6.1. Risks Associated with Interest Rate Fluctuation, Foreign Exchange Volatility, and Inflation

Risks associated with foreign currency:

The Company’s exposure to the risk of changes in foreign exchange rates relates primarily to the Company’s operating activities (when revenue or expense are denominated in a different currency from the Company’s functional currency) and the Company’s net investments in foreign subsidiaries. The Company reviews its assets and liabilities denominated in foreign currency and enter into forward exchange contracts to hedge the exposure from exchange rate fluctuations. The level of hedging depends on the foreign currency requirements from each operating unit. As the purpose of holding forward exchange contracts is to hedge exchange rate fluctuation risk, the gain or loss made on the contracts from the fluctuation in exchange rates are expected to mostly offset gains or losses made on the hedged item. The foreign currency sensitivity analysis of the possible change in foreign exchange rates on the Company’s profit is performed on significant monetary items denominated in foreign currencies as of the end of the reporting period. The Company’s foreign currency risk is mainly related to the volatility in the exchange rates for USD. The information of the sensitivity analysis is as follows: When NTD appreciates or depreciates against USD by 1 cent, the profit for the years ended December 31, 2013 and 2012 decreases or increases by NT$1,399 thousand and NT$983 thousand, while equity decrease/increase by NT$18,669 thousand and NT$16,881 thousand, respectively.

Risks associated with interest rate:

The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s loans and receivables at variable interest rates, bank borrowings with fixed interest rates and variable interest rates. Moreover, the market value of the Company’s investment in credit-linked deposits and interest rate-linked deposits are affected by interest rate. The market value would decrease (even lower than the principal) when the interest rate increases, and vice versa. The market values of exchange rate-linked deposits are affected by interest rates and changes in the value and volatility of the underlying. The following sensitivity analysis focuses on interest rate risk and does not take into account the interdependencies between risk variables. The interest rate sensitivity analysis is performed on items exposed to interest rate risk as of the end of the reporting period, including investments and borrowings with variable interest rates. At the reporting date, an increase/decrease of 10 basis points of interest rate in a reporting period could cause the profit for the years ended December 31, 2013 and 2012 to decrease/increase by NT$2,570 thousand and NT$4,327 thousand, respectively.

Risks associated with inflation:

There was no major impact from inflation on the Company’s 2013 operations.

The Finance Division is responsible for related risk management.

6.2. Risks Associated with High-Risk/High-Leveraged Investment; Lending, Endorsements, and Guarantees for Other Parties; and Financial Derivative Transactions

As part of the Company’s conservative financial management, it does not engage in investments that are either high-risk or highly leveraged. The Company has in place a complete and thorough policy and internal control scheme governing lending, endorsements, guarantees for other parties, and financial derivative transactions. The Company engages in derivative transactions for hedging purposes. Any gains or losses from such transactions should roughly cancel out gains or losses in the underlying assets. For fiscal year 2013, The Company has provided lease guarantees for its subsidiaries MediaTek Wireless, Inc.(USA) and MTK Wireless Limited (UK) in the amount of NT$38,426 thousand and NT$27,596 thousand. The company also provided guarantees for its subsidiaries Gaintech Co. Limited and MediaTek Inc. China for bank loans in the amount of NT$13,178,000 thousand and NT$5,091,500 thousand respectively. The Company also guarantees for its subsidiaries Ralink Technology Corp. for IP purchase in the amount of NT$67,163 thousand.

The Finance Division is responsible for related risk management.

6.3. Future R&D Plans and Expected R&D Spending

The Company’s R&D projects all follow industry trends and are implemented in a highly integrated and economical way. R&D expenses in 2012 and 2013 were NT$22,629,206 thousand and NT$26,453,942 thousand, accounting for 22.80% and 19.44% of revenue respectively. The Company will continue to invest in R&D to develop products for next generation communication standard.

6.4. Risk Associated with Changes in the Political and Regulatory Environment

The Financial Supervisory Commission (“FSC”) requires companies with shares listed on the Taiwan Stock Exchange ("TSE") or traded on the Taiwan GreTai Securities Market or Emerging Stock Market to prepare their financial statements in accordance with the International Financial Reporting Standards, International Accounting Standards, and Interpretations developed by the International Financial Reporting Interpretations Committee (collectively referred to as “IFRSs”), and the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, starting 2013. The Company has finished preparation of 2013 interim and annual financial report according to regulations of FSC.

The Company’s Finance Division is responsible for risks associated with changes in the political and regulatory environment

6.5. Impact of New Technology and Industry Changes

Technologies used in the electronics and semiconductor industries are constantly changing. New standards and applications continuously emerge in wireless communication and digital home segments. The Company will continue to invest in research and development, to improve operating efficiency, and to monitor the latest trend of the market, in order to secure and expand our market share.

The Company’s Business Units are responsible for risks associated with new technology and industry changes.

6.6. Changes in Corporate Image and Impact on Company’s Crisis Management

MediaTek prides itself on its corporate image. The management has always maintained a humanistic philosophy toward management. MediaTek provides a working environment that is both challenging and nurturing for its employees, who are able to grow and realize their full potential. Those are some of the reasons that MediaTek has been able to attract the top talents in the industry and maintain its leading position in global IC Design. At the same time, MediaTek’s has maintained its core values, such as trust, respect, integrity, honesty, introspection, life-long learning, creativity, and team-work. As of the Annual Report’s publication date, there has been no event that adversely impact in MediaTek’s corporate image and impact on company’s crisis management.

The Company’s Business Units are responsible for risks associated with the corporate image and impact on company’s crisis management.

6.7. Risks Associated with Mergers and Acquisitions

In order to enhance the Company’s operation efficiency and competitiveness, MediaTek ,through tender offers in 2012, acquired 254,115,685 shares of MStar (approximately 48% of MStar’s total common shares issued) under the condition that the price of the deal was 1 MStar share in exchange for 0.794 share of MTK’s common stock plus NT$1 in cash. MediaTek issued 201,767,854 new shares and paid NT$254,116 thousand in cash for the tender offer. In January 2014, MediaTek acquired substantial control of MStar and fully consolidated MStar. Please refer to section 7.3 of the annual report for more details.

The Company’s Business Units and the finance department are responsible for this risk item and execution.

6.8. Risks Associated with Plant Expansion

The Company in 2011 purchased a second office building near its Hsinchu Headquarters, which is located on No. 8, Dusing 1st Rd, Hsinchu City and finished plant expansion in October 2013. The expected benefit of plant expansion is not only to provide employees with enough work space and meeting rooms but to provide sufficient spaces for future growth.

The Human Resources Division is responsible for managing the risks associated with plant expansion.

6.9. Risks Associated with Purchase Concentration and Sales Concentration

MediaTek’s production allocation is flexible and diversified, and is able to deal with any emergencies from any of its production lines. Therefore there is no risk associated with purchase concentration. Sales concentration does not pose any risks since MediaTek’s products are sold to many clients throughout Japan, Korea, Europe, Southeast Asia, and Greater China.

Each business units are responsible for managing the risks associated with purchase concentration and sales concentration.

6.10. Risks Associated with Sales of Significant Numbers of Shares by MediaTek’s Directors and Major Shareholders Who Own 10% or More of MediaTek’s Total Outstanding Shares

In the latest fiscal year and as of the date of this Annual Report, there were no such risks for MediaTek.

6.11. Risks Associated with Change in Management

In the latest fiscal year and as of the date of this Annual Report, there were no such risks for MediaTek.

6.12. Risks Associated with Litigations

(1) Freescale Semiconductor, Inc. (“Freescale”) filed a complaint with the U.S. International Trade Commission against MediaTek and two other Respondents on June 8, 2011 alleging infringement of United States Patents No. 5,467,455. Freescale alleged that MediaTek's DTV chips infringe its patent and sought to prevent the accused products from being imported into the United States. U.S. International Trade Commission issued an Initial Determination for the above referenced matter on July 12, 2012 that found no violation of Section 337 of the Tariff Act by MediaTek’s products, Freescale failed to establish the domestic industry element, Freescale’s asserted patent claims are invalid, and MediaTek’s products do not infringe the asserted patent claims. On September 12, 2012, the U.S. International Trade Commission issued a Notice of its affirmation of all of the findings listed above and the termination this investigation.

Freescale also filed a complaint in the United States District Court for the Western District of Texas against MediaTek and one other defendant on June 8, 2011, alleging infringement of United States Patent No. 5,467,455. Freescale alleged that MediaTek’s DTV chips infringe its patent and sought damages and an injunction to prevent the accused products from being sold in the future. MediaTek filed a complaint in the United States District Court for the Northern District of California against Freescale on November 3, 2011 alleging infringement of United States Patent Nos. 6,738,845, 6,088,753, 6,311,244, and 6,889,331. MediaTek alleged that Freescale’s multimedia application processors and micro-controller products infringe the above referenced patents, and sought damages and an injunction to prevent the accused products from being sold in the future.

Freescale filed a complaint in the U.S. International Trade Commission against MediaTek and thirteen other Respondents on November 30, 2011 alleging infringement of United States Patent No. 5,467,455. Freescale alleged that MediaTek’s DTV chips infringe its patent and sought to prevent the accused products from being imported into the United States. U.S. International Trade Commission issued an Initial Determination for the above referenced matter on September 28, 2012, granting MediaTek and other Respondents’ request to terminate this investigation. On October 31, 2012, the U.S. International Trade Commission issued a Notice of its affirmation of the Initial Determination, formally terminating this investigation.

Additionally, Freescale filed a complaint in the United States District Court for the Western District of Texas against MediaTek and its subsidiary, MediaTek USA Inc., on July 6, 2012 alleging infringement of United States Patent Nos. 6,920,316, 5,825,640, 5,943,274. Freescale alleged that MediaTek’s DTV chips infringe its patents and sought damages and an injunction to prevent the accused products from being sold in the future. The United States District Court for the Western District of Texas took the patent-infringed proceedings of this and Freescale cases to the same court on June 8th , 2011. Since the United States District Court for the Western District of Texas didn’t have the jurisdiction of MediaTek, plaintiff’s appeal was rejected by the court on March 19th 2014.

The Company assessed that the cases mentioned above didn’t have an efficient impact on MediaTek and its subsidiary, MediaTek USA, operation.

(2) Azure Networks, LLC and Tri-County Excelsior Foundation filed a complaint in the United States District Court for the Eastern District of Taxes against MTK’s subsidiaries Ralink and Ralink Technology Corporation (USA), along with other defendants in March 2011, alleging infringement of United States Patent No. 7,756,129. On April 6, 2012, Azure Networks, LLC and Tri-County Excelsior Foundation filed a complaint in the United States District Court for the Eastern District of Texas against MediaTek alleging infringement of the same patent referenced above. On May 30, 2013, the Court entered a judgment in favor of Ralink and other defendants, dismissing the earlier case subject to the plaintiffs’ right to appeal. An appeal has been filed by plaintiffs on June 20, 2013. On June 10, 2013, the Court entered a Judgment dismissing the latter case pursuant to the parties' joint stipulation.

The operations of MediaTek and subsidiaries Ralink and Ralink Technology Corporation (USA) would not be materially affected by those patent litigations.

(3) Commonwealth Scientific and Industrial Research Organization filed a complaint in the United States District Court for the Eastern District of Texas against MediaTek and subsidiaries MediaTek USA Inc., Ralink, and Ralink Technology Corporation (USA), along with other defendants on August 27, 2012 alleging infringement of United States Patent No. 5,487,069. The operations of MediaTek and subsidiaries MediaTek USA Inc., Ralink, and Ralink Technology Corporation (USA) would not be materially affected by this case.

(4) Palmchip Technology Corporation (Palmchip) filed a complaint in the Superior Court of Californiain the County of Santa Clara against MediaTek and subsidiaries MediaTek USA Inc., Ralink and Ralink Technology Corporation (USA) on October 19, 2012, asserting claims of breach of contract. The operations of MediaTek and subsidiaries MediaTek USA Inc., Ralink and Ralink Technology Corporation (USA) would not be materially affected by this case. The Company will handle these cases carefully. Palmchip Technology Coropration (Palmchip) appealed in the United States District Court for the Central District of California against MediaTek and subsidiaries MediaTek USA Inc., Ralink and Ralink Technology Corporation (USA) on August 30, 2013, alleging infringement of United States Patent Nos. 6,601,126, 6,769,046, 7,124,376. The operations of MediaTek and subsidiaries MediaTek USA Inc., Ralink, and Ralink Technology Corporation (USA) would not be materially affected by this case.

(5) Lake Cherokee Hard Drive Technologies, LLC filed a complaint in the United States District Court for the Eastern District of Texas against MediaTek, its subsidiary, MediaTek USA Inc. and other companies on July 23, 2013, alleging that MediaTek’s CD/DVD-ROM relevant chips products infringe United States Patent Nos. 5,991,911 and 6,048,090. The operations of MTK and subsidiaries MediaTek USA would not be materially affected by this case.

(6) Optical Device, LLC (Optical Device) filed a complaint in U.S International Trade Commission against MediaTek and its subsidiary, MediaTek USA Inc, on September 3, 2013, alleging infringement of United States Patent Nos. 8,416,651 and prohibit importing any patent-infringed products. Optical Device also filed a complaint in U.S. Delaware District Court against MTK, its subsidiary, MediaTek USA Inc on September 3, 2013, alleging MediaTek's CD/DVD-ROM relevant chips products infringe United States Patent referred above. The operations of MediaTek and subsidiaries MediaTek USA would not be materially affected by this case.

(7) Vantage Point Technology, Inc. filed a complaint in the United States District Court for the Eastern District of Texas against MediaTek, its subsidiary, MediaTek USA Inc on November 21, 2013, alleging MediaTek USA infringe United States Patent Nos. 5,463,750 and 6,374,329. The operations of MediaTek and subsidiaries MediaTek USA would not be materially affected by this case.

The Company will handle these cases carefully.

6.13. Other Material Risk:

None.