Caution Regarding Forward-Looking Statements

All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. These forward-looking statements are based upon our current expectations, estimates and projections about our business and our industry, and reflect our beliefs and assumptions based upon information available to us as of the date of this report and are therefore subject to change. In some cases, you can identify these statements by words such as "if," "may," "might," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," and other similar terms. These forward-looking statements include, but are not limited to, projections of our future financial performance and our anticipated growth, our accounting estimates, assumptions and judgments, the demand for our products, descriptions of our strategies, our product and market development plans, the trends we anticipate in our business and the markets in which we operate, the competitive nature and anticipated growth of those markets, our dependence on a few key customers for a substantial portion of our net revenue, our ability to continue to successfully partner with strategic demodulator partners, the successful integration of Auvitek's operations and products, our ability to successfully address new markets where competition is intense and the success of our recently announced cost reduction efforts.

We caution readers that the forward-looking statements in this report are predictions based on our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially and adversely from those expressed or implied by any forward-looking statements as a result of various factors. We caution readers not to rely on these forward-looking statements, which reflect management's analysis only as of the date of this report. These forward-looking statements speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statement for any reason, except as otherwise required by law.

NOTE: For a more complete understanding of our financial condition and results of operations, and the risks that could affect our future results, see "Risk Factors" in Part II, Item 1A. below which describes some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this report and in our other filings with the United States Securities and Exchange Commission (SEC), before deciding to make an investment in our stock. You should also read "Quantitative and Qualitative Disclosures About Market Risk" in Part I, Item 3. below.

You should also read the following discussion and analysis in conjunction with our Unaudited Consolidated Financial Statements and related Notes in Part I, Item 1., "Financial Statements."

OVERVIEW

Microtune, Inc. was incorporated in 1996. We design and market receiver solutions for the cable, automotive entertainment electronics and digital television (DTV) markets. These solutions include radio frequency (RF) integrated circuits (ICs), digital signal processing ICs and subsystem module solutions. Our product portfolio consists of tuners, amplifiers, upconverters, demodulators and receivers, which permit the delivery, reception and exchange of broadband video, audio and data using terrestrial (off-air) and/or cable communications systems. Our tuner products shipped into the cable and DTV markets are in the form of ICs while our tuner products shipped into the automotive entertainment electronics market are principally in the form of subsystem modules, but are expected to be increasingly in the form of ICs in the near future. Our amplifier products are principally in the form of both ICs and subsystem modules and our upconverter products are principally in the form of subsystem modules, but also contain our ICs. Our demodulator and receiver products are in the form of ICs and are targeted principally in the digital TV market.

Our products enable or target various consumer electronics, broadband communications and automotive entertainment electronics applications or devices, including cable television set-top boxes; DOCSIS®-based, high-speed voice and data cable modems; car audio, television and antenna amplifier systems; digital/analog television systems, including high-definition televisions (HDTV); analog-to-digital converter boxes; and personal computer television (PC/TV) multimedia products. We sell our products to original equipment manufacturers (OEMs) and original design manufacturers (ODMs) who sell devices, subsystems and applications to consumers or service providers within the cable, automotive entertainment electronics and DTV markets. We operate Microtune as a single business unit or reportable operating segment serving our target markets. We record our operating expenses by functional area and account type, but we do not record or analyze our operating expenses by market, product type or product. We attempt to analyze our net revenue by market, but in some cases we sell our products to resellers or distributors serving multiple end markets, giving us limited ability to determine market composition of our net revenue from these customers. In addition, certain of our OEM customers purchase products from us for applications in multiple end-markets, also limiting our ability to determine our net revenue contribution from each market.

The cable, automotive entertainment electronics and DTV markets are intensely competitive and historically have seen rapid changes in demand. Certain applications, such as PC/TV, within our target markets can be characterized as having short product life cycles due to rapid technological changes, relatively simple application designs and aggressive competitive pricing. These factors can result in rapidly decreasing average selling prices, which we attempt to mitigate with our product cost reduction efforts and higher levels of integration and functionality. The volatility of demand within our target markets makes it difficult for us to identify and discuss business trends or to predict future results.

Today, our products are marketed principally to OEMs and ODMs in the following markets:

• Cable

Products targeting this market send and/or receive cable broadband signals. These products include tuners used in consumer premise equipment (CPE), including high-speed voice and data cable modems, digital cable set-top boxes and hybrid analog/digital cable set-top boxes; upconverter modules and chipsets used in headend modulators; and RF amplifiers used to send and receive signals between the cable headend and CPE. In some cases, the same tuners may be used to receive digital terrestrial signals. In this market, performance, the ability to support industry standards, power efficiency and overall solution cost are key factors in competing for design wins. Design cycles in the cable market range from a few months to more than one year.

• Automotive Entertainment Electronics

This market includes products targeting mobile automotive and, to a lesser extent, commercial aircraft environments. Our automotive entertainment electronics products range from components for traditional AM/FM radios (including tuners and antenna amplifiers) to components for emerging entertainment applications, including in-car television; in-flight video; digital radio, such as digital audio broadcast (DAB); and HD radio™. Performance, power efficiency and overall solution cost are key competitive factors in this market. Design cycles in the automotive entertainment electronics market are generally very long, in some cases, two to three years.

• Digital Television

Products targeting this market receive digital terrestrial signals or digital and analog terrestrial signals. These products are designed for use in consumer electronics devices such as digital television sets; digital terrestrial set-top converter boxes; satellite and IP set-top boxes that include one or more terrestrial tuners used to receive local high-definition television broadcasts; portable DVD players; digital video recorders (DVRs); DVD recorders; and PC/TV multimedia products, including both USB and PCI or PCI Express OEM and add-on devices. Products targeting these applications require high performance, power efficiency, competitive overall solution cost and adherence to worldwide industry TV reception standards. Design cycles in the DTV market can range from a few months to more than one year for peripheral devices and from a few months to several months for PC/TV applications. The design cycles for PC/TV are relatively shorter and require very low overall solution cost and low power consumption.

We monitor and analyze a number of key financial performance indicators in order to manage our business and evaluate our financial and operating performance. Those indicators include:

• Net Revenue: Our net revenue is generated principally by sales of our ICs and subsystem module products directly to OEMs and ODMs who sell devices or applications to consumers or service providers within the cable, automotive entertainment electronics and DTV markets. We also market and sell to third-party manufacturers and to distributors who sell directly to the OEMs and ODMs. The majority of our net revenue is generated through the efforts of our sales organization. However, we generated approximately 14% and 23% of our net revenue from sales made to distributors in the third quarter of 2009 and 2008, respectively. We generated approximately 10% and 14% of our net revenue from sales made to distributors in the first three quarters of 2009 and 2008, respectively. The decrease in net revenue from sales made to distributors in the third quarter and first three quarters of 2009 as compared to 2008 was due to decreased shipments of silicon tuner products for the coupon eligible converter box (CECB) market segment partially offset by increased shipments of demodulator products for the DTV market due to the acquisition of Auvitek in July 2009. The CECB market segment was non-recurring. Our net revenue varies based upon economic and market conditions in the semiconductor industry and our target markets; the timing, rescheduling or cancellation of customer orders; our ability, as well as the ability of our customers, to manage inventory; seasonality in the demand for consumer products into which our products are incorporated; and large orders placed by our key customers. These factors may cause our quarterly and yearly net revenue to fluctuate significantly, which makes it difficult for us to discuss revenue trends or to predict future results. We expect these fluctuations will continue in the future. We analyze trends in total net revenue and we attempt to analyze total net revenue trends by market, which is limited due to our lack of visibility into customers and/or applications, as described above. We also analyze revenue from key customers, focusing on our ten-percent customers, and aggregate net revenue from our top ten customers.

• Operating Expenses: Operating expenses are substantially driven by personnel-related expenses, including cash and stock-based compensation expense, lab supplies, training and prototype materials, professional fees and insurance expenses. We record stock-based compensation expense in operating expenses in accordance with ASC 718, which has resulted in a significant charge each period as the majority of our employees are classified in this category. We analyze trends in the absolute dollar value and percentage of net revenue for research and development and selling, general and administrative expenses. We also analyze the underlying expense inputs of significant operating expenses.

• Other Income and Expense: We analyze the individual components of other income and expense. We also analyze interest income and the rate of return earned on our cash and cash equivalents and short-term investments.

• Liquidity and Cash Flows: Our cash flows are primarily driven by our cash operating results and sales and purchases of investments. The primary source of our liquidity is our cash and cash equivalents and short-term investments. From period to period, we experience fluctuations in various items, including our working capital accounts, capital expenditures and proceeds from the exercise of employee stock options and shares purchased under our employee stock purchase program.

• Balance Sheet: We view cash and cash equivalents, short-term investments, accounts receivable, days sales outstanding, inventory, inventory turns, and working capital as important indicators of our financial health.

ACQUISITION OF AUVITEK

On July 31, 2009, Microtune completed the acquisition of Auvitek International Ltd. ("Auvitek") pursuant to the terms of the Agreement and Plan of Merger (Merger Agreement) dated as of July 10, 2009. Auvitek is a supplier of advanced DTV demodulator ICs for the HDTV and TV-enabled peripherals markets with primary engineering operations based in Shanghai, China. Pursuant to the Merger Agreement, Microtune acquired all of the outstanding capital stock of Auvitek. The merger consideration consisted of (i) cash payments totaling $7,026,687,
(ii) the issuance of 1,000,000 shares of Microtune common stock and (iii) an earn-out payment to be determined based upon the achievement of certain performance metrics during the period July 1, 2009 through June 30, 2010. The cash payment total may be adjusted based on the final closing balance sheet of Auvitek. In addition to the above described merger consideration, retention arrangements have been established for the benefit of certain Auvitek employees, which will be recognized as expense over the requisite service period, and a second earn-out payment to be determined based upon the achievement of certain performance metrics during the period July 1, 2009 through June 30, 2010 (using the same performance metrics as the earn-out payment for the former holders of Auvitek capital stock). Prior to entering into the Merger Agreement, there were no material relationships between Auvitek and Microtune. The Merger Agreement, the merger and related matters were approved by the boards of directors of each company. See Note 2, "Acquisition of Auvitek International Ltd.," to the Notes to Unaudited Consolidated Financial Statements.

RESULTS OF OPERATIONS

The following table shows certain data from our consolidated statements of
operations expressed as a percentage of net revenue:



                                         Three Months Ended         Nine Months Ended
                                           September 30,              September 30,
                                        2009            2008        2009           2008
 Net revenue                              100 %           100 %       100 %         100 %
 Cost of revenue                           47              52          51            51

 Gross margin                              53              48          49            49
 Operating expenses:
 Research and development                  41              22          39            23
 Selling, general and administrative       37              17          34            20

 Total operating expenses                  78              39          73            43

 Income (loss) from operations            (25 )             9         (24 )           6
 Other income (expense)                     2               1           2             1

 Income (loss) before income taxes        (23 )            10         (22 )           7
 Income tax expense                         1              -            1            -

 Net income (loss)                        (24 )%           10 %       (23 )%          7 %

COMPARISON OF THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

Net Revenue

The following table presents net revenue from each of our product types for the
third quarter and first three quarters of 2009 as compared to the third quarter
and first three quarters of 2008 (in thousands):



                       Three Months Ended                                   Nine Months Ended
                          September 30,                                       September 30,
            2009       2008      Change        % Change         2009       2008      Change        % Change
Silicon   $ 14,681   $ 24,042   $  (9,361 )         (39 )%    $ 43,447   $ 62,573   $ (19,126 )         (31 )%
Modules      3,197      7,822      (4,625 )         (59 )        9,905     21,319     (11,414 )         (54 )
Other          119         64          55            86            112        111           1             1

Total     $ 17,997   $ 31,928   $ (13,931 )         (44 )     $ 53,464   $ 84,003   $ (30,539 )         (36 )

The decrease in net revenue in the third quarter of 2009 as compared to the third quarter of 2008 was primarily the result of decreased shipments of silicon tuner products for the CECB market segment and cable set-top box market segment, module products for the automotive entertainment electronics market and to a lesser extent, lower average selling prices of silicon tuner products for the cable market and module products for the automotive entertainment electronics market. Silicon tuner unit shipments decreased by approximately 43% in the third quarter of 2009 as compared to the third quarter of 2008, primarily relating to the CECB market segment and cable set-top box market segment. Module unit shipments for the automotive entertainment electronics market decreased by approximately 54% in the third quarter of 2009 as compared to the third quarter of 2008. We believe these decreased shipments were primarily driven by the challenging economic environment, except for decreased shipments for the CECB market segment as it was non-recurring.

The decrease in net revenue in the first three quarters of 2009 as compared to the first three quarters of 2008 was primarily the result of decreased shipments of silicon tuner products for the cable market, module products for the automotive entertainment electronics market, silicon tuner products for the DTV market, primarily for the CECB market segment and to a lesser extent, lower average selling prices of silicon tuner products for the cable market and module products for the automotive entertainment electronics market. Silicon tuner unit shipments decreased by approximately 31% in the first three quarters of 2009 as compared to the first three quarters of 2008, primarily relating to the cable and DTV markets. Module unit shipments for the automotive entertainment electronics market decreased by approximately 49% in the first three quarters of 2009 as compared to the first three quarters of 2008, primarily relating to car television applications. We believe these decreased shipments in all of our markets were primarily driven by the challenging economic environment, except for the decreased shipments for the CECB market segment as described above.

We expect net revenue to continue to decline significantly in 2009 as compared to 2008, primarily due to the impact of the macro-economic slowdown. We expect the Auvitek business to contribute less than five percent to our total net revenue in 2009.

Net revenue from customers, including their respective manufacturing subcontractors, exceeding 10% of total net revenue was as follows:

                                      Three Months Ended          Nine Months Ended
                                         September 30,              September 30,
                                     2009            2008         2009           2008
   Unihan (1)(2)                         18 %             *           16 %         12 %
   Cisco                                 18 %            28 %         28 %         28 %
   Panasonic                             16 %            12 %         13 %         12 %
   Samsung                               12 %             *            *            *
   ATM Electronic Corporation (3)         *              18 %          *            *
   Ten largest customers                 86 %            86 %         86 %         85 %

(1) Primarily for the benefit of ARRIS Group, Inc.

(2) A wholly-owned subsidiary of Asustek Computer

(3) The majority of net revenue for the third quarter of 2008 from ATM Electronic Corporation was related to the CECB market segment. No significant revenue has been recognized in 2009 relating to the CECB market segment.

* Less than 10% of total net revenue

Cost of Revenue and Gross Margin

The following table presents cost of revenue and gross margin for the third
quarter and first three quarters of 2009 as compared to the third quarter and
first three quarters of 2008 (in thousands):



                                                  Three Months Ended                                          Nine Months Ended
                                                    September 30,                                               September 30,
                                  2009          2008         Change          % Change         2009          2008         Change           % Change
Cost of revenue                  $ 8,466      $ 16,477      $ (8,011 )            (49 )%    $ 27,038      $ 42,832      $ (15,794 )            (37 )%
Gross margin                       9,531        15,451        (5,920 )            (38 )       26,426        41,171        (14,745 )            (36 )
Gross margin %                      53.0 %        48.4 %         4.6 pts.                       49.4 %        49.0 %          0.4 pts.

Gross margin decreased in the third quarter of 2009 as compared to the third quarter of 2008 primarily due to an approximate $13.9 million decrease in net revenue, partially offset by a 460 basis point increase in gross margin percentage. Gross margin percentage in the third quarter of 2009 as compared to the third quarter of 2008 was positively impacted by a decrease in net revenue for the automotive entertainment electronics market as a percentage of total net revenue, which had a lower gross margin percentage as compared to other markets, and to a lesser extent, lower costs of our silicon products for the cable market, partially offset by lower average selling prices of our silicon products for the cable market and module products for the automotive entertainment electronics market.

Gross margin decreased in the first three quarters of 2009 as compared to the first three quarters of 2008 primarily due to an approximate $30.5 million decrease in net revenue, partially offset by a 40 basis point increase in gross margin percentage. Gross margin percentage in the first three quarters of 2009 as compared to the first three quarters of 2008 was positively impacted by a decrease in net revenue for the automotive entertainment electronics market as a percentage of total net revenue, which had a lower gross margin percentage as compared to other markets, and a decrease in the inventory valuation allowance, partially offset by lower average selling prices of our silicon products for the cable market and module products for the automotive entertainment electronics market.

We expect our gross margin percentage for the year 2009 to be consistent with the percentage for the year 2008 and to fall within the range of 49% to 50%, although the gross margin percentage for any particular quarter may fall outside of our target range.

Our cost of revenue for the third quarter and first three quarters of 2009 and 2008 benefited from the sale of inventory which had previously been identified as excess to expected demand and expensed in prior periods. The total value of these inventories was $0.5 million and $0.1 million for the third quarter of 2009 and 2008, respectively. The total value of these inventories was $1.1 million

and $0.4 million for the first three quarters of 2009 and 2008, respectively. The net impact of changes in the inventory valuation allowance and accrued noncancelable inventory purchase obligations for the third quarter of 2009 and 2008 was a benefit of $0.1 million and $0.3 million, respectively. The net impact of changes in the inventory valuation allowance and accrued noncancelable inventory purchase obligations for the first three quarters of 2009 and 2008 was a charge (benefit) of $1.0 million and $(0.5) million, respectively.

Amortization expense of intangible assets, including developed technology acquired with Auvitek, was insignificant for the third quarter and first three quarters of 2009. No amortization expense was recorded for the third quarter and first three quarters of 2008. In-process research and development acquired with Auvitek will be amortized over its useful life after reaching technological feasibility. If technological feasibility of the related projects is not achieved, a portion or all of the in-process research and development could be expensed in future periods, which could have a material impact on our results of operations.

. . .