Edgar Filing: MICROTUNE INC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark one)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended September 30, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ___________________ to ___________________

Commission file number 000-31029-40

MICROTUNE, INC.
(Exact name of registrant as specified in its charter)

Delaware 75-2883117
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)

2201 10th Street
Plano, Texas 75074
(Address of principal executive office and zip code)

(972) 673-1600
(Registrant's telephone number, including area code)

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 of 1934 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 filing requirements
for the past 90 days.
YES [X] NO [ ]

As of October 31, 2001, 40,313,128 shares of the Registrant's common stock were
outstanding.

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Microtune, Inc.

FORM 10-Q

September 30, 2001

INDEX

Page
----

Part I Financial Information

Item 1. Financial Statements.................................................................. 3

Consolidated Balance Sheets at September 30, 2001 and December 31, 2000
(unaudited)............................................................................. 3

Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2001 and 2000 (unaudited)................................................. 4

Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
2001 and 2000 (unaudited)............................................................... 5

Notes to Consolidated Financial Statements (unaudited).................................... 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................... 12

Item 3. Qualitative and Quantitative Disclosure About Market Risk............................. 20

Factors Affecting Future Operating Results and Stock Price................................ 21

Part II Other Information

Item 1. Legal Proceedings..................................................................... 35

Item 2. Changes In Securities and Use of Proceeds............................................. 35

Item 3. Defaults Upon Senior Securities...................................................... 35

Item 4. Submission of Matters to a Vote of Security Holders................................... 35

Item 5. Other Information..................................................................... 35

Item 6. Exhibits and Reports on Form 8-K...................................................... 35

Signatures...................................................................................... 36

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PART I Financial Information

Item 1. Financial Statements

Microtune, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
(unaudited)

Assets September 30, 2001 December 31, 2000
------------------ -----------------

Current assets:
Cash and cash equivalents....................................... $ 71,264 $ 77,650
Accounts receivable, net of allowance for doubtful accounts of 10,297
$481 at September 30, 2001 and $456 at December 31, 2000....... 12,301

Inventories..................................................... 9,855 16,389
Deferred income taxes........................................... 620 552
Other current assets............................................ 1,704 770
-------- --------
Total current assets.......................................... 93,740 107,662

Property and equipment, net........................................ 17,813 15,179
Intangible assets, net of accumulated amortization of $2,825 at
September 30, 2001 and $2,481 at December 31, 2000................ 4,918 6,054

Goodwill, net of accumulated amortization of $9,800 at September
30, 2001 and $5,570 at December 31, 2000.......................... 18,476 22,706

Deferred income taxes.............................................. 199 484
Other assets and deferred charges.................................. 1,521 946
-------- --------
Total assets............................................... $136,667 $153,031
======== ========

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................................ $ 3,128 $ 6,763
Accrued expenses................................................ 8,662 8,110
Accrued compensation............................................ 1,991 1,888
-------- --------
Total current liabilities..................................... 13,781 16,761

Deferred income taxes.............................................. 982 2,966
Other noncurrent liabilities....................................... 1,155 1,197
Commitments........................................................ - -

Stockholders' equity:
Preferred stock, $0.001 par value
Authorized shares - 25,000 at September 30, 2001 and
December 31, 2000.............................................. - -
Common stock, $0.001 par value
Authorized shares - 150,000 at September 30, 2001 and
December 31, 2000; issued and outstanding shares - 39,967
at September 30, 2001 and 38,547 at December 31, 2000.......... 40 39

Additional paid-in capital........................................ 185,736 180,661
Loans receivable from stockholders................................ (35) (788)
Accumulated other comprehensive loss.............................. (988) (988)
Accumulated deficit............................................... (64,004) (46,817)
-------- --------
Total stockholders' equity.................................... 120,749 132,107
-------- --------
Total liabilities and stockholders' equity................. $136,667 $153,031
======== ========

See accompanying notes.

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Microtune, Inc.

Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
2001 2000 2001 2000
------- ------- -------- --------

Net revenues......................................... $15,015 $19,935 $ 47,129 $ 48,896
Cost of revenues..................................... 9,981 12,654 34,170 32,585
------- ------- -------- --------
Gross margin......................................... 5,034 7,281 12,959 16,311
Operating expenses:
Research and development:
Stock option compensation....................... 335 365 1,014 991
Other........................................... 4,383 4,093 11,916 9,770
------- ------- -------- --------
4,718 4,458 12,930 10,761
Acquired in-process research and development....... - - - 12,692
Selling, general and administration:
Stock option compensation....................... 363 715 1,397 2,093
Other........................................... 3,180 4,073 11,298 12,170
------- ------- -------- --------
3,543 4,788 12,695 14,263
Amortization of intangible assets and goodwill..... 1,804 1,829 5,410 6,222
------- ------- -------- --------
Total operating expenses........................ 10,065 11,075 31,035 43,938
------- ------- -------- --------
Loss from operations................................. (5,031) (3,794) (18,076) (27,627)
Other income (expense):
Interest income.................................... 693 864 2,565 1,360
Foreign currency translation and transaction gains (79) (547) (1,245) (476)
(losses), net.....................................
Other.............................................. (972) 20 (910) 480
------- ------- -------- --------
Loss before income taxes............................. (5,389) (3,457) (17,666) (26,263)
Income tax expense (benefit)......................... 14 936 (478) 1,686
------- ------- -------- --------
Net loss............................................. $(5,403) $(4,393) $(17,188) $(27,949)
======= ======= ======== ========

Basic and diluted loss per common share.............. $ (0.14) $ (0.16) $(0.44) $(1.96)
======= ======= ======== ========
Weighted-average shares used in computing basic and
diluted loss per common share....................... 39,711 27,023 39,293 14,265
======= ======= ======== ========

See accompanying notes.

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Microtune, Inc.

Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

Nine Months Ended
September 30,
---------------------
2001 2000
-------- --------

Operating activities:
Net loss................................................................... $(17,188) $(27,949)
Adjustments to reconcile net loss to net cash used in operating
activities, net of effects of business combination:
Depreciation............................................................. 4,630 4,361
Amortization of intangible assets and goodwill........................... 5,410 6,222
Acquired in-process research and development............................. - 12,692
Foreign currency translation and transaction gains (losses), net......... 1,245 476
Stock option compensation................................................ 2,411 3,084
Write-off of uncollectable loan receivable............................... 1,026 -
Deferred income taxes.................................................... (1,584) (794)
Changes in operating assets and liabilities:
Accounts receivable................................................... 2,004 (2,560)
Inventories........................................................... 6,534 (4,713)
Other assets.......................................................... (1,386) 305
Accounts payable...................................................... (3,635) 2,488
Accrued expenses...................................................... 325 3,084
Accrued compensation.................................................. 103 (2,870)
-------- --------
Net cash used in operating activities.............................. (105) (6,174)
Investing activities:
Net cash acquired in acquisition of HMTF Acquisition....................... - 3,550
Purchases of property and equipment........................................ (7,468) (11,234)
Sale of property and equipment............................................. 196 249
Loans receivable........................................................... (1,148) 258
Purchase of intangible assets.............................................. (45) (887)
-------- --------
Net cash used in investing activities.............................. (8,465) (8,064)
Financing activities:
Proceeds from initial public offering of common stock...................... - 66,770
Proceeds from issuance of preferred stock.................................. - 9,600
Proceeds from issuance of common stock upon the exercise of options and 2,666 143
from shares purchased under Employee Stock Purchase Plan..................
Proceeds from loans receivable from stockholders........................... 753 432
-------- --------
Net cash provided by financing activities.......................... 3,419 76,945
Effect of foreign currency exchange rate changes on cash.................... (1,235) (840)
-------- --------
Net change in cash and cash equivalents..................................... (6,386) 61,867
Cash and cash equivalents at beginning of period............................ 77,650 20,129
-------- --------
Cash and cash equivalents at end of period.................................. $ 71,264 $ 81,996
======== ========

See accompanying notes.

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Microtune, Inc.
Notes to Consolidated Financial Statements
September 30, 2001
(unaudited)

1. Basis of Presentation

General

The accompanying unaudited financial statements as of and for the three and nine
months ended September 30, 2001 and 2000 have been prepared by Microtune, Inc.
(the Company), pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. These unaudited consolidated
financial statements should be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 2000.

In the opinion of management, all adjustments which are of a normal and
recurring nature and are necessary for a fair presentation of the financial
position, results of operations, and cash flows as of and for the three and nine
months ended September 30, 2001 have been made. Results of operations for the
three and nine months ended September 30, 2001, are not necessarily indicative
of results of operations to be expected for the entire year.

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Foreign Currency Translation

Through June 30, 2000, the Company used the U.S. Dollar as its functional
currency, except that the German Mark was used as its functional currency for
Microtune GmbH & Co. KG (Microtune KG) and its subsidiaries (collectively, the
Subsidiaries). Foreign currency exchange gains and losses resulting from the
translation of financial statements denominated in German Marks of Microtune KG
into U.S. Dollars through June 30, 2000, were included as a component of
stockholders' equity. Foreign currency exchange gains and losses resulting from
the remeasurement of financial statements not denominated in German Marks of
Microtune KG outside of Germany into German Marks were recognized currently in
the Company's results of operations as a component of foreign currency gains and
losses.

Effective July 1, 2000, the Company changed the functional currency of the
Subsidiaries to the U.S. Dollar from the German Mark to reflect the manner in
which the Subsidiaries are now managed and operated. Subsequent to June 30,
2000, the financial statements of the Subsidiaries are remeasured into the U.S.
Dollar. The impact from the remeasurement of financial statements not
denominated in U.S. Dollars is recognized currently in the Company's results of
operations as a component of foreign currency gains and losses.

Adoption of New Accounting Pronouncements

Effective January 1, 2000, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 133, Accounting for Derivatives and Hedging Activities.
SFAS No. 133 requires that all derivatives be recognized at fair value on the
balance sheet and that related gains and losses be included in net income or
comprehensive income depending on the nature of the hedging relationship.
Currently, the Company has not entered into contracts that will be classified as
derivative financial instruments under SFAS No. 133. However, the Company may
enter into contracts that are classified as derivative financial instruments in
the

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future. Adoption of SFAS No. 133 did not have an impact on the results of
operations or financial position of the Company. However, management cannot
estimate its impact on future results of operations and financial position.

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, the pooling-of-interests method of accounting for business combinations
has been eliminated. Also, the criteria for recognizing acquired intangible
assets apart from goodwill has been changed, and acquired goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized,
but will be subject to annual impairment tests in accordance with SFAS No. 141
and SFAS No. 142. Other intangible assets will continue to be amortized over
their useful lives.

The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of SFAS No. 142 is expected to result in an increase
in net income of $5.8 million ($0.15 per share) per year. During 2002, the
Company will perform the first of the required impairment test of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, effective for fiscal years beginning after
December 15, 2001. This statement establishes new rules for determining
impairment of certain other long-lived assets, including intangible assets
subject to amortization, property and equipment and long-term prepaid assets.
The adoption of this standard is not expected to have a significant effect on
the operating results or the financial position of the Company.

2. Completion of Initial Public Offering

On August 4, 2000, the Company completed its initial public offering. The
Company issued 4.6 million shares of its common stock resulting in net proceeds
of approximately $66.8 million. Upon the completion of the initial public
offering, all then outstanding convertible preferred stock converted into an
aggregate of approximately 23.1 million shares of common stock and all
outstanding warrants were automatically exercised for approximately 2.2 million
shares of common stock.

3. Acquisition of HMTF Acquisition (Bermuda), Ltd.

On January 10, 2000, the Company combined with HMTF Acquisition (Bermuda), Ltd.
(HMTF Acquisition), the ultimate parent company of Temic Telefunken
Hochfrequenztechnik GmbH (Temic), in a transaction accounted for as a purchase
business combination. HMTF Acquisition acquired Temic on December 22, 1999.
Temic is now called Microtune KG. The consideration in the combination consisted
of 3,318,513 shares of Series E Preferred Stock and warrants to purchase up to
2,212,342 shares of common stock at an exercise price of $0.001 per share. The
results of operations of HMTF Acquisition are included in the results of the
Company from the date of acquisition. The components of the aggregate cost of
the combination were as follows (in thousands, except share data):

Fair market value of 3,318,513 shares of Series E Preferred Stock.......... $55,548
Fair market value of warrants to purchase 2,212,342 shares of the
Company's common stock................................................ 7,411
Transaction costs.......................................................... 185
-------
Total combination cost..................................................... $63,144
=======

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The fair market values of the Series E Preferred Stock and the warrants were
based on the estimated fair market value of the Company's common stock at the
date of the combination and the cash purchase price paid by HMTF Acquisition for
Microtune KG on December 22, 1999 of $60.0 million.

The cost of the acquisition has been allocated to the assets and liabilities
acquired and to acquired in-process research and development, with the remainder
recorded as excess cost over net assets acquired, based on estimates of fair
values as follows (in thousands):

Working capital................................................................... $11,206
Property and equipment............................................................ 6,118
Intangible assets................................................................. 8,037
Goodwill.......................................................................... 28,276
Acquired in-process research and development costs charged to expense............. 12,692
Deferred income taxes............................................................. (1,914)
Other assets and liabilities, net................................................. (2,283)
Loans receivable from stockholders................................................ 1,012
-------
Total combination cost............................................................ $63,144
=======

The Company's management is primarily responsible for estimating the fair values
of intangible assets and acquired in-process research and development. The
estimates of the fair values of intangible assets and acquired in-process
research and development were determined based on information furnished by
management of Microtune KG. Amounts allocated to acquired in-process research
and development were expensed at the date of acquisition because the purchased
research and development had no alternative future uses, and had not reached
technological feasibility based on the status of design and development
activities that required further refinement and testing. The acquired in-
process research and development projects were assessed, analyzed and valued
using the exclusion approach articulated by the Securities and Exchange
Commission. The estimates used in valuing the research and development were
based upon assumptions regarding future events and circumstances management
believes to be reasonable, but that are inherently uncertain and unpredictable.
The relative stage of completion and projected operating cash flows of the
underlying in-process projects acquired were the most significant and uncertain
assumptions utilized in the valuation analysis of the acquired in-process
research and development. Such uncertainties could give rise to unforeseen
budget overruns and revenue shortfalls in the event that the Company is unable
to successfully complete and commercialize the projects.

The value of the acquired in-process research and development was determined by
discounting the estimated projected net cash flows related to the applicable
products for the next ten years, including costs to complete the development of
the technology and the future revenues to be earned upon release of the
products. The rate utilized to discount the net cash flows to present value was
22% based on the weighted average cost of capital adjusted for the risks
associated with the estimated growth, profitability, developmental and market
risks of the acquired development projects. Projected net cash flows from such
products are based on estimates of revenues and operating profit (loss) related
to such products. Management expects that the purchased research and
development projects generally will be successfully developed into commercially
viable products. However, there can be no assurance that commercial viability
or timely release of these products will be achieved.

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development efforts since the acquisition date. During 2000, the development
projects as of the acquisition date in the cable modem, set-top box and
multimedia product groups were completed at a cost of approximately $335,000,
$50,000 and $340,000, respectively. As of September 30, 2001, the amount
expended toward completing the development projects in the automotive product
group as of the acquisition date was approximately $1,800,000 and the date of
completion of the automotive development projects was September 2001. Projects
in the cable modem and multimedia product groups began to generate revenues in
2000. Revenues are projected to begin in 2002 for projects in the automotive
product group. At September 30, 2001, the Company expects to essentially meet
its original cash flows and return expectations for these projects. Revenues
were projected to begin in 2001 for development projects in the set-top box
product group, but as of September 30, 2001, it is expected that these projects
will not produce any significant future revenues nor will these products
generate net cash inflows. However, the failure to develop these products is not
expected to have a material impact on the Company's overall return or its
investment in the acquired technology or on future results of operations or
financial position.

4. Earnings Per Share

Basic earnings (loss) per common share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during each period.
Diluted earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during each
period and common equivalent shares consisting of preferred stock, stock
options, warrants, restricted stock subject to repurchase rights and employee
stock purchase plan options.

The following table sets forth anti-dilutive securities that have been excluded
from diluted earnings per share (in thousands):

Nine Months Ended
September 30,
-----------------
2001 2000
------ ------
Stock options..................................... 6,857 7,773
Restricted common stock........................... 126 239
Employee stock purchase plan...................... 28 8
------ ------
Total anti-dilutive securities excluded........... 7,011 8,020
====== ======

5. Cash and Cash Equivalents

Cash and cash equivalents consist of bank deposits, money market funds and
asset-backed commercial paper. The Company's investments in asset-backed
commercial paper are comprised of high-quality securities in accordance with the
Company's investment policy. The Company considers highly liquid investments
with original maturities of three months or less to be cash equivalents.

6. Inventories

Inventories consists of the following (in thousands):

September 30, December 31,
2001 2000
------------- ------------
Finished goods..................... $2,856 $ 4,978
Work-in-process.................... 2,106 2,085
Raw materials...................... 4,893 9,326
------ -------
$9,855 $16,389
====== =======

Inventories are stated at the lower of standard cost, which approximates actual
cost determined on a first-in, first-out basis, or estimated realizable value.

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7. Property and Equipment

Property and equipment, at cost, consists of the following (in thousands):

September 30, December 31,
2001 2000
------------- ------------
Leasehold improvements...................... $ 1,398 $ 1,227
Manufacturing equipment..................... 16,864 13,702
Other equipment............................. 5,375 3,039
Furniture and fixtures...................... 677 1,127
Computer software........................... 3,430 1,834
------- -------
Total property and equipment................ 27,744 20,929
Less accumulated depreciation............... 9,931 5,750
------- -------
$17,813 $15,179
======= =======

8. Accrued Expenses

Accrued expenses consists of the following (in thousands):

September 30, December 31,
2001 2000
------------- ------------
Accrued warranty obligation................. $ 694 $ 711
Accrued income taxes........................ 3,111 2,145
Deferred income taxes....................... 557 373
Other....................................... 4,300 4,881
------- ------
$ 8,662 $8,110
======= =======

9. Income Taxes

Prior to our combination with Microtune KG, the Company had not recognized any
provision for income taxes. For U.S. federal income tax purposes, at December
31, 2000, the Company had a net operating loss carryforward of approximately
$26.0 million and an unused research and development credit carryforward of
approximately $1.0 million, which begins to expire in 2011. Due to the
uncertainty of our ability to utilize these deferred tax assets, they have been
fully reserved.

The provision for the three months and benefit for the nine months ended
September 30, 2001, and the provision for the three and nine months ended
September 30, 2000, consists of foreign income taxes and U.S. state franchise
taxes. Effective January 1, 2001, the German government reduced tax rates of
retained earnings, previously 40%, and earnings distributed as a dividend,
previously 30%, to a flat rate of 25%. The impact of this change on deferred
income taxes was recorded in the third quarter of 2000 when the law was enacted.

10. Commitments and Contingencies

On January 24, 2001, the Company filed a lawsuit alleging patent infringement in
the United States Court for the Eastern District of Texas, Sherman Division,
against Broadcom Corporation. The lawsuit alleges that Broadcom Corporation's
BCM3415 microchip infringes on the Company's U.S. patent no. 5,737,035. The
Company's complaint is seeking monetary damages resulting from the alleged
infringement as well as injunctive relief precluding Broadcom Corporation from
taking any further action which infringes the Company's 5,737,035 patent. The
lawsuit is still at an early stage.

Starting on July 11, 2001, multiple purported securities fraud class action
complaints were filed in the United States District Court for the Southern
District of New York. The Company is aware of at least three such

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complaints: Berger v. Goldman, Sachs & Co., Inc. et al.; Atlas v. Microtune et
al.; and Ellis Investments Ltd. v. Goldman Sachs & Co., Inc. et al. The
complaints are brought purportedly on behalf of all persons who purchased the
Company's common stock from August 4, 2000 through December 6, 2000. According
to the law firm that filed it, the Atlas complaint names as defendants
Microtune, Douglas J. Bartek, the Company's Chairman and Chief Executive
Officer, Everett Rogers, the Company's Chief Financial Officer and Vice
President of Finance and Administration, and several investment banking firms
that served as underwriters of our initial public offering. Microtune, Mr.
Bartek and Mr. Rogers were served with notice on the Atlas complaint on August
22, 2001, however, they have not been served regarding the other referenced
complaints.

11. Stock Plans

During 1999 through July 2000, the Company issued stock options that were deemed
to have been issued at less than fair market value at the date of grant and
recorded $16.5 million and $3.2 million in 2000 and 1999, respectively, for
deferred stock compensation. This deferred stock compensation is being
recognized over the respective vesting periods of the stock options, which range
from one to six years. As of September 30, 2001, and December 31, 2000,
unamortized deferred stock compensation was $8.7 million and $14.6 million,
respectively. The weighted average remaining vesting period of outstanding
compensatory stock options was approximately 2.0 years at September 30, 2001.

12. Geographic Information and Significant Customers

The Company's headquarters and main design center are located in Plano, Texas.
The Company has other sales offices and design centers in the United States,
Korea, Taiwan and Hong Kong. The Company also has a systems application design
center in Germany and two manufacturing facilities in the Philippines. Net
revenues by geographical area are summarized below (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ---------------------------------
2001 2000 2001 2000
------- ------- ------- -------

North America............. $ 5,142 $ 9,829 $21,290 $23,680
Europe.................... 3,751 2,452 11,207 9,047
Asia Pacific.............. 5,982 7,133 14,303 15,109
Other..................... 140 521 329 1,060
------- ------- ------- -------
$15,015 $19,935 $47,129 $48,896
======= ======= ======= =======

Sales to DaimlerChrysler accounted for approximately 22% of consolidated net
revenues for the nine months ended September 30, 2001. Sales to DaimlerChrysler
and Motorola/General Instruments accounted for approximately 22% and 11%,
respectively, of consolidated net revenues for the nine months ended September
30, 2000.

Sales to DaimlerChrysler and Motorola/General Instruments accounted for
approximately 19% and 11%, respectively, of consolidated net revenues for the
three months ended September 30, 2001. Sales to DaimlerChrysler and
Motorola/General Instruments accounted for approximately 16% and 13%,
respectively, of consolidated net revenues for the three months ended September
30, 2000.

13. Subsequent Events

On October 1, 2001, the Company acquired a silicon design center in the
Netherlands for approximately $3.0 million in cash and 210,000 shares of the
Company's common stock valued at approximately $2.1 million.

On October 28, 2001, the Company entered into an Agreement and Plan of Merger
and Reorganization with Transilica Inc. (Transilica), a California corporation.
Under the terms of the Merger Agreement, the Company expects to acquire all of
the outstanding capital stock of Transilica. The consummation of the

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acquisition of Transilica, which is expected to occur in November 2001, is
subject to certain closing conditions. Upon closing, under the terms of the
Merger Agreement, shares equivalent to 19.99% of the Company's outstanding
shares of common stock at closing, plus a cash amount that is equal to
Transilica's cash and cash equivalants less certain liabilities at closing will
be issued and exchanged for all of the outstanding capital stock of Transilica.
The total purchase price to be allocated is currently estimated to be
approximately $155.0 million.

Transilica was founded in 1998 and designs system-on-chip silicon products for
next-generation short-range wireless applications. The products Transilica is
developing consist of highly integrated solutions incorporating radio
transceivers, digital baseband and software on a single chip, which offer
customers low-power consumption and small form factors. Transilica's initial
products will be targeted at the Bluetooth and 802.11a standards, which are
communication protocols for short-range wireless applications. To date,
Transilica's activities have consisted primarily of product research and
development and no significant revenues have been earned from the sale of these
products. Additional research and development efforts will be required before
these products will be available for commercial use. Transilica is also capable
of designing customized system-on-chip solutions to meet a customer's specific
application.

Both acquisitions, if the Transilica acquisition is consummated, will be
accounted for in accordance with the purchase method of accounting and,
accordingly, the results of operations of the Netherlands design center and
Transilica will be included in the Company's results of operations from the
respective dates of the acquisitions. The Company expects to incur non-
recurring charges to operations in the fourth quarter of 2001 currently
estimated to aggregate between $30.0 million and $40.0 million, consisting
primarily of the portion of the acquisition costs allocated to purchased in-
process research and development costs which will be charged to expense.

In October 2001, the Company's management committed to a plan to shut down one
of its two manufacturing facilities in the Philippines. Existing production at
this facility will be transferred to the Company's remaining Philippine
manufacturing facility. The shutdown is expected to be completed in December
2001. In conjunction with this closure, the Company expects to incur a
nonrecurring charge to operations in the fourth quarter of 2001, currently
estimated to aggregate between $2.0 million and $3.0 million.

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations'

Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "estimates," "expects," "intends," and words of similar import,
may constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Readers are referred to the
disclosures under the caption "Factors Affecting Future Operating Results and
Stock Price" in this report and to the risk factors set out in our Annual Report
filed on Form 10-K for fiscal year 2000, as amended, which describe factors that
could cause actual events to differ from those contained in any forward looking
statements.

Overview

History

We were incorporated in Texas in May 1996 and began operations in August
1996. In June 2000, we reincorporated in Delaware. From inception until
December 31, 1999, our primary activities consisted of raising capital,
recruiting radio frequency and analog engineers, developing our silicon
integrated circuit tuner for broadband radio frequencies and initiating
relationships with potential customers and suppliers.

In January 2000, we combined with Temic Telefunken Hochfrequenztechnik GmbH
(GmbH) and its affiliated companies (collectively, referred to as Temic). Temic
was founded in the early 1900's in Germany. In the late 1940's, Temic began
developing mechanical radio frequency tuners, and in the late 1960's, it was

-12-

the first company to develop an electronic radio frequency tuner. The two
companies have been operating as one company since the combination in January
2000. In addition, GmbH converted to a KG and changed its name to Microtune GmbH
& Co. KG (Microtune KG), in August 2000.

Recent Developments

On October 28, 2001, we entered into an Agreement and Plan of Merger and
Reorganization (the "Merger Agreement") with Transilica Inc., a California
corporation (Transilica). Under the terms of the Merger Agreement, Microtune
expects to acquire all of the outstanding capital stock of Transilica. The
consummation of the acquisition of Transilica, which is expected to occur in
November 2001, and which is structured to be a tax-free reorganization under
Section 368 of the Internal Revenue Code, is subject to certain closing
conditions. Upon closing, under the terms of the Merger Agreement, shares
equivalent to 19.99% of Microtune's outstanding shares of common stock at
closing, plus a cash amount that is based on the cash on the balance sheet of
Transilica less certain liabilities at closing (the "Merger Consideration"),
will be issued and exchanged for all of the outstanding capital stock of
Transilica (the "Transilica Acquisition"). The Merger Agreement also provides
that approximately 15% of the total Merger Consideration in the form of
Microtune shares of common stock will be placed in escrow for the purpose of
securing the indemnification obligations of Transilica under the Merger
Agreement. The escrow shares are to be released periodically, subject to any
escrow claims, at the end of each of the full three years following the closing.
The shares to be issued by us pursuant to the Merger Agreement will be issued
pursuant to an exemption from registration under the Securities Act. The Merger
Agreement provides the Transilica shareholders with the right to require us to
register their Microtune shares within 20 days after the closing. Despite this
registration obligation, former Transilica shareholders who receive shares of
Microtune common stock will not be able to sell their shares of Microtune common
stock until the earlier to occur of Transilica's achievement of certain product
revenue-based milestones or the date that is 3 months following closing. In
addition, the shares of Microtune common stock received by former Transilica
shareholders as a result of the Transilica Acquisition are subject to lock-up
agreements which restrict their ability to sell the shares of Microtune common
stock that they received as a result of the Transilica Acquisition. The lock-up
agreements provide that each month, 10% of the shares subject to the lock-up
will be released from the lock-up restrictions.

Concurrent with the signing of the Merger Agreement, Transilica and
Microtune entered into a Credit Agreement whereby Microtune has agreed to make
unsecured loans to Transilica in an aggregate not exceeding $5.0 million. Under
the Credit Agreement, if Transilica's cash balance is less than $500,000 and
subject to certain other conditions more fully described in the Credit
Agreement, Microtune shall make advances to Transilica upon Transilica's
request. In connection with the execution of the Credit Agreement, Transilica
executed a convertible promissory note for $5.0 million in favor of Microtune,
which provides that all outstanding amounts under the credit facility will bear
interest at the rate of 8% per annum. In the event that the Merger Agreement is
terminated, all outstanding amounts under the credit facility automatically
convert into Transilica Series B Preferred Stock at a price of $1.6026 per
share. The Credit Agreement also provides that Microtune will have the right to
participate on a pro rata basis in all future rounds of financing undertaken by
Transilica.

Transilica was founded in 1998 and designs system-on-chip silicon products
for next-generation short-range wireless applications. The products Transilica
is developing consist of highly integrated solutions incorporating radio
transceivers, digital baseband and software on a single chip, which offer
customers low-power consumption and small form factors. Transilica's initial
products will be targeted at the Bluetooth and 802.11a standards, which are
communication protocols for short-range wireless applications. To date,
Transilica's activities have consisted primarily of product research and
development and no significant revenues have been earned from the sale of these
products. Additional research and development efforts will be required before
these products will be available for commercial use. Transilica is also capable
of designing customized system-on-chip solutions to meet a customer's specific
application.

-13-

Financial Information

We are a radio frequency silicon and systems company, specializing in high-
performance radio frequency tuners, amplifiers and transceivers to the broadband
communications markets. We design, develop and sell highly integrated broadband
gateway radio frequency integrated circuits and modules for use in cable modems,
PC/TVs, set-top boxes, cable telephony, digital TV, automotive entertainment and
other consumer electronics devices.

Since inception we have incurred significant losses, and as of September
30, 2001, we had an accumulated deficit of approximately $64.0 million. As a
result of our combination with Microtune KG, our primary activities have
expanded to include the design, manufacture and sale of radio frequency modules.
In March 2000, we began shipment of our single chip silicon tuner and in
December 2000, we began shipment of our silicon upstream amplifier. Tuner
modules were developed, manufactured and marketed by Microtune KG prior to the
combination. Our limited combined operating history combined with business
risks, including those risks set forth under the caption "Factors Affecting
Future Operating Results and Stock Price" in this report and the risk factors
set out in our Annual Report filed on Form 10-K, as amended, for the fiscal year
2000, make the prediction of future results of operations difficult, and as a
result there can be no assurance that we will achieve or sustain revenue growth
or profitability.

The time lag between product availability and volume shipment can be
significant due to a sales process that includes customer qualification of our
products and can take as long as two years, during which we continue to evolve
our technology.

We recognize revenues from our products upon shipment to a customer or upon
notification of customer receipt, depending on the contract terms. We provide
at least a one-year warranty on all products and record a related provision for
estimated warranty costs at the date of sale.

We have invested heavily in research and development of our radio frequency
integrated circuits and systems technology. We expect to increase our
investment in these areas in absolute dollars to further develop our radio
frequency products. This investment will include the continued recruitment of
radio frequency and analog integrated circuit designers and systems engineers,
acquisition of test, development and production equipment and expansion of
facilities for research and manufacturing. As a result, we may continue to
incur substantial losses from operations for the foreseeable future.

We use IBM and X-FAB to manufacture our wafers and Amkor to assemble our
radio frequency integrated circuits. We perform final testing, packing and
shipping of our radio frequency integrated circuits at our facility in Plano,
Texas, and overseas at Amkor. With respect to our tuner modules, we perform all
of our assembly and calibration functions in our factories in Manila,
Philippines. Test functions are performed in our factories in Manila,
Philippines, and at our facility in Huntsville, Alabama. As a result of our
combination, we have recently experienced a period of rapid growth and
expansion. To manage this growth and any future growth effectively, we intend
to enhance our existing operational and financial systems

-14-

Results of Operations

The following table sets forth, for the periods presented, certain data
from our consolidated statements of operations expressed as a percentage of net
revenues:

Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------

2001 2000 2001 2000
----- ----- ----- -----
Net revenues........................... 100% 100% 100% 100%
Cost of revenues....................... 66 63 73 67
----- ----- ----- -----
Gross margin........................... 34 37 27 33
Operating expenses:
Research and development:
Stock option compensation......... 2 2 2 2
Other............................. 30 21 25 20
----- ----- ----- -----
32 23 27 22
Acquired in-process research and
development......................... - - - 26

Selling, general and administration:
Stock option compensation......... 3 4 3 4
Other............................. 21 20 24 25
----- ----- ----- -----
24 24 27 29
Amortization of intangible assets
and goodwill........................ 12 9 11 13
----- ----- ----- -----

Total operating expenses.......... 68 56 65 90
----- ----- ----- -----
Loss from operations................... (34) (19) (38) (57)
Other income (expense)................. (2) 2 1 3
----- ----- ----- -----

Loss before income taxes............... (36) (17) (37) (54)
Income tax expense (benefit)........... - 5 (1) 3
----- ----- ----- -----
Net loss............................... (36)% (22)% (36)% (57)%
===== ===== ===== =====

Comparison of the Three and Nine Months Ended September 30, 2001 and 2000.

Net Revenues

Revenues are recorded net of a provision for returns. Our net revenues
decreased $1.8 million, or 4%, to $47.1 million in the nine months ended
September 30, 2001, from $48.9 million in the nine months ended September 30,
2000. Our net revenues decreased $4.9 million, or 25%, to $15.0 million in the
three months ended September 30, 2001, from $19.9 million in the three months
ended September 30, 2000. This decrease is primarily due to lower demand for
our cable modem products partially offset by increased demand for our automotive
entertainment products. The cable modem industry has recently experienced a
buildup of inventories that has negatively impacted current demand for our
products in the three and nine months ended September 30, 2001. We anticipate
increased pricing pressures and softness in demand in the near future for our
products, except related to our automotive entertainment products, due to
economic pressures.

Cost of Revenues

Cost of revenues includes the cost of purchases for subcontracted
materials, integrated circuit assembly, factory labor and overhead and warranty
costs. In addition, we perform final testing of our products and incur cost for
the depreciation of our test and handling equipment, labor, quality assurance
and logistics. Our subcontracted materials experience cyclical trends in
pricing due to fluctuations in demand.

-15-

Our costs of revenues in the nine months ended September 30, 2001 were $34.2
million, or 73% of net revenues, compared to $32.6 million, or 67% of net
revenues, in the nine months ended September 30, 2000. Our cost of revenues in
the three months ended September 30, 2001 were $10.0 million, or 66% of net
revenues, compared to $12.7 million, or 63% of net revenues, in the three months
ended September 30, 2000. Our gross margins in the three and nine months ended
September 30, 2001 decreased compared to the same periods for 2000 as a result
of lower loading of our factories and pricing pressure on more mature product
lines. In addition, our gross margin in the nine months ended September 30, 2001
decreased compared to the same period for 2000 as a result of a reserve of $1.7
million for excess inventory that was recorded in the first quarter of 2001. In
the near future, we believe gross margins may improve due to increased
efficiencies in our factories and increasing levels of our silicon in our
product mix partially offset by increased selling price pressures. However, we
do not expect gross margins to consistently increase each quarter. As we add new
products to our manufacturing lines, we will incur higher cost of revenues,
which may be offset over time as we negotiate volume discounts with our
suppliers and become more efficient in manufacturing each new product.

Research and Development

Research and development expenses consist of personnel-related expenses,
lab supplies, training and prototype subcontract materials. We expense all of
our research and development costs in the period incurred. Research and
development expenses for the nine months ended September 30, 2001 were $12.9
million, or 27% of net revenues, compared to $10.8 million, or 22% of net
revenues, in the nine months ended September 30, 2000. Research and development
expenses for the three months ended September 30, 2001 were $4.7 million, or 32%
of net revenues, compared to $4.5 million, or 23% of net revenues, in the three
months ended September 30, 2000. The increase in research and development
expenses reflects continued recruiting of engineers and increased prototype
activity in the silicon design process. We expect that research and development
expenses will increase in absolute dollars in future periods, and may fluctuate
significantly as a percentage of total revenues from period to period. Stock
option compensation related to research and development was $1.0 million in the
nine months ended September 30, 2001 and 2000, and $0.3 million and $0.4 million
in the three months ended September 30, 2001 and 2000, respectively, but does
not affect our total stockholders' equity or cash flows.

Acquired In-Process Research and Development

As a result of our combination with Microtune KG, we recorded acquired in-
process research and development costs of $12.7 million for the nine months
ended September 30, 2000. Amounts allocated to acquired in-process research and
development were expensed at the date of combination, because the purchased
research and development had no alternative uses, and had not reached
technological feasibility based on the status of design and development
activities that required further refinement and testing. Acquired in-process
research and development did not affect our cash flows.

The Company's management is primarily responsible for estimating the fair
values of intangible assets and acquired in-process research and development.
The estimates of the fair values of intangible assets and acquired in-process
research and development were determined based on information furnished by
management of Microtune KG. Amounts allocated to acquired in-process research
and development were expensed at the date of acquisition because the purchased
research and development had no alternative future uses, and had not reached
technological feasibility based on the status of design and development
activities that required further refinement and testing. The acquired in-
process research and development projects were assessed, analyzed and valued
using the exclusion approach articulated by the Securities and Exchange
Commission. The estimates used in valuing the research and development were
based upon assumptions regarding future events and circumstances management
believes to be reasonable, but that are inherently uncertain and unpredictable.
The relative stage of completion and projected operating cash flows of the
underlying in-process projects acquired were the most significant and uncertain
assumptions utilized in the valuation analysis of the acquired in-process
research and development. Such uncertainties could give rise to

-16-

unforeseen budget overruns and revenue shortfalls in the event that the Company
is unable to successfully complete and commercialize the projects.

The value of the acquired in-process research and development was
determined by discounting the estimated projected net cash flows related to the
applicable products for the next ten years, including costs to complete the
development of the technology and the future revenues to be earned upon release
of the products. The rate utilized to discount the net cash flows to present
value was 22% based on the weighted average cost of capital adjusted for the
risks associated with the estimated growth, profitability, developmental and
market risks of the acquired development projects. Projected net cash flows
from such products are based on estimates of revenues and operating profit
(loss) related to such products. Management expects that the purchased research
and development projects generally will be successfully developed into
commercially viable products. However, there can be no assurance that
commercial viability or timely release of these products will be achieved.

The acquired in-process research and development relates to the development
of new tuners and modules for cable modem, set-top box, multimedia and
automotive applications, focusing on increased functionality, cost effectiveness
and size reduction, while maintaining a low level of power consumption. The
estimated percentage completion of the development projects as of the
acquisition date was approximately 70%, 50%, 70% and 60% for projects in the
cable modem, set-top box, multimedia and automotive product groups,
respectively. There have been no significant changes in estimates of costs
required to complete the development efforts since the acquisition date. During
2000, the development projects as of the acquisition date in the cable modem,
set-top box and multimedia product groups were completed at a cost of
approximately $335,000, $50,000 and $340,000, respectively. As of September 30,
2001, the amount expended toward completing the development projects in the
automotive product group as of the acquisition date was approximately $1,800,000
and the date of completion of the automotive development projects was September
2001. Projects in the cable modem and multimedia product groups began to
generate revenues in 2000. Revenues are projected to begin in 2002 for projects
in the automotive product group. At September 30, 2001, the Company expects to
essentially meet its original cash flows and return expectations for these
projects. Revenues were projected to begin in 2001 for development projects in
the set-top box product group, but as of September 30, 2001, it is expected that
these projects will not produce any significant future revenues nor will these
products generate net cash inflows. However, the failure to develop these
products is not expected to have a material impact on the Company's overall
return or its investment in the acquired technology or on future results of
operations or financial position.

Related to the potential Transilica acquisition, we expect to incur a non-
recurring charge to in-process research and development ranging between $30.0
million and $40.0 million in the fourth quarter of 2001.

Selling, General and Administration

Selling, general and administration expenses include our personnel-related
expenses for administration, finance, human resources, marketing and sales, and
information technology departments, and include expenditures related to legal,
public relations and financial advisors. In addition, these expenses include
promotional and marketing costs, sales commissions, shipping costs to customers
and reserves for bad debts. Selling, general and administration expenses for the
nine months ended September 30, 2001 were $12.7 million, or 27% of net revenues,
compared to $14.3 million, or 29% of net revenues, in the nine months ended
September 30, 2000. Selling, general and administration expenses for the three
months ended September 30, 2001 were $3.5 million, or 24% of net revenues,
compared to $4.8 million, or 24% of net revenues, in the three months ended
September 30, 2000. The decrease for both periods relates to decreases in
variable selling expenses such as commissions and shipping costs and due to
reductions in certain duplications of headcount and overhead that existed when
the Company and Temic first merged. Stock option compensation related to
selling, general and administration was $1.4 million and $2.1 million in the
nine months ended September 30, 2001 and 2000, respectively, and $0.4 million
and $0.7 million in the three months ended September 30, 2001 and 2000,
respectively, but does not affect our total stockholders' equity or cash flows.
The decrease in

-17-

stock option compensation is primarily due to the termination of options for
employees who are no longer employed by the Company.

Amortization of Intangible Assets and Goodwill

Amortization of intangible assets and goodwill for the nine months ended
September 30, 2001 was $5.4 million compared to $6.2 million, for the nine
months ended September 30, 2000. Amortization of intangible assets and goodwill
was $1.8 million for the three months ended September 30, 2001 and 2000.
Amortization of intangible assets and goodwill results principally from our
combination with Microtune KG. The combination has been accounted for using the
purchase method of accounting. The purchase price allocated to intangible assets
of $8.0 million is being amortized over the estimated useful lives of the
related assets of one to five years. Goodwill resulting from the transaction
totaled $28.3 million and is being amortized over five years. The amount of
amortization for intangible assets and goodwill will decrease effective January
1, 2002, which is the effective date of SFAS No. 142, Goodwill and Other
Intangible Assets, and it is currently estimated that annual amortization of
intangible assets and goodwill will decrease $5.8 million.

Other Income and Expense

Other income consists of interest income from investment of cash and cash
equivalents, foreign currency gains and losses and other non-operating income
and expenses.

Interest income for the nine months ended September 30, 2001 was $2.6
million compared to $1.4 million, for the nine months ended September 30, 2000.
The increase is mainly due to the investment of proceeds from our initial public
offering on August 4, 2000. The decrease in interest income of $0.2 million, to
$0.7 million for the three months ended September 30, 2001 compared to $0.9
million for the three months ended September 30, 2000, is mainly due to lower
interest rates. Through June 30, 2000, the Company used the U.S. Dollar as its
functional currency, except that the German Mark was used as its functional
currency for Microtune GmbH & Co. KG (Microtune KG) and its subsidiaries
(collectively, the Subsidiaries). Foreign currency exchange gains and losses
resulting from the translation of financial statements denominated in German
Marks of Microtune KG into U.S. Dollars through June 30, 2000, were included as
a component of stockholders' equity. Foreign currency exchange gains and losses
resulting from the remeasurement of financial statements not denominated in
German Marks of Microtune KG outside of Germany into German Marks were
recognized currently in the Company's results of operations as a component of
foreign currency gains and losses.

Other expenses for the three months ended September 30, 2001 includes a
$1.0 million one-time write-off due to the doubtful collectability of a loan to
a private radio frequency focused company which we made in May 2001.

Income Taxes

Prior to our combination with Microtune KG, the Company had not recognized
any provision for income taxes. For U.S. federal income tax purposes, at
December 31, 2000, the Company had a net operating loss carryforward of
approximately $26.0 million and an unused research and development credit
carryforward of approximately $1.0 million, which begins to expire in 2011. Due
to the uncertainty of our ability to utilize these deferred tax assets, they
have been fully reserved.

-18-

Liquidity and Capital Resources

As of September 30, 2001, the Company had net working capital of $80.0
million, including $71.3 million of cash and cash equivalents. As of December
31, 2000, the Company had net working capital of $90.9 million, including $77.7
million in cash and cash equivalents. Cash and cash equivalents consist of bank
deposits, money market funds and asset-backed commercial paper. Our investments
in asset-backed commercial paper are comprised of high-quality securities in
accordance with the Company's investment policy. The Company considers highly
liquid investments with original maturities of three months or less to be cash
equivalents.

Operating activities used $0.1 million in cash during the nine months ended
September 30, 2001 which was $6.1 million less than the $6.2 million used in
operating activities for the nine months ended September 30, 2000. The decrease
in cash used is primarily due to decreased inventory and accounts receivable as
we continue to consume existing inventories and accounts receivable decreased
due to lower sales. These decreases in cash usage are partially offset by a
reduction in accounts payable mainly due to reduced inventory purchases.

Investing activities used $8.5 million in cash during the nine months ended
September 30, 2001, which was $0.4 million greater than the $8.1 million used in
investing activities for the nine months ended September 30, 2000. Investments
in property and equipment were $7.5 million and $11.2 million in the nine months
ended September 30, 2001 and 2000, respectively. We expect capital expenditures
to range from $1.0 million to $4.0 million per quarter through 2002.

Financing activities provided $3.4 million in cash during the nine months
ended September 30, 2001, which was $73.5 million less than the $76.9 million
provided by operating activities for the nine months ended September 30, 2000.
On August 4, 2000, we issued 4.6 million common stock shares in our initial
public offering resulting in net proceeds of approximately $66.8 million. Prior
to our combination with Microtune KG, we funded our operations primarily through
the issuance of convertible preferred stock, which generated net cash proceeds
of approximately $9.6 million in the nine months ended September 30, 2000. We
received cash of approximately $2.7 million from the sale of common stock upon
the exercise of options and from shares purchased under our Employee Stock
Purchase Plan during the nine months ended September 30, 2001.

At September 30, 2001, Microtune KG had a credit agreement with a bank that
provides for borrowings of up to $0.9 million. The agreement is cancelable upon
notification by the bank. Borrowings under this agreement bear interest at a
rate determined from time to time by the bank. The rate was 7.25% at September
30, 2001. At September 30, 2001, no borrowings were outstanding under this
credit agreement.

On October 28, 2001, the Company entered into the Merger Agreement with
Transilica. Under the terms of the Merger Agreement, the Company expects to
acquire all of the outstanding capital stock of Transilica. The consummation of
the acquisition of Transilica, which is expected to occur in November 2001, is
subject to certain closing conditions. Upon closing, under the terms of the
Merger Agreement, shares equivalent to 19.99% of Microtune's outstanding shares
of common stock at closing, plus a cash amount that is based on the cash on the
balance sheet of Transilica less certain liabilities at closing will be issued
and exchanged for all of the outstanding capital stock of Transilica.

-19-

We believe that our current cash balance will provide adequate liquidity to
fund our operations and meet our other cash requirements through 2002. However,
we may find it necessary or we may choose to seek additional financing if our
investment plans change, or if industry or market conditions are favorable for a
particular type of financing. We filed a registration statement on Form S-3
using the shelf-registration process on August 17, 2001, as amended on August
28, 2001 and November 7, 2001. After we are declared effective by the SEC, we
and certain selling stockholders may offer from time to time in one or more
offerings, up to $250,000,000 of any combination of our common stock, preferred
stock, debt securities or warrants, as more fully described in our Form S-3. We
cannot be sure that financing will be available on reasonable terms, or at all,
when and if required. If we raise additional funds through the issuance of
equity or convertible debt securities, the percentage ownership of our
stockholders will be reduced.

Item 3. Qualitative and Quantitative Disclosure About Market Risk

The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the "Factors Affecting Future Operating
Results and Stock Price" section.

Following our combination with Temic, we now transact both sales and
purchases in multiple foreign currencies, including Euros, German Marks and
Philippine Pesos. Due to the volatile nature of the currency markets, there is a
potential risk of foreign currency translation losses, as well as gains.
Foreign currency translation losses and gains incurred during a period could
have a material impact on our net loss, cash flows or financial position.

A significant portion of our operations consists of manufacturing and sales
activities in foreign jurisdictions. Our products are manufactured in the
United States and the Philippines. We also have a sales office and design
center in Germany. We sell our products throughout the world. Some of our net
revenues are denominated in currencies other than the U.S. dollar, in particular
the German Mark. For the year ended December 31, 2000, approximately 8% of net
revenues were denominated in the German Mark. We also incur operating costs in
currencies other than the U.S. dollar, in particular the German Mark and the
Philippine Peso. As a result, our financial results could be significantly
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which we produce and distribute
our products. Our operating results are exposed to changes in the exchange
rates between the U.S. dollar and the Philippine Peso and the German Mark. When
the U.S. dollar strengthens against the German Mark, the value of nonfunctional
currency sales decreases and the value of nonfunctional currency operating costs
increase. When the U.S. dollar weakens, the value of nonfunctional currency
sales increases and the value of nonfunctional currency operating costs
decreases.

We currently do not use derivative financial instruments to hedge our
balance sheet exposures against future movements in exchange rates. However, we
are consistently evaluating our exchange risk management

-20-

strategy, including changes in our organizational structure and other capital
structuring techniques to manage our currency risk.

Our net investment in foreign subsidiaries, translated into U.S. dollars
using exchange rates at September 30, 2001 was $60.1 million. A potential loss
in the value of this net investment resulting from a hypothetical 10% adverse
change in foreign exchange rates would be approximately $6.0 million.

On January 1, 1999, 11 European Union member states (Germany, France, the
Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal and
Luxembourg) adopted the Euro as their common national currency. Until January
1, 2002, either the Euro or a participating country's national currency will be
accepted as legal tender. Beginning on January 1, 2002, Euro-denominated bills
and coins will be issued, and by July 1, 2002, only the Euro will be accepted as
legal tender. We do not expect future balance sheets, statements of operations
or statements of cash flows to be materially impacted by the Euro conversion.

Factors Affecting Future Operating Results and Stock Price

This report contains forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward looking statements as a result of certain factors,
including those set forth below and elsewhere in this report.

If we are unable to migrate our customers over time from our modules using
discrete components to our radio frequency silicon products or our modules that
incorporate our radio frequency silicon products, our operating results could be
harmed.

Currently, most of our revenues are from the sale of our tuner modules
using discrete, third-party components. Our future success will depend on our
ability to successfully migrate our customers from our modules that use discrete
components to our radio frequency silicon products, or MicroModules containing
the MicroTuner and our other silicon products, by convincing leading equipment
manufacturers to select these products for design into their own products. If we
are not able to convince these manufacturers to incorporate our silicon products
our operating results could be harmed.

We have not completed our integration with Microtune KG's operations and we
may be unable to do so effectively. In addition, we may be unable to effectively
integrate operations related to the Transilica Acquisition and any acquisition
that we may complete in the future.

We combined with Microtune KG in January 2000, and we are still in the
process of integrating Microtune KG's German and Philippines operations with
ours. Integrating operations of two ongoing businesses can be difficult,
especially when they are located in different countries. In addition to
integrating the operational aspects of our two companies, we will also face
challenges coordinating and consolidating our financial reporting functions. For
example, our accounting functions utilize different software programs, and
Microtune KG's consolidated financial statements have historically been prepared
based on German generally accepted accounting principles. We may not be able to
complete this integration on a timely and cost-effective basis.

We continually evaluate potential acquisitions of complementary businesses,
products and technologies, including those that are significant in size and
scope. In pursuit of our strategy to acquire complementary businesses and
products, we entered into the Merger Agreement to acquire Transilica on October
28, 2001. The Transilica Acquisition and future acquisitions may require
significant capital infusions and typically involve a number of special risks,
including the inability to obtain, or meet conditions imposed for governmental
approvals for the acquisition, the diversion of management's attention to the
assimilation of the operations and personnel of acquired businesses, the
unpredictability of costs related to the acquisition and the difficulty of
integration of acquired businesses, products, technologies and employees into
our business and

-21-

product offerings. Achieving the anticipated benefits of any acquisition will
depend, in part, upon whether integration of the acquired business, products,
technology, or employees is accomplished in an efficient and effective manner,
and there can be no assurance that this will occur. The difficulties of such
integration may be increased by the necessity of coordinating geographically
disparate organizations, the complexity of the technologies being integrated,
and the necessity of integrating personnel with disparate business backgrounds
and combining different corporate cultures. For example, Transilica has
operations in Japan, Taiwan and Singapore and has a corporate culture that may
differ in certain respects from our own. Accordingly, there can be no assurance
that we can successfully integrate the business and personnel of Transilica or
any future acquisitions into our own.

The inability of management to successfully integrate any acquisition that
we may pursue, and any related diversion of management's attention, could have a
material adverse effect on our business, operating results and financial
position. Moreover, there can be no assurance that any products acquired will
gain acceptance in our markets, that we will be able to penetrate new markets
successfully or that we will obtain the anticipated or desired benefits of such
acquisitions. We plan to acquire Transilica in part to incorporate its
wireless/LAN product offerings into our product offerings. Despite our belief
that Transilica's products will be accretive and synergistic to our business,
there can be no assurance that Transilica's products will gain acceptance by our
current customers or that they will enable us to penetrate new markets. Also,
acquired products may contain defects of which we are unaware which may result
in increased and unanticipated development costs. In addition, acquisitions may
materially and adversely affect our results of operations because they may
result in significant one-time accounting charges or could result in increased
debt or contingent liabilities, adverse tax consequences, substantial
depreciation or deferred compensation charges, acquired in-process research and
development expenses, or the amortization of amounts related to deferred
compensation, and intangible assets. Any acquisition that we pursue or
consummate could result in the incurrence of debt and contingent liabilities,
goodwill and other intangibles, other acquisition-related expenses, and the loss
of key employees. Moreover, we cannot predict accounting regulations,
conventions, interpretations and related issues that may emerge in the future
which could have a material adverse effect on our business, operating results or
financial position.

We cannot assure you that we will be able to consummate any pending or
future acquisitions or that we will realize the benefits anticipated from these
acquisitions. We have limited organizational experience in acquiring and
integrating businesses, and we will need to develop the relevant skills if we
are to be successful in realizing the benefits of any future acquisitions. In
the future, we may not be able to find other suitable acquisition opportunities
that are available at attractive valuations, if at all. Even if we do find
suitable acquisition opportunities, we may not be able to consummate the
acquisitions on commercially acceptable terms. In addition, we may need to issue
equity securities that could be dilutive to our existing stockholders in order
to consummate such acquisitions.

As a result of the Transilica Acquisition and any significant future
acquisitions that we complete in which a substantial amount of equity securities
of Microtune are issued, the holders of Microtune common stock will experience
immediate and substantial dilution to their percentage stockholdings of
Microtune.

Upon closing of the Transilica Acquisition, Microtune will issue shares
equivalent to 19.99% of its outstanding common stock to the shareholders of
Transilica. Upon the issuance of this stock, the holdings of the current
stockholders of Microtune will be substantially diluted. The issuance and
registration by Microtune of shares of its common stock in any acquisition may
cause the price of our common stock to decline. A decline in the price of our
common stock could also negatively affect our ability to pursue future
acquisitions, or cause future acquisitions to be more dilutive.

-22-

As a result of the Microtune KG acquisition, we have recorded $36.3 million
of goodwill and acquired intangibles which will be amortized over one to five
years.

This amortization, if continued, would increase our net loss or decrease
our net income by approximately $7.1 million in each of the years 2001 through
2004. However, in June 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (``SFAS'') No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for
fiscal years beginning after December 15, 2001. Under the new rules, the
pooling-of-interests method of accounting for business combinations has been
eliminated. Also, the criteria for recognizing acquired intangible assets apart
from goodwill has been changed, and acquired goodwill and intangible assets
recorded having indefinite lives will no longer be amortized, but will be
subject to annual impairment tests in accordance with SFAS No. 141 and SFAS No.
142. Other acquired intangible assets will continue to be amortized over their
useful lives. We will apply the new rules on accounting for goodwill and other
intangible assets recorded as a result of the Microtune KG acquisition beginning
in the first quarter of 2002. During 2002, we will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of January 1, 2002. We have not yet determined what the effect of these tests
will be on our earnings or financial position. If our investment is subject to
earlier than expected write-offs, our net income or net loss in any given period
could be lower than anticipated and the market price of our stock could decline.

We are dependent upon third parties, some of whom compete with us, for the
supply of components for our module manufacturing. Our failure to obtain
components for our module manufacturing would seriously harm our ability to ship
modules to our customers in a timely manner.

Many of the components for our modules are sole-sourced, meaning that we
depend upon one supplier for a specific component. At times we have experienced
significant difficulties in obtaining an adequate supply of components necessary
for our manufacturing operations, which have on occasion prevented us from
delivering radio frequency products to our customers in a timely manner. For
example, in 2000, we did not receive our expected allocation of components from
several significant sole-source suppliers which constrained our ability to meet
customer demand. Failure to meet customer demand can result in customers
selecting competitor products. We are not able to quantify the amount of lost
revenues due to our failure to satisfy customer demand, but we believe the loss
of revenue may have been material in 2000, and may be material in the future. We
may experience similar shortages of components in the future.

We usually do not have long-term supply agreements with our suppliers and
instead obtain components on a purchase order basis. Our suppliers typically
have no obligation to supply products to us for any specific period, in any
specific quantity or at any specific price, except as set forth in a particular
purchase order. Our requirements often represent a small portion of the total
production capacity of our suppliers, and our suppliers may reallocate capacity
to other customers even during periods of high demand for our radio frequency
products. In addition, some of our suppliers offer or may offer products that
compete with our radio frequency products. As a result, these suppliers may
preferentially allocate their components to in-house or third party
manufacturers, rather than us.

If our suppliers were to become unable or unwilling to continue
manufacturing or supplying the components that we utilize in our radio frequency
products, our business would be seriously harmed. As a result, we would have to
identify and qualify substitute suppliers or design around the component. This
would be time-consuming and difficult, and may result in unforeseen
manufacturing and operations problems. This may also require our customers to
requalify our parts for their products, which may be a lengthy process. The loss
of a significant supplier or the inability of a supplier to meet performance and
quality specifications or delivery schedules could impede our ability to meet
customer demand for timeliness, performance and quality, which could harm our
reputation and our business.

-23-

If we are unable to develop and introduce new radio frequency products
successfully and in a cost-effective and timely manner or to achieve market
acceptance of our new products, our operating results would be substantially
harmed.

Our future success depends on our ability to develop new radio frequency
products for existing and new markets, introduce these products in a cost-
effective and timely manner, meet customer specifications and convince leading
equipment manufacturers to select these products for design into their own new
products. Our quarterly results in the past have been, and are expected in the
future to continue to be, dependent on the introduction and market acceptance of
a relatively small number of new products and the timely completion and delivery
of those products to our customers. For example, we believe that market
acceptance of our radio frequency integrated circuits for the cable modem market
were limited until the time that we introduced radio frequency integrated
circuits with the power requirements that conformed to the evolving
specifications of some cable modem manufacturers.

The development of new radio frequency products is highly complex, and from
time to time we have experienced delays in completing the development and
introduction of new products. In addition, some of our new product development
efforts are focused on producing silicon products utilizing architectures and
technologies with which we have no experience and delivering performance
characteristics such as low power consumption at levels that we have not
previously achieved. If we are not able to develop and introduce these new
products successfully and in a cost-effective and timely manner, we will not be
able to penetrate our target markets successfully and our operating results
would be substantially harmed.

We face intense competition in the broadband communications and radio
frequency tuner markets, which could reduce our market share in existing markets
and affect our ability to enter new markets.

The broadband communications and radio frequency tuner markets are
intensely competitive. We expect competition to continue to increase as industry
standards become well known and as other competitors enter our target markets.
We compete with, or may in the future compete with, a number of major domestic
and international suppliers of integrated circuit and system modules in the
cable modem, PC/TV, set-top box, cable telephony, digital TV and automotive
markets. We compete primarily with tuner manufacturers such as Alps, Panasonic,
Philips Electronics, Samsung and Thomson, with semiconductor companies such as
Anadigics, Analog Devices, Broadcom and Maxim, and potentially with companies
such as Conexant and Silicon Wave. Conexant, Broadcom and Silicon Wave have
announced silicon tuner products that compete with our tuner products. Among
other things, several of our competitors have broader product and service
offerings and could bundle their competitive tuner products with other products
and services they offer. This competition has resulted and may continue to
result in declining average selling prices for our radio frequency products.

Many of our current and potential competitors have advantages over us,
including:

. longer operating histories and presence in key markets;

. greater name recognition;

. access to larger customer bases;

. significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources;

. relationships with potential customers as a result of the sales of
other components, which relationships our competitors can leverage
into sales of products competitive with our radio frequency products;
and

-24-

. broader product and service offerings that may allow them to compete
effectively by bundling their products.

As a result, our competitors may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements and may be able to
devote greater resources to the development, promotion and sale of their
products.

Consolidation by industry participants, including in some cases,
acquisitions of some of our customers or suppliers by our competitors, or
acquisitions of our competitors by our customers or suppliers, could create
entities with increased market share, customer base, technology and marketing
expertise in markets in which we compete. In fact, some of our suppliers offer
or may offer products that compete with our radio frequency products. These
developments may significantly and adversely affect our current markets, the
markets we are seeking to serve and our ability to compete successfully in those
markets, thereby harming our results of operations.

The average selling price of our products will likely decrease over time.
If the selling price reductions are greater than we expect, our operating
results will be harmed.

Historically, the average selling price of our products has decreased over
the products' lives. In addition, as the markets for radio frequency integrated
circuit products and transceivers mature, we believe that it is likely that the
average unit prices of our radio frequency products will decrease in response to
competitive pricing pressures, increased sales discounts, new product
introductions and product bundling. To offset these decreases, we rely primarily
on achieving yield improvements and other cost reductions for existing products
and on introducing new products that can often be sold at higher average selling
prices.

Although we will seek to increase the sales of our higher margin products,
our sales, product and process development efforts may not be successful. Our
new products or processes may not achieve market acceptance. To the extent we
are unable to reduce costs or sell our higher margin products, our results of
operations would suffer.

We expect our quarterly operating results to continue to fluctuate.

Our quarterly results of operations have fluctuated significantly in the
past and may fluctuate significantly in the future due to a number of factors,
many of which are not in our control. These factors include:

. timing, cancellation and rescheduling of significant customer orders,
which result in revenues being shifted from one quarter to another;

. the ability of our customers to procure the necessary components for
their end-products that utilize our radio frequency tuners to conduct
their operations as planned for any quarter;

. pricing concessions on volume sales to particular customers for
established time frames;

. slowdowns in customer demand and related industry-wide increases in
inventories;

. our inability to predict our customers' demand for our products;

. changes in our product and customer mix between quarters;

. labor disputes at our manufacturing facilities in the Philippines,
which may cause temporary slowdowns or shutdowns of operations; and

. quality problems with our radio frequency tuners that result in
significant returns.

-25-

Our manufacturing operations could be adversely impacted and our financial
performance worsened if our labor unions cause labor slowdowns or shutdowns at
our union factory.

One of our manufacturing facilities in the Philippines is covered by union
representation. This facility currently manufactures approximately 50% of our
radio frequency products. If we experience labor slowdowns or shutdowns at this
facility due to actions by the labor union, our manufacturing output, and
consequently our revenues, would diminish, our costs would increase and,
consequently, our business would be harmed.

We believe that transitioning our silicon products to higher performance
process technologies will be important to our future competitive position. If we
fail to make this transition efficiently, our competitive position could be
seriously harmed.

We continually evaluate the benefits, on a product-by-product basis, of
migrating to higher performance process technologies in order to produce more
efficient and higher performance integrated circuits. We believe this migration
is required to remain competitive. Other companies in the industry have
experienced difficulty in migrating to new process technologies and,
consequently, have suffered reduced yields, delays in product deliveries and
increased expense levels. We may experience similar difficulties.

Moreover, we are dependent on our relationships with foundries to
successfully migrate to higher performance processes. Our foundry suppliers may
not make higher performance process technologies available to us on a timely or
cost-effective basis, if at all. If our foundry suppliers do not make higher
performance process technologies available to us on a timely or cost-effective
basis or if we experience difficulties in migrating to these advanced processes,
our competitive position and business prospects could be seriously harmed.

Because we depend on a few significant customers for a substantial portion
of our revenues, the loss of a key customer could seriously harm our business.

We have derived a substantial portion of our revenues from sales to a
relatively small number of customers. As a result, the loss of any significant
customer could significantly harm our revenues. Sales to DaimlerChrysler
accounted for approximately 19% of our consolidated net revenues for the year
ended December 31, 2000 and 22% of consolidated net revenues for the nine months
ended September 30, 2001. Sales to DaimlerChrysler and Motorola/General
Instruments accounted for approximately 19% and 11%, respectively, of
consolidated net revenues for the three months ended September 30, 2001. Sales
to our twenty largest customers, including sales to their respective
manufacturing subcontractors, accounted for approximately 77% of our total sales
for the year ended December 31, 2000 and 88% of our total sales for the three
months ended September 30, 2001. We believe that our future operating results
will continue to depend on the success of our largest customers and on our
ability to sell existing and new products to these customers in significant
quantities. The loss of a key customer or a reduction in our sales to any key
customer could harm our revenues and consequently our financial condition.

If we are unable to continue to sell existing and new products to our key
customers in significant quantities or to attract new significant customers, our
future operating results could be harmed.

We may not be able to maintain or increase sales to our key customers or to
attract new significant customers for a variety of reasons, including the
following:

. most of our customers can stop purchasing our radio frequency products
with limited notice to us without incurring any significant
contractual penalty;

. most of our customers typically buy our radio frequency products
through a purchase order, which does not require them to purchase a
minimum amount of our radio frequency products;

-26-

. many of our customers and potential customers have pre-existing
relationships with our current or potential competitors, which may
affect their decision to purchase our radio frequency products;

. some of our customers or potential customers offer or may offer
products that compete with our radio frequency products; and

. our longstanding relationships with some of our larger customers may
also deter other potential customers who compete with these customers
from buying our radio frequency products.

If we do not maintain or increase sales to existing customers or attract
significant new customers, our revenues would diminish and consequently our
business would be harmed.

The sales cycle for our radio frequency products is long, and we may incur
substantial non-recoverable expenses and devote significant resources to sales
that may not occur when anticipated or at all.

Our customers typically conduct significant evaluation, testing,
implementation and acceptance procedures before they purchase our radio
frequency products. As a result, we may expend significant financial and other
resources to develop customer relationships before we recognize any revenues
from these relationships, and we may never recognize any revenues from these
efforts. Our customers' evaluation processes are frequently lengthy and may
range from three months to one year or more. In many situations, our customers
design their products to specifically incorporate our radio frequency products,
and our radio frequency products must be designed to meet their stringent
specifications. This process can be complex and may require significant
engineering, sales, marketing and management efforts on our part. This process
becomes more complex if we simultaneously qualify our products with multiple
customers.

Uncertainties involving the ordering and shipment of our radio frequency
products could harm our business.

Our sales are typically made pursuant to individual purchase orders, and we
generally do not have long-term supply arrangements with our customers,
including our most significant customers in terms of volume of sales. Our sales
orders typically provide that our customers may cancel orders until 90 days
prior to the shipping date and may reschedule shipments up to 30 days prior to
the shipping date; however, in the past, we have permitted customers to cancel
orders less than 90 days before the expected date of shipment, in many cases
with little or no penalty. Moreover, we routinely manufacture or purchase
inventory based on estimates of customer demand for our radio frequency
products, which demand is difficult to predict. The cancellation or deferral of
product orders, the return of previously sold products or overproduction due to
the failure of anticipated orders to materialize could result in our holding
excess or obsolete inventory that could substantially harm our business,
financial condition and results of operations. In addition, our inability to
produce and ship radio frequency products to our customers in a timely manner
could harm our reputation and damage our relationships with our customers.

We customize a substantial portion of our radio frequency products to
address our customers' specific radio frequency needs. If we do not sell our
customer-specific products in large volumes, we may be unable to cover our fixed
costs or may be left with substantial unsaleable inventory.

We manufacture a substantial portion of our radio frequency products to
address the needs of individual customers. Frequent product introductions by
systems manufacturers make our future success dependent on our ability to select
development projects that will result in sufficient volumes to enable us to
achieve manufacturing efficiencies. Because customer-specific radio frequency
products are developed for unique applications, we expect that some of our
current and future customer-specific radio frequency products may never be
produced in volume and may impair our ability to cover our fixed manufacturing
costs. In addition, if our customers fail to purchase these customized radio
frequency products from us, we risk having

-27-

substantial unsaleable inventory. If we have substantial unsaleable inventory,
our financial condition would be harmed.

We primarily depend on a single third-party wafer foundry to manufacture
all of our integrated circuit products, which reduces our control over the
integrated circuit manufacturing process and could increase costs and decrease
availability of our integrated circuit products.

We do not own or operate a semiconductor fabrication facility. We primarily
rely on IBM and X-FAB, outside foundries, to produce most of our integrated
circuit radio frequency products. We do not have a long-term supply agreement
with our founderies and instead obtain manufacturing services on a purchase
order basis. Our founderies have no obligation to supply products to us for any
specific period, in any specific quantity or at any specific price, except as
set forth in a particular purchase order. Our requirements represent a small
portion of the total production capacity of these foundries, and they may
reallocate capacity to other customers even during periods of high demand for
our integrated circuits. If our foundries were to become unable or unwilling to
continue manufacturing our integrated circuits, our business would be seriously
harmed. As a result, we would have to identify and qualify substitute foundries,
which would be time consuming and difficult, resulting in unforeseen
manufacturing and operations problems. In addition, if competition for foundry
capacity increases, our product costs may increase, and we may be required to
pay significant amounts to secure access to manufacturing services. If we do not
qualify or receive supplies from additional foundries, including X-FAB, we may
be exposed to increased risk of capacity shortages due to our dependence on IBM
and X-FAB.

We depend on a single third-party subcontractor for integrated circuit
packaging, which reduces our control over the integrated circuit packaging
process and could increase costs and decrease availability of our integrated
circuit products.

Our integrated circuit products are packaged by a sole independent
subcontractor, Amkor, using facilities located in South Korea. We do not have
long-term agreements with Amkor and typically obtain services from it on a
purchase order basis. Our reliance on Amkor involves risks such as reduced
control over delivery schedules, quality assurance and costs. These risks could
result in product shortages or increase our costs of packaging our products. If
Amkor is unable or unwilling to continue to provide packaging services of
acceptable quality, at acceptable costs and in a timely manner, our business
would be seriously harmed. We would also have to identify and qualify substitute
subcontractors, which could be time consuming and difficult and may result in
unforeseen operations problems.

Our inability to maintain or grow revenues from international sales could
harm our financial results.

For the nine months ended September 30, 2001, 55% of our net revenues were
from sales outside of North America. We plan to increase our international sales
activities by hiring additional international sales personnel. Our international
sales will be limited if we cannot do so. Even if we are able to expand our
international operations, we may not succeed in maintaining or increasing
international market demand for our products.

Currency fluctuations related to our international operations could harm
our financial results.

A significant portion of our international revenues and expenses are
denominated in foreign currencies. Accordingly, in the past, we have experienced
significant fluctuations in our financial results due to changing exchange rates
rather than operational changes. For example, in the nine months ended September
30, 2001, we recognized a foreign currency exchange loss of approximately $1.2
million or approximately 7% of the net loss for the period. We expect currency
fluctuations to continue, which may significantly impact our financial results
in the future. We may choose to engage in currency hedging activities to reduce
these fluctuations.

-28-

Our international operations, including our operations in Germany, the
Philippines, Hong Kong, Taiwan and Korea, may be negatively affected by actions
taken or events that occur in these countries.

We currently have facilities and suppliers located outside of the U.S.,
including research and development operations in Ingolstadt, Germany, two
manufacturing facilities in Manila, Philippines, and sales offices in Hong Kong,
Taiwan and Korea. Substantially all of our suppliers are located outside the
U.S., and substantially all of our products are manufactured outside the U.S. As
a result, our operations are affected by the local conditions in those
countries, as well as actions taken by the governments of those countries. For
example, if the Philippines government enacts restrictive laws or regulations,
or increases taxes paid by manufacturing operations in that country, the cost of
manufacturing our products in Manila could increase substantially, causing a
decrease in our gross margins and profitability. In addition, if the U.S.
imposes significant import restrictions on our products, our ability to import
our products into the U.S. from our international manufacturing and packaging
facilities could be diminished or eliminated. Local economic and political
instability in areas in the Far East, in particular in the Philippines where
there has been political instability in the past, could result in unpleasant or
intolerable conditions for our workers, and ultimately could result in a
shutdown of our facilities.

International operations that we may develop or acquire in the future may
subject us to additional business risks, including political instability, and
changing or conflicting laws, regulations and tax systems.

We may develop or acquire additional international operations in Europe and
the Pacific Rim region. International expansion or acquisitions, and any
subsequent international operations, could be affected by the local conditions
in those countries, as well as actions taken by the governments of those
countries. To expand our operations internationally, we will have to comply with
the laws and regulations of each country in which we conduct business. For
example, if a foreign government enacts restrictive laws or regulations, or
increases taxes paid by manufacturing operations in that country, the cost of
manufacturing our products in that country could increase substantially, causing
a decrease in our gross margins and profitability. We cannot assure you that we
will be successful in obtaining any necessary regulatory approvals, or in
complying with applicable regulations in those countries. Furthermore, even if
such approvals are obtained or such regulations are complied with, we cannot
assure you that we will be able to continue to comply with these regulations.

Our success could be jeopardized if key personnel leave.

Our future success depends largely upon the continued service of our
executive officers and other key management and technical personnel. Our success
also depends on our ability to continue to attract, retain and motivate
qualified personnel. Our personnel represent a significant asset as the source
of our technological and product innovations. The competition for qualified
personnel is intense in the radio frequency silicon and radio frequency systems
industries. We cannot assure you that we will be able to continue to attract and
retain qualified management, technical and other personnel necessary for the
design, development, manufacture and sale of our radio frequency products. We
may have difficulty attracting and retaining key personnel particularly during
periods of poor operating performance. The loss of the services of one or more
of our key employees or our inability to attract, retain and motivate qualified
personnel could harm our business.

We must manage our growth.

If we fail to manage our growth, our reputation and results of operations
could be harmed. Our total number of employees has grown from 149 as of
September 30, 2000 to 179 as of September 30, 2001, excluding manufacturing
personnel in Manila, Philippines. In addition, as of September 30, 2001, we had
1,127 manufacturing personnel in the Philippines. The growth has placed, and is
expected to continue to place, significant demands on our personnel, management
and other resources. We must continue to improve our operational, financial and
management information systems to keep pace with the growth of our business.

-29-

Our business may be harmed if we fail to protect our proprietary
technology.

We rely on a combination of patents, trademarks, copyrights, trade secret
laws, confidentiality procedures and licensing arrangements to protect our
intellectual property rights. We currently have patents issued and pending in
the U.S. and in foreign countries. We intend to seek further U.S and
international patents on our technology. We cannot be certain that patents will
be issued from any of our pending applications, that patents will be issued in
all countries where our products can be sold or that any claims will be allowed
from pending applications or will be of sufficient scope or strength to provide
meaningful protection or any commercial advantage. Our competitors may also be
able to design around our patents. The laws of some countries in which our
products are or may be developed, manufactured or sold, including various
countries in Asia, may not protect our products or intellectual property rights
to the same extent as do the laws of the U.S., increasing the possibility of
piracy of our technology and products. Although we intend to vigorously defend
our intellectual property rights, we may not be able to prevent misappropriation
of our technology. Our competitors may also independently develop technologies
that are substantially equivalent or superior to our technology.

Despite our efforts and procedures to protect our intellectual property
through the prosecution of patents, trademarks, copyrights and trade secrets and
other methods, we cannot assure you that our current intellectual property or
any intellectual property we may acquire through acquisitions or by other means
will be free from third party claims which may be valid. In connection with
contemplated acquisitions, including the Transilica Acquisition, we conduct due
diligence investigations of the intellectual property of these targeted
companies for the purpose of assessing the protection efforts by these companies
on their respective intellectual property. We cannot assure you that our
investigatory efforts will uncover any defects related to the protection of
intellectual property we may acquire. As a result, intellectual property we
acquire, including the intellectual property we acquire in the Transilica
Acquisition or in other acquisitions, may not be free from third party claims.
Any third party claims may lead to costly and time consuming litigation which
could have a material adverse effect on our business and financial position.

Our efforts to protect our intellectual property may cause us to become
involved in costly and lengthy litigation which could seriously harm our
business.

We may become involved in litigation in the future to protect our
intellectual property or defend allegations of infringement asserted by others.
Legal proceedings could subject us to significant liability for damages or
invalidate our proprietary rights. Any litigation, regardless of its outcome,
would likely be time consuming and expensive to resolve and would divert
management's time and attention. Any potential intellectual property litigation
also could force us to take specific actions, including:

. ceasing the sale of our products that use the challenged intellectual
property;

. obtaining from the owner of the infringed intellectual property right
a license to sell or use the relevant technology, which license may
not be available on reasonable terms, or at all; or

. redesigning those products that use infringing intellectual property.

As a result, the expense associated with intellectual property litigation
or management's diversion from daily operations of our business caused by any
intellectual property litigation may have a negative impact on our business and
our financial results.

Furthermore, we have initiated, and may initiate in the future, claims or
litigation against third parties for infringement of our proprietary rights or
to establish the validity of our proprietary rights. On January 24, 2001, we
filed a lawsuit alleging patent infringement in the United States Court for the
Eastern District of Texas, Sherman Division, against Broadcom Corporation. The
lawsuit is in the initial phases of discovery and its outcome is uncertain. If
we are unsuccessful in this litigation or other similar claims, then Broadcom
and

-30-

others will be able to compete directly against us, which would materially
adversely effect our ability to sell our products and grow our business. Any
current or future litigation by or against us or one of our customers could
result in significant expense and divert the efforts of our technical personnel
and management, whether or not the litigation results in a favorable
determination.

We are the target of several securities fraud class action complaints and
are at risk of securities class action litigation. This could result in
substantial costs to us, drain our resources and divert our management's
attention.

Beginning July 11, 2001, multiple securities fraud class action complaints
were filed in the United States District Court for the Southern District of New
York. We are aware of at least three such complaints: Berger v. Goldman, Sachs &
Co., Inc. et al (S.D.N.Y. July 25, 2001), Atlas v. Microtune et al (S.D.N.Y.
Aug. 7, 2001) and Ellis Investment Ltd. v. Goldman Sachs & Co., Inc. et al
(S.D.N.Y. August 7, 2001). Purportedly, the complaints are brought on behalf of
all persons who purchased our common stock from August 4, 2000 through December
6, 2000. According to the law firm that filed it, the Atlas complaint names as
defendants Microtune, Douglas J. Bartek, our Chairman and Chief Executive
Officer, Everett (``Buddy'') Rogers, our Chief Financial Officer and Vice
President of Finance and Administration, and several investment banking firms
that served as underwriters of our initial public offering. Microtune, Mr.
Bartek and Mr. Rogers were served with notice on the Atlas complaint on August
22, 2001, however, they have not been served on the other referenced complaints.
The Berger and Ellis Investment Ltd. complaints assert claims against the
underwriters only. More such lawsuits may be filed. Among other things, the
complaints allege liability under the federal securities laws as further set
forth in ``Recent Developments'' on the grounds that the registration statement
for the initial public offering did not disclose that: (1) the underwriters had
agreed to allow certain customers to purchase shares in the offering in exchange
for excess commissions paid to the underwriters; and (2) the underwriters had
arranged for certain customers to purchase additional shares in the aftermarket
at pre-determined prices. We are aware that similar allegations have been made
in lawsuits challenging over 180 other initial public offerings conducted in
1998, 1999 and 2000. No specific amount of damages is claimed in the three
complaints involving our initial public offering. These cases are subject to the
Private Securities Litigation Reform Act of 1995 and we expect that the cases
will be consolidated into a single action. These cases and all of the other
lawsuits filed in the Southern District of New York making similar allegations
have been coordinated before the Honorable Shira A. Scheindlin who is expected
to set a briefing schedule for motions to dismiss. We believe that the
allegations against Microtune. Mr. Bartek and Mr. Rogers are without merit. We
intend to contest them vigorously including filing a motion to dismiss these
cases. We are unable at this time to determine whether the outcome of the
litigation will have a material impact on our results of operations or financial
condition in any future period.

Our ability to sell our radio frequency products may suffer if any
outstanding claims of intellectual property infringement against us or one of
our customers is valid, if any other third party claims that we or our customers
infringe on their intellectual property or if any of our issued patents are
proven to be invalid.

The electronics industry is characterized by vigorous protection and
pursuit of intellectual property rights and positions, which have resulted in
significant and often protracted and expensive litigation. In addition, our
customers may be subject to infringement claims for products incorporating our
radio frequency products. If any claims of infringement are made against any of
our customers, our customers may seek to involve us in the infringement claim
and request indemnification from us. For example, we could be notified of a
claim against one of our customers for which the customer would make a claim for
indemnification from us. If the claim resulted in an adverse result for our
customer, it may reduce or completely eliminate marketing of its infringing
product, which would decrease sales of our radio frequency products to this
customer. Further, if our customer prevailed in its claim for indemnification
against us, or if we were found to infringe on any other third- party
intellectual property, we could be required to:

. pay substantial damages such as royalties on our historical and future
product sales;

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. indemnify our customers for their legal fees and damages paid;

. stop manufacturing, using and selling the infringing products;

. expend significant resources to develop non-infringing technology;

. discontinue the use of some of our processes; or

. obtain licenses to the technology.

We may be unsuccessful in developing noninfringing products or negotiating
licenses upon reasonable terms. These problems might not be resolved in time to
avoid harming our results of operations.

Our customers' products are subject to governmental regulation.

Governmental regulation could place constraints on our customers and
consequently minimize their demand for our radio frequency products. The Federal
Communications Commission, or FCC, has broad jurisdiction over several of our
target markets in the U.S. Similar governmental agencies regulate our target
markets in other countries. Although our products are not directly subject to
current regulations of the FCC or any other federal or state communications
regulatory agency, much of the equipment into which our products are
incorporated is subject to direct government regulation. Accordingly, the
effects of regulation on our customers or the industries in which they operate
may, in turn, impede sales of our products. For example, demand for our radio
frequency products will decrease if equipment incorporating our products fails
to comply with FCC emissions specifications.

We may be unable to obtain the capital required to grow our business.

From time to time, we may need to raise funds to meet our working capital
and capital expenditure needs through the sale of securities under this
prospectus or through other financing alternatives. We cannot be certain that we
would be able to obtain additional financing on favorable terms, if at all. Our
capital requirements depend upon several factors, including the rate of market
acceptance of our products, our ability to expand our customer base, our level
of expenditures for sales and marketing, the cost of product and service
upgrades and other factors. If our capital requirements vary materially from
those currently planned, we may require additional financing sooner than
anticipated. Further, if we issue equity securities, stockholders will
experience additional dilution and the new equity securities may have rights,
preferences or privileges senior to those of existing holders of common stock.
If we issue debt securities, the debt securities will have rights senior to
those of existing holders of equity securities generally. If we cannot raise
funds, if needed, on acceptable terms, we may not be able to develop our
products and services, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements, any of which could harm our
ability to grow our business.

Future sales of our securities or the expectation of or uncertainty about
those sales may cause our stock price to decline.

The market price of our common stock or any other securities that we issue
could decline as a result of the registration or sale of substantial amounts of
our securities, including common stock, in the public market or to private
investors, or the expectation or uncertainty that those sales could occur. These
sales or the possibility that they may occur also could also make it more
difficult for us to raise funds through future offerings of securities.

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Provisions in our charter documents and Delaware law may deter takeover
efforts that you may feel would be beneficial to you.

Several provisions of our amended and restated certificate of incorporation
and Bylaws may discourage, delay or prevent a merger or acquisition that you may
consider favorable and therefore may harm our stock price. Those provisions
include:

. authorizing the issuance of "blank check" preferred stock;

. providing for a classified board of directors with staggered, three-
year terms;

. prohibiting cumulative voting in the election of directors;

. limiting the persons who may call special meetings of the board or the
stockholders;

. prohibiting stockholder action by written consent;

. establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted
on by stockholders at stockholder meetings; and

. establishing super-majority voting requirements in some instances.

Management will have broad discretion in using the proceeds of any offering
of our securities.

We need to retain flexibility to respond to factors affecting our business.
Accordingly, our management will retain broad discretion as to the allocation of
the proceeds of any offering of our securities and may use the proceeds in a
manner with which you may not agree. If our management does not effectively use
the proceeds from any offering of our securities, we may not be able to operate
and grow our business successfully.

If we do not anticipate and adapt to evolving industry standards in the
radio frequency tuner and broadband communications markets, or if industry
standards develop more slowly than expected, our products could become obsolete
and we could lose market share.

Products for broadband communications applications generally are based on
industry standards that are continuously evolving. In some cases, the
development of these standards takes longer than originally anticipated. We have
directed our development toward producing radio frequency products that comply
with the evolving standards. The delayed development of a standard in our target
markets has resulted in slower deployment of new technologies, which may harm
our ability to sell our radio frequency products, or frustrate the continued use
of our proprietary technologies. The continued delay in the development of these
industry standards could result in fewer manufacturers purchasing our radio
frequency products in favor of continuing to use the proprietary technologies
designed by our competitors. Such delayed development of industry standards and
the resulting slower deployment of new technologies would result in diminished
and/or delayed revenues and consequently harm our business. Further, if new
industry standards emerge, our products or our customers' products could become
unmarketable or obsolete. In addition, we may incur substantial unanticipated
costs to comply with these evolving standards.

Our ability to adapt to changes and to anticipate future standards and the
rate of adoption and acceptance of those standards is a significant factor in
maintaining or improving our competitive position and prospects for growth. Our
inability to anticipate the evolving standards in the broadband communications
markets and, in particular, in the radio frequency market, or to develop and
introduce new products successfully into these markets, could result in
diminished revenues and consequently harm our business.

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Other technologies for the broadband communications market will compete
with some of our target markets. If these technologies prove to be more
reliable, faster or less expensive or become more popular, the demand for our
radio frequency products and our revenues may decrease.

Some of our target markets, such as cable modem and cable telephony
services, are competing with a variety of non-radio frequency based broadband
communications technologies, including digital subscriber line technology. Many
of these technologies may compete effectively with cable modem and cable
telephony services. If any of these competing technologies are more reliable,
faster or less expensive, reach more customers or have other advantages over
radio frequency based broadband technology, the demand for our radio frequency
products and our revenues may decrease.

Our success depends on the continued growth of the broadband communications
markets generally and the radio frequency product markets specifically.

We derive a substantial portion of our revenues from sales of radio
frequency products into markets related to broadband communication applications,
in particular, the cable modem market. These markets are characterized by:

. intense competition;

. rapid technological change; and

. short product life cycles, especially in the consumer electronics
markets.

Although the broadband communications markets generally have grown rapidly
in the last few years, these markets may not continue to grow or a significant
slowdown in these markets may occur. In particular, the set-top box, cable modem
and cable telephony markets may not grow at a rate sufficient for us to achieve
profitability. Because of the intense competition in the broadband
communications markets, the unproven technology of many products addressing
these markets and the short life cycles of many consumer products, it is
difficult to predict the potential size and future growth rate of the radio
frequency product markets. In addition, the broadband communications markets are
transitioning from analog to digital, as well as expanding to new services,
including internet access, cable telephony and interactive television. The
future growth of the radio frequency product markets are partially dependent
upon the market acceptance of products and technologies addressing the broadband
communications markets, and we cannot assure you that the radio frequency
technologies upon which our products are based will be accepted by any of these
markets. If the demand for radio frequency products is not as great as we
expect, we may not be able to generate sufficient revenues to become successful.

The semiconductor industry is cyclical. If there is a sustained upturn in
the semiconductor market, there could be a resulting increased demand for
foundry services, significantly reducing product availability and increasing our
costs.

The semiconductor industry periodically experiences increased demand and
production capacity constraints. An increased demand for semiconductors could
substantially increase the cost of producing our radio frequency products,
particularly our integrated circuit products, and consequently reduce our profit
margins. As a result, we may experience substantial period-to-period
fluctuations in future results of operations due to general semiconductor
industry conditions.

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Part II Other Information

Item 1. Legal Proceedings

From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not currently a party to
any material litigation, except as described below.

On January 24, 2001, we filed a lawsuit alleging patent infringement in the
United States Court for the Eastern District of Texas, Sherman Division, against
Broadcom Corporation. The lawsuit alleges that Broadcom Corporation's BCM 3415
microchip infringes our U.S. patent no. 5,737,035. In our complaint, we are
seeking monetary damages resulting from the alleged infringement as well as
injunctive relief precluding Broadcom Corporation from taking any further action
which infringes our 5,737,035 patent. The lawsuit is still at an early stage.

Starting on July 11, 2001, multiple purported securities fraud class action
complaints were filed in the United States District Court for the Southern
District of New York. We are aware of at least three such complaints: Berger v.
Goldman, Sachs & Co., Inc. et al.; Atlas v. Microtune et al.; and Ellis
Investments Ltd. v. Goldman Sachs & Co., Inc. et al. The complaints are brought
purportedly on behalf of all persons who purchased our common stock from August
4, 2000 through December 6, 2000. According to the law firm that filed it, the
Atlas complaint names as defendants Microtune, Douglas J. Bartek, our Chairman
and Chief Executive Officer, Everett Rogers, our Chief Financial Officer and
Vice President of Finance and Administration, and several investment banking
firms that served as underwriters of our initial public offering. Microtune,
Mr. Bartek and Mr. Rogers were served with notice on the Atlas complaint on
August 22, 2001, however, they have not been served regarding the other
referenced complaints.

Item 2. Changes In Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

Item 5. Other Information

On August 9, 2001, August 17, 2001, and August 20, 2001, respectively,
Lawrence Stuart, Philipe von Stauffenberg, and Martin Englmeier resigned from
our board of directors. Mr. Stuart's and Mr. von Stauffenberg's seats were
filled by Eric Lindberg and Jack Furst, respectively. In addition, on September
2, 2001 John Norsworthy resigned from our board of directors. The seats held by
Mr. Englmeier and Mr. Norsworthy are currently unfilled.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

(b) Reports on Form 8-K

There were no Form 8-K's filed during the quarter ended September 30,
2001.

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Signatures

In accordance with the requirements of the Securities Exchange Act of 1934
as amended, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

Date: November 14, 2001

/s/ Everett (Buddy) Rogers
--------------------------------------------
Everett (Buddy) Rogers
Chief Financial Officer and Vice President
of Finance and Administration
(Principal Financial and Accounting Officer)

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