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 June 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 July 31, 2001, 39,751,223 shares of the Registrant's common stock were
outstanding.

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Microtune, Inc.

FORM 10-Q
June 30, 2001

INDEX

Page
----

Part I Financial Information

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

Consolidated Balance Sheets at June 30, 2001 and December 31, 2000 (unaudited)............................... 3
Consolidated Statements of Operations for the Three and Six Months Ended June 30,
2001 and 2000 (unaudited).............................................................................. 4
Consolidated Statements of Cash Flows for the Six Months Ended June 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................................................ 17
Factors Affecting Future Operating Results and Stock Price................................................... 17

Part II Other Information

Item 1. Legal Proceedings........................................................................................ 27

Item 2. Changes In Securities and Use of Proceeds ............................................................... 27

Item 4. Submission of Matters to a Vote of Security Holders...................................................... 27

Item 6. Exhibits and Reports on Form 8-K......................................................................... 28

Signatures........................................................................................................ 29

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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 June 30, 2001 December 31, 2000
-------------- ------------------

Current assets:

Cash and cash equivalents................................................ $ 71,067 $ 77,650
Accounts receivable, net of allowance for doubtful accounts of $579 at
June 30, 2001 and $456 at December 31, 2000............................. 9,403 12,301

Inventories.............................................................. 13,203 16,389
Deferred income taxes.................................................... 1,450 552
Other current assets..................................................... 1,146 770
-------- --------
Total current assets................................................... 96,269 107,662

Property and equipment, net................................................. 18,382 15,179
Intangible assets, net of accumulated amortization of $2,430 at June 30,
2001 and $2,481 at December 31, 2000..................................... 5,302 6,054

Goodwill, net of accumulated amortization of $8,390 at June 30, 2001 and
$5,570 at December 31, 2000.............................................. 19,886 22,706

Deferred income taxes....................................................... 208 484
Other assets and deferred charges........................................... 2,032 946
-------- --------
Total assets........................................................ $142,079 $153,031
======== ========

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable......................................................... $ 5,188 $ 6,763
Accrued expenses......................................................... 8,718 8,110
Accrued compensation..................................................... 1,773 1,888
-------- --------
Total current liabilities.............................................. 15,679 16,761

Deferred income taxes....................................................... 950 2,966
Other noncurrent liabilities................................................ 993 1,197
Commitments................................................................. - -

Stockholders' equity:
Preferred stock, $0.001 par value
Authorized shares - 25,000 at June 30, 2001 and December 31, 2000........ - -
Common stock, $0.001 par value
Authorized shares - 150,000 at June 30, 2001 and December 31, 2000;
issued and outstanding shares - 39,601 at June 30, 2001 and 38,547 at
December 31, 2000....................................................... 40 39
Additional paid-in capital................................................. 184,041 180,661
Loans receivable from stockholders......................................... (35) (788)
Accumulated other comprehensive loss....................................... (988) (988)
Accumulated deficit........................................................ (58,601) (46,817)
-------- --------
Total stockholders' equity............................................. 124,457 132,107
-------- --------
Total liabilities and stockholders' equity.......................... $142,079 $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 Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
---------- ---------- ----------- ----------

Net revenues......................................... $ 14,455 $ 15,065 $ 32,114 $ 28,961
Cost of revenues..................................... 10,101 9,860 24,189 19,931
---------- ---------- ----------- ----------
Gross margin......................................... 4,354 5,205 7,925 9,030
Operating expenses:
Research and development:
Stock option compensation....................... 339 359 679 626
Other........................................... 3,579 3,093 7,533 5,677
---------- ---------- ----------- ----------
3,918 3,452 8,212 6,303
Acquired in-process research and development....... - - - 12,692
Selling, general and administration:
Stock option compensation....................... 420 856 1,034 1,378
Other........................................... 4,249 4,795 8,118 8,097
---------- ---------- ----------- ----------
4,669 5,651 9,152 9,475
Amortization of intangible assets and goodwill..... 1,804 2,215 3,606 4,393
---------- ---------- ----------- ----------
Total operating expenses........................ 10,391 11,318 20,970 32,863
---------- ---------- ---------- ----------
Loss from operations................................. (6,037) (6,113) (13,045) (23,833)
Other income (expense):
Interest income.................................... 814 220 1,872 496
Foreign currency translation and transaction gains
(losses), net..................................... (1,221) (806) (1,166) 71
Other.............................................. 18 289 62 460
---------- ---------- ----------- ----------
Loss before income taxes............................. (6,426) (6,410) (12,277) (22,806)
Income tax expense (benefit)......................... (185) 386 (492) 750
---------- ---------- ----------- ----------
Net loss............................................. $ (6,241) $ (6,796) $ (11,785) $ (23,556)
========== ========== ========== ==========

Basic and diluted loss per common share.............. $ (0.16) $ (0.86) $ (0.30) $ (3.05)
========== ========== ========== ==========
Weighted-average shares used in computing basic and
diluted loss per common share....................... 39,327 7,881 39,084 7,726
========== ========== ========== ==========

See accompanying notes.

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Microtune, Inc.

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

Six Months Ended June 30,
--------------------------
2001 2000
-------- --------

Operating activities:
Net loss................................................................... $(11,785) $(23,556)
Adjustments to reconcile net loss to net cash used in operating
activities, net of effects of business combination:
Depreciation............................................................. 3,116 2,527
Amortization of intangible assets and goodwill........................... 3,606 4,393
Acquired in-process research and development............................. - 12,692
Foreign currency translation and transaction gains (losses), net......... 1,166 (71)
Stock option compensation................................................ 1,713 2,004
Deferred income taxes.................................................... (2,844) (754)
Changes in operating assets and liabilities:
Accounts receivable................................................... 2,898 (231)
Inventories........................................................... 3,186 (2,796)
Other assets.......................................................... (462) 393
Accounts payable...................................................... (1,575) 2,976
Accrued expenses...................................................... 608 929
Accrued compensation.................................................. (115) (3,162)
-------- --------
Net cash used in operating activities.............................. (488) (4,656)
Investing activities:
Net cash acquired in acquisition of HMTF Acquisition....................... - 3,550
Purchases of property and equipment........................................ (6,423) (6,483)
Sale of property and equipment............................................. 92 237
Loan receivable............................................................ (1,000) -
Purchase of intangible assets.............................................. (34) (849)
-------- --------
Net cash used in investing activities.............................. (7,365) (3,545)
Financing activities:
Proceeds from issuance of preferred stock.................................. - 9,600
Proceeds from issuance of common stock upon the exercise of options and
from shares purchased under Employee Stock Purchase Plan.................. 1,669 103
Proceeds from loans receivable from stockholders........................... 753 355
-------- --------
Net cash provided by financing activities.......................... 2,422 10,058
Effect of foreign currency exchange rate changes on cash.................... (1,152) (308)
-------- --------
Net change in cash and cash equivalents..................................... (6,583) 1,549
Cash and cash equivalents at beginning of period............................ 77,650 20,129
-------- --------
Cash and cash equivalents at end of period.................................. $ 71,067 $ 21,678
======== ========

See accompanying notes.

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Microtune, Inc.

Notes to Consolidated Financial Statements

June 30, 2001

(unaudited)

1. Basis of Presentation

General

The accompanying unaudited financial statements as of and for the three and six
months ended June 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 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 six
months ended June 30, 2001 have been made. Results of operations for the three
and six months ended June 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 future. Adoption of SFAS No. 133 did not have an impact on the results of
operations or financial position of

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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, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized, but will be subject to annual impairment tests. 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.

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
=======

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.

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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 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 acquired in-process technology 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 June 30, 2001, the amount expended toward completing the
development projects in the automotive group as of the acquisition date was
approximately $1,760,000. As of June 30, 2001, the estimated cost of completion
of the development projects in the automotive product group is approximately
$290,000 and the projects are expected to be completed by December 2002.

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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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):

Six Months Ended
June 30,
-------------------------------------
2001 2000
----------------- -----------------

Preferred stock convertible into common stock.............. - 23,097
Stock options.............................................. 7,382 7,791
Warrants................................................... - 2,253
Restricted common stock.................................... 153 321
Employee stock purchase plan............................... 12 -
---------- ----------
Total anti-dilutive securities excluded.................... 7,547 33,462
========== ==========

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):

June 30, December 31,
2001 2000
------------ ------------

Finished goods............................................. $ 3,649 $ 4,978
Work-in-process............................................ 2,481 2,085
Raw materials.............................................. 7,073 9,326
------- -------
$13,203 $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):

June 30, December 31,
2001 2000
------------ ------------

Leasehold improvements..................................... $ 1,415 $ 1,227
Manufacturing equipment.................................... 16,808 13,702
Other equipment............................................ 4,806 3,039
Furniture and fixtures..................................... 675 1,127
Computer software.......................................... 3,130 1,834
------------ ------------
Total property and equipment............................... 26,834 20,929
Less accumulated depreciation.............................. 8,452 5,750
------------ ------------
$18,382 $15,179
============ ============

8. Accrued Expenses

Accrued expenses consists of the following (in thousands):

June 30, December 31,
2001 2000
------------ ------------

Accrued warranty obligation...................................... $ 672 $ 711
Accrued income taxes............................................. 4,137 2,145
Deferred income taxes............................................ 168 373
Other............................................................ 3,741 4,881
------------ ------------
$8,718 $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 benefit for the three and six months ended June 30, 2001, and the provision
for the three and six months ended June 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 inacted.

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.

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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 June 30, 2001, and December 31, 2000, unamortized
deferred stock compensation was $12.2 million and $14.6 million, respectively.

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 June 30, Six Months Ended June 30,
---------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------

North America............. $ 6,145 $ 7,441 $ 16,148 $ 13,851
Europe.................... 3,778 3,389 7,456 6,595
Asia Pacific.............. 4,425 4,184 8,321 7,976
Other..................... 107 51 189 539
---------- ---------- ---------- ----------
$ 14,455 $ 15,065 $ 32,114 $ 28,961
========== ========== ========== ==========

Sales to DaimlerChrysler accounted for approximately 24% of consolidated net
revenues for the six months ended June 30, 2001. Sales to DaimlerChrysler and
Motorola/General Instruments accounted for approximately 25% and 10%,
respectively, of consolidated net revenues for the six months ended June 30,
2000.

Sales to DaimlerChrysler, Motorola/General Instruments, Askey and Panasonic
accounted for approximately 29%, 13%, 11% and 11%, respectively, of consolidated
net revenues for the three months ended June 30, 2001. Sales to DaimlerChrysler
and Motorola/General Instruments accounted for approximately 24% and 10%,
respectively, of consolidated net revenues for the three months ended June 30,
2000.

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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, 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 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, referred to as Microtune KG, in August 2000.

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 June 30,
2001, we had an accumulated deficit of approximately $58.6 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 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.

-12-

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 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. We also moved our U.S. corporate headquarters
to a new facility in Plano, Texas, during September 2000.

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 June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------

Net revenues........................... 100 % 100 % 100 % 100 %
Cost of revenues....................... 70 65 75 69
------------ ------------ ------------ ------------
Gross margin........................... 30 35 25 31
Operating expenses:
Research and development:
Stock option compensation......... 2 2 2 2
Other............................. 25 20 24 19
------------ ------------ ------------ ------------
27 22 26 21
Acquired in-process research and
development......................... - - - 44
Selling, general and administration:
Stock option compensation......... 3 6 3 5
Other............................. 29 32 26 28
------------ ------------ ------------ ------------
32 38 29 33
Amortization of intangible assets
and goodwill........................ 13 15 11 15
------------ ------------ ------------ ------------
Total operating expenses.......... 72 75 66 113
------------ ------------ ------------ ------------
Loss from operations................... (42) (40) (41) (82)
Other income (expense)................. (2) (2) 2 4
------------ ------------ ------------ ------------
Loss before income taxes............... (44) (42) (39) (78)
Income tax expense (benefit)........... (1) 3 (2) 3
------------ ------------ ------------ ------------
Net loss............................... (43) % (45) % (37) % (81) %
============ ============ ============ ============

-13-

Comparison of the Three and Six Months Ended June 30, 2001 and 2000.

Net Revenues

Revenues are recorded net of a provision for returns. Our net revenues
increased $3.2 million, or 11%, to $32.1 million in the six months ended June
30, 2001, from $29.0 million in the six months ended June 30, 2000. The increase
is primarily due to increased demand for our products in the cable modem market
in the first quarter of 2001 and the increased demand for our products in the
automotive entertainment market in the second quarter of 2001. Our net revenues
decreased $0.6 million, or 4%, to $14.5 million in the three months ended June
30, 2001, from $15.1 million in the three months ended June 30, 2000. This
decrease is primarily due to lower demand for our cable modem products offset by
increased demand for our automotive entertainment products . Our industry has
recently experienced a buildup of inventories that has negatively impacted
current demand for our products in the three and six months ended June 30, 2001.
We expect softness in demand and increasing pressure to reduce the selling
prices of our cable modem products in the near future as the industry completes
its inventory correction. However, we expect to see increasing revenues as a
result of expected gains in market share for our automotive entertainment
products, set-top box products and cable telephony products.

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. Our cost of revenues in the six months ended June
30, 2001 were $24.2 million, or 75% of net revenues, compared to $19.9 million,
or 69% of net revenues, in the six months ended June 30, 2000. Our cost of
revenues in the three months ended June 30, 2001 were $10.1 million, or 70% of
net revenues, compared to $9.9 million, or 65% of net revenues, in the three
months ended June 30, 2000. Our gross margins in the three and six months ended
June 30, 2001 have decreased compared to the same periods for 2000 as a result
of lower loading of our factories and decreased demand in the industry which has
resulted in increased competition. In addition, our gross margins in the six
months ended June 30, 2001 have 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 we expect will be offset 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 six months ended June 30, 2001 were $8.2 million,
or 26% of net revenues, compared to $6.3 million, or 21% of net revenues, in the
six months ended June 30, 2000. Research and development expenses for the three
months ended June 30, 2001 were $3.9 million, or 27% of net revenues, compared
to $3.5 million, or 22% of net revenues, in the three months ended June 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 $0.7 million and $0.6 million in the six
months ended June 30, 2001 and 2000, respectively, and $0.3 million and

-14-

$0.4 million in the three months ended June 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 six months ended
June 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 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 from
operations.

Selling, General and Administration

Selling, general and administration expenses include our personnel-related
expenses for administrative, financial, 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 six months ended June 30, 2001 were $9.2 million, or 29% of net
revenues, compared to $9.5 million, or 33% of net revenues, in the six months
ended June 30, 2000. Selling, general and administration expenses for the three
months ended June 30, 2001 were $4.7 million, or 32% of net revenues, compared
to $5.7 million, or 38% of net revenues, in the three months ended June 30,
2000. The decrease for both periods relates to reductions in certain
duplications in headcount and overhead that existed when the Company and Temic
first merged. Stock option compensation related to selling, general and
administration was $1.0 million and $1.4 million in the six months ended June
30, 2001 and 2000, respectively, and $0.4 million and $0.9 million in the three
months ended June 30, 2001 and 2000, respectively, but does not affect our total
stockholders' equity or cash flows. The decrease in 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 six months ended
June 30, 2001 was $3.6 million compared to $4.4 million, for the six months
ended June 30, 2000. Amortization of intangible assets and goodwill for the
three months ended June 30, 2001 was $1.8 million compared to $2.2 million, for
the three months ended June 30, 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, as a result of 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 increased for the six months ended June 30, 2001 to $1.9
million compared to $0.5 million, for the six months ended June 30, 2000.
Interest income increased for the three months ended June 30, 2001 to $0.8
million compared to $0.2 million, for the three months ended June 30, 2000. The
increase is mainly due to the investment of proceeds from our initial public
offering on August 4, 2000.

-15-

The foreign currency translation and transaction gain (loss), net relates
to the operations of Microtune KG and its subsidiaries. We used the German Mark
as the functional currency for Microtune KG's and its subsidiaries' financial
statements through June 30, 2000. Foreign currency exchange gains and losses
resulting from the remeasurement of financial statements not denominated in
German Marks of Microtune KG and its subsidiaries outside of Germany into German
Marks were recognized in the statements of operations as a component of foreign
currency gains and losses through June 30, 2000. Foreign currency exchange gains
and losses resulting from the translation of financial statements denominated in
German Marks of Microtune KG and its subsidiaries into U.S. Dollars were
included as a component of stockholders' equity through June 30, 2000.

Starting July 1, 2000, we used the U.S. Dollar as the functional currency
for Microtune KG's and its subsidiaries' financial statements. The functional
currency was changed to the U.S. Dollar from German Marks for these entities as
a result of the manner in which these entities are now managed and operated.
Foreign currency exchange gains and losses resulting from the remeasurement of
financial statements not denominated in U.S. dollars of Microtune KG and its
subsidiaries into U.S. Dollars are recognized currently in the statement of
operations as a component of foreign currency gains and losses.

Income Taxes

Liquidity and Capital Resources

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 $44.2 million. On August 4, 2000, we issued
4.6 million common stock shares in our initial public offering that raised net
proceeds of approximately $66.8 million. As of June 30, 2001, we had net working
capital of $80.6 million, including $71.1 million of cash and cash equivalents.

At June 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 June 30,
2001. At June 30, 2001, no borrowings were outstanding under this credit
agreement.

Investments in property and equipment were $6.4 million and $6.5 million in
the six months ended June 30, 2001 and 2000, respectively. We expect capital
expenditures to remain consistent with the levels experienced in 2000. Other
uses of cash include the funding of operating activities, which were $0.5
million and $4.7 million in the six months ended June 30, 2001 and 2000,
respectively.

We believe that our current cash balance will provide adequate liquidity to
fund our operations and meet our other cash requirements for at least the next
24 months. 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 cannot be sure that financing
will be available on reasonable

-16-

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. 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 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 June 30, 2001 was $58.8 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 $5.9 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 RF silicon products or our modules that incorporate
our RF 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 RF silicon products, or MicroModules containing the MicroTuner
and 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.

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

-17-

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 are dependent upon third parties, some of which 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
are dependent 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. 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.

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 will depend 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 will be limited until the time that we introduce radio
frequency integrated circuits with the power requirements that conform 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

-18-

introduce these new products successfully and in a cost-effective and timely
manner, we will not be able to successfully penetrate all of our target markets
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 markets are intensely
competitive. We expect competition to continue to increase in the future 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, and with semiconductor companies such
as Anadigics, Analog Devices, Broadcom and Maxim, and potentially with companies
such as Conexant and Silicon Wave. 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; and
. 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.

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 vice
versa, 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 from
operations.

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 was originally anticipated. We
have directed our development toward producing radio frequency products that
comply with the evolving standards. The slowness of the 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 the continued use of proprietary technologies. The continued delay in the
development of the standards could result in fewer manufacturers purchasing our
radio frequency products in favor of continuing to use the proprietary
technologies designed by our competitors. Either of the aforementioned effects
would result in diminished revenues and consequently harm our business. Further,
if new industry standards emerge, our products or our customers' products could
become unmarketable or obsolete. We may also have to incur substantial
unanticipated costs to comply with these new standards.

-19-

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
market 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.

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 and new product
introductions. 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 cost and emphasis on higher margin products does not occur,
our results of operations would suffer.

We expect our quarterly operating results to fluctuate.

Our quarterly results of operations have fluctuated 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;
. 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;
. slowdown in customer demand and related industry-wide buildup of
inventories;
. our inability to predict our customers' demand for our products;
. changes in our product and customer mix between quarters; and
. quality problems with our radio frequency tuners that result in
significant returns.

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.

-20-

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 24% of consolidated net revenues for the six months
ended June 30, 2001. Sales to DaimlerChrysler, Motorola/General Instruments,
Askey and Panasonic accounted for approximately 29%, 13%, 11% and 11%,
respectively, of consolidated net revenues for the three months ended June 30,
2001. Sales to our twenty largest customers, including sales to their respective
manufacturing subcontractors, accounted for approximately 94% of total sales for
the three months ended June 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 tuners through a
purchase order, which does not require them to purchase a minimum amount
of our radio frequency tuners;
. 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 tuners;
. some of our customers or potential customers offer or may offer products
that compete with our radio frequency tuners; 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, as well as sales, marketing and management efforts on our part.
This process becomes more complex as we simultaneously qualify our products with
multiple customers.

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

-21-

Our sales are typically made pursuant to individual purchase orders, and we
generally do not have long-term supply arrangements with our customers. 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 substantial unsaleable inventory. If
substantial unsaleable inventory occurs, our financial condition would be
harmed.

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 different non-radio frequency based
broadband communications technologies, including digital subscriber line
technology. Many of these technologies will 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.

We depend on the continued growth of the broadband communications market
generally, and the radio frequency product market specifically, for our success.

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

. intense competition;
. rapid technological change; and
. short product life cycles, especially in the consumer electronics
markets.

Although the broadband communications market, in general, has grown rapidly
in the last few years, it may not continue to grow or a significant slowdown in
this market 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 or at all. Because of the uncertainty of the level of competition
and the strength of competitors in the broadband communications market, the
unproven technology of many products addressing this market and the short life

-22-

cycles of many consumer products, it is difficult to predict the potential size
and future growth rate of the radio frequency product market. In addition, the
broadband communications market is 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 market
is partially dependent upon the market acceptance of products and technologies
addressing the broadband communications market, and we cannot assure you that
the radio frequency technologies upon which our products are based will be
accepted by the market. 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 increasing prices and reducing product availability.

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, in
particular, 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.

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.

We do not own or operate a semiconductor fabrication facility. We primarily
rely on IBM, an outside foundry, to produce most of our integrated circuit radio
frequency products, although we are in the process of qualifying x-FAB for
manufacturing our newer integrated circuit products. We do not have a long-term
supply agreement with IBM and instead obtain manufacturing services on a
purchase order basis. IBM has 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 this foundry, and IBM may reallocate
capacity to other customers even during periods of high demand for our
integrated circuits. If IBM 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.

We depend on a single third-party subcontractor for integrated circuit packaging
which reduces our control over the integrated circuit packaging process

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 them 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.

We may be unable to integrate operations that we may acquire in the future.

From time to time, we expect to continue to evaluate acquisitions and may
make additional acquisitions in the future. Our acquisition of Microtune KG was
our first acquisition of a business.

-23-

Accordingly, 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. If in
the future we acquire technologies or businesses, we could have difficulty
integrating acquired technology into our product offerings or integrating our
technology with an acquired company's products. We could also have difficulty
coordinating and integrating overall business strategies, controls, procedures
and policies, as well as sales and marketing and research and development
efforts. Assimilating employees into our corporate culture and coordinating
operations across geographically dispersed locations could prove to be difficult
or time consuming. Moreover, we currently do not know and cannot predict the
accounting treatment of any future acquisition, in part because we cannot be
certain what accounting regulations, conventions or interpretations may prevail
in the future. These difficulties could disrupt our ongoing business, distract
our management and employees and increase our expenses. Furthermore, we may have
to incur debt or issue equity securities to pay for any future acquisitions, and
those issuances could be dilutive to our existing stockholders.

Our inability to generate revenues from international sales could harm our
financial results.

For the six months ended June 30, 2001, 50% 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. 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.

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 countries over which we have no control.

We currently have facilities and suppliers located outside of the U.S.,
including research and development operations in Ingolstadt, Germany, and two
manufacturing facilities in Manila, Philippines, and sales offices in Hong Kong,
Taiwan and Korea. 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 in that country.

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

We may acquire or open additional international operations in Europe and
the Pacific Rim region. International expansion or acquisitions, and any
subsequent international operations, could be affected by the

-24-

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 the necessary
regulatory approval, or in complying with applicable regulations in those
countries or, if such approvals are obtained or such regulations are complied
with, 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.

Our manufacturing operations could be jeopardized and our production decreased
if our labor union causes labor slowdowns or shutdowns at our union facility.

One of our manufacturing facilities is covered by union representation.
This facility currently manufactures a significant portion of our tuner module
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, could be diminished.

We must manage our growth.

If we fail to manage our growth, our reputation and results of operations
could be harmed. Since June 30, 2000, our total number of employees has grown
from 142 to 173 as of June 30, 2001, excluding manufacturing personnel in
Manila, Philippines. In addition, as of June 30, 2001, we had 1,157
manufacturing personnel, in the Philippines. The resulting 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.

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 or 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.

-25-

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 or 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 or 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 tuners 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 a royalties on our historical and future
product sales;
. 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, or at all. These problems might not be resolved
in time to avoid harming our results of operations.

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. 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.

The products of our customers are subject to governmental regulation.

Governmental regulation could place constraints on our customers and
consequently minimize our customers' need or desire 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, it is possible that
demand for our radio frequency products will decrease if equipment incorporating
our products fails to comply with FCC emissions specifications.

-26-

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 compliant, 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.

Item 2. Changes In Securities and Use of Proceeds

From the time of receipt through June 30, 2001, we have applied our net
proceeds from the offerings toward funding capital expenditures. Net cash used
from our stock offerings for capital expenditures totaled $11.9 million through
June 30, 2001. The Company is currently investing the remainder of the proceeds
in interest bearing, investment grade securities for future use.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

At our Annual Meeting of the Stockholders held on April 26, 2001 in Plano,
Texas, our stockholders voted on the following matters.

1. The election of class 1 directors to serve for a term of three years
that expires upon the 2004 annual meeting of stockholders or until
their successors are duly elected and qualified. The nominees of the
Board of Directors were elected.

Against or
For Withheld
-------------- --------------

Douglas J. Bartek 33,166,620 856,070
Harvey B. (Berry) Cash 33,885,605 137,085
Walter S. Ciciora 33,887,215 135,475

2. To ratify the appointment of Ernst & Young LLP as the Company's
--------------------------------------------------------------------
independent auditors for the year ended December 31, 2001. The
--------------------------------------------------------------
appointment of Ernst & Young LLP was ratified.
---------------------------------------------

Against or
For Withheld
------------ ------------

Ratification of Ernst & Young LLP as
independent auditors 33,577,065 445,625

-27-

Item 5. Other Information

Not applicable.

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 June 30, 2001.

-28-

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: August 14, 2001

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

-29-