		Low		Close		Share Volume
	(Canadian dollars per share)						(millions)		(U.S. dollars per share)						(millions)
September 2004	21	.22	17	.85	19	.38	26	.1	16	.49	13	.82	15	.33	51	.0
October 2004	23	.14	19	.41	21	.97	28	.7	18	.53	15	.41	18	.05	70	.3
November 2004	24	.70	21	.55	22	.81	29	.2	20	.51	17	.86	19	.40	60	.6
December 2004	25	.15	22	.90	23	.26	27	.7	20	.66	18	.89	19	.39	72	.8
January 2005	23	.82	20	.42	21	.53	24	.6	19	.82	16	.40	17	.33	62	.6
February 2005	22	.42	21	.06	21	.70	22	.3	18	.12	16	.87	17	.54	63	.3
March 2005	22	.50	19	.67	20	.88	31	.7	18	.31	16	.20	17	.29	74	.5
April 2005	21	.43	18	.22	18	.79	29	.3	17	.68	14	.51	14	.80	59	.7
May 2005	21	.06	18	.51	18	.81	33	.1	16	.58	14	.77	15	.07	86	.5
June 2005	19	.30	13	.91	14	.50	50	.8	15	.52	11	.29	11	.85	185	.2
July 2005	16	.60	13	.90	15	.42	29	.4	13	.68	11	.20	12	.58	118	.7
August 2005	15	.99	12	.40	14	.41	26	.4	13	.24	10	.47	12	.18	124	.7

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ITEM 7.    DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the name, province or state, and country of residence, positions and offices with ATI and principal occupation of each of the directors and executive officers of ATI as of August 31, 2005. Directors of ATI hold office until the next annual meeting of shareholders or until their successors are duly elected or appointed.

7.1  Directors

Name and Municipality of Residence	Position Held	Director Since	Principal Occupation
K.Y. HO(6) Toronto, Ontario	Chairman and Director	1986	Director and officer of ATI.
ALAN D. HORN(1)(4) Toronto, Ontario	Director	1993	Vice President, Finance and Chief Financial Officer, Rogers Communications Inc., a cable, internet access, wireless data, broadcasting and publishing company.
JAMES D. FLECK(1)(2)(3)(5) Toronto, Ontario	Director	1995	Chairman, Fleck Management Services Ltd., a management services company.
PAUL RUSSO(2) Los Altos Hills, California	Director	2002	Chairman, President and Chief Executive Officer, Silicon Optix Inc., a fabless semiconductor company.
RONALD CHWANG(3) Los Altos Hills, California	Director	2003	Chairman and President, iD Ventures America, LLC (formerly, Acer Technology Ventures (ATV) America), a high-tech venture capital company.
JOHN E. CALDWELL(1)(2)(3)(4) Toronto, Ontario	Director	2003	President and Chief Executive Officer of SMTC Corporation, an electronics manufacturing services provider.
ROBERT A. YOUNG(1) New Canaan, Connecticut	Director	2003	Managing Director, Mirador Capital, L.L.C., a venture capital firm.

(1) Member of the Audit Committee.

(2) Member of the Human Resource and Compensation Committee.

(3) Member of the Governance and Nominations Committee.

(4) Mr. Horn and Mr. Caldwell would each be considered a “financial expert” as defined under the United States Sarbanes-Oxley Act of 2002 and the rules of the United States Securities and Exchange Commission.

(5) Chair of the Board of Directors effective November 2005.

(6) Retired November 2005.

We do not have an executive committee. During the past five years, all of our directors have held their principal business affiliations as noted opposite their respective names except that:

(a) prior to October 2002, Mr. Caldwell was a consultant to GEAC Computer Corporation Limited (“GEAC”); prior to December 2001, Mr. Caldwell was the President and CEO of GEAC; and prior to October 1999, Mr. Caldwell was the President and CEO of CAE Inc.; and

(b) prior to February 2002, Dr. Young was the Chairman and CEO of Curl Corporation.

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Mr. Caldwell was also a director of Mosaic Group Inc. in December 2002 when it obtained a court order under the Companies Creditors Arrangement Act (Canada) (“CCAA”) to initiate the restructuring of its debt obligations and capital structure. Mr. Caldwell is also a director of Stelco Inc. In January 2004, Stelco Inc. obtained a court order under the CCAA to initiate a restructuring of its debt obligations and capital structure. Concurrently, Stelco Inc. made a petition for recognition of the CCAA order and ancillary relief under section 304 of the United States Bankruptcy Act.

Mr. Horn was a director of AT&T Canada Inc. (“AT&T Canada”), as a representative of Rogers Communications Inc. until October 2002 when he resigned following a change in the ownership structure of AT&T Canada. Subsequently on October 15, 2002, AT&T Canada filed for protection under the CCAA.

Each of the directors was a director of ATI in March 2005, when we entered into a settlement agreement with the OSC relating to allegations that in 2000 we did not make timely disclosure of a shortfall in earnings and made a misleading statement to the OSC staff. Under the terms of the settlement agreement, we agreed to pay CAD$900,000 in costs and settlement payments and provided a letter of comfort confirming our practices and procedures relating to trading and corporate governance.

7.2  Executive Officers

Name and Municipality of Residence	Position Held	Principal Occupation
K.Y. HO(1)	Chairman of the Board of Directors	Officer of ATI
Toronto, Ontario
DAVID ORTON	President and Chief Executive Officer	Officer of ATI
Los Altos, California
RICK BERGMAN	Senior Vice President and General Manager, PC Group	Officer of ATI
San Jose, California
MICHEL CADIEUX	Senior Vice President, Corporate Services	Officer of ATI
Aurora, Ontario
PATRICK CROWLEY	Senior Vice President, Finance and Chief Financial	Officer of ATI
Oakville, Ontario	Officer
JOHN DOCHERTY(2)	Senior Vice President, Operations	Officer of ATI
Singapore, Singapore
ADRIAN HARTOG Toronto, Ontario	Senior Vice President and General Manager, Consumer Group	Officer of ATI
RICK HEGBERG	Senior Vice President, Worldwide Sales	Officer of ATI
Mendham, New Jersey
HENRY QUAN	Vice President, Corporate Development	Officer of ATI
Woodbridge, Ontario
RICHARD BRAIT	General Counsel	Officer of ATI
Oakville, Ontario
DEAN BLAIN	Corporate Secretary	Solicitor
Toronto, Ontario

⁽¹⁾ Retired November 2005.

⁽²⁾ Employee of ATI Technologies Singapore Pte. Ltd.

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During the past five years, all of the executive officers of ATI have held the positions noted opposite their respective names or other senior positions with ATI, except:

• Patrick Crowley who between February 2000 and April 2004, was Executive Vice-President and Chief Financial Officer of Canada Life Financial Corporation.

• Rick Bergman who, prior to January 2001, was Chief Operating Officer of S3 Graphics, a division of SONICblue Inc.

• Michel Cadieux who, prior to September 2000, was Vice President, Human Resources, at Telemedia Communications Inc.

• John Docherty who, prior to August 2005, was Vice President, Operations at Agere Systems Inc. (formerly, Lucent Microelectronics).

• Rick Hegberg who, prior to January 2003, was the Chief Executive Officer of Net Octave; and prior to January 2001, was the Vice President, North American Sales of Agere Systems Inc. (formerly Lucent Microelectronics).

• Richard Brait who, prior to April 2004, was Senior Partner and Chair of the Technology Group at Stikeman Elliott LLP and prior to December 2001, was General Counsel for Nortel Networks’ Optical Components Group.

As at November 15, 2005, the directors and executive officers of ATI as a group beneficially owned, directly or indirectly, or exercised control or direction over 4,344,775 common shares, representing approximately 1.7% of the outstanding common shares of ATI. The information as to shares owned indirectly or over which control or direction are exercised by the directors and executive officers, but which are not registered in their names and not being within the knowledge of ATI, has been furnished by such directors and executive officers.

The success of ATI is dependent on the services of a number of members of senior management. The experience of these individuals will be a factor contributing to ATI’s continued success and growth. The loss of one or more of these individuals could have a material adverse effect on ATI’s operations and business prospects.

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ITEM 8.    AUDIT COMMITTEE INFORMATION

Currently, the members of the audit committee of ATI (the “Audit Committee”) are Alan D. Horn (Chair), James D. Fleck, John E. Caldwell and Robert A. Young. The Audit Committee has direct communication channels with ATI’s internal finance department to review issues as appropriate and meets directly with our internal and external auditors on a regular basis. The Audit Committee Charter (see Appendix A) outlines, among other things, the mandate of the Audit Committee to:

• oversee the integrity of ATI’s financial statements and financial reporting process;

• oversee the qualifications and independence of ATI’s external auditors;

• oversee the scope of the annual audit plan;

• oversee the work of ATI’s financial officers and executives, internal auditors and external auditors; and

• provide an open avenue of communication between the external auditors, the Board of Directors and management.

Each of the members of the Audit Committee are independent and financially literate. Messrs. Horn and Caldwell, both of whom are Chartered Accountants, are each considered to be a “financial expert”. Each member of the Audit Committee has the ability to perform his responsibilities as an Audit Committee member based on his education and/or experience as summarized below:

•	Mr. Horn (Chairman)	–	Chartered Accountant;
		–	Chief Financial Officer of Rogers Communications Inc.
•	Mr. Caldwell	–	Chartered Accountant;
		–	Former Chief Financial Officer of CAE Inc.;
		–	Director and chair of the audit committee of Cognos Inc., Faro Technologies Inc. and Stelco Inc.;
•	Mr. Fleck	–	Director of Certicom Corp.;
		–	Doctorate in Finance, Harvard University.;
•	Mr. Young	–	Director and chair of the audit committee of Tessera Technologies Inc.;
		–	Former Managing Director in Corporate Finance, Dillon, Read & Co.;

The Board of Directors, upon the recommendation of the Audit Committee, has adopted a written policy on auditor independence (the “Policy”). Under the Policy, except in very limited circumstances, all audit and permitted non-audit services are required to be pre-approved by the Audit Committee. The Policy prohibits the auditors from providing the following types of non-audit services:

• bookkeeping or other services related to the accounting records or financial statements of ATI;

• financial information systems design and implementation;

• appraisal or valuation services, fairness opinion, or contribution-in-kind reports;

• actuarial services;

• internal audit outsourcing services;

• management functions or human resources services;

• broker or dealer, investment advisor or investment banking services on behalf of ATI; and

• legal services and expert services unrelated to the audit.

The Policy also permits the auditors to provide other types of non-audit services, including tax services, but only if approved in advance by the Audit Committee, subject to limited exceptions.

External auditor service fees for the last two fiscal years are as follows:

      Audit Fees

Audit fees paid to KPMG LLP totaled $699,000 in 2005 and $465,000 in fiscal 2004 (which included audit fees incurred in connection with the preparation of ATI’s base shelf prospectus, but excluded audit fees associated with interim review procedures performed in connection with the review of ATI’s quarterly reports in fiscal 2004). Audit fees comprise of professional services for the audit of ATI’s annual financial statements, interim review procedures performed in connection with ATI’s quarterly reports, and services normally provided in connection with ATI’s statutory and regulatory filings which includes the audit of the tax provision and fees for accounting consultation and statutory audits of subsidiaries.

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      Audit-Related Fees

Audit-related fees paid to KPMG LLP totaled $169,000 in fiscal 2005 and $205,000 in fiscal 2004 (which included audit fees associated with interim review procedures performed in connection with the review of ATI’s quarterly reports in fiscal 2004). These audit-related fees include fees associated with other accounting advisory and assistance services such as due diligence assistance, accounting consultation on proposed transactions and SOX advisory services.

      Tax Fees

Fees paid to KPMG LLP for tax services, including tax compliance, tax advice and tax planning, totaled approximately $357,000 in fiscal 2005 and $190,000 in fiscal 2004.

      All Other Fees

Fees paid to KPMG LLP for services other than those reported in the categories above totaled $9,000 in fiscal 2005 and $420,000 in 2004.

ITEM 9.    MATERIAL CONTRACTS

In connection with the OSC proceedings (see “Narrative Description of the Business – Legal Proceedings and Regulatory Matters”), we entered into a settlement agreement with the staff of the OSC relating to allegations that in 2000 we did not make timely disclosure of a shortfall in earnings and made a misleading statement to staff of the OSC in the context of an investigation by staff. On March 29, 2005, a panel of the OSC approved the settlement agreement between us and the staff of the OSC. Terms of the settlement included an agreement for us to pay CAD$900,000 in costs and settlement payments. We also agreed to provide a letter of comfort confirming our practices and procedures related to trading and corporate governance. A copy of the settlement agreement is available on SEDAR at www.sedar.com and on the EDGAR website at www.sec.gov.

ITEM 10.    TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for ATI’s common shares is CIBC Mellon Trust Company, 320 Bay Street, P.O. Box 1, Toronto, Ontario, M5H 4A6.

ITEM 11.    INTERESTS OF EXPERTS

11.1  Names of Experts

Our auditors are KPMG LLP, Chartered Accountants, Yonge Corporate Centre, 4100 Yonge Street, Suite 200, Toronto, Ontario, M2P 2H3.

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ITEM 12.    ADDITIONAL INFORMATION

12.1  Annual Report and Management Information Circular

Additional information relating to ATI is available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.

Additional information with respect to ATI, including directors’ and officers’ remuneration and indebtedness, principal holders of our securities and securities authorized for issuance under equity compensation plans is contained, where applicable, in our Management Information Circular dated December 17, 2004. We expect to mail our Management Information Circular for our January 2006 Annual Meeting of Shareholders in December 2005 (“2005 Circular”).

Additional financial information is provided in our Consolidated Financial Statements and Notes to the Consolidated Financial Statements and in our Management’s Discussion and Analysis, included in the 2005 Annual Report.

Copies of our 2005 Annual Report, 2005 Circular and of this Annual Information Form may be obtained upon request from the Corporate Secretary or our Investor Relations Department. These documents will also be available on the SEDAR website at www.sedar.com and our 2005 Annual Report, 2005 Circular and Form 40-F will also be available on the EDGAR website at www.sec.gov.

12.2  Base Shelf Prospectus

In February of 2004, ATI filed with securities regulatory authorities in each of the provinces of Canada, other than the Province of Quebec, a short-form base shelf prospectus in connection with the new issue and/or secondary offering of common shares, preferred shares, secured or unsecured obligations in the form of senior or subordinated debt securities, stock purchase contracts or units or warrants to purchase common shares, preferred shares, debt securities or other securities (collectively, the “Securities”), pursuant to one or more offerings up to an aggregate offering price of $500,000,000 during the 25 month period that the short-form base shelf prospectus remains effective. ATI also filed a registration statement on Form F-10 with the United States Securities and Exchange Commission with respect to the Securities.

At any time while our securities are in the course of a distribution, the Corporate Secretary will provide any person, upon request, with a copy of: (i) this Annual Information Form; (ii) our most recent annual report containing the audited consolidated financial statements of ATI for the most recently completed fiscal year together with the accompanying report of the auditor; (iii) any interim financial statements of ATI subsequent to the financial statements for the most recently completed fiscal year; (iv) the management information circular for the most recent annual meeting of shareholders involving the election of directors; and (v) any other document incorporated by reference into the preliminary short form prospectus or the final short form prospectus filed in connection with such distribution of securities.

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APPENDIX A

AUDIT COMMITTEE CHARTER

PURPOSE

This Audit Committee (the “Committee”) Charter (the “Charter”) has been adopted by the Board of Directors (the “Board”) of ATI Technologies Inc. (the “Company”) to provide parameters within which the Committee is to assist the Board in fulfilling its public company obligations. In this regard, the overall mandate of the Committee is to:

• oversee the integrity of the Company’s financial statements and financial reporting process, including the audit process and the Company’s internal accounting controls and procedures and compliance with related legal and regulatory requirements;

• oversee the qualifications and independence of the Independent Auditors engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company;

• oversee the work of the Company’s financial officers and executives (“Management”), Internal Audit function (“Internal Auditors”) (under the responsibility of the Head of Internal Audit) and Independent Auditors; and

• provide an open avenue of communication between the Independent Auditors, the Internal Auditors, the Board and Management.

RESPONSIBILITY OF MANAGEMENT, THE INTERNAL AUDITORS AND
THE INDEPENDENT AUDITORS

Management is responsible for the preparation, presentation and integrity of the Company’s financial statements and related disclosure in accordance with generally accepted accounting principles. Management is also responsible for the design and effective operation of a system of internal controls that provide reasonable assurance that assets are safeguarded, that transactions are properly authorized, recorded and reported, and that financial statements and related disclosure are prepared in accordance with generally accepted accounting standards and applicable laws and regulations.

The Internal Auditors are responsible for, among other things, evaluating the adequacy and effectiveness of the system of internal controls.

The Independent Auditors are responsible for expressing an opinion based upon their audit of the Company’s annual financial statements, as to whether such financial statements present fairly, in all material respects, the financial position of the Company in accordance with generally accepted accounting principles. In addition, the Independent Auditors are responsible for the planning, performance and reporting on other audit, review or attest services for the Company, as required by applicable laws and regulations, and as required by the Committee. This includes, for example, an engagement to provide an attestation report on Management’s assessment of internal controls over financial reporting (as required by section 404(b) of the Sarbanes-Oxley Act of 2002).

Absent actual knowledge to the contrary (which shall be promptly reported to the Board), each member of the Committee shall be entitled to rely on (i) the integrity of those persons or organizations within and outside the Company from which it receives information, (ii) the accuracy of the financial and other information provided to the Committee by such persons or organizations and (iii) representations made by Management and the Independent Auditors as to any services provided by the Independent Auditors to the Company.

In carrying out its responsibility, it is recognized that Management and the Independent Auditors have more resources and time and more detailed knowledge and information regarding the Company’s accounting, auditing, internal control and financial reporting practices than is available to the Committee. It is not the responsibility of the Committee to plan or conduct audits, to determine that the Company’s financial statements are complete and accurate and are in accordance with generally accepted accounting principles or to conduct other types of auditing or accounting reviews or similar procedures or investigations.

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AUTHORITY TO INVESTIGATE AND ENGAGE ADVISORS

The Committee is empowered to investigate any matter relating to the Company’s accounting, auditing, internal control or financial reporting practices, with full access to all Company books, records, facilities and personnel. The Committee has the authority to engage outside counsel, auditors or other advisors as it determines necessary to carry out its duties and may set and pay the compensation for any such advisors at the Company’s expense. The Committee is empowered to communicate directly with Management, the Independent Auditors and the Internal Auditors and other third parties as deemed necessary.

COMPOSITION AND MEMBER INDEPENDENCE

The membership of the Committee shall consist of at least three directors who shall be appointed annually by the Board. Each individual member of the Committee (a “Member”) must be free of any relationship that, in the opinion of the Board, may interfere with the Member’s exercise of independent judgement. Directors shall not be eligible for membership on the Committee if they have participated in the preparation of the financial statements of the Company at any time during the past three years. Each Member shall meet the independence and financial literacy requirements for serving on audit committees and at least one Member shall have accounting or related financial management experience, all as defined by applicable Canadian and U.S. stock exchange rules or securities laws requirements. The Member(s) identified with the requisite accounting or related financial management experience shall be designated as the “Audit Committee Financial Expert(s),” as defined by the Securities and Exchange Commission.

In addition, the membership of the Committee shall comply with the residency requirements, if any, prescribed by the applicable laws and constating documents governing the Company.

Each Member of the Committee shall hold office until the close of the next annual meeting of shareholders of the Company, or until the Member ceases to be a director, resigns or is removed from office or replaced by the Board, whichever occurs first. Any vacancy on the Committee from time to time may be filled only by resolution of the Board.

MEMBER COMPENSATION

Directors’ fees are the only compensation a Committee Member may receive from the Company.

CHAIR

One Member of the Committee shall be appointed by the independent directors of the Board as Chair of the Committee. The Chair shall be responsible for leadership of the Committee, including overseeing the scheduling of, and preparation of agendas for, meetings, presiding over meetings, and making regular reports to the Board. The Chair will also regularly liase with the Chief Executive Officer and Chief Financial Officer of the Company and the lead partner of the Company’s Independent Auditors.

MEETINGS

The Committee shall meet as often as necessary in order to discharge its duties effectively, and shall meet at least once in each fiscal quarter.

A meeting of the Committee may be called by any Member or the Independent Auditors of the Company. Notice of the time and place or manner of participation for every meeting of the Committee shall be sent to each member of the Committee, the Independent Auditors of the Company and the Chair of the Board in accordance with the general by-law of the Company. The Chair of the Board, the lead director of the Board and the Independent Auditors are entitled to attend all meetings of the Committee but shall not be entitled to any voting rights with respect to any business transacted by the Committee.

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If all of the Members consent (such consent may be given at any time), a Member may participate in a Committee meeting by means of a telephonic, electronic or other communication facility that permits all participants to communicate adequately with each other during the meeting, and a Member participating in such a meeting by such means is deemed to be present at that meeting.

The procedure of the Committee shall be governed by the provisions of the general by-law of the Company which govern proceedings of the Board, so far as the same can apply to proceedings of the Committee.

The Committee shall appoint a Secretary of the Committee. In the absence of the Secretary of the Committee from any meeting, another Member shall so act. The Secretary shall keep records of all proceedings and transactions of the Committee.

CONDUCT OF BUSINESS

No business shall be transacted by the Committee except:

(a) at a meeting of the Members at which

(i) a majority of Members of the Committee are present;

(ii) such number of resident Canadians, if any, as required by the applicable laws and constating documents governing the Company are present; and

(iii) an Audit Committee Financial Expert is present; or

(b) by way of resolution signed by all members of the Committee.

RESPONSIBILITIES OF THE AUDIT COMMITTEE

Although the Committee may also have such other duties as may from time to time be assigned to it by the Board, the general recurring activities of the Committee in carrying out its oversight role are described below. These recurring activities are set forth as a guide with the understanding that the Committee may wish to consider other duties from time to time and may diverge from this guide as appropriate given the circumstances. The Committee shall be responsible for:

Nomination and Oversight of the Independent Auditors

1. Recommending to the Board the accounting firm to be nominated for appointment by the shareholders as the Independent Auditor of the Company. Such auditors are ultimately accountable to the Board and the Committee, as representatives of the shareholders.

2. Taking, or recommending that the Board take, appropriate action to oversee the independence of the Independent Auditors.

3. Evaluating, together with the Board, the performance of the Independent Auditors and, where appropriate, recommending to the Board the replacement of the Independent Auditors or the rotation of members of the audit engagement team in accordance with applicable regulatory requirements. The Independent Auditors shall report directly to the Committee.

4. Obtaining annually from the Company’s Independent Auditors a formal written statement describing all relationships between the Independent Auditors and the Company consistent with CICA Handbook Section 5751 or successor requirements (“CICA 5751”) and actively engaging in a dialogue with the Independent Auditors with respect to any disclosed relationships or services that may impact on the objectivity and independence of the Independent Auditors.

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5. Establishing policies and procedures relating to the pre-approval and engagement of all non-audit services proposed to be provided by the Independent Auditors and its affiliates as well as prohibiting the engagement of the Independent Auditors or its subsidiary entities for certain specific non-audit services as determined by the Committee, with the objective of preserving the independence of the Independent Auditors.

6. Overseeing the work of the Independent Auditors, including discussing with the Independent Auditors the nature of the audit process, receiving and reviewing audit reports and other auditor communications (as required by applicable regulatory bodies), reviewing the annual management comment letter and providing the Independent Auditors with access to the Committee to report on any and all appropriate matters.

7. Reviewing and signing the terms of the engagement with the Independent Auditors. Reviewing on an annual basis prior to the annual audit of the Company’s annual financial statements, the audit work plan proposed by the Company’s Independent Auditors, including details as to scope of work to be undertaken and relevant areas of focus.

8. Reviewing and recommending to the Board for approval the compensation to be paid by the Company to the Independent Auditors.

9. Establishing and monitoring policies for the hiring by the Company of current or former partners and employees of the Independent Auditors.

10. Resolving disagreements between Management and the Independent Auditors regarding financial reporting.

Reviewing the Financial Statements and Related Disclosure

11. Reviewing, prior to public release by the Company, the audited financial statements and annual Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and discussing this disclosure with Management and the Independent Auditors. These discussions shall include a review of matters required to be discussed under CICA 5751 or successor requirements and consideration of the quality of the Company’s accounting principles as applied in its financial reporting, including a review of particularly sensitive accounting estimates, reserves and accruals, judgement areas, audit adjustments and other such inquiries as the Committee or the Independent Auditors shall deem appropriate. Based on such review and discussion, the Committee shall make a recommendation to the Board as to the approval of the Company’s audited financial statements and annual MD&A.

12. Reviewing the procedures for preparation of the interim financial statements, including receiving the review engagement reports from the Independent Auditors.

13. Reviewing, prior to public release by the Company, with the Independent Auditors and Management, the interim financial statements and interim MD&A. Based upon this review, the Board shall approve the interim financial statements and interim MD&A prior to public release by the Company, unless the approval of such matters has been delegated by the Board to the Committee.

14. Confirming that the process is in place to complete and file all certifications by officers of the Company of periodic financial reports, disclosure, or internal controls required to comply with applicable laws and regulations.

15. Reviewing, prior to public release by the Company, previously undisclosed, material financial information contained in any financial press release issued by the Company and any other publications prepared by the Company, including any annual or interim earnings press releases.

16. Reviewing any proposed changes in accounting practices or policies and the resulting impact on the Company’s financial statements, including the impact of any regulatory or accounting initiatives, or off-balance sheet structures.

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17. Discussing with Management and, if applicable, the Company’s general counsel any legal matters (including the status of pending litigation) that may have a material impact on the Company’s financial statements and any material reports or inquiries from regulatory or governmental agencies.

18. Reviewing and approving (if not approved by another independent body of the Board) all related party transactions entered into by the Company on an ongoing basis, other than director, officer or employee compensation arrangements approved or recommended by the Human Resource and Compensation Committee.

Reviewing Financial Risks and the System of Internal Controls

19. Reviewing the audit plans of the Internal Auditors, including a discussion of the scope, staffing, budget, locations, reliance upon Management and general audit approach and any significant reports prepared by the Head of Internal Audit as well as Management’s responses, approve the hiring and dismissal of the Head of Internal Audit, approve and review periodically the Internal Audit Charter to ensure that the function has guidelines that allow it to operate effectively, and ensure that the Company’s Internal Auditors have access to the Company’s records as necessary to permit the function to operate effectively.

20. Meeting periodically, as necessary, in separate executive sessions with the Independent Auditors, Head of Internal Audit and Management to discuss any matters that the Committee, the Independent Auditors, the Head of Internal Audit or Management believe should be discussed privately with the Committee.

21. Overseeing the accounting and financial reporting processes of the Company.

22. Receiving from Management, the Head of Internal Audit, or the Independent Auditors communications regarding any significant deficiencies in the design or operation of internal controls that could affect the Company’s ability to record, process, summarize and report financial data. Receiving from Management, the Head of Internal Audit, or the Independent Auditors, communications regarding any fraud, whether or not material, that involves Management or other employees who have a significant role in the Company’s internal controls.

23. Establishing whistleblower procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by the Company’s employees of concerns regarding questionable accounting or auditing matters and reviewing periodically with Management and the Head of Internal Audit these procedures and any significant complaints received.

24. Meeting with Management periodically to review the process and systems in place for ensuring the reliability of public disclosure documents that contain audited and unaudited financial information and their effectiveness. The Committee must be satisfied that adequate procedures are in place for the review of the Company’s public disclosure of financial information extracted or derived from the issuer’s financial statements and must periodically assess the adequacy of these procedures.

25. Investigating any matter brought to the attention of the Committee within the scope of its duties if, in the judgment of the Committee, such investigation is necessary or appropriate. The Chair of the Committee may represent the entire Committee in making such determination.

26. Reviewing with Management the principal financial risks relevant to the business of the Company, its subsidiaries and joint ventures, and the financial control processes and systems put in place in order to monitor, manage and mitigate these risks. These discussions shall include a review of the quality and adequacy of and compliance with the Company’s internal controls.

27. Performing such other functions and having such powers as may be necessary or appropriate in the efficient and lawful discharge of the foregoing.

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Review and Disclosure of Charter

28. Reviewing at least once annually, the terms of this Audit Committee Charter and recommending to the Board for approval any changes which it believes are necessary. The Committee shall ensure that this Charter is disclosed in accordance with all applicable securities laws or regulatory requirements in the annual information form of the Company or such other annual filing as may be permitted or required by applicable securities regulatory authorities.

Approved: July 10, 2002
Updated: December 14, 2004
Updated: October 5, 2005

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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 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.

/s/ K.Y. Ho K.Y. Ho	/s/ David E. Orton David E. Orton	/s/ Patrick Crowley Patrick Crowley
Chairman	President and	Senior Vice President, Finance and
	Chief Executive Officer	Chief Financial Officer
October 4, 2005

Auditors’ Report to the Shareholders

We have audited the consolidated balance sheets of ATI Technologies Inc. as at August 31, 2005 and 2004 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, 2005. 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, 2005 and 2004 and the results of its operations and its cash flows for each of the years in the three-year period ended August 31, 2005 in accordance with Canadian generally accepted accounting principles.

/s/ KPMG LLP

Chartered Accountants
Toronto, Canada
October 4, 2005

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 change described in note 1 (o) to the financial statements. Our report to the shareholders dated October 4, 2005 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.

/s/ KPMG LLP

Chartered Accountants
Toronto, Canada
October 4, 2005

Page 64 of 126

Consolidated Statements of Operations and Retained Earnings

(In thousands of U.S. dollars, except per share amounts)

Years ended August 31	2005	2004	2003
REVENUES	$ 2,222,509	$ 1,996,717	$ 1,385,293
Cost of revenues	1,608,582	1,303,802	956,116
Gross margin	613,927	692,915	429,177
OPERATING EXPENSES:
Selling and marketing	146,352	117,597	92,810
Research and development	327,017	265,491	212,976
Administrative	61,808	46,702	39,413
Amortization of intangible assets (note 7)	8,919	6,115	10,767
Stock-based compensation	42,504	7,583	–
Other charges (recoveries) (note 16)	2,508	(304)	28,724
	589,108	443,184	384,690
Income from operations	24,819	249,731	44,487
Interest and other income, net (note 8)	14,935	2,950	4,382
Interest expense (note 11)	(2,096)	(2,058)	(1,899)
Income before income taxes	37,658	250,623	46,970
Income taxes (note 13)	20,729	45,824	11,741
NET INCOME	16,929	204,799	35,229
RETAINED EARNINGS, beginning of year	308,825	104,026	68,797
Adjustment to opening retained earnings:
Change in accounting policy on stock-based compensation (note 1(o))	(13,843)	–	–
Repurchase of common shares (note 12(a))	(18,541)	–	–
Retained earnings, end of year	$ 293,370	$ 308,825	$ 104,026
NET INCOME PER SHARE (note 14):
Basic	$ 0.07	$ 0.84	$ 0.15
Diluted	0.07	0.80	0.14
WEIGHTED AVERAGE NUMBER OF SHARES (000s):
Basic	250,680	245,257	238,251
Diluted	258,314	256,208	244,353
See accompanying notes to consolidated financial statements.

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Consolidated Balance Sheets

(In thousands of U.S. dollars)

August 31		2005		2004
ASSETS
Current assets:
Cash and cash equivalents	$	223,277	$	359,608
Short-term investments (note 3)		363,370		189,308
Accounts receivable		386,264		365,644
Inventories (note 4)		348,209		254,867
Prepayments and sundry receivables		24,463		22,395
Future income tax assets (note 13)		5,348		8,022
Total current assets		1,350,931		1,199,844
Capital assets (note 5)		112,875		85,943
Intangible assets (note 7)		17,631		5,558
Goodwill (note 7)		190,095		190,095
Long-term investments (note 8)		291		2,751
Tax credits recoverable		59,080		29,149
Future income tax assets (note 13)		12,588		1,114
Total assets	$	1,743,491	$	1,514,454
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	362,926	$	274,772
Accrued liabilities		302,028		219,607
Deferred revenue (note 10)		24,576		29,131
Current portion of long-term debt (note 11)		1,852		1,571
Total current liabilities		691,382		525,081
Long-term debt (note 11)		29,110		28,053
Future income tax liabilities (note 13)		8,861		16,632
Total liabilities		729,353		569,766
Shareholders’ equity (note 12):
Share capital:
Authorized:
Unlimited preferred shares
Unlimited common shares
Issued and outstanding:
251,473,305 common shares (2004 – 249,287,125)		665,566		638,985
Treasury stock		(14,867)		(22,100)
Contributed surplus		61,795		10,704
Retained earnings		293,370		308,825
Currency translation adjustment		8,274		8,274
Total shareholders’ equity		1,014,138		944,688
Total liabilities and shareholders’ equity	$	1,743,491	$	1,514,454

Commitments and contingencies (notes 4, 6, 18 and 22)
Guarantees (note 15)
See accompanying notes to consolidated financial statements.

On behalf of the Board:

/s/ K.Y. Ho K.Y. Ho	/s/ James D. Fleck James D. Fleck
Director	Director

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Consolidated Statements of Cash Flows

(In thousands of U.S. dollars)

Years ended August 31		2005		2004		2003
CASH PROVIDED BY (USED IN):
Operating activities:
Net income	$	16,929	$	204,799	$	35,229
Items which do not involve cash:
Future income taxes		(12,839)		(2,275)		(1,802)
Stock-based compensation (note 12)		41,882		5,849		–
Depreciation and amortization		31,575		26,031		34,705
Other charges		–		–		1,400
Loss (gain) on investments		1,580		1,307		(3,876)
Gain on sale of long-lived assets (note 16(c)(i))		–		(538)		–
Unrealized foreign exchange loss		2,560		961		3,637
Changes in non-cash operating working capital:
Accounts receivable		(20,620)		(131,096)		(93,422)
Inventories		(93,342)		(78,373)		15,627
Prepayments and sundry receivables		(1,950)		9,358		(8,678)
Accounts payable		88,148		83,576		19,103
Accrued liabilities		82,617		81,858		87,288
Deferred revenue		(4,555)		(8,538)		37,419
Tax credits recoverable		(29,347)		(7,968)		(21,181)
		102,638		184,951		105,449
Financing activities:
Decrease in bank indebtedness		–		–		(12,015)
Addition to long-term debt		–		–		10,709
Principal payments on long-term debt		(1,663)		(1,442)		(1,064)
Settlement of swap contract		–		–		(1,365)
Issuance of common shares		30,170		56,531		20,977
Repurchase of common shares (note 12(a) and (d))		(23,856)		(22,100)		–
Repayment of share purchase loans		–		–		225
Proceeds from sale of treasury stock		9		–		–
		4,660		32,989		17,467
Investing activities:
Purchase of short-term investments		(495,971)		(268,515)		(49,784)
Maturity and proceeds from sales of short-term investments		321,909		128,991		49,649
Additions to capital assets		(48,831)		(20,671)		(16,390)
Purchase of long-term investments		–		(98)		(2,460)
Proceeds from investments		880		–		10,029
Proceeds from sale of long-lived assets (note 16(c)(i))		–		2,489		–
Acquisitions, net of cash acquired (note 6)		(22,057)		(2,071)		–
		(244,070)		(159,875)		(8,956)
Foreign exchange gain (loss) on cash held in foreign currency		441		638		(181)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(136,331)		58,703		113,779
CASH AND CASH EQUIVALENTS, beginning of year		359,608		300,905		187,126
CASH AND CASH EQUIVALENTS, end of year		223,277		359,608		300,905
Short-term investments		363,370		189,308		49,784
Cash position, end of year	$	586,647	$	548,916	$	350,689

Supplemental cash flow information (note 20)
See accompanying notes to consolidated financial statements. 

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Notes to Consolidated Financial Statements

Years ended August 31, 2005, 2004 and 2003 (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.	(a)    Basis of presentation
Significant accounting policies	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 proportionate 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 all 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) auction rate paper that is carried at cost, which approximates fair value; (iii) portfolio investments, consisting of actively managed funds holding government and corporate obligations, agency discount notes, money market funds, commercial paper, and auction rate paper; and (iv) corporate bonds. Both portfolio investments and corporate bonds are carried at amortized cost plus accrued interest. 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. In determining net realizable value, the Company considers factors such as market conditions, the aging of inventory and forecasted future demand. 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:
	Asset	Method	Rate
	Buildings	Diminishing balance	5.0%
	Building under capital lease	Straight line	15 years
	Laboratory and     computer equipment	Diminishing balance/straight line	331/3%/over one to five years
	Computer software	Diminishing balance/straight line	50.0%/over two to three years
	Production equipment	Diminishing balance/straight line	20.0%/over one year
	Office equipment	Diminishing balance/straight line	20.0%/over three years
	Leasehold improvements	Straight line	Over term of lease

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2005, 2004 and 2003 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

(f)    Goodwill
The Company does not amortize goodwill but 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 carrying value of the reporting unit in which the goodwill resides 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 then 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 quarters of fiscal 2005 and 2004, the Company performed its annual goodwill impairment test and determined that there was no goodwill impairment.
(g)    Intangible assets
Intangible assets are recorded at cost and are amortized on a straight-line basis over their estimated useful lives as follows:
Purchased in-process research and development	1 year
Core technology	2–5 years
Other	8 months–3 years
(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 undiscounted, future net cash flows that the long-lived assets are expected to generate. If the carrying amount exceeds such cash flows, an impairment charge is recognized equal to the excess of the assets’ carrying value over their fair value.
(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.
(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. Sales made to distributors and retailers under agreements allowing for price protection and/or rights of return are recognized at the time of sale to these customers. Estimated returns and allowances, price protection and sales rebates are recorded as a reduction of revenue at the time of revenue recognition. Estimates are based on historical experience, planned customer incentive programs and other relevant factors. If estimates of future market conditions and changing product life cycles in the marketplace are inaccurate, it may be necessary to increase customer incentive offerings, which could necessitate a further reduction in revenue. Such increases are recorded as a reduction of revenue at the time the program is introduced or enhanced. The Company also 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.

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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, if any, are recognized when identified.

Where estimating the final outcome of a project 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 cost 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.

Cash received from customers in advance of the Company meeting its applicable revenue recognition criteria is recorded as deferred revenue.

(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 2005 amounted to $45.5 million (2004 – $29.0 million; 2003 – $21.7 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 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, primarily, the sum of the Company’s provision for current income taxes and the difference between opening and closing balances of future income tax assets and liabilities.

(n)    Net income per share

Basic net income per share has been calculated by dividing the net income 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 per share. Diluted net income per share is computed similar to basic net income 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 and equity-settled restricted share units (“RSUs”), if dilutive. The number of additional shares is calculated by assuming that outstanding stock options and RSUs 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.

(o)    Stock-based awards
(i)      Stock options
The Company has share option plans, which are described in note 12. Any consideration paid by employees on exercise of stock options or purchase of stock is credited to share capital.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2005, 2004 and 2003 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

On September 1, 2004, the Company adopted the revised CICA Handbook Section 3870, “Stock-based Compensation and Other Stock-based Payments,” which requires the application of a fair value method of accounting to all stock-based compensation arrangements with employees. As a result, the Company is required to estimate the fair value of the stock options granted and expense that fair value over the service period which, in all cases, equals the vesting period of the stock options. Prior to September 1, 2004, the Company recorded no compensation cost on the grant of stock options to employees. In accordance with the transitional provisions of Section 3870, the Company has retroactively, without restatement, applied the fair value method of accounting for stock option awards granted since September 1, 2002, using the Black-Scholes option pricing model, and recorded an adjustment to opening retained earnings at September 1, 2004 in the amount of $13.8 million, representing the stock option expense, net of income taxes, for fiscal 2003 and 2004. The offsets to retained earnings are increases in contributed surplus and future income tax assets in the amounts of $17.5 million and $3.7 million, respectively. The stock option expense for the year ended August 31, 2005 was $34.0 million.
The following table reports certain pro forma amounts, adjusted to reflect stock-based compensation expense measured by the fair value method based on stock options issued subsequent to September 1, 2002, for the years ended August 31, 2004 and 2003:
	2004	2003
Net income:
As reported	$    204,799	$    35,229
Pro forma	191,481	34,704
Basic net income per share:
As reported	0.84	0.15
Pro forma	0.78	0.15
Diluted net income per share:
As reported	0.80	0.14
Pro forma	0.75	0.14
(ii)    Restricted share units and deferred share units
The Company has RSU and deferred share unit (“DSU”) plans, which are described in note 12. For equity-settled RSUs, stock-based compensation, representing the underlying value of the common shares of the Company at the date of grant of the RSUs, is recognized evenly over the three-year vesting period. RSUs and DSUs that will be settled in cash are recorded as liabilities. The measurement of the liability and compensation costs 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 grant of the award and prior to the settlement date, due to changes in the market value of the underlying Company common shares, are recorded as a charge to operating income in the period incurred. The payment amount is established for cash-settled RSUs as of the vesting date of the award and for DSUs as of 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 revenue 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. Management makes its estimates based on historical experience and on various other assumptions it believes are reasonable. Actual results could differ from those estimates.

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(q)    Financial instruments

During fiscal 2004, the Company adopted CICA Accounting Guideline (“AcG”) No. 13, “Hedging Relationships,” for its derivative instruments. The Company engages 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 the 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 prior to the occurrence of the hedge transaction 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 or 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.

(r)    Accounting changes
(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. The Company was not impacted by the adoption of this standard.

(ii)    Consolidation of variable interest entities

In November 2004, the CICA revised AcG No. 15, “Consolidation of Variable Interest Entities,” to AcG-15R, 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 fiscal year. The adoption of this standard did not have an impact on the Company’s financial position, results of operations or cash flows.

(iii)    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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2005, 2004 and 2003 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

	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.
	(s)    Recently issued accounting pronouncement Financial Instruments In January 2005, the CICA issued Section 3855, “Financial Instruments – Recognition and Measurement,” Section 1530, “Comprehensive Income” and Section 3865, “Hedges.” The new standards will be effective for interim and annual financial statements commencing in the Company’s 2007 fiscal year. Earlier adoption is permitted. Most significantly for the Company, the new standards will require presentation of a separate statement of comprehensive income. Foreign exchange gains and losses on the translation of the financial statements of self-sustaining subsidiaries previously recorded in a separate section of shareholders’ equity will be presented in comprehensive income. Derivative financial instruments will be recorded in the balance sheet at fair value and the changes in fair value of derivatives designated as cash flow hedges will be reported in comprehensive income. The existing hedging principles of AcG-13 will be maintained. The Company is assessing the impact of the new standards.
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.
	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 a building facility in Markham, Ontario. 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, 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.

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As at August 31, 2005, the Company has $94.5 million Canadian dollars (2004 – Cdn. $35.0 million) outstanding in Forwards that mature in the next six months at an average exchange rate of 1.2579. All of the Forwards have become favorable to the Company since their inception and have an unrealized fair value of $4.7 million at August 31, 2005 (2004 – $1.3 million).

NOTE 3.			Less than		Greater than
Short-term			one year		one year					Yield to
investments	2005		maturities		maturities			Total		maturity
	Portfolio investments	$	102,466	$	–		$	102,466		3.59%–3.61%
	Corporate obligations		47,607		–			47,607		2.17%–3.86%
	Auction rate paper		210,775		–			210,775		3.49%–3.80%
	Term deposits/certificates of deposit		2,522		–			2,522		3.20%–5.70%
		$	363,370	$	–		$	363,370		2.17%–5.70%
			Less than		Greater than
			one year		one year					Yield to
	2004		maturities		maturities			Total		maturity
	Portfolio investments	$	60,139	$	–		$	60,139		1.64%–2.19%
	Corporate obligations		16,051		25,918			41,969		1.42%–2.45%
	Auction rate paper		87,200		–			87,200		1.72%–1.85%
		$	163,390	$	25,918		$	189,308		1.42%–2.45%
	At August 31, 2005 and 2004, the carrying value of short-term investments approximated their quoted market value. All short-term investments have a minimum credit rating of either A1 by Standard and Poor’s or P1 by Moody’s.
NOTE 4.								2005		2004
Inventories
	Raw materials						$	32,599	$	44,882
	Work in process							193,448		122,020
	Finished goods							122,162		87,965
							$	348,209	$	254,867
	At August 31, 2005, the Company had non-cancellable inventory purchase commitments totalling $223.6 million (2004 – $181.1 million).
NOTE 5.						Accumulated				Net book
Capital assets	2005				Cost			depreciation		value
	Land			$	2,968		$	–	$	2,968
	Buildings				17,198			2,906		14,292
	Building under capital lease				33,268			7,574		25,694
	Laboratory and computer equipment				86,118			45,090		41,028
	Computer software				24,278			16,244		8,034
	Production equipment				6,153			2,175		3,978
	Office equipment				12,813			5,348		7,465
	Leasehold improvements				14,110			4,694		9,416
				$	196,906		$	84,031	$	112,875

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2005, 2004 and 2003 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

				Accumulated		Net book
2004		Cost		depreciation		value
Land	$	1,506	$	–	$	1,506
Building		10,659		2,339		8,320
Building under capital lease		33,268		5,357		27,911
Laboratory and computer equipment		61,427		32,613		28,814
Computer software		17,010		12,531		4,479
Production equipment		2,745		1,769		976
Office equipment		8,901		3,554		5,347
Leasehold improvements		12,100		3,510		8,590
	$	147,616	$	61,673	$	85,943

	Depreciation expense related to capital assets amounted to $22.7 million in fiscal 2005 (2004 – $19.9 million; 2003 – $23.9 million).
NOTE 6. Acquisitions	(a)     On March 9, 2005, the Company acquired certain cable modem silicon intellectual property assets and certain employees of Terayon Communications Systems, Inc. (“Terayon”) for cash consideration of $11.3 million. Under the terms of the agreement, Terayon was eligible to receive additional consideration of up to $3.25 million, contingent upon achieving certain future deliverables. The purchase price was allocated to the net assets acquired, comprised of intangible assets of $13.3 million and other assets of $0.5 million based on their relative fair values at the date of acquisition. The useful life of intangible assets acquired ranges from one to three years.
	As at August 31, 2005, $2.5 million of the contingency was earned. This remaining contingency will be recorded when determinable.
	(b)     On February 24, 2005, the Company acquired CuTe Solutions Private Limited (“CuTe”) for cash consideration of $4.1 million. CuTe, a high-technology embedded solutions provider, is located in India. The acquisition was accounted for using the purchase method, whereby the results of operations of CuTe 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:

Net assets:
Current assets, including cash of $41	$    159
Capital assets	245
Core technology	2,891
Other intangible	1,100
Liabilities assumed	(248)
Cash consideration	$ 4,147

Core technology and the other intangible are being amortized as follows:

Core technology	2 years
Other intangible	8 months

(c)     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 intangible assets acquired was approximately one year.

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	On September 30, 2004, the Company acquired the remaining assets located in Taiwan and China from AMI Technologies Corp. for cash consideration of $1.6 million. This acquisition was accounted for as a business combination. The purchase price was allocated to the net assets acquired, comprising intangible assets of $1.6 million and other assets of $12,000, based on their relative fair values at the date of acquisition. The useful life of intangible assets acquired is approximately one year. (d)    On September 1, 2004, the Company acquired certain assets of RT&C International (“RT&C”), its sales organization for South Korea, for cash consideration of $1.3 million. This acquisition was accounted for as a business combination. The purchase price was allocated to the net assets acquired, comprising intangible assets of $1.3 million and other assets of $37,000, based on their relative fair values at the date of acquisition. The useful life of the intangible assets acquired is approximately 16 months. Under the terms of the agreement, RT&C is eligible to receive cash consideration up to $1.5 million, contingent upon RT&C achieving future performance targets within one year after the closing date. As at August 31, 2005, $750,000 of the contingency was earned. No further amounts will be earned in connection with this contingency.
NOTE 7.	The net book values of intangible assets and goodwill acquired are as follows:
Intangible assets				Accumulated				Net book
and goodwill	2005		Cost			amortization		value
	Core technology	$	38,226		$	23,038	$	15,188
	Other		9,298			6,855		2,443
	Total intangible assets	$	47,524		$	29,893	$	17,631
	Goodwill	$	376,788		$	186,693	$	190,095
						Accumulated		Net book
	2004		Cost			amortization		value
	Purchased in-process R&D	$	56,250		$	56,250	$	–
	Core technology		23,670			18,112		5,558
	Other		2,862			2,862		–
	Total intangible assets	$	82,782		$	77,224	$	5,558
	Goodwill	$	376,788		$	186,693	$	190,095
	Amortization expense related to intangible assets amounted to $8.9 million for fiscal 2005 (2004 – $6.1 million; 2003 – $10.8 million).
NOTE 8.						2005		2004
Long-term
investments	Share investments				$	291	$	2,751
	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 2005, the Company fully wrote down its 13.2% investment in a private technology-based company, originally acquired in fiscal 2003, in the amount of $2.5 million, to reflect the other than temporary decline in its value.
	(b)     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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2005, 2004 and 2003 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

	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.
	(c)     During fiscal 2003, the Company disposed of all its shares in the two publicly traded companies, 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, 2005, the Company had available bank credit facilities of $21.0 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, 2005 and 2004, there were no borrowings outstanding under these facilities.
	Standby fees are calculated at rates of 0.125% to 0.2% per annum on the unused portion of the facilities.
NOTE 10. Deferred revenue	Deferred revenue includes $22.1 million (2004 – $28.8 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.		Interest rate	2005	2004
Long-term debt
	Obligation under capital lease (a)	6.31%	$  19,077	$  18,049
	Mortgage payable (b)	6.96%	11,885	11,575
			30,962	29,624
	Less current portion		1,852	1,571
			$  29,110	$  28,053

(a)     Obligation under capital lease
The Company’s obligation under capital lease represents the lease on a building facility occupied by the Company in Markham, Ontario. The capital lease is denominated in Canadian dollars. As at August 31, 2005, the remaining amount outstanding on the capital lease was $19.1 million (Cdn. $22.7 million).

(b)     Mortgage payable
On September 10, 2002, CVRH, a joint venture in which the Company has a 50.0% ownership interest, entered into a mortgage agreement with a lender to finance a building facility occupied by the Company. The Company’s proportionate share of the mortgage as at August 31, 2005 amounted to $11.9 million (Cdn. $14.1 million). The mortgage has a repayment term of 12 years and is denominated in Canadian dollars.

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	(c)     The Company’s obligations under this mortgage and capital lease are as follows:
	Year ending August 31:
	2006		$	3,817
	2007			3,903
	2008			4,024
	2009			4,024
	2010			4,024
	Thereafter through 2017			23,579
	Total minimum payments on long-term debt			43,371
	Less amount representing interest			12,409
	Present value of net minimum payments on long-term debt			30,962
	Less current portion of long-term debt			1,852
			$	29,110
	Interest of $1.2 million and $0.9 million relating to the capital lease obligation and the mortgage payable, respectively, is included in interest expense for fiscal 2005 (2004 – $1.1 million and $0.9 million; 2003 – $1.1 million and $0.7 million).
NOTE 12.	(a)    Common shares issued and outstanding
Shareholders’		Number		Amount
equity
	Outstanding, August 31, 2002	236,870,685	$	561,477
	Issued for cash	4,871,428		20,977
	Outstanding, August 31, 2003	241,742,113		582,454
	Issued for cash	7,545,012		56,531
	Outstanding, August 31, 2004	249,287,125		638,985
	Issued for cash	4,186,180		30,170
	Repurchased and cancelled	(2,000,000)		(5,280)
	Stock option expense transferred from contributed surplus
	due to exercise of stock options by employees	–		1,691
	Outstanding, August 31, 2005	251,473,305	$	665,566

In March 2005, the Board of Directors authorized a share repurchase program of up to 24.7 million common shares through a normal course issuer bid. In fiscal 2005, the Company repurchased and cancelled a total of two million shares for an aggregate cost of $23.9 million. If considered advisable, additional shares may be repurchased from time to time on the open market through March 29, 2006 at prevailing market prices. The timing and amount of purchases, if any, will be dependent upon the availability and alternative uses of capital, market conditions and other factors.

(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 management 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 is 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%, or in respect of insiders of the Company, may not exceed 10.0%, of the number of common shares issued and outstanding.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2005, 2004 and 2003 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

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.

Commencing the third quarter of fiscal 2005, the Company amended the ATI Plan to provide the Board of Directors with the discretion to award tandem stock appreciation rights (“tandem SARs”) in connection with all or a portion of the existing and future options granted under the ATI Plan. Tandem SARs provide an optionee with the right to surrender vested options for termination in return for common shares with a market value equal to the net proceeds that the optionee would have otherwise received had such optionee exercised the vested options and immediately sold the underlying shares. During the year ended August 31, 2005, tandem SARs were attached to new option grants only. Options subject to tandem SARs numbered 3,169,015 at August 31, 2005.

(ii)     When the Company acquired ArtX, on April 4, 2000, it assumed the ArtX common shares options plan (the ”ArtX Plan”). No new options have been issued under this plan since the date of acquisition. The Company maintains the ArtX Plan for the benefit of former directors, officers, employees and consultants of ArtX.

(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 have been amortized over 18 months. During fiscal 2005, the amount recorded as compensation expense was $1.9 million (2004 – $3.5 million).

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

	2005			2004			2003
	Number of		Weighted	Number of		Weighted	Number of		Weighted
	options		average	options		average	options		average
	outstanding		price	outstanding		price	outstanding		price
Options outstanding,
beginning of year	27,883,127	$	11.22	27,731,851	$	8.31	32,813,005	$	7.18
Grant of additional options	5,354,205		15.95	8,639,607		16.21	907,550		4.89
Cancellation/expiry of options	(2,134,628)		16.28	(943,319)		11.77	(1,117,276)		9.03
Exercise of options	(4,186,180)		7.20	(7,545,012)		7.50	(4,871,428)		4.10
Options outstanding, end of year	26,916,524	$	13.14	27,883,127	$	11.22	27,731,851	$	8.31
Exercisable, end of year	14,365,985	$	10.81	13,771,306	$	8.99	15,727,485	$	8.35

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As at August 31, 2005, the ranges of exercise prices for options outstanding and exercisable (vested) are as follows:

	Number of	Weighted		Weighted	Number		Weighted
	options	average		average	of options		average
Price range	outstanding	life (years)		price	exercisable		price
$0.09–$0.93	758,566	4.24	$	0.33	758,566	$	0.33
$3.94–$5.86	4,037,257	2.74		5.75	3,806,507		5.82
$6.13–$9.00	2,725,677	3.61		7.17	1,817,170		7.25
$9.31–$13.54	3,948,598	2.86		11.89	3,097,584		11.69
$14.47–$20.86	15,446,426	5.45		17.07	4,886,158		17.10
	26,916,524	4.44	$	13.14	14,365,985	$	10.81
	As at August 31, 2005, the price range of $0.09 to $0.93, as noted above, represents all of the options unexercised relating to the ArtX Plan. All other options outstanding or exercisable relate to the ATI Plan. During the year ended August 31, 2005, 846,495 options relating to the ArtX Plan were exercised at a weighted average price of $0.33 and no options were cancelled.
	The weighted average estimated fair value at the date of grant for the options granted during fiscal 2005 was $8.04 per share (2004 – $8.96; 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:

	2005	2004	2003
Risk-free interest rate	3.7%	3.7%	3.1%
Dividend yield	–	–	–
Volatility factor of the expected market     price of the Company’s common shares	62.1%	69.2%	71.1%
Expected life of the options	4.1 years	4.2 years	4.2 years

The estimated fair value of the stock options is amortized to expense on a straight-line basis over the options’ vesting period and the related expense for the year ended August 31, 2005 amounted to $34.0 million. The stock option expense by functional areas is as follows:

Cost of revenues	$   1,774
Selling and marketing	6,609
Research and development	20,105
Administrative	5,481
	$ 33,969

(d)     Restricted share units
In October 2003, the Company adopted three plans to grant RSUs as part of its overall stock-based compensation plan. The RSU Plans allow participants to earn actual shares (or, for non-North American participants, the cash equivalent) of the Company over time, rather than options that give employees the right to purchase stock at a set price.

The RSU Plans include: a plan for Canadian employees and directors; a plan for U.S. employees and directors; and a plan for all other employees and directors outside of North America. In accordance with the terms of the RSU Plans, the Board of Directors approves which employees and directors are entitled to participate in the respective plans and the number of RSUs to be awarded. Each RSU awarded conditionally entitles the participant to the delivery of one common share (or cash in lieu of such share for participants resident outside of North America) upon attainment of the RSU vesting period. RSUs awarded to participants vest in accordance with terms determined by the Board of Directors, which terms may include certain performance criteria in which the number of common shares (or cash in lieu of such common shares for participants resident outside of North America) to be delivered to a participant in respect of each RSU awarded is dependent upon the Company’s performance and/or market price of the common shares, as determined by the Board of Directors. At the time that RSUs are granted to participants in North America, the Board of Directors must determine whether the common shares to be delivered to participants upon the vesting of such RSUs will be purchased on the open market, issued from treasury or obtained from a combination of market purchases and treasury issuances. For participants outside of North America, if common shares are not issued from treasury, they are only entitled to receive a cash payment from the Company equal to the number of RSUs awarded to such participants multiplied by the value of the common shares on the NASDAQ Stock Market at the relevant vesting date. Each common share issued from treasury upon the vesting of such RSUs reduces the number of common shares available for issuance under the RSU plans. A total of three million common shares have been reserved for issuance from treasury under the RSU plans. RSUs that are satisfied through the purchase of common shares on the market vest over a maximum period ending December 31 of the third calendar year after the date of grant. Grants of RSUs to participants residing outside of North America are recognized at their face value, whereby the value of the RSUs and their related amortization are adjusted based on the underlying value of the Company’s common shares at the end of each fiscal quarter.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2005, 2004 and 2003 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

During fiscal 2004, the Company granted a total of 1,556,244 RSUs to certain employees to replace the annual grant of options for the 2003 calendar year. The Company advanced $22.1 million to the trustee of the RSU plans to enable the trustee to purchase the Company’s common shares in the open market for future delivery of 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 sheets. In addition, the Company also awarded a onetime cash payment of $7.8 million to the non-executive employees who were eligible to participate in the RSU plans. The full amount of the cash payment was expensed in fiscal 2004. Of the RSUs granted, 42,327 were forfeited during fiscal 2004.

In fiscal 2005, 508,803 RSUs vested and were settled by delivery of common shares of the Company to the participants or by cash equivalent to their market value on the vesting date. At August 31, 2005, 983,033 common shares of the Company were held by the trustee.

During fiscal 2005, the Company started granting RSUs to its employees which are settled through the issuance of common shares of the Company from treasury. The number of RSUs granted in fiscal 2005 was 1,183,488 and the number of RSUs forfeited was 57,084. Of the RSUs granted in fiscal 2005, 1,084,723 are subject to performance-related factors which result in the number of common shares that may be issued upon the settlement of such RSUs at each vesting date being dependent on the Company achieving certain performance targets. As at August 31, 2005, there were 2,131,518 RSUs awarded and outstanding.

The total expenses incurred by functional area for fiscal 2005 and 2004 pertaining to the amortization of RSUs are summarized in the following table:

	2005	2004
Cost of revenues	$    961	$      16
Selling and marketing	1,271	1,000
Research and development	5,008	4,423
Administrative	1,054	961
	$ 8,294	$ 6,400

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(e)   Deferred share units
During fiscal 2004, the Company established a plan to grant DSUs to its non-management directors. This plan was retroactively applied and 51,457 DSUs were granted for service related to fiscal 2003. 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 NASDAQ (the “Weighted Average Price”) immediately prior to the date on which the value of the DSU is determined. DSUs vest quarterly over a period of one year and may not be redeemed until the director leaves the board, thereby providing an ongoing equity stake in the Company throughout the director’s period of service. On termination or retirement from the Board, directors will be able to redeem DSUs during the six-month period following their departure from the Board. DSUs, however, must be redeemed 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. DSUs granted during fiscal 2005 numbered 40,625 (2004 – 40,625). As at August 31, 2005, there were 132,707 DSUs outstanding, of which 109,009 were vested.

As of the date of the grant, the fair values 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 2005 related to DSUs granted to the directors for services rendered was $0.2 million (2004 – $1.2 million).

(f)   Contributed surplus
During fiscal 2005, a net total of $51.1 million was added to contributed surplus, of which $17.5 million related to the change in accounting for stock-based compensation (note 1(o)), $34.0 million and $8.1 million related to the amortization of stock option expense and RSU expense, respectively, and $0.4 million related to the tax effect on the stock option expense. The above increase was partly offset by $7.2 million worth of RSUs granted to employees that were exchanged for common shares upon vesting of the RSUs and $1.7 million pertaining to the amortization of stock option expense being reclassified to the share capital account as the related options were exercised during 2005.

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.

NOTE 13.	Income (loss) before income taxes consist of the following:
Income taxes			2005		2004		2003
	Income (loss) before income taxes:
	Canadian	$	(10,587)	$	51,682	$	2,081
	Foreign		48,245		198,941		44,889
	Income before income taxes	$	37,658	$	250,623	$	46,970
	The income tax expense (recovery) consists of the following:
			2005		2004		2003
	Current:
	Canadian	$	9,690	$	28,586	$	9,572
	Foreign		23,878		19,513		3,971
	Future:
	Canadian		(4,458)		(802)		2,234
	Foreign		(8,381)		(1,473)		(4,036)
	Income tax expense	$	20,729	$	45,824	$	11,741

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2005, 2004 and 2003 (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: 

		2005		2004
FUTURE INCOME TAXES
Assets:
Capital assets	$	10,597	$	4,320
Reserves		7,334		11,399
Tax loss carryforwards and         undeducted R&D pools		97,310		65,044
Stock-based compensation		10,568		2,483
Other		7,252		6,652
Total gross future tax assets		133,061		89,898
Valuation allowance		(82,304)		(61,252)
Net future tax assets		50,757		28,646
Liabilities:
Capital assets		14,097		15,732
Investment tax credits		22,204		17,597
Intangible assets		177		367
Deferred revenue		5,204		2,256
Other		–		190
Total gross future tax liabilities		41,682		36,142
Net future tax assets (liabilities)	$	9,075	$	(7,496)
Net future tax assets (liabilities) are classified for balance sheet purposes as follows:
		2005		2004
Current assets	$	5,348	$	8,022
Long-term assets		12,588		1,114
Long-term liabilities		(8,861)		(16,632)
	$	9,075	$	(7,496)

Income tax expense 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.

		2005		2004		2003
Income before income taxes	$	37,658	$	250,623	$	46,970
Income taxes at Canadian rates	$	13,557	$	85,212	$	17,379
Tax effect of:
Utilization of provincial research
and development tax incentives		(5,673)		(3,008)		(2,076)
Foreign exchange		(12,070)		(7,787)		(8,704)
Tax rate differences of       foreign jurisdictions		3,939		(41,242)		8,348
Change in valuation allowance for       future tax assets		21,052		21,657		(691)
Tax effect related to stock options		3,649		(6,731)		(1,926)
Change in tax rates		(986)		(1,029)		221
Other		(2,739)		(1,248)		(810)
Income taxes	$	20,729	$	45,824	$	11,741

No provision for Canadian income taxes was made for undistributed income for certain non-Canadian subsidiaries. The Company intends to reinvest this income indefinitely in operations outside Canada.

As at August 31, 2005, the Company had $58.9 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 fiscal 2010.

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NOTE 14.  The following table presents a reconciliation of the numerators and denominators used in the calculations of the basic and diluted net income per share:

Net income per share		2005	2004	2003
	Net income	$  16,929	$  204,799	$  35,229
	Weighted average number of common
	shares outstanding (000s):
	Basic	250,680	245,257	238,251
	Effect of stock options	7,634	10,951	6,102
	Diluted	258,314	256,208	244,353
	Net income per share:
	Basic	$0.07	$0.84	$0.15
	Diluted	0.07	0.80	0.14

	As at August 31, 2005, options to purchase 8,556,598 shares (2004 – 5,167,670; 2003 –16,154,211) of common stock were outstanding but were not included in the calculation of diluted net income 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 a building facility occupied by the Company. 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.
	In addition, the Company posted a letter of credit in the amount of $2.5 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:
		2005	2004	2003
	Settlement of class action lawsuits (a)	$          –	$          –	$      4,670
	Regulatory matters (b)	2,508	1,885	5,828
	Restructuring charge (recovery) –
	European operations (c)	–	(725)	6,542
	Lease exit charge (recovery) (d)	–	(1,464)	2,684
	Settlement of patent litigation with
	Cirrus Logic, Inc. (e)	–	–	9,000
		$      2,508	$      (304)	$    28,724

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2005, 2004 and 2003 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

(b)   Regulatory matters
On January 16, 2003, the staff of the Ontario Securities Commission (the “OSC”) filed a notice of hearing and statement of allegations (the ”Notice”). 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 the 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 named in the Notice. The Notice alleged that six of these individuals, including K.Y. Ho, the Chairman and then Chief Executive Officer of the Company, engaged in insider trading contrary to the Securities Act (Ontario). On March 29, 2005, a panel of the OSC approved a settlement agreement reached between the Company and OSC staff. As part of the settlement, the Company agreed to pay Cdn. $900,000 in costs and settlement payments and agreed to provide a letter of comfort confirming its practices and procedures related to trading and corporate governance. The individuals named in the Notice, other than Mr. Ho and his wife, also entered into settlement agreements with the OSC. In October 2005, a panel of three commissioners of the OSC (including the Vice-Chair of the OSC) dismissed all allegations of insider trading against K.Y. Ho and his wife. The panel’s decision completely exonerated Mr. Ho and his wife. The decision was made following a hearing which was held by the OSC panel in the spring of 2005.

(c)   Restructuring charge (recovery) – European operations
The following table details the activity through the restructuring liabilities accrual:

	2005	2004
Balance, beginning of year	$  18	$  4,246
Recovery	–	(187)
Cash payments	(18)	(4,041)
Balance, end of year	$    –	$      18

(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 fiscal 2004.

(ii)    During the fourth quarter of fiscal 2003, the Company decided to close 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 recorded in fiscal 2003. The Company completed the major components of its exit plan for ATI Research GmbH in December 2003. During fiscal 2005, the Company paid off the remaining balance of $18,000 relating to the restructuring liabilities accrual.

(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 in the second quarter.

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.

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		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 fiscal 2003 year-end, the Company and Cirrus Logic, Inc. (“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 transferred 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 designs and manufactures innovative 3D graphics and digital media silicon solutions. The Company determined in the first quarter of fiscal 2005 that it operates in two reportable segments: Personal Computer (“PC”) and Consumer. The PC segment includes all 3D graphics, video and multimedia products and chipsets which are developed for use in desktop and notebook personal computers including professional workstations, servers and home media PCs. The Consumer segment includes products used in mobile phones, PDAs, DTVs and set-top boxes. The Consumer segment also includes royalties and contract engineering services derived from mobile phone and game console products. Previously, the Company reported as a single reportable segment. Fiscal 2004 and 2003 amounts have been presented below based on the reportable segments identified in 2005.
		The Company’s management evaluates segment performance based on revenue and on operating income (loss) which is calculated as income (loss) from operations before taxes, excluding expenses related to stock-based compensation, amortization of intangible assets and other charges.
		The Company does not identify or allocate total assets by reportable segment. In addition, there are no inter-segment revenues. The accounting policies for all operating segments are the same as those described in the summary of significant accounting policies.
		The following table presents the revenues and operating income (loss) of the two reportable segments for the years ended August 31, 2005, 2004 and 2003:
		Consolidated			PC			Consumer
	2005	2004	2003	2005	2004	2003	2005	2004	2003
Revenues	$2,222,509	$1,996,717	$1,385,293	$1,905,759	$1,765,595	$1,328,390	$316,750	$231,122	$  56,903
Operating
income       (loss)	78,750	263,125	83,978	47,248	247,514	109,323	31,502	15,611	(25,345)
		The following table reconciles total operating income for reportable segments to income from operations as reported in the Consolidated Statement of Operations and Retained Earnings:

	2005		2004		2003
Total operating income for reportable segments	$      78,750		$      263,125		$      83,978
Unallocated amounts:
Amortization of intangible assets	(8,919	)	(6,115	)	(10,767	)
Stock-based compensation expense	(42,504	)	(7,583	)	--
Other (charges) recoveries	(2,508	)	304		(28,724	)
Income from operations in
Consolidated Statement of Operations	$      24,819		$      249,731		$      44,487

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2005, 2004 and 2003 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

The following tables provide revenues by geographic area, as well as capital assets, intangible assets and goodwill by geographic area. The breakdown in revenues by geographic area in the following table is based on customer and royalty payer location, whereas the breakdown in capital assets, intangible assets and goodwill is based on physical location.

	2005	2004	2003
Revenues:
Canada	$    20,359	$    22,439	$    20,065
United States	253,594	257,542	258,545
Europe	82,817	95,287	113,193
Asia-Pacific	1,865,739	1,621,449	993,490
Consolidated revenues	$2,222,509	$1,996,717	$1,385,293
		2005	2004
Capital and intangible assets and goodwill:
Canada		$    98,602	$    73,863
United States		212,348	206,147
Europe		231	165
Asia-Pacific		9,420	1,421
Consolidated capital, intangible assets and goodwill		$  320,601	$  281,596

At August 31, 2005, one of the Company’s customers accounted for 12.0% of consolidated accounts receivable balance (2004 – no customer accounted for 10.0% or more). In fiscal 2005, one customer accounted for 10.7% and another customer accounted for 10.3% of consolidated revenues (2004 – one customer accounted for 10.6%; 2003 – three customers accounted for 16.2%, 13.0% and 10.6%, respectively).

NOTE 18.
Commitments   The Company is committed to the following minimum payments related to office premises and license and royalty agreements: 

		License and
	Office		royalty
Year ending August 31	premises	agreements		Total
2006	$ 10,640		$ 16,301	$ 26,941
2007	9,774		11,163	20,937
2008	9,088		7,505	16,593
2009	8,256		619	8,875
2010	6,946		–	6,946
2011 and thereafter	7,611		–	7,611

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 building facility was completed in April 2002 and is fully occupied by the Company. The completed cost of the building facility amounted to $33.3 million.

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The following amounts represent the Company’s proportionate interest in the joint venture:
		2005		2004
Condensed balance sheet information:
Current assets	$	1,470	$	1,473
Other current liabilities		(1,278)		(897)
Long-term debt		(10,932)		(10,769)
Condensed cash flows:
Financing activities	$	(1,261)	$	(967)
Operating activities		1,124		23

	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 was 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.		2005	2004	2003
Supplemental cash
flow information	Supplemental cash flow information:
	Interest paid	$   1,990	$   1,946	$   1,739
	Interest received	12,421	4,358	2,902
	Income taxes paid	2,960	1,653	2,127
NOTE 21. Canadian and United States accounting policies differences	(a)    The following table reconciles net income 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 for the year that would have been reported had the financial statements been prepared in accordance with U.S. GAAP:
		2005	2004	2003
	Net income in accordance with Canadian GAAP	$ 16,929	$ 204,799	$ 35,229
	Amortization of purchased in-process R&D (a)(i)	–	–	4,417
	Expenses related to stock options (a)(ii)	33,969	–	–
	Stock-based compensation expenses (a)(iii), (a)(iv)	(1,458)	(9,579)	(25,486)
	Tax effect of stock options (a)(ii), (a)(iii), (a)(vi)	(7,876)	(7,291)	(2,083)
	Other (a)(v)	112	112	94
	Net income in accordance with U.S. GAAP	$ 41,676	$ 188,041	$ 12,171
	Net income per share in accordance with U.S. GAAP:
	Basic	$0.17	$0.77	$0.05
	Diluted	0.16	0.73	0.05
	Weighted average number of shares (000s):
	Basic	250,680	245,257	238,251
	Diluted	258,314	256,208	244,353

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2005, 2004 and 2003 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

(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, effective September 1, 2004, the Company adopted the fair value method of recognizing stock-based compensation. For U.S. GAAP purposes, the intrinsic value method is used to account for stock-based compensation for employees. Compensation expense of $34.0 million (note 12(c)) recognized under Canadian GAAP would not be recognized under U.S. GAAP for the year ended August 31, 2005. In addition, the retroactive adoption of the policy described in note 1(o)(i) would not be recognized. The exercise price of stock options is equal to the market value of the underlying shares at the date of grant; therefore, except as indicated below, there is no expense under the intrinsic method for U.S. GAAP purposes for fiscal 2005.

As described in note 12(c)(i), the Company granted tandem SARs. These awards have been accounted for using the fair value method under Canadian GAAP. For U.S. GAAP purposes, variable plan accounting under the intrinsic method is used to account for tandem SARs. Under variable plan accounting, compensation expense is adjusted to reflect increases in the market value of the Company’s common shares to the measurement date. There is no compensation expense under U.S. GAAP for the tandem SARs in fiscal 2005, as the exercise price for the awards exceeds the market price at year-end.

(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, are required to be accounted for under the variable plan method. During the period from January 19, 2001 to February 28, 2002, certain options were granted with exercise prices in Canadian dollars. 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 June 2002 (note 12(c)(iii)) 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.

(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, for U.S. GAAP purposes, compensation expense for its share option plans, based on the intrinsic value, has been recorded in the reconciliation above for all periods presented. For U.S. GAAP purposes, 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 (“SFAS”) No. 123, “Accounting for Stock-based Compensation,” the Company’s net income and net income per share would have been reported as the pro forma amounts indicated in the table below:

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	2005		2004		2003
Net income in accordance with
U.S. GAAP, as reported above	$       41,676		$       188,041		$       12,171
Stock compensation (a)(iii) and (iv)	1,458		9,579		25,486
Pro forma adjustment for SFAS No. 123	(35,044	)	(22,009	)	(16,700	)
Pro forma net income	$         8,090		$      175,611		$      20,957
Pro forma net income per share:
Basic	$           0.03		$           0.72		$           0.09
Diluted	0.03		0.69		0.09

The weighted average estimated fair values at the date of the grant, as defined by SFAS No. 123, for   options granted in fiscal 2005, 2004 and 2003 were $8.04, $8.96 and $2.65 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:

	2005		2004		2003
Risk-free interest rate	3.7	%	3.7	%	3.1	%
Dividend yield	--		--		--
Volatility factor of the expected market price of the Company’s common     shares	62.1	%	69.2	%	71.1	%
Expected life of the options	4.1 years		4.2 years		4.2 years

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.

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

		2005							2004
	U.S. GAAP		Canadian GAAP		Difference		U.S. GAAP		Canadian GAAP		Difference
Assets:
Prepayments and sundry receivables (a)(v)		$       28,085		$       24,463		$          3,622		$       22,512		$       22,395		$             117
Goodwill (b)(v)		170,367		190,095		(19,728	)	170,367		190,095		(19,728	)
Future income tax assets -- long-term		4,824		12,588		(7,764	)	--		--		--
Liabilities and shareholders' equity:
Share capital		656,454		665,566		(9,112	)	627,283		638,985		(11,702	)
Contributed surplus		48,725		61,795		(13,070	)	46,466		10,704		35,762
Retained earnings		314,496		293,370		21,126		291,361		308,825		(17,464	)
Accumulated other comprehensive    income		4,669		--		4,669		1,276		--		1,276
Currency translation adjustments		(19,209	)	8,274		(27,483	)	(19,209	)	8,274		(27,483	)

ATI 2005 63

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2005, 2004 and 2003 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

(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 or shareholders’ equity, it does increase assets, liabilities, revenue, expenses and cash flows from operations from those amounts otherwise reported under U.S. GAAP. As allowed for under the rules of the Securities and Exchange Commission, this difference has not been reflected in the table of certain consolidated balance sheet items presented above.

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

(A) As at August 31, 2005, the consolidated accounts receivable provision for returns and doubtful accounts was approximately $22.4 million (2004 – $17.1 million).

(B) As at August 31, 2005, sales rebates payable represent 24.8% of total consolidated current liabilities (2004 – 22.0%) .

(C) For the year ended August 31, 2005, the net foreign exchange gain was approximately $1.2 million (2004 – gain of $0.5 million; 2003 – gain of $0.8 million).

(D) For the year ended August 31, 2005, the advertising costs incurred by the Company were approximately $27.5 million (2004 – $22.5 million; 2003 – $14.0 million).

(iii) Comprehensive income:

SFAS No. 130, “Reporting Comprehensive Income,” requires disclosure of comprehensive income, which includes reported net income 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 and its components:

	2005	2004	2003
Net income in accordance with U.S. GAAP	$41,676	$188,041	$12,171
Other comprehensive income:
Unrealized gain on forward
foreign exchange contracts(1)	3,393	1,276	–
Comprehensive income	$45,069	$189,317	$12,171

⁽¹⁾ As at August 31, 2005, the Company had Cdn. $94.5 million (2004 – Cdn. $35.0 million) outstanding in forward exchange contracts that mature in the next six months at an average exchange rate of 1.2579. All of the forward foreign exchange contracts have become favorable to the Company since their inception and have an unrealized fair value of $4.7 million at August 31, 2005 (2004 – $1.3 million).

(iv) Operating, financing and investing cash flows presented on the consolidated statement of cash flows under Canadian GAAP would not differ from amounts disclosed in a consolidated cash flow statement prepared under U.S. GAAP.

(v) Under Canadian GAAP, the aggregate purchase price of ArtX was based on the average closing market price of the Company’s common shares around the closing date of the transaction. Under U.S. GAAP, the aggregate purchase price of ArtX was based on the average closing market price of the Company’s common shares around the date of the announcement of the transactions. As a result, the recorded amount of goodwill and related amount of accumulated amortization differ.

(c)    New United States accounting pronouncements

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB Opinion No. 25, as allowed under the original provisions of SFAS No. 123. SFAS No. 123R requires the use of an option pricing model for estimating fair value, which is amortized to expense over the service periods. The requirements of SFAS No. 123R are effective for the first fiscal year beginning after June 15, 2005. SFAS No. 123R allows for either prospective recognition of compensation expense or retrospective recognition, which may be back to the original issuance of SFAS No. 123. The Company is currently evaluating the impact of the adoption of SFAS No. 123R.

64 ATI 2005

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In March 2005, the SEC staff issued guidance on SFAS No. 123R. Staff Accounting Bulletin No. 107 (“SAB 107”) was issued to assist preparers by simplifying some of the implementation challenges of SFAS No. 123R while enhancing the information that investors receive. SAB 107 creates a framework that is premised on two overarching themes: (i) considerable judgment will be required by preparers to successfully implement SFAS No. 123R, specifically when valuing employee stock options; and (ii) reasonable individuals, acting in good faith, may conclude differently on the fair value of employee stock options. Key topics covered by SAB 107 include: (a) valuation models – SAB 107 reinforces the flexibility allowed by SFAS No. 123R to choose an option pricing model that meets the standard’s fair value measurement objective; (b) expected volatility – SAB 107 provides guidance on when it would be appropriate to rely exclusively on either historical or implied volatility in estimating expected volatility; and (c) expected term – the new guidance includes examples and some simplified approaches to determining the expected term under certain circumstances. The Company will apply the principles of SAB 107 in conjunction with its adoption of SFAS No. 123R.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of APB No. 43, Chapter 4. SFAS No. 151 amends APB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) should be recognized as current period charges. In addition, SFAS No. 151 requires that allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities. The provision of SFAS No. 151 shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect the adoption of SFAS No. 151 to have a material impact on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets – An Amendment of APB Opinion No. 29 (“APB No. 29”), Accounting for Non-monetary Transactions. SFAS No. 153 eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets in paragraph 21(b) of APB No. 29 and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of SFAS No. 153 to have a material impact on its consolidated financial statements.

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB No. 3, Reporting Accounting Changes in Interim Financial Statements. The statement applies to all voluntary changes in accounting principle and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ consolidated financial statements of a voluntary change in accounting principle unless to do so is impracticable. It is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June 1, 2005. The Company does not expect the effect of SFAS No. 154 to have a material impact on its consolidated financial statements.  

ATI 2005 65

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Years ended August 31, 2005, 2004 and 2003 (Tabular amounts in thousands of U.S. dollars, except per share amounts)

NOTE 22. (a)  American Video Graphics LLP

Litigation American Video Graphics LLP filed a series of suits in the Eastern District of Texas alleging infringement of several patents against various PC manufacturers, game console manufacturers and videogame publishers. After some reconfiguration of the suits, there are a total of six suits pending. Of these six suits, there are two suits pending against the entire group of PC manufacturers and two suits pending against the entire group of game console manufacturers. The Company voluntarily intervened in these four suits. The Company participated in two district court-ordered mediations for these matters. Neither mediation resulted in settlement. The first trial involving the PC manufacturers is currently scheduled for September 2006 and the first trial involving the game console manufacturers is scheduled for December 2006.

(b)  U.S. securities class action lawsuits

In August and September 2005, five class action lawsuits were filed in the United States District Court for the Eastern District of Pennsylvania against the Company and certain of its directors and officers on behalf of shareholders who purchased the Company’s common shares between October 7, 2004 and on or about June 23, 2005. The claims allege that the Company and certain of its directors and officers violated U.S. securities laws by failing to disclose material facts and making statements that contained misrepresentations about the Company’s business and future outlook. It is alleged that as a result of the failure to disclose material facts and the alleged misrepresentations, the Company’s stock traded at artificially inflated prices until the stock price dropped on the news of the Company’s third quarter results in June 2005. The claims further allege that, while in possession of material undisclosed information, certain directors and officers sold a portion of their common shares at inflated prices. These claims are at a very preliminary stage.

(c)  U.S. shareholder complaint

In August 2005, a shareholder complaint was filed in the Superior Court of the State of California for the County of Santa Clara by a shareholder on behalf of the Company. The defendants to the complaint include the Company, members of the Board of Directors and certain officers. The complaint alleges breach of California Law, including breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment and violation of the California Corporations Code during the period between October 2004 and August 26, 2005. The Company has been served with the complaint. This complaint is at a very preliminary stage.

The Company currently believes the amount of ultimate liability, if any, with respect to these legal proceedings, including the class action lawsuits and the shareholder complaint, will not materially affect its financial position, results of operations, or liquidity. The Company and the named directors and officers intend to defend themselves vigorously. However, the ultimate outcome of any litigation is uncertain and should any of these actions or proceedings against the Company be successful, the Company may be subject to significant damages awards, which could have a material adverse effect on its financial condition.  

NOTE 23.
Comparative figures Certain fiscal 2004 and 2003 figures have been reclassified to conform with the consolidated financial statement presentation adopted in fiscal 2005.

66 ATI 2005

EX-99.3

Page 93 of 126

EXHIBIT 3

1993
• ATI becomes a public
 company, trading on the
 Toronto Stock Exchange (TSX),
 trading symbol: ATY
  1994 
• ATI introduces the
 Mach64 chip and a new
 set of graphics boards --
 the first graphics boards
 to accelerate motion video
 
• ATI localizes application
 software in 13 different
 international languages

Management’s Discussion and Analysis

Table of Contents

The MD&A is presented in seven sections:

About Our Business – p. 9
describes our business, target markets, objectives, strategy and outlook.

Fiscal 2005 Overview and Highlights – p. 13
offers a brief look at our performance and key highlights in fiscal 2005.

Business Outlook for Fiscal 2006 – p. 16
provides our business outlook for next fiscal year.

Financial Results Analysis – p. 17
provides a detailed review of our financial and operating performance for the past three years.

Liquidity and Capital Resources – p. 26
explains how we manage our cash and capital resources.

Risks and Uncertainties – p. 30
examines uncertainties and challenges that could affect our business.

Our Critical Accounting Policies – p. 32
describe our critical accounting policies and the key estimates and assumptions that management has made in the preparation of our financial statements. It also provides a description of changes in accounting standards used to prepare our financial statements.

Please refer to the glossary on page 67 for a description of some of the technical terms used throughout this MD&A to describe our business.

This Management’s Discussion and Analysis (“MD&A”) comments on ATI’s operations, performance and financial condition for the two fiscal years ended August 31, 2005 and 2004. The MD&A should be read in conjunction with ATI’s 2005 consolidated financial statements and accompanying notes beginning on page 38 of this Annual Report. All tabular amounts are expressed in thousands of U.S. dollars except per share amounts. Unless otherwise noted, “2005” and “2004” refer to our fiscal 2005 and fiscal 2004 years, respectively. This MD&A is based on information available to us at November 1, 2005, unless otherwise indicated.

As of our fiscal 2005 year-end, an evaluation was carried out under the supervision of and with the participation of Management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of August 31, 2005, the end of the period covered by the Annual Report, to ensure that material information relating to ATI Technologies and its consolidated subsidiaries would be made known to them by others within those entities.

About Forward-looking Statements

Forward-looking statements look into the future and provide an opinion as to the effect of certain events and trends on the business. Forward-looking statements may include words such as “plans”, “intends”, “anticipates”, “should”, “estimates”, “expects”, “believes”, “indicates”, “targeting”, “suggests” and similar expressions.

This Annual Report and MD&A, and in particular our Business Outlook for Fiscal 2006 on page 16 and the discussion of our Target Operating Model on page 11, contain forward-looking statements about ATI’s objectives, strategies, financial condition and results, as well as statements with respect to our beliefs, expectations, anticipations, estimates and intentions. These “forward-looking” statements are based on current expectations and various factors and assumptions. Accordingly, these statements entail various risks and uncertainties. The material factors and assumptions that were applied in making the forward-looking statements in this Annual Report and MD&A are as follows:

• the expected rate of growth of the PC and Consumer markets;
• the expected mix of discrete and integrated chipsets that will be sold in the PC market;
• our expected market share across various customers and product segments;
• our expected future design wins both in the PC and Consumer markets;
• our expected product and production costs;
• the timely introduction of our new products for the PC and Consumer markets;
• the expected product specific average selling price (“ASP”);
• in the digital television (“DTV”) segment, the expected rate of consumer adoption of high-definition television (“HDTV”); and;
• our overall competitive position and the competitiveness of our current and future products.

It is important to note that:

• Unless otherwise indicated, forward-looking statements in this Annual Report and MD&A describe our expectations as of November 1, 2005.

8 ATI 2005

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1995 
• ATI becomes the first
 graphics company to ship
 Mac-compatible graphics
 boards, proving ATI is
 committed to both PC
 and Mac platforms

• ATI announces an agreement
 with United Microelectronics
 Corporation (UMC) and other
 joint ventures to build a
 semiconductor manufacturing
 facility in Taiwan

• We caution readers not to place undue reliance on these statements as our actual results may differ materially from our expectations if known and unknown risks or uncertainties affect our business, or if our estimates or assumptions prove inaccurate. Therefore, we cannot provide any assurance that forward-looking statements will materialize.
• We assume no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or any other reason.

For a description of material factors that could cause our actual results to differ materially from the forward-looking statements in this Annual Report and MD&A, please see the Risks and Uncertainties section of this MD&A on page 30 and Item 3.12 “Narrative Description of the Business – Risks and Uncertainties” in our 2005 Annual Information Form.

In this MD&A, the terms ATI, we, us and our refer to ATI Technologies Inc. and its subsidiaries.

Additional information regarding ATI and our business is contained in our filings with securities regulatory authorities, including our Annual Information Form and Management Information Circular. These documents are available on SEDAR at www.sedar.com or on our company website at www.ati.com. Our Form 40-F and other filings we make with the U.S. Securities and Exchange Commission are available at www.sec.gov.

ABOUT OUR BUSINESS

ATI Technologies Inc. is one of the world’s leading providers of graphics processors and technologies. Our graphics processing units (GPUs) are highly specialized semiconductors that increase the speed, complexity and visual fidelity of digital images that can be displayed on graphical interfaces. Our products are found in desktop and notebook computers (PCs), and consumer electronic devices such as mobile phones, digital televisions and game consoles.

At August 31, 2005, we employed more than 3,300 people in the Americas, Europe and Asia. Our common shares trade on the NASDAQ Stock Market under the symbol “ATYT” and on the Toronto Stock Exchange under the symbol “ATY”.

Business Segments

Effective the first quarter of fiscal 2005, we began to report our financial results in two segments – PC and Consumer – reflecting the two primary markets for our semiconductor graphics products.

• The PC segment includes all 3D graphics, video and multimedia products, and chipsets developed for use in desktop and notebook computers, including professional workstations, servers and home media PCs.
• The Consumer segment includes products used in mobile phones, PDAs, DTVs and consumer electronics, as well as royalties and contract engineering services derived from mobile phone and game console products.
  
  See note 17 to the consolidated financial statements for more information on our segmented reporting.

Products and Target Markets

We develop products and technologies for the markets set out below. Current product information and specifications can be found on our website at www.ati.com.

ATI 2005 9

Page 95 of 126

1996	•	ATI releases the first 3D chip in the graphics industry. Sales exceed one million chips	•	ATI establishes ATEL (ATI Ireland), the Company’s distribution headquarters in Europe	•	ATI announces Macintosh-based boards, making the Company the first manufacturer of PCI-based boards for the Mac, other than Apple itself
		One million chips sold

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONT.) 

  THE PC SEGMENT INCLUDES ALL 3D GRAPHICS, VIDEO
AND MULTIMEDIA PRODUCTS, AND CHIPSETS DEVELOPED
FOR USE IN DESKTOP AND NOTEBOOK COMPUTERS,
INCLUDING PROFESSIONAL WORKSTATIONS, SERVERS
AND HOME MEDIA PCs.

P C

Desktop discrete	Notebook discrete	Chipsets (integrated and discrete)
Our desktop GPUs address desktop PC	Our notebook GPUs address the portable or	Our chipset products feature core logic
markets where customers expect high levels	laptop computer segment. In this category,	functionality, are targeted to motherboard
of performance and a compelling visual	low power consumption and visual	manufacturers and OEMs, and are available
experience. We cater to all four segments of	performance are the uppermost considerations	with or without integrated graphics. Our
the desktop PC market: value, mainstream,	of our customers. We focus on designing	Radeon Xpress 200 integrated chipsets for
performance and enthusiast. We also design	notebook GPUs that meet and exceed these	the desktop and notebook markets include
and build GPU solutions for the advanced	expectations in the enthusiast, performance	graphics functionality and are geared
workstation and home media markets.	thin, value mainstream, and thin and light	towards the value or price-sensitive segment
Our primary brands include Radeon	categories. Mobility Radeon is our brand for	of the PC market. Radeon Xpress CrossFire
(desktop products), FireGLTM (workstations)	notebook discrete products.	Edition chipsets do not contain integrated
and All-in-Wonder® (multimedia products).		graphics and are designed to be used in
		conjunction with one or more discrete
		graphics chips in graphically demanding
		applications such as gaming.

  THE CONSUMER SEGMENT INCLUDES PRODUCTS USED IN
MOBILE PHONES, PDAs, DIGITAL TELEVISIONS (“DTVs”)
CONSUMER ELECTRONICS, AS WELL AS ROYALTIES AND
CONTRACT ENGINEERING SERVICES DERIVED FROM MOBILE
PHONE AND GAME CONSOLE PRODUCTS.

C O N S U M E R

Handheld devices	Digital television	Game consoles
Our products are designed to provide	Our Xilleon and Theater products are cost-	In recent years, we have successfully
advanced visual and audio processing for	effective and highly integrated visual and	leveraged our core visual processing
color mobile phones and other handheld	signal processing solutions offered to DTV	technology into the game console market.
devices. Higher resolution panels, higher	and set-top box manufacturers. The U.S.	The Microsoft Xbox 360 and Nintendo
performing embedded processors as well	Federal Communications Commission has	GameCube both use our technology to deliver
as increased internal and removable storage	issued a mandate requiring the integration of	breathtaking graphics performance. We are
are contributing to the revolution in	digital tuners into TV sets by 2007. This	also developing the “Hollywood” graphics
handheld and mobile communication devices.	mandate, together with the superior picture	processor for Nintendo’s next generation
Our Imageon product line delivers advanced	quality and functionality offered by digital	game console, currently known
visual and audio processing along with	technology, is driving consumer interest and	in the industry as “Revolution.”
power saving technology and a high level	the adoption of DTV.
of integration to this market.

10 ATI 2005

Page 96 of 126

1996 
• ATI becomes the
  first graphics company to
  introduce a hardware chip
  to display computer
  graphics on a television

• ATI becomes the first
  graphics company to
  introduce a fully 3D-enabled
  chip for the notebook
  personal computer market

 
• ATI becomes the first
  graphics company to
  introduce a combination
  graphics and TV tuner
  card, enabling users to
  receive and capture analog
  TV signals

Business Strategy and Objectives

We strive to be the foremost innovator and provider of advanced graphics processors and technology for the PC and digital consumer markets. We aim to deliver products that excite our customers while ensuring that our roadmap is aligned with key industry inflection points.

We use a “fabless” manufacturing strategy, whereby we outsource wafer manufacturing, assembly, testing and packaging to suppliers with established expertise in these areas. By outsourcing these functions, we are able to reduce our capital requirements for our PC, handheld and DTV products, lower our fixed costs, and focus resources on the design, development and marketing of our products.

We sell our products through a variety of channels and to different customers, including:

• original equipment manufacturers (OEMs);
• system integrators (SIs) who build our products into their PCs;
• original design manufacturers (ODMs) and add-in-board manufacturers (AIBs) who add our products to their PC motherboard products or graphic board products; and
• distributors and retailers, both traditional and online.

In our game console business, rather than supplying actual graphics processors, we typically design highly customized and optimized GPUs in exchange for non-recurring engineering revenues (“NRE”) and royalty payments.

The following are the key strategies used to pursue our objectives:

Sustain product and technology leadership in our GPU products. Maintain performance leadership across our product segments and successfully drive the technology through all segments of the market.

Build a strong and sustainable franchise in the integrated chipset market. Grow our share of the growing desktop and notebook integrated chipset market with products that deliver superior graphics performance and maximum value in the industry.

Expand in select Consumer market segments. Continue to increase the revenue and profit contribution from new products for rapidly growing consumer electronics markets such as handheld, digital television and game consoles.

Innovate cost-effectively and improve operating and financial performance. Translate technology and industry leadership into strong financial performance for our shareholders, and drive efficiencies through scale.

Target Operating Model

The following contains forward-looking statements about our target operating model. Reference should be made to “About forward-looking statements” on page 8. For a description of material factors that could cause our actual results to differ from the forward-looking statements in the following, please see the Risks and Uncertainties section of this MD&A on page 30 and Item 3.12 “Narrative Description of the Business – Risks and Uncertainties” in our 2005 Annual Information Form.

The following discussion and table highlight the target operating model that we are working to achieve over the next several years. Our overall gross margins are highly dependent on product mix, as gross margins may vary considerably by line of business. Gross margins are also influenced by a number of other key factors, including the cost of input materials, the manufacturing yield of wafers received from foundries and the average selling prices of our products. The continuous change in these factors, most of which are beyond our control, cause our overall gross margins to fluctuate from quarter to quarter. As a result, the target operating model reflects our aspirations over the next several years.

ATI 2005 11

Page 97 of 126

1997
• 
ATI ships 3D RAGE™ II+ DVD
chip, the first graphic
accelerator with motion
compensation DVD software

• 
ATI becomes the first graphics
company to release products with full support for the
Accelerated Graphics Port
(AGP 2X)
• 
ATI becomes the first graphics
company to provide hardware
support for DVD acceleration
and display

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONT.)

We are targeting to achieve gross margins in our core PC discrete business of approximately 32%–35% of revenues over the long term. Our target gross margin for chipsets is 25%–30% of revenues. However, we believe that our ability to leverage core technology and resources from the PC discrete business will allow us to maintain operating margins for chipsets that are close to those of PC discrete. In our Consumer segment, which typically carries higher gross margins than the PC segment, we are targeting to maintain gross margins above 40% of revenues.

We are targeting to achieve consolidated gross margins in the range of 34%–38% of revenues while maintaining operating expenses within the ranges listed below, and we are targeting to achieve pre-tax operating income (defined for this purpose as gross margin less research and development, selling and marketing, and administrative expenses) in the range of 11%–15% of revenues.

Please see the Risks and Uncertainties section of this MD&A for a list of the various risk factors that could impact gross margins and operating margins and prevent us from achieving our targets.

			ATI (CONSOLIDATED)
	Target	2005	2004	2003
As a percentage of revenues	2005–2007	Performance	Performance	Performance
Gross margin	34%–38%	27.6%	34.7%	31.0%
R&D	13%–15%	14.7%	13.3%	15.4%
SG&A	8%–10%	9.4%	8.2%	9.5%
Pre-tax operating income	11%–15%	3.5%	13.2%	6.1%

Fiscal 2006 Strategic Priorities

The following summarizes our key strategic priorities for fiscal 2006:

• Drive PC growth through technology leadership, innovation and strategic platforms
• Increase integrated chipset gross margins through R&D and operational improvements
• Improve operational consistency in product delivery and ramping of new technologies
• Focus on new customers and accelerating growth in the Consumer business
• Implement expense management strategies including expansion into lower-cost geographies

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1998 
• ATI becomes the first
  company to introduce a
  complete set-top box design
 
• ATI secures more design
  wins with the top ten
  OEM personal computer
  manufacturers than any
  other graphics company

• ATI, the AGP market leader,
  ships its ten millionth
  AGP chip
 
• ATI launches RAGE
  MAGNUM™ deemed to
  be OEM's best choice for
  fastest graphics performance
  for high-end PC graphics
 

FISCAL 2005 OVERVIEW
AND HIGHLIGHTS

Despite solid progress in many key areas, overall financial performance in fiscal 2005 fell below expectations. Results for the first half were positive as we reported the two strongest revenue quarters in our history. However, a number of challenges prevented us from carrying this momentum into the latter part of the year and our performance in the second half suffered as a result.

These challenges included slower than expected product ramps, a critical product delay, operational issues, and a slowdown in demand for certain desktop discrete products in the third and fourth quarters. These factors, combined with the timing of new products, led to gross margin and inventory pressures in the second half of the year and an inventory write-down in the fourth quarter. In addition, sales of integrated chipsets, which currently have considerably lower gross margins than our other products, comprised almost 15% of total revenues in the second half as compared with approximately 6% in the first half. As a result, we were not able to achieve stronger earnings in fiscal 2005 compared to fiscal 2004 as we had anticipated in the MD&A in our 2004 Annual Report.

Among our accomplishments in fiscal 2005, revenue increased by 11% to approximately $2.2 billion and shipments approached 115 million units, both new records. We also gained overall market share in discrete graphics and gained significant traction in our consumer, workstation and desktop chipset businesses. Subsequent to fiscal year-end, we launched a new family of desktop discrete products, which we believe will strengthen our competitive position and contribute to stronger performance in discrete graphics going forward.

Looking ahead to fiscal 2006, we have undertaken a number of initiatives aimed at providing greater visibility into the dynamics of our distribution channels. We believe these initiatives will lead to a more solid foundation on which to build our business in fiscal 2006 and beyond.
 
Product Line Review and Highlights
 
In addition to our segmented reporting, the following section includes a discussion of our results by key product line to give further insight into our results. For competitive reasons, the charts below and on the following two pages do not provide figures for revenue. Current product information and specifications can be found on our website at www.ati.com.

The chart below illustrates the composition of our consolidated revenues by major product line:

ATI 2005 13

Page 99 of 126

1998
• 
  ATI introduces next-generation
  RAGE™ 128 GL graphics chip
  delivering the world’s best
  performance and features to the
  high performance PC market

• 
  ATI’s new RAGE 128 VR
  graphics chip delivers a new
  level of 3D graphics performance
  on the motherboard
• 
  ATI’s RAGE LT PRO brings no-
  compromise 2D, 3D and DVD to
  leading notebooks

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONT.)

P C   P R O D U C T S

	Revenue rose more than 10% in fiscal 2005 and accounted for approximately one-half of consolidated revenues. Shipments increased more than 20% and surpassed 40 million units, a new record. Strong sales in the first half were partially offset by a decline in AIB and retail sales in the third and fourth quarters. Revenue from products for the higher-margin workstation market increased 60%.
	Revenue rose almost 10% in 2005 and accounted for approximately one-quarter of consolidated revenues.Shipments increased by more than 5% and exceeded 16 million units. Maintained market share greater than 70%. Despite strong growth of the notebook PC market and leading market share, greater use of integrated chipsets in notebooks continues to impact growth potential for discrete solutions.
	Revenue rose nearly 250% and represented less than 5% of consolidated revenues in fiscal 2005. Shipments grew more than 350% to more than four million chipsets. Sales were driven by OEM design wins for the PCI Express-based Radeon Xpress 200 series. The CrossFire multi-GPU platform began to ship after fiscal year-end.
	Revenue and shipments declined nearly 30% in fiscal 2005. Total shipments approached six million chipsets. Notebook integrated products accounted for slightly more than 5% of consolidated revenues in fiscal 2005. Increased competition and lower market share led to the decline in sales.

14 ATI 2005

Page 100 of 126

1998
• ATI becomes the first
  graphics company to intro-
  duce a DTV-enabled chip that
  allows users to watch DVD
  on a personal computer

• K.Y. Ho, President & CEO,
  selected as Canada's
  Entrepreneur of the Year

C O N S U M E R   P R O D U C T S

	•	Revenue grew nearly 30% to approximately 7% of consolidated revenues in fiscal 2005.
	•	Shipments increased nearly 60% and exceeded 40 million units.
	•	Ended the year with design wins from four of the top six mobile phone manufacturers.
	•	Acquired CuTe Solutions Private Limited (CuTe), of India, with expertise in audio and digital media solutions.
	•	Revenue was up 70% to nearly 5% of consolidated revenues.
	•	Shipments increased 80% and approached seven million units.
	•	Maintained strong market share and secured design wins with leading DTV manufacturers.
	•	Acquired cable modem technology from Terayon Communication Systems Inc. (Terayon), extending ATI's leadership in DTV as the industry moves towards interactive digital cable ready (IDCR) technology.
	•	Revenue from royalties and engineering revenues increased approximately $10 million and accounted for approximately 3% of consolidated revenues.
	•	Introduced the GPU for the Microsoft Xbox 360 based on 90 nanometer process technology.
	•	Continued development of graphics technology for Nintendo's next generation game console, Revolution, anticipated in 2006.

ATI 2005 15

Page 101 of 126

1999
• K.Y. Ho, President & CEO,
  selected as one of the
  top 25 business leaders in
  the world by Business
  Week Magazine

• ATI announces RAGE
  Mobility M1 – the world’s
  first notebook PC graphics
  accelerator with 8MB of
  integrated memory

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONT.)

BUSINESS OUTLOOK FOR FISCAL 2006

The following contains forward-looking statements about ATI’s business outlook for fiscal 2006. Reference should be made to “About forward-looking statements” on page 8. For a description of material factors that could cause our actual results to differ materially from the forward-looking statements in the following, please see the Risks and Uncertainties section of this MD&A on page 30 and Item 3.12 “Narrative Description of the Business – Risks and Uncertainties” in our 2005 Annual Information Form.

PC

Our success in the PC segment in fiscal 2006 will depend on our ability to introduce and deliver new products in a timely fashion, improve operational efficiencies, manage the ongoing PCI Express and lead-free transitions, and transition to advanced process technologies. We are further working to ensure that we are well-positioned to capitalize on future industry inflection points, including the introduction of Microsoft’s next operating system, Windows Vista, expected by the industry to launch in calendar 2006.

Subsequent to our fiscal year-end, we launched a family of desktop discrete products based on 90 nanometer process technology that targets the enthusiast, performance and mainstream segments of the market. We also began volume shipments of Crossfire, our high-performance multi-GPU chipset platform. In the first half of fiscal 2006, we expect to introduce new 90 nanometer discrete products for the notebook market. One of our key priorities in the PC segment for the coming year is to successfully roll out these new products and reassert broad-based technology leadership in PC graphics.

We expect our sales from integrated chipsets in fiscal 2006 will continue to grow. We remain intently focused on increasing chipset gross margins through aggressive cost reductions including product and packaging redesign and manufacturing and yield improvements.

Consumer

Handheld, DTV and game console revenues are expected to remain key growth and profit drivers for ATI. We expect Consumer revenues in fiscal 2006 to increase both on an absolute basis and as a percentage of consolidated revenues.

Handheld revenue is expected to grow on increased sales of Imageon processors to meet the growing consumer demand for feature-rich multimedia mobile phones. According to Display Search, a market research firm, the mobile phone market is expected to grow from approximately 817.9 million units in calendar 2005 to 1,071.9 million units by 2008, with nearly 98% of mobile phones having color display.

We expect sales of our DTV products to increase in fiscal 2006 with the continued roll-out of digital television in the North American market. In addition, we are beginning to focus our development on products for the European and Asian markets to fuel future growth. According to Strategy Analytics, a market research firm, worldwide DTV shipments are predicted to be 73.7 million units in calendar 2005, climbing to an estimated 134.5 million units by 2008.

We expect a stronger contribution from our game console segment in fiscal 2006 due to the incremental royalties that are expected from sales of Microsoft’s Xbox 360. Nintendo’s Revolution console, the successor to the GameCube, will also contain our graphics technology and is widely expected by the industry to launch sometime in calendar 2006.

Consolidated

We continue to work aggressively to improve our operational capabilities and achieve a higher level of overall efficiency.

While we believe gross margins will remain under some pressure in the near-term due to the growing contribution from integrated chipsets, we expect gross margins to improve modestly as the year progresses. We also expect fiscal 2006 to yield both revenue and earnings growth relative to fiscal 2005.

16 ATI 2005

Page 102 of 126

1999 
• ATI’s RAGE 128 first to
  break the 3DWinBench
  99 700 barrier. Mercury
  Research report proves
  RAGE 128-based
  RAGE FURY 32MB board
  at 743 Winmarks, the
  fastest in the world

• ATI ships five million RAGE
  Mobility graphics chips.
  The family of products sets
  new industry record, shipping
  nearly one million 3D units
  per month

		Quarterly Financial Data
FINANCIAL RESULTS
ANALYSIS		(Unaudited) (In thousands of U.S. dollars, except per share amounts)
			Fiscal 2005						Fiscal 2004
	Aug. 31		May 31	Feb. 28	Nov. 30		Aug. 31	May 31		Feb. 29	Nov. 30
		2005	2005	2005		2004	2004		2004	2004	2003
Revenues	$   470,227		$   530,235	$   608,188	$   613,859		$   572,218	$   491,457		$   463,337	$   469,705
Gross Margin(1)	42,345		154,429	208,303	208,850		192,382	172,539		160,423	167,571
Operating Expenses	159,085		157,057	141,867	131,099		119,958	112,355		103,561	107,310
Net Income (Loss)	(103,522)		(445)	57,193	63,703		61,156	48,619		47,585	47,439
Net Income (Loss)
per Share (Basic)		$(0.41)	$0.00	$0.23		$0.26	$0.25		$0.20	$0.19	$0.20
Net Income (Loss)
per Share (Diluted)		$(0.41)	$0.00	$0.22		$0.25	$0.24		$0.19	$0.19	$0.19
(1) Gross margin for the fourth quarter of fiscal 2005 includes an inventory write-down of $67 million.

Fourth Quarter Performance

2005 versus 2004

Revenues declined 18% to $470.2 million from $572.2 million in the same period last year. The PC segment accounted for 80% of total revenues in the fourth quarter with the Consumer segment accounting for the remaining 20%.

PC revenues for the quarter declined 22% to $376.9 million on a 4% increase in volumes. The primary reason for the decline was lower sales of performance and enthusiast desktop products in the Add-in-Board (AIB) and retail channels. The combination of lower volumes and reductions in average selling price (ASP) to stimulate demand led to the decline in revenues. In the first quarter of fiscal 2006, we launched a new family of desktop discrete products which we expect will improve our competitive position and performance in this segment. Revenue from notebook discrete products declined approximately 20% reflecting the market trend towards increased use of integrated chipsets.

The sales declines in discrete were partially offset by a significant increase in desktop chipset revenues, which were approximately seven times greater than in the same period in 2004. The increase was driven by OEM design wins and strong demand for the Radeon Xpress 200 product line for AMD and Intel platforms. Sales of notebook integrated chipsets were down slightly year over year.

Consumer revenue increased 6% to $93.3 million. Handheld unit shipments increased 30%, however, revenues only increased by 4% due to a higher concentration of sales to the mainstream market where ASPs are generally lower. Sales of DTV products rose 4% year over year on a unit increase of more than 20%. In DTV, growth was impacted by an expected decline in business from a set-top box customer and a slower-than-expected industry transition to digital. This transition is expected to accelerate in future quarters.

Gross margin fell to $42.3 million from $192.4 million in the same period last year. As a percentage of sales, gross margin fell to 9.0% from 33.6% . We recorded an inventory write-down of $67 million in the quarter largely related to performance and enthusiast level desktop discrete products. This write-down accounted for a majority of the gross margin decline in the quarter. Excluding the inventory write-down, gross margin fell to 23.3%, reflecting weaker product mix and more aggressive ASP reductions to stimulate AIB channel demand. In addition, sales of integrated chipsets, which currently have considerably lower margins than our other products, comprised almost 20% of revenues in the quarter as compared with 10% in the same period last year. Consumer product gross margins remained stable due to a continued focus on cost reduction strategies.

ATI 2005 17

Page 103 of 126

1999 
• ATI becomes the first
  graphics company to ship
  a fully-enabled DVI chip,
  permitting direct connection
  to a digital flat panel monitor

• ATI tops US$1 billion mark in
  annual revenues

One Billion
(US) annual revenue

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONT.)

Selling and marketing, administrative, and research and development expenses rose 34%, 50% and 16%, respectively, from the same period one year ago. Operating expenses rose due to increased personnel, higher marketing and advertising costs, and increased development and prototyping costs related to new products, including a new family of discrete products based on 90 nanometer process technology.

Stock-based compensation expense was $11.2 million in the fourth quarter of fiscal 2005 as compared with $1.7 million for the same period last year. The increase was primarily related to ATI beginning the expensing of stock options in compliance with Canadian GAAP during the first quarter of fiscal 2005.

Net loss for the fourth quarter was $103.5 million ($0.41 per diluted share), as compared with net income of $61.2 million ($0.24 per diluted share) in the fourth quarter of 2004.

During the fourth quarter, we repurchased and cancelled two million common shares at a total cost of $23.9 million. Our cash position at August 31, 2005 was $586.6 million, up from $548.9 million last year.

Fiscal 2005

Comparison of Operating Results

The following table compares operating results for our three most recent fiscal years. Each line item is also expressed as a percentage of revenues.

(Unaudited) (In thousands of U.S. dollars, except per share amounts)
	2005		2004		2003
REVENUES	$   2,222,509	100.0%	$   1,996,717	100.0%	$   1,385,293	100.0%
Cost of revenues	1,608,582	72.4%	1,303,802	65.3%	956,116	69.0%
GROSS MARGIN	613,927	27.6%	692,915	34.7%	429,177	31.0%
OPERATING EXPENSES
Selling and marketing	146,352	6.6%	117,597	5.9%	92,810	6.7%
Research and development	327,017	14.7%	265,491	13.3%	212,976	15.4%
Administrative	61,808	2.8%	46,702	2.3%	39,413	2.8%
Amortization of intangible assets	8,919	0.4%	6,115	0.3%	10,767	0.8%
Stock-based compensation	42,504	1.9%	7,583	0.4%	–	–
Other charges (recoveries)	2,508	0.1%	(304)	–	28,724	2.1%
	589,108	26.5%	443,184	22.2%	384,690	27.8%
INCOME FROM OPERATIONS	24,819	1.1%	249,731	12.5%	44,487	3.2%
Interest and other income, net	14,935	0.7%	2,950	0.2%	4,382	0.3%
Interest expense	(2,096)	(0.1%)	(2,058)	(0.1%)	(1,899)	(0.1%)
INCOME BEFORE INCOME TAXES	37,658	1.7%	250,623	12.6%	46,970	3.4%
Income taxes	20,729	0.9%	45,824	2.3%	11,741	0.9%
NET INCOME	$         16,929	0.8%	$      204,799	10.3%	$         35,229	2.5%
NET INCOME PER SHARE
Basic	$0.07		$0.84		$0.15
Diluted	0.07		0.80		0.14

18 ATI 2005

Page 104 of 126

2000 • ATI becomes the
 worldwide leader in the
 supply of mobile graphics
 solutions, according
 to Mercury Research • ATI completed the acquisition
 of ArtX, Inc. – a leading
 developer of high-
 performance graphics for
 both PCs and consumer
 appliances

	Revenues
	2005 versus 2004
	Revenues increased 11% to approximately $2.2 billion from approximately $2.0 billion in 2004. The revenue growth was a result of higher sales in the PC and Consumer segments. The PC segment accounted for 86% of consolidated revenues in fiscal 2005 with Consumer accounting for the remaining 14%. Annual shipments grew more than 30% on broad-based demand and approached 115 million units for the fiscal year.
	In 2005, two customers accounted for 10.7% and 10.3%, respectively, of our consolidated revenues. In 2004, one customer accounted for 10.6% of total revenues. Our top ten customers accounted for 61.2% of revenues in 2005 compared with 61.9% in 2004.
	PC
	Desktop revenue, consisting of both discrete and integrated sales, increased more than 15% in fiscal 2005. While volumes grew more than 30%, a product mix shift towards lower-ASP mainstream and value parts in the second half of the year partially offset the dollar increase.
	Desktop discrete revenue represented approximately half of our overall business in both 2005 and 2004. Strong sales growth in the first half of the year was partially offset by a decline in AIB and retail desktop discrete sales in the third and fourth quarters. Desktop integrated chipset revenue rose nearly 250% in 2005, making it our fastest-growing product line in 2005. Notebook revenue, consisting of both discrete and integrated sales, was essentially flat year over year. Notebook discrete sales, which accounted for more than three-quarters of total notebook revenues, rose approximately 10%. This was offset by a significant decline in notebook integrated sales.
	Approximately 30% of consolidated revenues in 2005 were generated by sales from our notebook products, compared with approximately 35% in 2004. The decline in notebook revenue resulted from growth in desktop and consumer, as well as the notebook market’s continued transition towards integrated chipsets, where our market share is well below that of discrete.
	Consumer
	Consumer revenues, consisting predominantly of handheld and DTV product sales, as well as royalty income and non-recurring engineering revenues (“NRE”), rose about 37% in fiscal 2005. Handheld products represented nearly half of our Consumer revenues for 2005. While handheld unit shipments rose almost 60%, revenue increased almost 30% due primarily to product mix and more modest ASPs in the mainstream mobile phone segment where sales were concentrated. Increased sales of Imageon processors to OEM customers, primarily Motorola, accounted for the increase in handheld business.

DTV revenue rose 70% in fiscal 2005 on higher sales of Xilleon and Theater processors to leading DTV and set-top box manufacturers. While unit shipments increased approximately 80%, the increase in dollar terms was offset by lower blended ASPs.

The royalty income we received from Nintendo for our graphics technology used in their GameCube products, which is accounted for at 100% gross margin, was flat relative to the prior year. NRE revenues associated with our development contracts with Microsoft and Nintendo rose approximately $10 million from 2004. On a combined basis, royalties and NRE continued to represent less than 3% of consolidated revenues in 2005.

2004 versus 2003

Our revenues for 2004 increased 44%, to approximately $2.0 billion, compared with approximately $1.4 billion in 2003. The revenue growth was a result of sales increases in all our main business lines.

ATI 2005 19

Page 105 of 126

2000 • ATI launches Radeon: 
  the world’s most powerful
  and feature-packed graphics
  processor. Radeon marks
  ATI’s entry and market
  leadership in the high-end
  gaming and 3D workstation
  segments • ATI releases its integrated
  graphics chip, combining
  the northbridge chipset
  function on-chip and
  providing a low-cost yet full-
  featured graphics and video
  solution for OEMs

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONT.)

Desktop revenue increased by more than 30% as the number of units sold grew by nearly 50%. Desktop revenues represented a little less than half of our overall business in 2004, versus about 55% in 2003. Overall business grew due to a more competitive product stack, particularly in the mainstream and value segments of the desktop market, and greater penetration in the AIB channel.

Notebook revenue growth was driven by growth in the notebook market overall, as well as improvement in ATI’s notebook discrete market share. This was slightly offset by a decline in our share of the growing notebook integrated graphics market.

About 35% of consolidated revenues in 2004 were generated by our notebook products, compared with approximately 40% in 2003.

In 2004, about three-quarters of total notebook revenue was generated from discrete products while the remainder was integrated. Notebook revenue continued to grow rapidly in fiscal 2004. However, notebook’s share of ATI’s total revenue declined because of the extraordinarily high growth in Consumer revenue.

Approximately 12% of our consolidated 2004 revenues were generated by Consumer products. Our handheld products represented slightly more than one-half of Consumer revenue. DTV accounted for approximately one-quarter of Consumer revenue.

Royalties from our Nintendo business and NRE continued to represent less than 3% of consolidated revenues in 2004, and in absolute dollars more than doubled in 2004 relative to 2003.

In 2004, one customer accounted for 10.6% of total revenues. In 2003, three customers accounted for 16.2%, 13.0% and 10.6%, respectively, of total revenues. Our top 10 customers accounted for 61.9% of revenues in 2004 compared with 69.6% in 2003.

Gross Margin

2005 versus 2004

Gross margin for fiscal 2005 was $613.9 million or 27.6% of sales as compared with $692.9 million or 34.7% of sales in fiscal 2004. Strong gross margins in each of the first two quarters of fiscal 2005 were offset by a decline in PC margins in the second half of the year. During the third and fourth quarters, soft demand among AIB and retail customers for performance and enthusiast level desktop discrete products led to lower volumes, weaker product mix and lower ASPs, which impacted gross margin.

The decline in gross margins relative to last year is mostly attributable to the following factors:

• a net inventory write-down of $67.4 million in the fourth quarter;
• weaker product mix and demand-stimulating initiatives in the AIB and retail channels in the second half; and
• low gross margins on integrated chipsets.

Excluding the impact of the inventory write-down, gross margin for fiscal 2005 was 30.7% .

During fiscal 2005, our desktop chipset business experienced significant revenue growth but at low gross margins. A margin improvement program is in place to increase gross margins in our chipset business and to achieve long-term gross margins of 25% to 30% for this business. The program includes cost improvement initiatives, a focus on new product introductions, and achieving improved cost effectiveness through product design.

Gross margins in handheld and DTV remained strong in fiscal 2005, as cost reduction initiatives helped to offset the effect of normal ASP declines. Handheld gross margins remained level with the prior year while DTV margins increased modestly over 2004.

20 ATI 2005

Page 106 of 126

2001 • ATI unveils the Mobility
  Radeon chip for the
  notebook personal computer
• ATI acquires workstation
  graphics processor pioneer
  FireGL Graphics, formalizing
  its entry into the high-
  performance workstation
  graphics segment of the PC
  graphics industry • ATI unveils new hybrid
  business model, whereby
  company permits OEMs and
  AIBs to use its patented chip
  technology in their products

2004 versus 2003

Gross margin percentage for fiscal 2004 was 34.7% or 3.7% higher than the 31.0% achieved in fiscal 2003. Margin improvement was driven by increases in margin levels on PC products as well as by the greater share of revenues resulting from higher-margin consumer electronics products.

The increased competitiveness of our desktop products along with less aggressive ASP reductions drove the improvement in desktop discrete PC margins. As we continued to increase the share of revenues derived from the relatively higher margin Consumer business, the change in revenue mix also contributed to overall margin improvement. This increase was slightly offset by the decline in our PC discrete product margins in the fourth quarter due to the introduction of our PCI Express products.

Operating Expenses

2005 versus 2004

Operating expenses, including selling and marketing, R&D, and administrative expenses, and excluding stock-based compensation, amortization of intangible assets and other charges, increased $105.4 million or 24.5% as compared with fiscal 2004. The percentage growth in operating expenses exceeded percentage growth in revenues due primarily to a revenue shortfall in the second half of the year, as well as increased investments in R&D to develop our next-generation products and marketing efforts on design wins to support our future revenue growth.

Our Canadian overhead and staff costs were approximately Cdn. $260 million in fiscal 2005 compared to approximately Cdn. $220 million in fiscal 2004. The appreciation of the Canadian dollar relative to the U.S. dollar, from an average rate of 75 cents in fiscal 2004 to an average rate of 80 cents in fiscal 2005, had approximately $13 million in negative impact on 2005 operating expenses, as ATI reports and measures its results in U.S. dollars. Continuing strength in the Canadian dollar relative to the U.S. dollar will result in upward pressure on operating expenses in fiscal 2006.

During the third quarter of fiscal 2005, we purchased forward foreign exchange contracts (”Forwards”) to buy $94.5 million Canadian dollars over the next nine months at an average exchange rate of 1.2579. All of the Forwards have become favorable to us since their inception and had a fair value of $4.7 million at August 31, 2005.

In accordance with Canadian GAAP, beginning with the first quarter of fiscal 2005, ATI expensed compensation costs associated with stock options granted to employees after September 1, 2002. This expense item, along with the expense associated with restricted share units and deferred share units, is reflected in the expense for stock-based compensation included in the attached consolidated statements of operations and retained earnings. Prior to the first quarter of fiscal 2005, the expenses associated with restricted share units and deferred share units were reflected in selling and marketing, R&D and administrative expenses. These amounts have been reclassified for comparative purposes.

2004 versus 2003

Our overhead and staffing costs were approximately Cdn. $220 million in fiscal 2004 compared with approximately Cdn. $160 million in fiscal 2003. The rise in the value of the Canadian dollar relative to the U.S. dollar, from an average rate of 67 cents in fiscal 2003 to an average rate of 75 cents in fiscal 2004, had an approximate $18.0 million negative impact on our operating expenses in 2004.

ATI 2005 21

Page 107 of 126

2001 • ATI acquires HydraVision™
  desktop management
  software application from
  Appian Graphics
• ATI unveils FireGL 8800
  workstation graphics board,
  the first such product to
  evolve out of its acquisition
  of FireGL graphics

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONT.)

Selling and Marketing Expenses

2005 versus 2004

Selling and marketing expenses consist primarily of salaries, commissions and bonuses, sales promotions and advertising, and travel and entertainment expenses related to product marketing, including trade shows and launch events.

Selling and marketing expenses rose $28.8 million or 24.5% in fiscal 2005 due to additional personnel as well as advertising and other promotional expenses related to trade shows and product launches. Other marketing costs such as travel and customer samples contributed to the increase. As a percentage of revenues, our selling and marketing expenses rose to 6.6% from 5.9%.

In 2005, we purchased certain assets of RT&C International (RT&C ), one of our third-party sales and distribution partners in South Korea, as well as the remaining assets of AMI Technologies Corp. (AMI), certain assets of which were acquired the previous year. As a result, our fixed selling costs increased in 2005 due to these acquisitions; however, the decrease in commissions paid more than offset the increase. These investments are expected to support further revenue growth in the Asia-Pacific region.


2004 versus 2003

Our selling and marketing expenses in 2004 rose $24.8 million or 26.7% to $117.6 million. As a percentage of revenues, our selling and marketing expenses declined to 5.9% from 6.7% in 2003.

The largest contributor to the increase in selling and marketing expenses was staffing costs, including additional sales and marketing personnel in North America and in the Asia-Pacific region, and higher incentive-based compensation that resulted from higher sales. Increased advertising expenditures related to product launches, videogame developer programs and co-marketing programs with our OEM, AIB and retail partners also contributed to the year over year increase.

Our purchase of certain assets of AMI, one of our third-party sales and distribution partners in Asia-Pacific, in early 2004 helped to reduce the growth in expenses associated with sales into this region in fiscal 2004. Although fixed selling costs increased in 2004 due to the acquisition, the decrease in commissions paid more than offset the increase.


Research and Development (R&D) Expenses

2005 versus 2004

R&D expenses include engineering salaries, costs of development tools and software, component and board prototype costs, consulting fees, licensed technology fees and patent filing fees.

R&D expenses increased by $61.5 million or 23.2% in fiscal 2005 primarily due to a $46.2 million increase related to additional personnel and a $21.4 million increase in development and engineering costs related to product tape-outs and prototype materials. R&D as a percentage of revenues was 14.7% and in line with our target range of 13%–15%.

In 2005, we acquired CuTe, a company specializing in audio and digital media solutions located in India. We also acquired certain cable modem silicon intellectual property and hired certain employees of Terayon. While this has increased our expenses in the current year, it will allow us to support continued product and technology leadership.

Investment in R&D is a key part of our strategy to maintain product and technology leadership. R&D is essential to our continued achievement of our strategic objectives of product and technology leadership, establishing a strong franchise in the integrated chipset market and securing market leadership in consumer digital electronics. Investment in R&D effectively drives ATI’s future revenue growth and we will continue to invest in R&D in support of these strategic objectives.

22 ATI 2005

Page 108 of 126

2001 • ATI announces Mobility
  Radeon 7500, the most
  powerful, feature-rich
  mobile solution in the
  world for the notebook
  personal computer
• ATI introduces the All-in-
  Wonder Radeon 8500DV,
  the world’s most advanced
  multimedia graphics board
• ATI introduces Xilleon 220;
  the world’s most highly
  integrated system-on-chip
  for the digital set-top
  box market

2004 versus 2003

R&D expenses increased by 24.7% to $265.5 million; however, they declined as a percentage of revenues to 13.3% from 15.4% in 2003. The dollar increase was related to increased staffing costs, particularly in our consumer products business to support our growing color mobile phone business. Other factors include the expansion of our software engineering competencies, as well as higher incentive-based compensation; increased investments in our desktop products business, including an additional $15.0 million in prototyping expenses; the impact of a stronger Canadian dollar; and higher licensing fees, which include increases in computer-aided design (CAD) tool expenditures to support the development of new products.


Administrative Expenses

2005 versus 2004

Administrative expenses consist of salaries and expenses of the corporate infrastructure groups, including the operations, human resources, finance, legal and information technology functions. Most of our administrative expenditures are denominated in Canadian dollars.

Administrative expenses increased $15.1 million or 32.3% to $61.8 million or 2.8% of revenues, primarily due to increased staffing and professional and consulting fees, including fees related to compliance with evolving regulatory requirements such as those imposed by the Sarbanes-Oxley Act of 2002.


2004 versus 2003

Our administrative expenses increased 18.5% to $46.7 million in 2004. As a percentage of revenues, administrative expenses in 2004 declined to 2.3% from 2.8% in 2003.

The increase in administrative expenses in 2004 was primarily a result of increased staffing to support our growing business, higher incentive-based compensation, and the stronger Canadian dollar.


Stock-based Compensation

In accordance with Canadian GAAP, beginning with the first quarter of fiscal 2005, we began expensing compensation costs associated with stock options granted to employees after September 1, 2002. This expense item, along with the expense associated with restricted share units and deferred share units, is reflected in the expense for stock-based compensation in the attached consolidated statements of operations and retained earnings. Prior to fiscal 2005, the expense associated with restricted share units and deferred share units were reflected in the selling and marketing, R&D and administrative expenses. These amounts have been reclassified for comparative purposes.

Stock options, restricted share units and deferred share units comprise all stock-based compensation currently awarded by ATI to our employees and directors. Stock-based compensation costs were $42.5 million in 2005 as compared with $7.6 million last year. The increase in stock-based compensation was primarily related to ATI commencing the expensing of stock options in compliance with Canadian GAAP during the first quarter of fiscal 2005.

The $42.5 million expense in fiscal 2005 included $34.0 million for compensation costs associated with stock options and $8.5 million for compensation costs associated with restricted share units and deferred share units.


Amortization of Intangible Assets

2005 versus 2004

Our total amortization expense increased from $6.1 million to $8.9 million in 2005.

The increase is primarily due to incremental amortization related to the core technology and other intangibles assumed as a result of the acquisition of CuTe and the acquisition of certain assets of Terayon, RT&C and AMI.

ATI 2005 23

Page 109 of 126

2001 • ATI introduces Radeon 7000
  and 7200 boards – the latest
  additions to the most
  powerful, innovative graphics
  family in the world • ATI unveils Mobility™ FireGL
  7800 – the world’s fastest
  and most powerful mobile
  workstation GPU designed
  for 3D animation and
  CAD/CAM • ATI unveils FireGL 8700
  workstation graphics board,
  a new entry-level offering for
  the digital content creation,
  3D animation and MCAD
  workstation customer

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONT.)

2004 versus 2003

Our total amortization expense declined by $4.7 million, or 43.2%, to $6.1 million in 2004. The decrease was primarily the result of the completion of the amortization of intangibles related to the acquisition of NxtWave Communications Inc.


Other Charges

2005 versus 2004

On March 29, 2005, a panel of the Ontario Securities Commission (“OSC”) approved a settlement agreement reached between Staff of the OSC and us. As part of the settlement, we agreed to pay a total of Cdn. $900,000 in costs and settlement payments. The balance of other charges relate to legal fees incurred in respect of the investigation and OSC proceedings.

See note 16 to the consolidated financial statements.


2004 versus 2003

We recorded a recovery of $0.3 million in respect of other charges in 2004. The amount resulted from recoveries in excess of the estimated amount from the restructuring of our European operations and the reversal of a lease exit charge incurred in 2003, less a charge to address issues related to an investigation by the OSC.

See note 16 to the consolidated financial statements.


Interest and Other Income, Net

(Unaudited) (In thousands of U.S. dollars)

	2005	2004	2003
Interest income on cash and short-term investments	$     14,330	$      4,352	$      2,802
Gain (loss) on investments	(1,580)	(1,307)	3,876
Gain on foreign exchange	1,174	540	819
Loss on disposal of fixed assets	(25)	(3,087)	(3,932)
Insurance claim on Taiwan earthquake	--	578	--
Other income	1,036	1,874	817
Interest and other income, net	$    14,935	$      2,950	$      4,382

Interest Expense

2005 versus 2004

Interest expense remained flat year over year at $2.1 million. Our interest expense relates primarily to our capital lease obligation and mortgage for a building facility located in Markham, Ontario, a joint venture in which we hold a 50.0% interest.


2004 versus 2003

Our interest expense increased to $2.1 million in 2004 from $1.9 million in the prior year mostly as a result of the foreign exchange impact of the rise of the Canadian dollar versus the U.S. dollar.

24 ATI 2005

Page 110 of 126

2001 • ATI unveils its technology for the
  Nintendo GameCube at the
  Electronic Entertainment Expo
  (E3), officially marking its entry
  into the game console market

Income Taxes

2005 versus 2004 versus 2003

(Unaudited) (In thousands of U.S. dollars)

	2005	2004	2003
Operating income tax expense	$    29,715	$    46,393	$    15,570
Stock-based compensation	(3,360)	--	--
Recovery of future tax liability related to intangible assets (other than goodwill)	(312)	(532)	(1,679)
Income tax recovery related to inventory write-down and other charges	(5,314)	(37)	(2,150)
	$    20,729	$    45,824	$    11,741

Income tax expense declined to $20.7 million due to our lower net income in 2005. Income tax expense increased to $45.8 million in 2004 from $11.7 million in 2003 due to our higher net income in 2004 as compared with 2003.

ATI’s operating tax rate, which excludes the impact of the amortization of intangible assets related to acquisitions, inventory write-down and other charges and stock-based compensation costs was 18.0% in 2005, 18.0% in 2004, and 18.9% in 2003. ATI’s tax rate is affected by the amount of net income earned in its various operating jurisdictions.

See note 13 to the consolidated financial statements.


Net Income

2005 versus 2004

Net income in 2005 declined to $16.9 million from $204.8 million in 2004. The decrease in net income was the result of a 7.1% decrease in gross margins and the increase in operating expenses outlined in earlier sections of this MD&A. Diluted earnings per share fell to $0.07 from $0.80 in fiscal 2004.


2004 versus 2003

Net income in 2004 was $204.8 million, an increase of $169.6 million from $35.2 million in 2003. The increase in net income was a result of the significant increase in revenues and continuing strong margins throughout 2004.

ATI 2005 25

Page 111 of 126

2002 • ATI elevated to permanent
  membership in OpenGL
  standards board • ATI unveils Radeon 8500
  Mac Edition and Radeon
  7000 Mac Edition dual
  display PCI graphics card • ATI enters wireless market
  with Imageon 100, the
  most advanced display
  co-processor for PDAs
  and smart phones

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONT.)

LIQUIDITY AND CAPITAL RESOURCES This section explains how we manage our cash and capital resources to carry out our strategy and deliver financial results.


Cash Position

The table below summarizes our cash inflows and outflows for each of the past three years:

(Unaudited) (In thousands of U.S. dollars)

	2005	2004	2003
Net income	$       16,929	$    204,799	$      35,229
Non-cash add backs	35,411	23,367	12,883
Working capital changes	50,298	(43,215)	57,337
Issue of common shares	30,170	56,531	20,977
Repurchase of common shares (net of proceeds from sale of ordinary shares)	(23,847)	(22,100)	--
Bank indebtedness	--	--	(12,015)
Net movement in long-term debt	(1,663)	(1,442)	9,645
Net purchases of capital assets	(48,831)	(18,182)	(16,390)
Net proceeds from investments, net of purchases	880	(98)	7,569
Net purchases of short-term investments	(174,062)	(139,524)	(135)
Acquisitions	(22,057)	(2,071)	--
Other	--	--	(1,140)
	(136,772)	58,065	113,960
Foreign exchange gain (loss)	441	638	(181)
Net increase (decrease) in cash and cash equivalents	$    (136,331)	$      58,703	$    113,779
Cash, cash equivalents and short-term investments	$     586,647	$    548,916	$    350,689

2005 versus 2004

Our cash position (cash, cash equivalents and short-term investments) at August 31, 2005 increased 7% to $586.6 million from $548.9 million at fiscal 2004 year-end. Our cash position increased mainly as a result of cash flow from operations in the fiscal year. During the year, $23.9 million was spent on the repurchase of two million common shares under a normal course issuer bid.

We have access to $21.0 million in credit facilities at August 31, 2005 compared to $43.0 million at August 31, 2004. With our large cash position we took action to reduce our credit facilities during the year and correspondingly reduce costs. There are no amounts outstanding on these facilities as of the date of this MD&A.


2004 versus 2003

Our cash position (cash, cash equivalents and short-term investments) increased 56.5% to $548.9 million in 2004 as a result of increased cash flow from operations throughout the fiscal year.

We had access to $43.0 million in credit facilities at August 31, 2004 compared to $25.4 million at August 31, 2003.

26 ATI 2005

Page 112 of 126

2002 • With ATI’s Remote
  Wonder™, users can take
  control of their computer.
  New remote enables
  multimedia access from
  anywhere in your room,
  house, stage or classroom • ATI launches System
  Integrator Partner Program
  in North America • ATI acquires NxtWave
  Communications giving
  ATI the set-top box
  technology to provide
  complete solutions
  for customers

Commitments

As at August 31, 2005, we were committed to the following minimum payments related to office premises, license and royalty agreements, building under capital lease payments, mortgage payments and non-cancellable inventory purchases:

 

(Unaudited) (In thousands of U.S. dollars)	Total	2006	2007	2008	2009	2010	Thereafter
Commitments related to office premises, license and     royalty agreements	$      87,903	$      26,941	$      20,937	$      16,593	$       8,875	$       6,946	$       7,611
Commitment related to capital lease	27,285	2,078	2,164	2,285	2,285	2,285	16,188
Commitment related to mortgage	16,086	1,739	1,739	1,739	1,739	1,739	7,391
Commitment related to non-cancellable inventory purchase	223,600	223,600	--	--	--	--	--
Total commitments	$    354,874	$    254,358	$      24,840	$      20,617	$      12,899	$      10,970	$      31,190

We believe that cash flows from operating activities, together with our cash position and borrowings available under our credit facilities, will be sufficient to fund currently anticipated working capital, planned operating and capital expenditures and debt service requirements, during fiscal 2006.


Normal Course Issuer Bid

Under the terms of a normal course issuer bid announced on March 24, 2005, we may purchase up to 24.7 million common shares, representing approximately 10% of our “public float” as of March 17, 2005. Purchases will be made on the open market by us through the facilities of the TSX or the NASDAQ Stock Market Inc. (“NASDAQ”). The prices we will pay for any purchased common shares will be the market price of such shares on the TSX or NASDAQ, as the case may be, at the time of acquisition. We will make no purchases of common shares other than open-market purchases.

In fiscal 2005, a total of two million common shares were repurchased for a total consideration of $23.9 million for cancellation under the terms of the normal course issuer bid. In fiscal 2006, we repurchased 408,100 common shares for a total consideration of $5.69 million for cancellation. The normal course issuer bid will terminate on March 29, 2006 or on such earlier date as we complete our purchases under the terms of the normal course issuer bid. We will cancel any common shares repurchased under this normal course issuer bid.


Operating Activities – Working Capital

2005 versus 2004


Accounts Receivable

Our accounts receivable increased by 5.6% to $386.3 million at August 31, 2005 compared to the prior year-end, due to the timing of sales during the fourth quarter. Our accounts receivable are within our target range for current sales levels.

At August 31, 2005, 93.9% of accounts receivable were less than 60 days outstanding, compared with 94.8% at August 31, 2004. Days’ sales in accounts receivable increased to 65 days in 2005 compared to 50 days in 2004. The increase is attributable to the higher proportion of shipments within the last month of the fiscal year as well as the timing of revenues relating to certain engineering services.

At August 31, 2005, one of our customers accounted for 12% of our accounts receivable balance. At August 31, 2004, none of our customers accounted for 10% or more of our accounts receivable balance.


Inventories

Inventory at August 31, 2005 increased 36.6% to $348.2 million from $254.9 million in fiscal 2004. Our inventory position at fiscal year-end includes the impact of an inventory write-down of $67.4 million in the fourth quarter of fiscal 2005 consisting predominantly of mid- to high-end PCI Express and AGP desktop discrete products. Following the inventory write-down, days of inventory on hand at the end of fiscal 2005 were 85 as compared with our long-term target of 70 days.

ATI 2005 27

Page 113 of 126

2002 • ATI and Massive render
  The Lord of the Rings: The
  Fellowship of the Ring™
  in real time in Linux® at
  SIGGRAPH 2002 • ATI’s new FireGL X1
  powers DCC and CAD
  workstations into new era of
  content creation. ATI has the
  world’s most advanced
  workstation graphics board
  with OpenGL®, Microsoft®
  DirectX® 9.0 and Linux® in
  one graphics solution

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONT.)

Accounts Payable and Accrued Liabilities

Accounts payable increased 32.1% to $362.9 million in 2005 from $274.8 million in 2004 as a result of increased inventory purchases required to support our sales increase.

Accounts payable are within our target range for current sales levels.

Accrued liabilities increased 37.5% to $302.0 million in 2005 from $219.6 million in 2004. The increase is largely a result of the timing of payments related to sales rebates and price protection which are directly related to sales levels.


Deferred Revenue

Deferred revenue declined 15.6% to $24.6 million from $29.1 million in 2004. The higher balance in 2004 was a result of the timing of cash received from customers in advance of meeting our applicable revenue recognition criteria.

Deferred revenue primarily relates to payments associated with development contracts where revenue is recognized on a percentage of completion basis.

See note 1(j) to the consolidated financial statements.


Financing Activities

2005 versus 2004

We generated cash from common shares issued from the exercise of stock options totaling $30.2 million in 2005 compared to $56.5 million in 2004.

In fiscal 2005, we re-purchased two million common shares at a total cost of $23.9 million for cancellation under a normal course issuer bid.


2004 versus 2003

We generated cash from common shares issued from the exercise of stock options totaling $56.5 million in 2004 compared to $21.0 million in 2003.

In 2004, approximately 1.5 million shares of the Company were acquired for the amount of $22.1 million to satisfy employee incentive obligations.

See note 12(d) to the consolidated financial statements.


Investing Activities

2005 versus 2004


Capital Assets

Capital expenditures net of proceeds on disposals increased 168.6% to $48.8 million in 2005 from $18.2 million in 2004. The increase was driven by an investment in land and building of $7.3 million and laboratory, computer equipment and software purchases of $32.3 million (2004 –$16.9 million).

Please refer to notes 1(e), 1(h), and 5 to the consolidated financial statements.


Short-term Investments

Please refer to notes 1(c) and 3 to the consolidated financial statements.


Long-term Investments

2005 versus 2004

From time to time, we make equity investments in other companies, generally in conjunction with a technology relationship. We made no such equity investment in fiscal 2005. During the year, we fully wrote down the book value of a long-term investment in a private company and realized a loss of $2.5 million.

28 ATI 2005

Page 114 of 126

2002 • ATI launches Radeon 9700.
  Radeon 9700 delivers
  double the performance
  of any graphics product
  currently on the market • ATI unleashes two more
  revolutionary family
  members of Radeon visual
  processors, Radeon 9000
  and Radeon 9000 PRO,
  delivering high-end graphics
  to the mainstream for the
  first time • ATI introduces Mobility
  Radeon 9000, the world’s
  first mobile graphics solution
  with programmable pixel
  shaders delivering stunning
  3D performance and
  impeccable photo-realism

In 2004, we invested $0.1 million in these types of investments, compared with $2.5 million in 2003.


Acquisitions

Our growth strategy is based on internal expansion and strategic acquisitions of companies, technologies or other key assets where they will enhance our competitive position.

In 2005, we acquired CuTe, a company specializing in audio and digital media solutions located in India, for $4.1 million. We also acquired certain assets from Terayon, RT&C and AMI for a combined cash consideration of $17.5 million net of contingent payments still outstanding.

In 2004, we acquired certain assets of AMI for cash consideration of $3.1 million of which $1.0 million was paid in 2005.


Outstanding Shares

As at November 1, 2005, there were 251,492,202 common shares of ATI outstanding.

See notes 12(a) and 14 to the consolidated financial statements.


Claims and Proceedings

Ontario Securities Commission Hearing

On December 16, 2002, we disclosed that staff of the OSC had raised concerns regarding the timeliness of our announcement on May 24, 2000 of a shortfall in our revenues and earnings for the third quarter of our 2000 fiscal year. We also reported that we were aware that OSC staff had raised concerns about trading that took place prior to the announcement by certain of our insiders and others, including certain directors and officers. On January 16, 2003, OSC staff filed a notice of hearing and statement of allegations in relation to us and others. The notice alleged that we 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 TSX. The notice also alleged that we made a misleading statement to OSC staff in August 2000 regarding the events leading up to the disclosure on May 24, 2000 of the shortfall. Seven individuals were named in the notice. The notice alleged that six of these individuals, including K.Y. Ho, Chairman and then Chief Executive Officer of ATI, engaged in insider trading contrary to the Securities Act (Ontario). On March 29, 2005, a panel of the OSC approved a settlement agreement reached between us and OSC staff. As part of the settlement, we agreed to pay Cdn. $900,000 in costs and settlement payments and agreed to provide a letter of comfort confirming our practices and procedures related to trading and corporate governance. The individuals named in the notice, other than Mr. Ho and his wife, also entered into settlement agreements with the OSC. In October 2005, a panel of three commissioners of the OSC (including the Vice-Chair of the OSC) dismissed all allegations of insider trading against K.Y. Ho and his wife. The panel’s decision completely exonerated Mr. Ho and his wife. The decision was made following a hearing which was held by the OSC panel in the spring of 2005.


American Video Graphics LLP

American Video Graphics LLP filed a series of suits in the Eastern District of Texas alleging infringement of several patents against various PC manufacturers, game console manufacturers and videogame publishers. After some reconfiguration of the suits, there are a total of six suits pending. Of these six suits, there are two suits pending against the entire group of PC manufacturers and two suits pending against the entire group of game console manufacturers. We voluntarily intervened in these four suits. We have participated in two distinct court ordered mediations for these matters. Neither mediation resulted in settlement. The first trial involving the PC manufacturers is currently scheduled for September 2006 and the first trial involving the game console manufacturers is scheduled for December 2006.

ATI 2005 29

Page 115 of 126

2002 • ATI’s Radeon 9700 PRO
  graphics board based on
  newly introduced GPU
  architecture delivers double
  the performance of any
  graphics card available
 
• ATI demonstrates world’s
  first graphics cards powered
  by DDR-2 technology • ATI Mobility FireGL 9000
  visual processor for mobile
  workstations becomes the
  world’s most powerful
  anytime, anywhere mobile
  workstation graphics
  accelerator driving DCC
  and CAD/CAM forward
  a generation • ATI’S Radeon 9700 PRO
  wins PC Magazine 2002
  Award for Technical
  Excellence. The world’s
  fastest, most complex
  graphics architecture
  nominated and awarded
  in components category

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONT.)

U.S. Securities Class Action Lawsuits

In August and September 2005, five class action lawsuits were filed in the United States District Court for the Eastern District of Pennsylvania against us and certain of our directors and officers on behalf of shareholders who purchased our common shares between October 7, 2004 and on or about June 23, 2005. The claims allege that we and certain of our directors and officers violated U.S. securities laws by failing to disclose material facts and making statements that contained misrepresentations about our business and future outlook. It is alleged that as a result of the failure to disclose material facts and the alleged misrepresentations, our stock traded at artificially inflated prices until the stock price dropped on the news of our third quarter results in June 2005. The claims further allege that while in possession of material undisclosed information, certain directors and officers sold a portion of their common shares at inflated prices. These claims are at a very preliminary stage.


U.S. Shareholder Complaint

In August 2005, a shareholder complaint was filed in the Superior Court of the State of California for the County of Santa Clara by a shareholder on behalf of the Company. The defendants to the complaint include us, members of the board of directors and certain officers. The complaint alleges breach of California Law, including breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment and violation of the California Corporations Code during the period between October 2004 and August 26, 2005. We have been served with the complaint. This complaint is at a very preliminary stage.

We currently believe the amount of ultimate liability, if any, with respect to these legal proceedings, including the class action lawsuits and the shareholder complaint, will not materially affect our financial position, results of operations, or liquidity. We and the named directors and officers intend to defend ourselves vigorously. However, the ultimate outcome of any litigation is uncertain and should any of these actions or proceedings against us be successful, we may be subject to significant damages awards, which could have a material adverse effect on our financial condition.

RISKS AND UNCERTAINTIES Our operating results have been and will continue to be subject to quarterly and other fluctuations due to changing market and economic conditions and various other factors set out below. As a result, our revenues can fluctuate from quarter to quarter, and, within a quarter, revenues may vary from month to month. In addition, because our operating expenses are largely independent of revenues in any particular period, we may be unable to rapidly adjust our spending to compensate for an unexpected revenue shortfall, which could harm quarterly operating results. As a result, it is difficult to accurately predict revenues and profits or losses.

Our reported operating results may vary from prior periods or may be adversely impacted in periods when we are undergoing a product line transition during which sales of new products may be ramped up to replace sales of our older products. These older products often come under significant pricing and margin pressure as a result of competitors’ actions in the marketplace. Product transitions expose us to inventory risk and potential inventory write-downs. In addition, newer products may be more costly to produce in the early stages of their introduction, which may adversely affect margins and our results of operations.

Should our products not offer the features and performance required by our customers or fail to achieve meaningful market share, our operating results will be negatively impacted. Our ability to continue to sell and develop our products is dependent upon our ability to obtain licenses to industry technology or other intellectual property rights, which may not be readily available or available on commercially reasonable terms. As a result of any combination of these or other issues referred to below, our operating results and common share price may be subject to a significant level of volatility, particularly on a quarterly basis.

30 ATI 2005

Page 116 of 126

2003 • ATI launches the most
  comprehensive and
  feature-rich product
  lineup in graphics history
  with Radeon 9800,
  Radeon 9600 &
  Radeon 9200
• ATI announces the
  Mobility Radeon 9600
  family of mobile
  visual processors
• ATI Technologies Inc.
  introduces high-end
  FireGL X2-256 and the
  entry-level FireGL T2-128,
  now offering a complete
  top-to-bottom line of
  workstation graphics
  accelerators
• ATI announces that Valve,
  a leading game developer,
  has named ATI as the
  preferred graphics card
  partner for its upcoming
  game Half-Life 2

Factors that have affected our operating results in the past or could affect them in the future include, among other things:

• demand for and acceptance of our products and those of our customers, including integrated graphics components and consumer electronic devices;
• successful and timely development and production of next-generation products, including products for the consumer electronics market;
• levels of growth or decline in the PC industry;
• introduction of new products by our competitors;
• rapid and frequent technological change in the PC graphics industry;
• the relative demand in the PC industry for discrete solutions as compared with integrated chipsets;
• availability of licenses for industry technology or other intellectual property rights necessary for the continued sale or development of our products;
• changes to ASPs resulting from competitive pressures;
• ability to achieve new design wins;
• the rescheduling or cancellation of customer orders;
• volume of orders received that can be filled in the quarter;
• addition or loss of significant customers;
• delays or early introduction of new microprocessors or their related chipsets;
• changes to our overall product mix or the geographic regions where our products are sold;
• supply constraints and disruptions for other components incorporated into our products and those of our customers;
• R&D costs associated with the development of new products;
• increasing product line complexity and the related management of inventory;
• unexpected variances in the cost or availability of materials, especially silicon wafer, memory, printed circuit boards (“PCBs”) and packaging costs;
• changes to the expected yield of our component products;
• excess or shortage of manufacturing capacity;
• seasonal and variable demand associated with the PC industry;
• changes in the rate of exchange of Canadian currency to U.S. dollars;
• sales levels of game console and other products from which we generate royalty income;
• legal and other costs related to defending intellectual property and other types of lawsuits, claims or proceedings; and
• new laws that require us to undertake an evaluation of our internal controls through which we may identify internal control weaknesses which may require correction.

ATI 2005 31

Page 117 of 126

2003 • ATI announces agreements
  with Microsoft and Nintendo
  to develop graphics solutions
  for future game consoles • ATI extends its global reach
  with the acquisition of AMI
  Technologies, its distributor
  in the Asia-Pacific region • ATI is added to the
  NASDAQ-100 Index®

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONT.)

As a result of the factors listed above, period-to-period comparisons of our operating results should not be relied upon as an indication of future performance. The results of any quarterly period are not indicative of results to be expected for a full fiscal year. Accordingly, our operating results may be below the expectations of securities analysts and investors. Our failure to meet these expectations could adversely affect the market price of our common shares.

For a more complete discussion of general risks and uncertainties which apply to our business and our operating results, please see Item 3.12 “Narrative Description of the Business – Risks and Uncertainties” in our Annual Information Form, and our other filings with Canadian and U.S. securities regulatory authorities.

For a description of certain legal proceedings affecting our business, please see notes 16 and 22 to the consolidated financial statements.

OUR CRITICAL ACCOUNTING POLICIES We prepare our consolidated financial statements using Canadian GAAP and have provided a reconciliation of our financial statements to U.S. GAAP in note 21 to the consolidated financial statements. Significant accounting policies and methods used in preparation of our consolidated financial statements are described in note 1 to the consolidated financial statements.

Under Canadian GAAP, we are required to make estimates and assumptions when we account for and report assets, liabilities, revenue and expenses and disclose contingent assets and liabilities in our financial statements. We are also required to constantly evaluate the estimates and assumptions we use. We base our estimates and assumptions on historical experience and other factors that we believe are reasonable in the circumstances. Because our estimates and assumptions involve judgment and varying degrees of uncertainty, actual results could materially differ from our estimates and assumptions.

We make significant estimates when determining provisions for sales returns and allowances, our allowance for doubtful accounts, our provision for inventory obsolescence, the fair value of reporting units for goodwill impairment testing, the valuation of long-lived assets, our worldwide income tax provision, the realization of future tax assets and hedging relationships.

We believe the following are the most critical accounting policies we follow as they rely heavily on our judgment and estimates:


Revenue Recognition

We recognize revenue 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. Sales made to distributors and retailers under agreements allowing for price protection and/or rights of return are recognized at the time of sale to these customers.

Estimated returns and allowances, price protection and sales rebates are recorded as a reduction of revenue at the time of revenue recognition. Estimates are based on historical experience, planned customer incentive programs and other relevant factors. If estimates of future market conditions and changing product life cycles in the marketplace are inaccurate, it may be necessary to increase customer incentive offerings, which could necessitate a further reduction of revenue. Such increases are recorded as a reduction of revenue at the time the program is introduced or enhanced. We also provide for the estimated cost of product warranties at the time of revenue recognition.

We primarily use a binding purchase order as evidence of its sales arrangements and, in certain cases, use contractual agreements. We consider 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, we assess whether collection is reasonably assured. If we determine that collection is not reasonably assured, we defer recognition of the revenue until collection becomes reasonably assured, which is generally upon the receipt of cash.

32 ATI 2005

Page 118 of 126

2004 • ATI announces the first
  3D gaming chip for
  mobile phones. The
  Imageon 2300 enables
  game developers
  to create visually rich
  gaming experiences for
  mobile phones
• ATI leads the PCI-Express
  transition with the first
  native products for desk-
  top, notebook and
  workstation platforms
  based on the new
  PC architecture
• ATI ships more than
  5 million chips for high-
  definition digital televisions
  and set-top boxes in
  the year
• ATI tops US$2 billion in
  annual revenues

Two Billion

(US) annual revenue

We follow the percentage-of-completion method of accounting for contracts requiring us 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 project is impractical, except to ensure that no loss will be incurred, we use 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 cost incurred. We then record an equal amount of revenue against costs. Cost of revenue is adjusted to recognize the profit element from the arrangement once we are able to estimate total revenue and total costs.

Cash received from customers in advance of meeting our applicable revenue recognition criteria is recorded as deferred revenue.

Accounts Receivable

We maintain an allowance for doubtful accounts receivable for estimated losses resulting from the inability of our customers to make required payments. Management determines this allowance, which consists of an amount identified for specific customer issues. Our overall estimated exposure excludes significant amounts that are covered by credit insurance and letters of credit. If the financial condition of our customers, the financial institutions providing letters of credit, or our credit insurance carrier were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required that could adversely affect our operating results. Furthermore, there can be no assurance that we will be able to obtain credit insurance in the future.

Inventory Valuation

We record raw materials 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. We write down our inventory for estimated obsolescence, and excess inventories based upon assumptions about future demand and market conditions. The business environment in which we operate is subject to rapid change in technology and customer demand. If actual market conditions are less favorable than those estimated or if our future product purchase commitments to our suppliers exceed our forecasted future demand for such products, additional material inventory write-downs may be required.

Goodwill

We perform our annual goodwill impairment test in the fourth quarter of each year, and more frequently if events or changes in circumstances indicate that an impairment loss may have been incurred. We test for impairment at the reporting unit level by comparing the reporting unit’s carrying value with its fair value. The fair values of the reporting units are estimated using a discounted cash flow approach. The process we follow when determining a reporting unit’s fair value is subjective and requires judgment in making assumptions about future results, including revenue and cash flow projections at the reporting unit level, and discount rates. Future goodwill impairment tests may result in material impairment charges.

Valuation of Long-lived Assets

We review long-lived assets, such as property and equipment and intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We utilize a two-step approach to testing long-lived assets for impairment. The first step tests for possible impairment indicators. If an impairment indicator is present, the second step measures whether the asset is recoverable based on a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of an asset exceeds the fair value of the asset. Our review requires the use of judgment and estimates. No such impairment charges have occurred to date. However, future events or circumstances may result in a charge to earnings if we determine that the carrying value of a long-lived asset is not recoverable.

ATI 2005 33

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2005 • ATI acquires key assets from
  Terayon Communication
  Systems Inc., adding
  interactive digital cable
  modem technology to its
  DTV portfolio • ATI broadens its expertise
  in audio and digital media
  with the acquisition of CuTe
  Solutions Private Limited.
  The company also becomes
  the cornerstone of ATI’s new
  R&D centre in India
• ATI introduces the GPU
  for the Microsoft Xbox 360,
  featuring revolutionary
  technologies and ushering
  in the era of high-definition
  gaming

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONT.)

Income Taxes

Our worldwide income tax provision is impacted by the amount of net income earned in each taxing jurisdiction and the rate of tax payable in respect of that income. In the ordinary course of our global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. The final tax outcome of these matters may be different than the estimates we have made in determining our income tax provisions and accruals. If our estimates and assumptions are determined to be inaccurate there could be a material effect on our income tax provision and net income in the period in which the determination is made.

We record a valuation allowance to reduce our future tax assets to the amount of future tax benefit that is more likely than not to be realized. We consider future taxable income in our operating jurisdictions and ongoing prudent and feasible tax planning strategies in determining the need for the valuation allowance. If we were to determine that we could realize our future tax assets in excess of their recorded amounts we would record an adjustment to the future tax asset and increase income in the period the determination is made. Alternatively, if we were to determine that we could not realize all or parts of our future tax assets, we may record a material charge to income in the period the determination is made.

Hedging Relationships

We engaged in activities to purchase certain derivative financial instruments, principally forward foreign exchange contracts, to manage foreign currency exposure. ATI’s policy is not to utilize derivative financial instruments for trading or speculative purposes.

We formally document all relationships between hedging instruments and hedged items, as well as the 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. We also formally assess, 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.

We purchase forward foreign exchange contracts to hedge anticipated Canadian dollar expenses pertaining to our 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 and 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.

34 ATI 2005

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2005 • ATI introduces Radeon
  Xpress 200 CrossFire
  Edition chipsets supporting
  multi-GPU capability • ATI launches the X1000 series
  of products – the industry’s
  first available GPUs based
  on 90 nanometer silicon
  process technology

New Accounting Policies

During 2005 we have applied changes as a result of newly issued accounting standards as follows:

Stock-based Compensation

We adopted the revised CICA Handbook Section 3870 “Stock-based Compensation and Other Stock-based Payments” which requires the application of a fair value method of accounting to all stock-based compensation arrangements with employees. As a result, we are required to estimate the fair value of all stock options granted and expense the fair value over the service period, which in all cases equals the vesting period, of the stock options. Prior to September 1, 2004, we recorded no compensation cost on the grant of stock options to employees. In accordance with the transitional provisions of Section 3870, we have retroactively applied the fair value method of accounting for stock option grants awarded since September 1, 2002, using the Black-Scholes option pricing models, and recorded an adjustment to opening retained earnings at September 1, 2004.

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 our 2005 fiscal year. We were not impacted by the adoption of this standard.

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. We expect that the adoption of this standard will have no material impact on our financial position, results of operations or cash flows.

In addition to the standards we have applied in the year, there are additional new standards that will be applied in future years as follows:

Financial Instruments

In January 2005, the CICA issued Section 3855, “Financial Instruments – Recognition and Measurement,” Section 1530, “Comprehensive Income” and Section 3865, “Hedges.” The new standards will be effective for interim and annual financial statements commencing in our 2007 fiscal year. Earlier adoption is permitted. Most significantly for us, the new standards will require presentation of a separate statement of comprehensive income. Foreign exchange gains and losses on the translation of the financial statements of self-sustaining subsidiaries previously recorded in a separate section of shareholders’ equity will be presented in comprehensive income. Derivative financial instruments will be recorded in the balance sheet at fair value and the changes in fair value of derivatives designated as cash flow hedges will be reported in comprehensive income. The existing hedging principles of AcG-13 will be maintained. We are assessing the impact of the new standards.

ATI 2005 35

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Quarterly Information
(Unaudited) (In thousands of U.S. dollars, except per share amounts)
	November 30		February 28/29			May 31		August 31
	2004	2003		2005	2004	2005	2004		2005	2004
REVENUES	$ 613,859	$ 469,705		$ 608,188	$ 463,337	$ 530,235	$ 491,457		$ 470,227	$ 572,218
Cost of revenues	405,009	302,134		399,885	302,914	375,806	318,918		427,882	379,836
Gross margin	208,850	167,571		208,303	160,423	154,429	172,539		42,345	192,382
OPERATING EXPENSES:
Selling and marketing	33,125	30,079		36,352	27,031	37,744	31,243		39,131	29,244
Research and development	73,114	63,278		77,726	60,809	88,508	65,539		87,669	75,865
Administrative	12,676	11,487		15,793	11,532	16,013	12,166		17,326	11,517
Amortization of
intangible assets	1,244	1,542		1,389	1,541	3,046	1,546		3,240	1,486
Stock-based compensation	10,558	751		10,329	2,826	10,395	2,315		11,222	1,691
Other charges (recoveries)	382	173		278	(178)	1,351	(454)		497	155
	131,099	107,310		141,867	103,561	157,057	112,355		159,085	119,958
INCOME (LOSS) FROM
OPERATIONS	77,751	60,261		66,436	56,862	(2,628)	60,184		(116,740)	72,424
Interest and other
income (expense), net	2,176	(1,754)		4,504	1,856	3,914	33		4,341	2,815
Interest expense	(519)	(515)		(537)	(531)	(525)	(513)		(515)	(499)
Income (loss) before
income taxes	79,408	57,992		70,403	58,187	761	59,704		(112,914)	74,740
Income taxes (recoveries)	15,705	10,553		13,210	10,602	1,206	11,085		(9,392)	13,584
NET INCOME (LOSS)	63,703	47,439		57,193	47,585	(445)	48,619		(103,522)	61,156
RETAINED EARNINGS,
BEGINNING OF PERIOD	308,825	104,026		358,685	151,465	415,878	199,050		415,433	247,669
Adjustments to opening
retained earnings:
Change in accounting
policy on stock-based
compensation	(13,843)	–		–	–	–	–		–	–
Repurchase of
common shares	–	–		–	–	–	–		(18,541)	–
RETAINED EARNINGS,
END OF PERIOD	$ 358,685	$ 151,465		$ 415,878	$ 199,050	$ 415,433	$ 247,669		$ 293,370	$ 308,825
Net income (loss) per share:
Basic	$ 0.26	$ 0.20		$ 0.23	$ 0.19	$ 0.00	$ 0.20		$ (0.41)	$ 0.25
Diluted	0.25	0.19		0.22	0.19	0.00	0.19		(0.41)	0.24
WEIGHTED AVERAGE
NUMBER OF SHARES (000s):
Basic	249,027	242,998		251,046	244,373	251,602	245,960		251,045	247,699
Diluted	257,917	254,109		259,743	255,876	251,602	256,650		251,045	258,198
OUTSTANDING NUMBER
OF SHARES, END OF
PERIOD (000s):	251,324	244,239		252,258	246,604	252,845	247,886		251,473	249,287

36 ATI 2005

EX-99.5

ATI 42503 Exhibit 5

EX-99.6

Page 123 of 126

EXHIBIT 6

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, David Orton, principal executive officer of ATI Technologies Inc. (the “issuer”), certify that:

1. I have reviewed this annual report on Form 40-F of the issuer;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

4. The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

5. The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

Date: November 22, 2005 By: /s/ David Orton                                              
David Orton
President and Chief Executive Officer

EX-99.7

Page 124 of 126

EXHIBIT 7

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Patrick Crowley, principal financial officer of ATI Technologies Inc. (the “issuer”), certify that:

1. I have reviewed this annual report on Form 40-F of the issuer;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

4. The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

5. The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

Date: November 22, 2005 By: /s/ Patrick Crowley                                              
Patrick Crowley
Senior Vice President, Finance and Chief
Financial Officer

EX-99.8

Page 125 of 126

EXHIBIT 8

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002

              ATI Technologies Inc. (the “Company”) is filing its annual report on Form 40-F for the fiscal year ended August 31, 2005 (the “Report”) with the U.S. Securities and Exchange Commission.

              I, David Orton, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the U.S. Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(i) the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ David Orton                                                            

David Orton
President and Chief Executive Officer
November 22, 2005

EX-99.9

Page 126 of 126

EXHIBIT 9

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002

              ATI Technologies Inc. (the “Company”) is filing its annual report on Form 40-F for the fiscal year ended August 31, 2005 (the “Report”) with the U.S. Securities and Exchange Commission.

               I, Patrick Crowley, Senior Vice President, Finance and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the U.S. Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(iii) the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934; and

(iv) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Patrick Crowley                                                            

Patrick Crowley
Senior Vice President, Finance and
Chief Financial Officer
November 22, 2005