MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Mos Chip Semiconductor Technology Limited (Mos Chip India) is a fabless semiconductor company with its headquarters in Hyderabad, India. The Company specializes in providing value added services in VLSI design, Software development & development SOC (System On a Chip) for Consumer, Industrial applications. In this report, "Mos Chip Group", "Group", "we", "us" and "our" each refers to Mos Chip India and also its wholly owned subsidiary, Mos Chip Semiconductor Technology, USA (Mos Chip USA).

The financial statements have been brpared in compliance with the requirements of the Companies Act 2013 and the Generally Accepted Accounting Principles in India. The management of Mos Chip accepts responsibility for the integrity and objectivity of these financial statements, as well as, for various estimates and judgments used therein.

In addition to the historical information, this report contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth under the sub-heading "Risks and Concerns." Forward looking statements can be identified by the use of forward-looking words, such as "may," "could," "expect," "believe," "plan," "anticipate," "continue," 'likely," or other similar words.

Overview

Mos Chip is the first publicly traded fabless semiconductor Company from India with specific focus on cutting edge products. Mos Chip leverages its engineering skills to develop custom products, IP development and design/development services.

Mos Chip is currently focusing on design and development services division. It has services agreements with several companies in India and abroad.

Industry

The Indian semiconductor industry offers high growth potential as the areas where semiconductors are extensively used are themselves high growth areas. Semiconductors find applications across a wide range of industries such as Mobile Devices, Telecommunications, Information Technology & Office Automation (IT & OA), Industrial, Automotive and other industries (Aerospace, Defense and Medical industries).

According to the Department of Electronics and Information Technology (DeitY), nearly 2,000 chips are being designed every year in India and more than 20,000 engineers are working on various aspects of chip design and verification.

Over the years, the Indian semiconductor design industry has developed significant capabilities and currently works on state-of-the-art products. Growing technical competence combined with stringent IP protection environment and trend towards localization of contents will help this segment continue to grow.

Considering the continued growth momentum, the Indian semiconductor design market is expected to grow at a CAGR of 29.4 percent to touch US$ 52.6 billion in 2020.

The key drivers for the semiconductor market in India include telecom infrastructure equipment, wireless handsets, notebooks and other IT and office automation products, set-top boxes and smart cards. Growth sectors, including health care equipment, automotive, consumer goods and industrial goods—all of which increasingly use electronics—are also expected to boost semiconductor consumption in India.

Most of the important components in ISRO-made launch vehicles or satellites are electronics which are mostly being imported at the moment. "In PSLV, the imported component is 10 per cent while in the GSLV, it is 20 per cent and in satellites, it is as high as 35 per cent. There is a lot of scope for the Indian Electronics and Semiconductor Industry to contribute to the space program in the long run

Government Initiatives

The electronic system design and manufacturing (ESDM) industry will benefit from the government's "Make in India" campaign and is projected to see investment proposals worth Rs 10,000 crores (US$ 1.61 billion) over the next two years, according to the India Electronics and Semiconductor Association (IESA), an industry body.

Steps are being taken to boost domestic production of electronic items and reduce dependence on imports. These include imposition of basic customs duty on certain items falling outside the purview of IT Agreement, exemption from SAD on inputs/components for PC manufacturing, imposition of education cess on imported electronic products for parity, etc.

The services industry has been growing as the demand for engineers continues to rise. It brsents opportunities to provide value added services. However many of the MNC's have started establishing development centres within India and thereby the margins have been under tremendous brssure.

Outlook

The following sections highlight management's assessment of business potential. Design Services business

Mos Chip leverages its engineering skills to develop custom products, IP development and design/development services. After the sale of I/O products of the company, it is focusing itself on SOC products, which have a very promising future and the design services business.

Mos Chip leverages this strength in services business. It is successfully making inroads in design services business and foresees a very bright future ahead. The company has transformed into value added services and has made steady inroads into very large Tier-1 customers, including domestic customers. The Company has been working on a very complex custom System-on-a-Chip (SOC) from a domestic customer. The design has been completed and successfully demonstrated to the Customer. It is now in the process for sending to the Fabrication facilities in 40nm Low power technology.

Increasing focus on Defence projects

Defence manufacturing in India is at an inflection point with a capex opportunity of $245 billion over the next decade, underpinned by:

(1) Defence being one of the 25 sectors in the government's 'Make in India' initiative;

(2) FDI limit for the defence sector being lifted to 49% from 26%;

(3) Greater focus on procurement of locally made equipment;

(4) Liberalization of licensing policies; and,

(5) Approval for projects worth more than US$ 28 billion aimed at kick-starting the sector.

One key risk about the defence sector is that the only buyer is the government of the country and hence the most critical growth driver has to be government's policies.

We believe that while demand always existed, the lack of a thrust from the Government of India and the lack of policies to encourage private sector companies brvented the growth of the Indian defence manufacturing industry.

However, we believe that under the brsent Government, the defence manufacturing sector has already started to get a policy action push. Hence, we believe that the Indian defence sector is likely to offer enormous opportunities for growth.

Given the equipment requirements for the modernization of India's armed forces, along with the thrust from GoI and brsent policy of 'Make in India', we believe India is about to start one of the world's largest procurement cycles. Citi Research estimated the opportunity of the Indian defence manufacturing sector to be worth US$245bn overthe next 10 years.

We believe the opportunity will be more back-ended given the long procurement cycles in defence (despite timeline-crunching by the new government). However, not only could orders be large but they also could be recurring, making demand less cyclical. While the larger private companies would target the OEM level, their involvement could nurture tier 1 & tier 2 suppliers, creating a virtuous cycle for India's defence manufacturing sector.

Risks and concerns

The following important factors could affect our future results of operations.

Semiconductor Services under brssure

There is pricing brssure in the value added services space within the Semiconductor Industry as many MNC's are looking at lowering their R&D budgets and have expanded their operations within India and other countries with cheaper labour force. The billing rates are under brssure, and due to this the margins are affected adversely.

Future success depends upon the continued services of key personnel, many of whom would be difficult to replace

The Company's future success depends upon the continued services of its executive officers, key hardware and software engineers, and sales, marketing and support personnel, many of whom would be difficult to replace. The loss of one or more of these employees could seriously harm the Company's business. In addition, because of the highly technical nature of its business, the loss of key engineering personnel could delay product introductions and significantly impair the Company's ability to successfully create future products.

Others may bring infringement actions against Mos Chip Group that could be time-consuming and expensive to defend.

The Group may become subject to claims involving patents and other property rights. Intellectual property claims would subject the Group to significant liability claims for damages and invalidate its proprietary rights. In addition, intellectual property claims may be brought against customers that incorporate its products in the design of their own products. These claims, regardless of their success or merit and regardless of whether the Group is named as a defendant in a lawsuit, would likely be time consuming and expensive to resolve and would divert the time and attention of the Management and technical personnel.

The cyclical nature of the semiconductor industry may lead to significant variances in the demand for Mos Chip Group's products and could harm its operations.

The cyclical nature of the semiconductor industry could lead to significant variances in demand and thereby impacting the margins. The Group may experience periodic fluctuations in its future financial results because of changes in industry-wide conditions.

The Company's operating and consolidated results may be adversely affected by variations of the Indian rupee against foreign currencies and the US dollar

The Company has international exposure and is subject to currency fluctuations. The Company also consolidates its results with wholly owned subsidiaries in USA. Any adverse fluctuations in the currencies in which the Company's exports/imports or any adverse fluctuations against the US dollar would affect the Company's results of operations and the consolidated financial position.

Internal control systems

The Company has formulated effective internal control systems and implemented the same strictly to ensure that the assets and interests of the Company are safeguarded and to determine the accuracy and reliability of accounting data.

The Company has an internal audit system and its functions are to ensure that systems are designed and implemented with adequate internal controls. The Company's control methodology is commensurate with the size of operations, the transactions that are executed, and the assets that must be safeguarded and deployed in accordance with the Company's policies.

An Audit Committee, headed by a non-executive independent Director, periodically reviews the audit information/observation and all significant issues are brought to the attention of the committee.

Human Resources

The Company currently employs a total of 100 employees. All the employees are located at Hyderabad, India. Of these 76 are technical employees and the rest are marketing and support staff.

Mos Chip firmly believes that the key to its success is in its ability to hire and retain employees with appropriate qualifications and competencies. The Company's human resource management works towards this goal and strives to provide the right work atmosphere, opportunities for learning and personal development to all employees, and appraisal and reward mechanisms to encourage excellence in performance.  The Company regularly ensures that the compensation packages are in line with industry levels and grants stock options to retain talent.