content: <PAGE>
  
                        SECURITIES AND EXCHANGE COMMISSION
                              Washington, D.C. 20549
  
  
  
                                     Form 8-K
  
  
  
                 Current Report Pursuant to Section 13 or 15(d) of
                        the Securities Exchange Act of 1934
  
  
  
                                 February 14, 2000
                 Date of Report (Date of earliest event reported)
  
  
  
                                 TUT SYSTEMS, INC.
              (Exact name of registrant as specified in its charter)
  
  <TABLE>
  <S>                               <C>                                <C>
             Delaware                           0-25291                           94-2958543
  ------------------------------    -------------------------------    -------------------------------
  (State or other jurisdiction of       (Commission File Number)               (I.R.S. Employer
          incorporation)                                                      Identification No.)
  </TABLE>
  
                                  2495 ESTAND WAY
                         PLEASANT HILL, CALIFORNIA  94523
           (Address of principal executive offices, including zip code)
  
  
                                  (925) 682-6510
               (Registrant's telephone number, including area code)
  
  
                                        N/A
              (Former name or address, if changed since last report)
  <PAGE>
  
  Item 2.  Acquisition or Disposition of Assets
           ------------------------------------
  
       Pursuant to an Agreement and Plan of Reorganization dated as of November
  16, 1999 (the "Agreement") among Tut Systems, Inc., a Delaware corporation
  ("Tut"), Fortress Acquisition Corporation, a Delaware corporation and a wholly
  owned subsidiary of Tut ("Sub"), FreeGate Corporation ("FreeGate"), U.S. Bank
  Trust, as Escrow Agent and, with respect to Article VII only, James Mongiello,
  as Stockholder Representative, on February 14, 2000 (the "Closing"), Tut
  acquired FreeGate by means of a merger of FreeGate with and into Sub (the
  "Merger").  As a result of the Merger, each share of FreeGate capital stock was
  converted into shares of Tut Common Stock according to the following exchange
  ratios: 0.017617 shares of Tut Common Stock for each share of FreeGate common
  stock, 0.001516 shares of Tut Common Stock for each share of Series A Preferred
  Stock, 0.009476 shares of Tut Common Stock for each share of Series B Preferred
  Stock, 0.021478 shares of Tut Common Stock for each share of Series C Preferred
  Stock,  0.037903 shares of Tut Common Stock for each share of Series D Preferred
  Stock. All options and warrants to purchase shares of FreeGate capital stock
  were cancelled upon the Closing.  The Company issued options to purchase Tut
  Common Stock in substitution for 1,113,000 cancelled options at an exchange
  ratio of 0.017617 shares of Tut Common Stock for each one share of FreeGate
  common stock subject to those options.  At the Closing, ten percent of the
  shares issued pursuant to the Merger were deposited into an escrow account to
  secure the indemnification obligations of FreeGate (the "Escrow Fund").  The
  Escrow fund is to be governed by the terms set forth in the Agreement at Tut's
  cost and expense.  The Escrow Fund shall be the sole source of funds available
  for the fulfillment of any indemnification obligations of FreeGate to Tut and
  Sub.
  
       The provisions of the Agreement described in this report are qualified in
  their entirety by reference to the actual text of that agreement, included as an
  exhibit to this report.
  
  Item 7.  Financial Statements and Exhibits.
  
       (a) Financial Statements of Business Acquired.
  
           The audited financial statements for the years ended December 31, 1998
  and 1999 of Freegate Corporation.
  
       (b) Pro Forma Financial Information.
  
           The unaudited pro forma combined statement of operations for the year
  ended December 31, 1999 gives effect to the transaction as if it had taken place
  on January 1, 1999. The unaudited pro forma combined balance sheet as of
  December 31, 1999 gives effect to the transaction as if it had taken place on
  December 31, 1999. The unaudited pro forma financial information is not
  necessarily indicative of the results or financial position that would actually
  have been reported had the sale and purchase transactions underlying the pro
  forma adjustments actually been consummated on such dates nor is it necessarily
  indicative of future operating results or financial position.
  
       (c) Exhibits.
  
           The following exhibits are filed herewith:
  <PAGE>
  
            2.1  Agreement and Plan of Reorganization dated as of November 16,
                 1999, as amended, by and among Tut Systems, Inc., Fortress
                 Acquisition Corporation, FreeGate Corporation, U.S. Bank Trust,
                 as Escrow Agent, and, with respect to Article VII only, James
                 Mongiello, as stockholder representative.*
  
  ______________________
  *  Certain exhibits to, and schedules delivered in connection with, the
     Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Tut
     agrees to supplementally furnish to the Commission a copy of any such exhibit
     or schedule upon request.
  
                                        -2-
  <PAGE>
  
  Item 7(a)       Financial Statements of Business Acquired:
  
                                FREEGATE CORPORATION
  
                                 TABLE OF CONTENTS
  
  <TABLE>
  <CAPTION>
                                                                              Page
                                                                              ----
  <S>                                                                         <C>
  Report of Independent Accountants.......................................... F-2
  
  Independent Auditors' Report............................................... F-3
  
  Balance Sheets............................................................. F-4
  
  Statements of Operations................................................... F-5
  
  Statements of Stockholder's Equity (Deficit)............................... F-6
  
  Statements of Cash Flows................................................... F-7
  
  Notes to Financial Statements.............................................. F-8
  </TABLE>
  
                                        F-1
  
  <PAGE>
  
                         REPORT OF INDEPENDENT ACCOUNTANTS
  
  To the Stockholders and Board of Directors of
  FreeGate Corporation
  
    In our opinion, the accompanying balance sheet as of December 31, 1999 and
  the related statements of operations, of cash flows, and of stockholders'
  equity (deficit) present fairly, in all material respects, the financial
  position of FreeGate Corporation at December 31, 1999, and the results of its
  operations and its cash flows for the year then ended in conformity with
  accounting principles generally accepted in the United States. These financial
  statements are the responsibility of the Company's management; our
  responsibility is to express an opinion on these financial statements based on
  our audit. We conducted our audit of these statements in accordance with
  auditing standards generally accepted in the United States, which require that
  we plan and perform the audit to obtain reasonable assurance about whether the
  financial statements are free of material misstatement. An audit includes
  examining, on a test basis, evidence supporting the amounts and disclosures in
  the financial statements, assessing the accounting principles used and
  significant estimates made by management, and evaluating the overall financial
  statement presentation. We believe that our audit provides a reasonable basis
  for the opinion expressed above.
  
                                            /s/ PricewaterhouseCoopers LLP
  
  San Jose, California
  February 14, 2000
  
                                        F-2
  
  <PAGE>
  
                            INDEPENDENT AUDITORS' REPORT
  
  The Board of Directors of
  FreeGate Corporation
  
    We have audited the accompanying balance sheet of FreeGate Corporation (the
  "Company") as of December 31, 1998, and the related statements of operations,
  stockholders' equity, and cash flows for the year then ended. These financial
  statements are the responsibility of the Company's management. Our
  responsibility is to express an opinion on these financial statements based on
  our audit.
  
    We conducted our audit in accordance with generally accepted auditing
  standards. Those standards require that we plan and perform the audit to obtain
  reasonable assurance about whether the financial statements are free of
  material misstatement. An audit includes examining, on a test basis, evidence
  supporting the amounts and disclosures in the financial statements. An audit
  also includes assessing the accounting principles used and significant
  estimates made by management, as well as evaluating the overall financial
  statement presentation. We believe that our audit provides a reasonable basis
  for our opinion.
  
    In our opinion, the financial statements referred to above present fairly, in
  all material respects, the financial position of FreeGate Corporation as of
  December 31, 1998, and the results of its operations and its cash flows for the
  year then ended, in conformity with generally accepted accounting principles.
  
    The accompanying financial statements have been prepared assuming the Company
  will continue as a going concern. As discussed in Note 1 to the financial
  statements, the Company has incurred net losses and negative operating cash
  flows since inception that cause substantial doubt about its ability to
  continue as a going concern. Management's plans in regard to these matters are
  also described in Note 1. Continuation of the Company as a going concern is
  dependent upon management's ability to obtain additional financing and the
  successful development and marketing of its products. The financial statements
  do not include any adjustments that might result from the outcome of this
  uncertainty.
  
  
                                                                      /s/ KPMG LLP
  
  Mountain View, California
  April 23, 1999, except
   as to Note 7, which is
   as of November 1, 1999
  
                                        F-3
  
  <PAGE>
  
  
                                FREEGATE CORPORATION
  
                                   BALANCE SHEETS
                      (in thousands, except per share amounts)
  
  <TABLE>
  <CAPTION>
                                                                 December 31,
                                                               ------------------
                                                                 1998      1999
                                                               --------  --------
  <S>                                                          <C>       <C>
                             ASSETS
  Current assets:
    Cash and cash equivalents ................................ $  6,120  $    130
    Accounts receivable, net of allowance for doubtful
     accounts of $201 and $132, respectively .................      557       403
    Inventory ................................................      497       210
    Prepaid expenses and other current assets ................       80       224
                                                               --------  --------
      Total current assets ...................................    7,254       967
  Property and equipment, net ................................      661       394
  Other assets ...............................................       50        52
                                                               --------  --------
      Total assets ........................................... $  7,965  $  1,413
                                                               ========  ========
  
         LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
  Current liabilities:
    Accounts payable ......................................... $    306  $    465
    Accrued liabilities ......................................      690       734
    Notes payable ............................................      --        895
    Capital lease obligations ................................      281       323
    Deferred revenue .........................................      112       418
                                                               --------  --------
      Total current liabilities ..............................    1,389     2,835
  Capital lease obligations, net of current portion ..........      547       279
  Deferred revenue, net of current portion....................      220       134
                                                               --------  --------
      Total liabilities ......................................    2,156     3,248
                                                               --------  --------
  Commitments and contingencies (Note 5)
  
  Stockholders' equity (deficit):
    Convertible preferred stock, $0.0001 par value:
     Series A: 2,500 shares authorized; 2,500 shares issued
      and outstanding as of December 31, 1998 and 1999;
      liquidation preference of $300 .........................      --        --
     Series B: 5,200 shares authorized; 5,067 shares issued
      and outstanding as of December 31, 1998 and 1999;
      liquidation preference of $3,800 .......................      --        --
     Series C: 5,000 shares authorized; 4,706 shares issued
      and outstanding as of December 31, 1998 and 1999;
      liquidation preference of $8,000........................      --        --
     Series D: 5,000 shares authorized; 4,442 shares issued
      and outstanding as of December 31, 1998 and 1999,
      respectively; liquidation preference of $13,325 ........      --        --
    Restricted common stock, $0.0001 par value; 35,000 shares
     authorized; 9,272 and 10,048 shares issued and
     outstanding as of December 31, 1998 and 1999,
     respectively ............................................      --        --
    Additional paid-in capital ...............................   25,779    26,443
    Notes receivable from stockholders .......................     (143)     (275)
    Accumulated deficit ......................................  (19,827)  (28,003)
                                                               --------  --------
      Total stockholders' equity (deficit)....................    5,809    (1,835)
                                                               --------  --------
        Total liabilities and stockholders' equity (deficit).. $  7,965  $  1,413
                                                               ========  ========
  </TABLE>
     The accompanying notes are an integral part of these financial statements.
  
                                        F-4
  <PAGE>
  
  
                                FREEGATE CORPORATION
  
                              STATEMENTS OF OPERATIONS
                      (in thousands, except per share amounts)
  
  <TABLE>
  <CAPTION>
                                                                Years Ended
                                                                December 31,
                                                              -----------------
                                                                1998     1999
                                                              --------  -------
  <S>                                                         <C>       <C>
  Revenue ................................................... $  2,824  $ 2,134
  Cost of revenue ...........................................    1,819    1,159
                                                              --------  -------
  Gross profit ..............................................    1,005      975
                                                              --------  -------
  Operating expenses:
    Sales and marketing .....................................    5,771    3,636
    Research and development ................................    4,178    3,899
    General and administrative ..............................    1,807    1,406
    Noncash expense..........................................       17      221
                                                              --------  -------
      Total operating expenses ..............................   11,773    9,162
                                                              --------  -------
  Loss from operations ......................................  (10,768)  (8,187)
  Interest expense...........................................     (100)     (62)
  Interest income............................................      207       76
                                                              --------  -------
  Loss before income taxes ..................................  (10,661)  (8,173)
  Income taxes ..............................................        1        3
                                                              --------  -------
  Net loss .................................................. $(10,662) $(8,176)
                                                              ========  =======
    Net loss per share, basic and diluted ................... $  (1.73) $ (1.03)
                                                              ========  =======
  Shares used in computing basic and diluted net loss per
   share.....................................................    6,149    7,964
                                                              ========  =======
  </TABLE>
  
  
     The accompanying notes are an integral part of these financial statements.
  
                                        F-5
  <PAGE>
  
                               FREEGATE CORPORATION
  
                   STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
  
                      YEARS ENDED DECEMBER 31, 1998 AND 1999
                                  (in thousands)
  
  <TABLE>
  <CAPTION>
                                  Convertible Preferred Stock
                    -------------------------------------------------------
                                                                             Restricted                  Notes
                      Series A      Series B      Series C      Series D    common stock   Additional  Receivable
                    ------------- ------------- ------------- ------------- --------------  Paid-In       from     Accumulated
                    Shares Amount Shares Amount Shares Amount Shares Amount Shares  Amount  Capital   Stockholders   Deficit
                    ------ ------ ------ ------ ------ ------ ------ ------ ------  ------ ---------- ------------ -----------
  <S>               <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>     <C>    <C>        <C>          <C>
  Balances,
  December 31,
  1997............  2,500   $ --  5,067   $ --  4,706   $ --    --    $ --   8,963   $ --   $12,338      $ --       $ (9,165)
  Issuance of
  Series D
  preferred stock,
  net of issuance
  costs of $90....    --      --    --      --    --      --  4,442     --     --      --    13,235        --            --
  Repurchase of
  common stock....    --      --    --      --    --      --    --      --    (790)    --       (72)       --            --
  Issuance of
  common stock--
  options
  exercised.......    --      --    --      --    --      --    --      --     964     --       221        --            --
  Issuance of
  common stock in
  exchange for
  legal services..    --      --    --      --    --      --    --      --     135     --        40        --            --
  Warrants issued
  in connection
  with capital
  lease...........    --      --    --      --    --      --    --      --     --      --        17        --            --
  Issuance of
  notes receivable
  from
  stockholders....    --      --    --      --    --      --    --      --     --      --       --        (143)          --
  Net loss........    --      --    --      --    --      --    --      --     --      --       --         --        (10,662)
                    -----   ----  -----   ----  -----   ----  -----   ----  ------   ----   -------      -----      --------
  Balances,
  December 31,
  1998............  2,500     --  5,067     --  4,706     --  4,442     --   9,272     --    25,779       (143)      (19,827)
  Repurchase of
  common stock....    --      --    --      --    --      --    --      --    (400)    --       (49)       --            --
  Issuance of
  common stock--
  options
  exercised.......    --      --    --      --    --      --    --      --     886              354        --            --
  Issuance of
  common stock in
  exchange for
  services........    --      --    --      --    --      --    --      --     290     --        69        --            --
  Warrants issued
  under capital
  lease...........    --      --    --      --    --      --    --      --     --      --        17        --            --
  Warrants issued
  under financing
  activity........    --      --    --      --    --      --    --      --     --      --       273        --            --
  Issuance of
  notes receivable
  from
  stockholders....    --      --    --      --    --      --    --      --     --      --       --        (132)          --
  Net loss........    --      --    --      --    --      --    --      --     --      --       --         --         (8,176)
                    -----   ----  -----   ----  -----   ----  -----   ----  ------   ----   -------      -----      --------
  Balances,
  December 31,
  1999............  2,500   $ --  5,067   $ --  4,706   $ --  4,442   $ --  10,048   $ --   $26,443      $(275)     $(28,003)
                    =====   ====  =====   ====  =====   ====  =====   ====  ======   ====   =======      =====      ========
  <CAPTION>
                        Total
                    Stockholders'
                       Equity
                      (Deficit)
                    -------------
  <S>               <C>
  Balances,
  December 31,
  1997............     $ 3,173
  Issuance of
  Series D
  preferred stock,
  net of issuance
  costs of $90....      13,235
  Repurchase of
  common stock....         (72)
  Issuance of
  common stock--
  options
  exercised.......         221
  Issuance of
  common stock in
  exchange for
  legal services..          40
  Warrants issued
  in connection
  with capital
  lease...........          17
  Issuance of
  notes receivable
  from
  stockholders....        (143)
  Net loss........     (10,662)
                    -------------
  Balances,
  December 31,
  1998............       5,809
  Repurchase of
  common stock....         (49)
  Issuance of
  common stock--
  options
  exercised.......         354
  Issuance of
  common stock in
  exchange for
  services........          69
  Warrants issued
  under capital
  lease...........          17
  Warrants issued
  under financing
  activity........         273
  Issuance of
  notes receivable
  from
  stockholders....        (132)
  Net loss........      (8,176)
                    -------------
  Balances,
  December 31,
  1999............     $(1,835)
                    =============
  </TABLE>
  
    The accompanying notes are an integral part of these financial statements.
  
                                        F-6
  <PAGE>
  
                                FREEGATE CORPORATION
  
                              STATEMENTS OF CASH FLOWS
                                   (in thousands)
  
  <TABLE>
  <CAPTION>
                                                                 Years Ended
                                                                 December 31,
                                                               -----------------
                                                                 1998     1999
                                                               --------  -------
  <S>                                                          <C>       <C>
  Cash flows from operating activities:
   Net loss .................................................. $(10,662) $(8,176)
   Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization ............................      352      418
    Noncash warrant expense ..................................       17      221
    Common stock issued for services .........................       40       69
    Changes in operating assets and liabilities:
     Accounts receivable .....................................     (390)     154
     Inventory ...............................................     (359)     287
     Prepaid expenses and other assets .......................      --      (146)
     Accounts payable ........................................       58      159
     Accrued liabilities .....................................      211       44
     Deferred revenue ........................................      314      220
                                                               --------  -------
      Net cash used in operating activities ..................  (10,419)  (6,750)
                                                               --------  -------
  Cash flows from investing activities:
   Purchase of property and equipment ........................     (369)    (151)
   Notes receivable from stockholders ........................      200      (10)
                                                               --------  -------
      Net cash used in investing activities ..................     (169)    (161)
                                                               --------  -------
  Cash flows from financing activities:
   Proceeds from sale of equipment under sale/leaseback
    arrangement ..............................................      378       55
   Proceeds from sale of preferred stock .....................   13,235      --
   Proceeds from exercise of stock options ...................       78      222
   Principal payments of capital leases ......................     (152)    (226)
   Repurchase of common stock ................................      (72)     (49)
   Proceeds from bridge loan financing .......................      --       919
                                                               --------  -------
      Net cash provided by financing activities                  13,467      921
                                                               --------  -------
  Net increase (decrease) in cash and cash equivalents .......    2,879   (5,990)
  Cash and cash equivalents at beginning of year .............    3,241    6,120
                                                               --------  -------
  Cash and cash equivalents at end of year ................... $  6,120  $   130
                                                               ========  =======
  Supplemental disclosure of cash flow information:
   Cash paid during year for interest ........................ $     92  $    79
                                                               ========  =======
   Noncash financing activity:
    Warrants issued in connection with bridge loan............ $    --   $   273
                                                               ========  =======
    Warrants issued in connection with capital lease.......... $     17  $    17
                                                               ========  =======
    Common stock issued for services ......................... $     40  $    69
                                                               ========  =======
    Stock options issued in exchange for notes receivable .... $    143  $   132
                                                               ========  =======
  </TABLE>
  
     The accompanying notes are an integral part of these financial statements.
  
                                        F-7
  <PAGE>
  
                                FREEGATE CORPORATION
  
                           NOTES TO FINANCIAL STATEMENTS
  
  1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  
   (a) Description of business
  
    FreeGate Corporation (the "Company") was incorporated in the state of
  Delaware on December 26, 1995. FreeGate Corporation provides "all-in-one"
  Internet and Intranet connectivity solutions for small to medium sized
  businesses and branch offices. These solutions combine E-mail, web access and
  publishing, electronic file transfer, remote access, virtual private
  networking, firewall security, and LAN/router capabilities in an affordable,
  reliable turnkey system for a nontechnical audience.
  
    Beyond this integrated Internet and Intranet functionality, the Company
  provides a remote provisioning and management system that opens up business
  opportunities for value-added Internet applications and services, with
  increased security and reliability.
  
   (b) Basis of presentation
  
    The Company has incurred net losses and negative operating cash flows since
  inception that raise substantial doubt about its ability to continue as a going
  concern. The accompanying financial statements have been prepared assuming the
  Company continues in existence as a going concern. Continuation of the Company
  as a going concern is dependent upon the successful conclusion of the merger
  agreement signed in November 1999 (see Note 7).
  
   (c) Use of estimates
  
    The preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the reported amounts of assets and liabilities and disclosure of
  contingent assets and liabilities at the date of the financial statements and
  reported results of operations during the reporting period. Actual results
  could differ from those estimates.
  
   (d) Revenue recognition
  
    On October 1, 1997, the Company adopted Statement of Position (SOP) 97-2,
  Software Revenue Recognition. The adoption of SOP 97-2 did not have a material
  effect on the Company's operating results. SOP 97-2 generally requires revenue
  earned on software arrangements involving multiple elements to be allocated to
  each element based on the relative fair values of the elements. The fair value
  of an element must be based on evidence that is specific to the vendor. If a
  vendor does not have evidence of the fair value of all elements in a multiple-
  element arrangement, all revenue from the arrangement is deferred until such
  evidence exists or until all elements are delivered.
  
    Product revenue is generally recognized upon delivery or if sales are made to
  a distributor, with right of return, upon sell through, provided the Company
  deems the receivable to be collectible. Revenue allocated to maintenance is
  recognized ratably over the maintenance term.
  
   (e) Concentrations of credit risk
  
    Financial instruments that subject the Company to concentrations of credit
  risk consist primarily of cash and cash equivalents, accounts receivable, and a
  note receivable. The Company maintains all of its cash with one financial
  institution in the United States. Cash equivalents are comprised of money
  market funds. The Company's policy limits the amount of credit exposure in any
  one-debt issue. Management believes the financial risks associated with these
  financial instruments are minimal. The notes receivable are due from
  stockholders of the Company and management believes that the risk of credit
  loss is low. With respect to accounts receivable, the Company performs credit
  evaluations of its customers and maintains reserves for potential credit
  losses.
  
                                        F-8
  <PAGE>
  
                                FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
  
    Significant customer information is as follows:
  
  <TABLE>
  <CAPTION>
                                                   Percentage
                                                       of
                                                      Total         Accounts
                                                    Revenues       Receivable
                                                   -------------   -------------
                                                   1998    1999    1998    1999
                                                   -----   -----   -----   -----
       <S>                                         <C>     <C>     <C>     <C>
       Customer A.................................    46%     19%     --      --
       Customer B.................................    10%     --      21%     --
       Customer C.................................    --      16%     --      41%
  </TABLE>
  
   (f) Capitalized software
  
    Costs related to the research and development for new software products and
  enhancements to existing software products are expensed as incurred until
  technological feasibility of the product has been established, at which time
  such costs are capitalized subject to expected recoverability. As of December
  31, 1999, the Company had not capitalized any development costs related to
  software products.
  
   (g) Inventory
  
    Inventory as of December 31, 1999, consisted of finished goods and raw
  materials valued at the lower of cost, using the first in first out method, or
  market.
  
   (h) Property and equipment
  
    Property and equipment are stated at cost less accumulated depreciation and
  amortization. Depreciation is calculated using the straight-line method over
  the estimated useful lives of the equipment, generally three years. Assets
  under capital leases are amortized over the shorter of the lease terms or the
  estimated useful lives of the assets.
  
   (i) Income taxes
  
    The Company utilizes the asset and liability method of accounting for income
  taxes. Under the asset and liability method, deferred tax assets and
  liabilities are recognized for the future tax consequences attributable to
  differences between the financial statement carrying amounts of existing assets
  and liabilities and their respective tax bases and operating loss and tax
  credit carryforwards. Deferred tax assets and liabilities are measured using
  enacted tax rates expected to apply to taxable income in the years in which
  those temporary differences are expected to be recovered or settled. A
  valuation allowance is recorded to reduce deferred tax assets to an amount that
  is more likely than not to be realized. The effect on deferred tax assets and
  liabilities of a change in tax rates is recognized in income in the period that
  includes the enactment date.
  
   (j) Stock-based compensation
  
    The Company accounts for its employee stock option plan in accordance with
  the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
  for Stock Issued to Employees, and related interpretations. As such,
  compensation expense is recorded on the date of grant only if the current
  market price of the underlying stock exceeds the exercise price. Statement of
  Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
  Compensation, permits entities to recognize as expense over the vesting period
  the fair value of all stock-based awards on the date of grant. Alternatively,
  SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion
  No. 25 and provide pro forma net income or loss disclosures for employee
  options granted as if the fair value-based method defined in SFAS No. 123 had
  been applied. The Company has elected to apply the provisions of APB Opinion
  No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
  
                                        F-9
  <PAGE>
  
                                FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
  
   (k) Accumulated other comprehensive income
  
    In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
  130, Reporting Comprehensive Income. SFAS No. 130 establishes standards of
  reporting and display of comprehensive income and its components of net income
  and "Other Comprehensive Income" in a full set of general-purpose financial
  statements. Other comprehensive income refers to revenues, expenses, gains, and
  losses that are not included in net income but rather are recorded directly in
  stockholders' equity. SFAS No. 130 was adopted by the Company in 1998 but the
  Company has no elements of other comprehensive income.
  
   (l) Impairment of long-lived assets
  
    In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
  Assets and for Long-Lived Assets to Be Disposed Of, management evaluates the
  Company's long-lived assets for impairment whenever events or changes in
  circumstances indicate that the carrying value of an asset may not be
  recoverable. As of December 31, 1999, the Company does not consider any assets
  to be impaired.
  
   (m) Net loss per share
  
    Basic net loss per share is computed using the weighted-average number of
  vested outstanding shares of common stock. Diluted net loss per share is
  computed using the weighted-average number of shares of vested common stock
  outstanding and when dilutive, unvested common stock outstanding, potential
  common shares from options and warrants to purchase common and preferred stock
  using the treasury stock method and from convertible securities using the as-
  if-converted basis. All potential common shares have been excluded from the
  computation of diluted net loss per share for all periods presented because the
  effect would be antidilutive.
  
    Diluted net loss per share does not include the effect of the following (in
  thousands):
  
  <TABLE>
  <CAPTION>
                                                                  1998    1999
                                                                 ------- -------
  <S>                                                            <C>     <C>
  Shares issuable under common stock options....................   1,563   1,839
  Shares of unvested common stock subject to repurchase.........   2,017   2,579
  Shares issuable pursuant to warrants to purchase common and
   convertible preferred stock..................................      89     426
  Shares of convertible preferred stock on an "as-if-converted"
   basis........................................................  16,715  16,715
  </TABLE>
  
    The weighted-average exercise price of stock options outstanding was $0.24
  and $0.53 as of December 31, 1998 and 1999, respectively. The weighted-average
  purchase price of unvested stock was $0.11 and $0.41 as of December 31, 1998
  and 1999, respectively. The weighted-average exercise price of warrants was
  $1.14 and $2.61 as of December 31, 1998 and 1999, respectively.
  
   (n) Recent Accounting Pronouncements
  
    In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
  Instruments and Hedging Activities. FreeGate is required to adopt SFAS No. 133
  in fiscal 2001. SFAS No. 133 establishes methods of accounting for derivative
  financial instruments and hedging activities related to those instruments as
  well as other hedging activities. To date, the Company has not entered into any
  derivative financial instruments or hedging activities.
  
    In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
  Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
  Statements," which provides guidance on the recognition, presentation, and
  disclosure of revenue in financial statements filed with the SEC. SAB 101
  
                                        F-10
  <PAGE>
  
                                FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
  outlines the basic criteria that must be met to recognize revenue and provides
  guidance for disclosures related to revenue recognition policies. Management
  believes that the impact of SAB 101 will not have a material effect on the
  financial position or results of the operations of the Company.
  
  2. BALANCE SHEET COMPONENTS
  
   (a) Cash and cash equivalents
  
    The Company considers all highly liquid investments with an original maturity
  of 90 days or less to be cash equivalents. Cash equivalents as of December 31,
  1998 and 1999, consisted of money market funds totaling $5,961,043 and nil,
  respectively.
  
   (b) Inventory
  
    Inventory consisted of the following as of December 31, 1998 and 1999 (in
  thousands)
  
  <TABLE>
  <CAPTION>
                                                                         December
                                                                            31,
                                                                         ---------
                                                                         1998 1999
                                                                         ---- ----
       <S>                                                               <C>  <C>
       Finished goods................................................... $400 $164
       Raw materials....................................................   97   46
                                                                         ---- ----
                                                                         $497 $210
                                                                         ==== ====
  </TABLE>
  
   (c) Property and Equipment
  
    Property and equipment consisted of the following as of December 31, 1998 and
  1999 (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                   December 31,
                                                                   --------------
                                                                    1998    1999
                                                                   ------  ------
       <S>                                                         <C>     <C>
       Property and equipment, net:
         Computer equipment and purchased software................ $1,007  $1,158
         Office equipment.........................................    229     229
                                                                   ------  ------
                                                                    1,236   1,387
         Less: Accumulated depreciation and amortization..........   (575)   (993)
                                                                   ------  ------
                                                                   $  661  $  394
                                                                   ======  ======
  </TABLE>
  
    Computer equipment and purchased software as of December 31, 1998 and 1999,
  included equipment under capital leases of approximately $1,037,000 and
  $1,191,000 respectively, and related accumulated amortization of approximately
  $283,000 and $847,000, respectively.
  
   (d) Accrued liabilities
  
    Accrued liabilities consisted of the following as of December 31, 1998 and
  1999 (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                        December
                                                                           31,
                                                                        ---------
                                                                        1998 1999
                                                                        ---- ----
       <S>                                                              <C>  <C>
       Accrued compensation............................................ $146 $119
       Accrued warranty................................................   64  149
       Legal and professional fees.....................................  135  199
       Other...........................................................  345  267
                                                                        ---- ----
                                                                        $690 $734
                                                                        ==== ====
  </TABLE>
  
                                        F-11
  <PAGE>
  
                                FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
  
  3. STOCKHOLDERS' EQUITY
  
   (a) Convertible preferred stock
  
    The rights, preferences, and privileges of the holders of Series A, B, C, and
  D convertible preferred stock are as follows:
  
    . The holders of Series D convertible preferred stock shall be entitled to
      receive dividends, at a rate of $0.18 per share, per annum in preference
      to holders of Series A, B, and C convertible preferred stock payable when
      and if declared by the Company's Board of Directors. The holders of
      Series A, B, and C convertible preferred stock are entitled to receive
      dividends at the rate of $0.0075, $0.045, and $0.102, per share,
      respectively, per annum, payable when and if declared by the Company's
      Board of Directors in preference and priority to any payments of
      dividends to holders of the Company's common stock. The dividend rights
      are not cumulative.
  
    . The holders of Series D convertible preferred stock have a liquidation
      preference of $3.00 per share in preference to the holders of Series A,
      B, and C convertible preferred stock. Subject to Series D rights, the
      holders of Series A, B, and C convertible preferred stock have a
      liquidation preference of $0.12, $0.75, and $1.70 per share,
      respectively. After payment of the liquidation preference, all remaining
      assets of the Company shall be distributed among holders of convertible
      preferred stock and common stock pro rata on an "as-if-converted" basis.
      Distributions to holders of convertible preferred stock are limited to an
      aggregate of $0.24, $1.50, $3.40, and $6.00 per share to holders of
      Series A, B, C, and D convertible preferred stock, respectively. After
      payment of the maximum liquidation distribution to holders of convertible
      preferred stock, any remaining assets of the Company will be distributed
      pro rata to holders of common stock.
  
    . Each share of convertible preferred stock is convertible into one share
      of common stock. Conversion will occur automatically upon an initial
      public offering with a price of not less than $4.50 per share and
      proceeds in excess of $30,000,000.
  
    . Holders of Series A, B, C, and D convertible preferred stock vote equally
      with shares of common stock on an "as-if-converted" basis.
  
    . Holders of Series A, B, C, and D convertible preferred stock possess
      certain registration rights and the right to participate in future
      financings.
  
    No dividends have been declared or paid on convertible preferred stock or
  common stock since inception of the Company.
  
   (b) Common stock
  
    During 1996, the Company issued 6,000,000 shares of common stock to the
  Company's founders in exchange for certain rights and services. The fair value
  assigned to the rights and services was equivalent to the fair value of the
  common stock on the issuance date as determined by the Board of Directors. Upon
  issuance, the Company had the right to repurchase 50% of these shares at $0.005
  per share. Subject to continued employment of the founders, the repurchase
  right expired in December 1996 for 25% of the shares and, for the remaining
  shares, expired ratably over 36 months through December 1999. Under certain
  circumstances, the shares may immediately vest upon a change in control of the
  Company.
  
    Stock issued to the founders, as well as stock issued upon exercise of stock
  options under the 1996 Stock Option Plan, is subject to vesting. The Company
  reserves the right of first refusal to purchase all vested shares of common
  stock. All unvested shares of common stock may be repurchased by the Company at
  the original issuance price upon an employee's termination of employment. The
  repurchase right expires when the Company's stock becomes publicly traded or
  upon a change in control of the Company. As of December 31, 1998 and 1999,
  2,017,832 and 2,579,419 shares of outstanding common stock, respectively, are
  unvested and, therefore, subject to repurchase by the Company.
  
                                        F-12
  <PAGE>
  
                                FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
  
    By decision of the Board of Directors in November 1999, however, these
  options will vest immediately on the closing date of the merger of the Company.
  
   (c) 1996 Stock Option Plan
  
    The Company's 1996 Stock Option Plan (the "Plan") authorizes the granting of
  incentive and nonstatutory common stock options to employees and nonemployees
  at exercise prices no less than 85% of the fair market value of the common
  stock on the grant date, as determined by the Board of Directors. The options
  may be exercised immediately upon issuance and generally have a term of 10
  years. The common stock issued upon the exercise of stock options vests 25%
  after one year of service and thereafter ratably over 36 months of service.
  Upon termination of service, an employee's unvested shares may be repurchased
  by the Company at the option exercise price. Approximately 5,000,000 shares of
  common stock have been reserved for issuance under the Plan.
  
   (d) Accounting for stock-based compensation
  
    Under APB Opinion No. 25, the Company has recorded no compensation costs
  related to its stock option plan for the year ended December 31, 1999, because
  the exercise price of each employee option equals or exceeds the market value
  of the underlying common stock as of the grant date for each employee stock
  option. Had compensation cost for the Company's plans been determined
  consistent with the fair value approach enumerated in SFAS No. 123, the
  Company's pro forma net loss would have been as follows (in thousands, except
  per share amounts):
  
  <TABLE>
  <CAPTION>
                                                                  1998     1999
                                                                 -------  ------
       <S>                                                       <C>      <C>
       Net loss attributable to common stockholders--as
        reported...............................................  $10,662  $8,176
       Net loss attributable to common stockholders--pro
        forma..................................................   10,677   8,408
       Net loss per share attributable to common stockholders--
        as reported............................................    (1.73)  (1.03)
       Net loss per share attributable to common stockholders--
        pro forma..............................................    (1.74)  (1.06)
  </TABLE>
  
    The fair value of employee options granted was estimated on the date of grant
  using the minimum-value method. The fair value of nonemployee options granted
  was estimated on the date of grant using the Black-Scholes option-pricing
  model. There were no nonemployee options granted in 1998. The following
  weighted-average assumptions were used in these calculations: risk-free
  interest rate of approximately 5.3% and 6.1% for the years ended 1998 and 1999,
  respectively; expected life of five years and ten years for the years ended
  December 31, 1998 and 1999, respectively; no dividends and expected volatility
  of 0% and 65% for employee and nonemployee options, respectively.
  
    The weighted average fair values of options granted in 1998 and 1999 was
  $0.07 and $0.24, respectively.
  
                                        F-13
  <PAGE>
  
                                FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
  
    A summary of activity under the Company's option plan for the period from
  January 1, 1998 to December 31, 1999, is presented below (in thousands, except
  per share amounts):
  
  
  <TABLE>
  <CAPTION>
                                                                      Options
                                                                    Outstanding
                                                                  ----------------
                                                                          Weighted
                                                         Options          Average
                                                        Available         Exercise
                                                        for Grant Shares   Price
                                                        --------- ------  --------
  <S>                                                   <C>       <C>     <C>
  Balances as of January 1, 1998 ......................     805    1,232   $0.15
    Granted ...........................................  (1,286)   1,286    0.30
    Exercised .........................................     --      (444)   0.18
    Canceled ..........................................     511     (511)   0.23
    Unvested stock repurchased ........................     790      --     0.09
                                                         ------   ------
  Balances as of December 31, 1998.....................     820    1,563    0.24
    Granted ...........................................  (2,554)   2,554    0.46
    Exercised .........................................     --      (941)   0.19
    Canceled ..........................................   1,337   (1,337)   0.29
    Unvested stock repurchased ........................     400      --     0.13
                                                         ------   ------
  Balances as of December 31, 1999.....................       3    1,839   $0.53
                                                         ======   ======
  </TABLE>
  
  In addition to the 1996 stock option plan, the Company granted options of
  475,000 and 235,000 for the years ended December 31, 1998 and 1999,
  respectively.
  
    A breakdown of the Company's outstanding options as of December 31, 1999 is
  presented below (in thousands, except per share data):
  
  <TABLE>
  <CAPTION>
                                Outstanding                       Exercisable
                      --------------------------------------   ---------------------
                                   Weighted
                                   Average        Weighted                Weighted
       Range of       Number      Remaining       Average      Number     Average
       Exercise         of       Contractual      Exercise       of       Exercise
         Price        Shares     Life (Years)      Price       Shares      Price
     -------------    ------     ------------     --------     ------     --------
     <S>              <C>        <C>              <C>          <C>        <C>
            $0.075       69          6.68          $0.075         69       $0.075
            $0.170       71          7.55          $0.170         71       $0.170
            $0.300      586          9.31          $0.300        586       $0.300
            $0.700    1,113          9.92          $0.700      1,113       $0.700
                      -----                                    -----
     $0.075-$0.700    1,839          9.51          $0.529      1,839       $0.529
                      =====                                    =====
  </TABLE>
  
  
                                        F-14
  <PAGE>
  
                                FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
  
   (e) Warrants
  
    Warrants outstanding are as follows (in thousands, except per share amounts):
  
  <TABLE>
  <CAPTION>
                                                        Warrants Outstanding
                                                   ------------------------------
                                                          Weighted Average
                                                   Shares  Exercise Price  Amount
                                                   ------ ---------------- ------
     <S>                                           <C>    <C>              <C>
     Balance at December 31, 1997.................   75        $1.03       $   77
     Warrants granted.............................   14         1.70           25
                                                    ---                    ------
     Balance at December 31, 1998.................   89         1.14          102
     Warrants granted.............................  337         3.00        1,012
                                                    ---                    ------
     Balance at December 31, 1999.................  426        $2.61       $1,114
                                                    ===                    ======
  </TABLE>
  
    The Company issued warrants in 1996 and 1997 for the purchase of 52,668
  shares of Series B convertible preferred stock and 22,058 shares of Series C
  convertible preferred stock, respectively. The Series B convertible preferred
  stock warrants will expire on the later of June 17, 2003, or three years from
  the effective date of an initial public offering. The Series C preferred stock
  warrants will expire on the later of September 1, 2004, or three years from the
  effective date of an initial public offering. In addition, the warrants expire
  immediately upon either of the following:
  
    . An initial public offering whereby the per share sale price to the public
      is $3.40 or higher, or if requested by the underwriter.
  
    . A merger or sale of substantially all of the Company's assets.
  
    In connection with a credit facility, the Company issued warrants in 1998 for
  the purchase of 14,706 shares of Series C convertible stock at an exercise
  price of $1.70 per share. The fair value of the preferred stock warrants at the
  date of grant was $1.17 and will expire on the later of February 1, 2005 or
  three years from the effective date of an initial offering. In addition, the
  warrants expire immediately upon either of the following:
  
    . An initial public offering whereby the per share sale price to the public
      is $4.50 or higher,or if requested by the underwriter.
  
    . A merger or sale of substantially all of the Company's assets.
  
    In connection with a capital lease, the Company issued warrants in 1999 for
  the purchase of 8,333 shares of Series D convertible preferred stock at an
  exercise price of $3.00 per share. The fair value of the Series D convertible
  preferred stock warrants at the date of grant was $2.07. The Company determined
  the fair value of Series D warrants using the Black-Scholes model with the
  following assumptions: risk free interest rate of 6.1%; expected life of seven
  years; volatility of 65%; and no dividend yield. The Series D preferred stock
  warrants will expire on the later of January 1, 2006 or three years from the
  effective date of an initial public offering. In addition, the warrants expire
  immediately upon either of the following:
  
    . An initial public offering whereby the per share sale price to the public
      is $3.40 or higher, or if requested by the underwriter.
  
    . A merger or sale of substantially all of the Company's assets.
  
    In connection with short-term note payable agreements entered into during
  1999, the Company issued 329,079 Series D preferred stock warrants at a price of
  $3.00 per share. The fair value of preferred stock warrants at the date of the
  grant was $0.67. The Company determined the fair value of the Series D warrants
  using the Black-Scholes model with the following assumptions: risk free interest
  rate of 6.1%; expected life of seven years; volatility of 65% and no
  
                                        F-15
  <PAGE>
  
                                FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
  dividend yield. The warrants are immediately exercisable and expire on the
  earliest of (i) September 23, 2000; (ii) the effective date of the Company,
  completing an initial public offering; (iii) on a sale or transfer by the
  Company of all or substantially all of its assets; or (iv) the acquisition of
  the Company by another entity.
  
  4. INCOME TAXES
  
    Income tax expense for the years ended December 31, 1998 and 1999, consisted
  of state income tax. The difference between the statutory income tax rate of
  34% and the Company's effective tax rate is primarily due to the valuation
  allowance provided for deferred tax assets. The Company has provided a
  valuation allowance due to the uncertainty of generating future taxable income
  that would allow for the realization of such deferred tax assets.
  
    The types of temporary differences that give rise to significant portions of
  the deferred tax assets and liabilities as of December 31, 1998 and 1999 are as
  follows (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                  December 31,
                                                                -----------------
                                                                 1998      1999
                                                                -------  --------
       <S>                                                      <C>      <C>
       Deferred tax assets:
         Accruals and reserves................................. $   356  $    422
         Deferred start-up costs...............................     667       643
         Deferred revenue......................................     141        54
         Research credit carryforwards.........................     722       957
         Net operating loss carryforwards......................   7,406     9,549
         Fixed assets..........................................       9         9
                                                                -------  --------
           Total gross deferred tax assets.....................   9,301    11,634
         Less: Valuation allowance.............................  (9,301)  (11,634)
                                                                -------  --------
           Total deferred tax assets                            $   --   $    --
                                                                =======  ========
  </TABLE>
  
    The change in valuation allowance for the years ended December 31, 1998 and
  1999, was $5,038,000 and $2,333,000 respectively.
  
    The Company has net operating loss carryforwards for federal and state tax
  purposes of approximately $24,000,000 and $20,500,000, respectively. The
  federal carryforwards expire from 2010 to 2018. The state net operating loss
  carryforwards expire in 2003. The Company also has tax credit carryforwards of
  approximately $591,000 and $366,000 for federal and state tax purposes,
  respectively, which expire from 2001 to 2003.
  
    The Internal Revenue Code of 1986, and applicable state tax laws, impose
  substantial restrictions on the ability of the Company to utilize net operating
  loss and tax credit carryforwards in the event of an ownership change, as
  defined. During 1997, the Company underwent an ownership change, and, as a
  result, the federal and state tax losses and tax credit carryovers incurred
  through that date are subject to an annual limitation.
  
  5. COMMITMENTS AND CONTINGENCIES
  
   Lease Obligations
  
    The Company leases certain equipment and its facilities under various
  noncancelable operating leases. In addition, the Company has entered into
  capital lease arrangements for certain office and computer equipment.
  
                                        F-16
  <PAGE>
  
                                FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
  
    Future minimum lease payments under operating and capital leases as of
  December 31, 1999, are as follows (in thousands):
  
  <TABLE>
  <CAPTION>
       Years Ending December 31,                   Capital Leases Operating Leases
       -------------------------                   -------------- ----------------
       <S>                                         <C>            <C>
       2000.......................................      $359             $469
       2001.......................................       230              482
       2002.......................................        71              352
                                                       -----           ------
       Total minimum lease payments...............       660           $1,303
                                                                       ======
       Less: Amount representing interest.........       (58)
                                                       -----
       Present value of minimum lease payments....       602
       Less: Current portion......................      (323)
                                                       -----
         Long-term lease obligations..............     $ 279
                                                       =====
  </TABLE>
  
    Rent expense was $452,184 and $467,439 for the years ended December 31, 1998
  and 1999, respectively.
  
   Notes payable
  
    The Company entered into short-term note payable agreements with various
  lenders on September 23, 1999 for $987,000. The notes bear interest of 10% and
  are payable in full on March 23, 2000. The principal amount outstanding on
  these notes at December 31, 1999 is $895,000.
  
  6. SEGMENT INFORMATION
  
    The Company has adopted the provisions of SFAS No. 131, Disclosure about
  Segments of an Enterprise and Related Information. SFAS No. 131 establishes
  standards for reporting information about operating segments. The method for
  determining what information to report is based on the way that management
  organizes the operating segments within the Company for making operating
  decisions and assessing financial performance. The Company's chief operating
  decision-maker is considered to be the Company's Chief Executive Officer (CEO).
  The consolidated financial information reviewed by the CEO is identical to the
  information presented in the accompanying statements of operations. Therefore,
  the Company operates in a single operating segment.
  
    The CEO does not receive discrete financial information about individual
  components of the Company's operations. The CEO reviews financial information
  presented on a consolidated basis accompanied by disaggregated information
  about revenue by geographic region for purposes of making operating decisions
  and assessing financial performance.
  
    Information regarding product revenue and geographic areas for the years
  ended December 31, 1998 and 1999 are as follows (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                      1998   1999
                                                                     ------ ------
       <S>                                                           <C>    <C>
       Product and service:
         Product.................................................... $2,747  1,880
         Maintenance................................................     77    254
                                                                     ------ ------
                                                                     $2,824 $2,134
                                                                     ====== ======
       Geographic:
         United States.............................................. $1,219 $1,605
         Japan......................................................  1,303    425
         Canada.....................................................    266     40
         Other......................................................     36     64
                                                                     ------ ------
                                                                     $2,824 $2,134
                                                                     ====== ======
  </TABLE>
  
                                        F-17
  <PAGE>
  
                                FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
  
  7. SUBSEQUENT EVENTS
  
    On November 16, 1999, the Company entered into a definitive merger agreement
  with Tut Systems, Inc. in which the stockholders of the Company received
  common stock of the acquiring company in exchange for all of the outstanding
  shares of preferred stock, common stock, shares issuable under common stock
  options, and shares issuable under warrants for common stock and preferred
  stock. In accordance with the definitive agreement, the Company's stockholders
  are to receive 510,931 shares of the acquirer's common stock and approximately
  19,600 options to acquire Tut Systems, Inc. common stock. The acquirer has
  also agreed to pay for all investment banking fees and related closing costs
  of approximately $1,200,000. The acquisition closed on February 14, 2000.
  
                                       F-18
  <PAGE>
  
  Item 7(b) Pro Forma Financial Information:
  
                                 TUT SYSTEMS, INC.
  
                 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
  
    The following unaudited pro forma combined financial statements for Tut
  Systems, Inc. (the "Company") consist of the Unaudited Pro Forma Combined
  Statement of Operations for the year ended December 31, 1999 and the Unaudited
  Pro Forma Combined Balance Sheet as of December 31, 1999. This pro forma
  financial information gives effect to Tut's acquisition of FreeGate
  Corporation ("FreeGate") in a business combination to be accounted for as a
  purchase, which was consummated on February 14, 2000. In exchange for the
  acquisition of all of FreeGate's outstanding capital stock, Tut issued
  FreeGate stockholders 510,931 shares of its common stock and reserved
  approximately 19,600 additional shares for issuance upon the exercise of stock
  options of FreeGate which will be converted into options to purchase shares of
  Tut stock.
  
    The unaudited pro forma combined balance sheet gives effect to this
  acquisition as if it had occurred on December 31, 1999, by consolidating the
  balance sheet of FreeGate with the balance sheet of Tut, at December 31, 1999.
  
    The unaudited pro forma combined statement of operations gives effect to this
  acquisition as if it had occurred on January 1, 1999, by consolidating the
  results of operations of FreeGate for the year ended December 31, 1999 with the
  results of operations of Tut for the year ended December 31, 1999.
  
    The unaudited pro forma combined statement of operations is not necessarily
  indicative of the operating results that would have been achieved had the
  transactions been in effect as of the beginning of the periods presented and
  should not be construed as being representative of future operating results.
  
    The historical financial statements of the Company and FreeGate are included
  elsewhere in this Prospectus and the unaudited pro forma combined financial
  information presented herein should be read in conjunction with those financial
  statements and related notes.
  
                                        F-19
  <PAGE>
  
                                 TUT SYSTEMS, INC.
  
                     UNAUDITED PRO FORMA COMBINED BALANCE SHEET
                                   (in thousands)
  
  <TABLE>
  <CAPTION>
                                                 December 31, 1999
                                      --------------------------------------------
                                        Tut     FreeGate  Adjustments    Pro Forma
                                      --------  --------  -----------    ---------
  <S>                                 <C>       <C>       <C>            <C>
                ASSETS
  Current assets:
    Cash and cash equivalents........ $ 13,405  $    130   $    --       $ 13,535
    Short-term investments ..........   18,831       --         --         18,831
    Accounts receivable, net ........   11,742       403        --         12,145
    Inventories .....................    8,401       210        --          8,611
    Prepaid expenses and other ......    3,746       224        --          3,970
                                      --------  --------   --------      --------
      Total current assets ..........   56,125       967        --         57,092
  Property and equipment, net .......    3,476       394        --          3,870
  Intangible assets, net ............    1,774       --      25,409 (A)    27,183
  Other assets ......................    3,981        52       --           4,033
                                      --------  --------   --------      --------
      Total assets .................. $ 65,356  $  1,413   $ 25,409      $ 92,178
                                      ========  ========   ========      ========
  
     LIABILITIES AND STOCKHOLDERS'
            EQUITY (DEFICIT)
  
  Current liabilities:
    Accounts payable ................ $  5,859  $    465   $    --       $  6,324
    Accrued expenses and other
     payables .......................    3,551       734      1,200 (A)     5,485
    Lines of credit .................    1,529       --         --          1,529
    Notes payable....................      --        895        --            895
    Capital lease obligations .......      --        323        --            323
    Deferred revenue ................      770       418        --          1,188
                                      --------  --------   --------      --------
      Total current liabilities .....   11,709     2,835      1,200        15,744
  Capital lease obligations, net of
   current portion ..................      --        279        --            279
  Deferred revenue, net of current
   portion ..........................    2,125       134        --          2,259
                                      --------  --------   --------      --------
      Total liabilities .............   13,834     3,248      1,200        18,282
                                      --------  --------   --------      --------
  Stockholders' equity (deficit):
    Common stock ....................       12       --           1 (A)        13
    Additional paid in capital ......  108,969    26,443    (26,443)(A)   132,417
                                                             23,448 (A)
    Notes receivable from
     stockholders ...................      --       (275)       --           (275)
    Deferred stock compensation .....     (972)      --         --           (972)
    Accumulated deficit .............  (56,487)  (28,003)    28,003 (A)   (57,287)
                                                               (800)(A)
                                      --------  --------   --------      --------
      Total stockholders' equity
       (deficit) ....................   51,522    (1,835)    24,209        73,896
                                      --------  --------   --------      --------
        Total liabilities and
         stockholders' equity
         (deficit)................... $ 65,356  $  1,413   $ 25,409      $ 92,178
                                      ========  ========   ========      ========
  </TABLE>
  
      The accompanying notes are an integral part of these unaudited combined
                               financial statements.
  
                                        F-20
  <PAGE>
  
                                    TUT SYSTEMS
  
                UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
                      (in thousands, except per share amounts)
  
  <TABLE>
  <CAPTION>
                                            Year Ended December 31, 1999
                                       -------------------------------------------
                                         Tut     FreeGate  Adjustments   Pro Forma
                                       --------  --------  -----------   ---------
  <S>                                  <C>       <C>       <C>           <C>
  Revenue:
    Product .......................... $ 26,266  $ 2,134       $ --       $ 28,400
    License and royalty ..............    1,541      --          --          1,541
                                       --------  -------    --------     ---------
                                         27,807    2,134         --         29,941
  Cost of goods sold .................   15,459    1,159         680(B)     17,298
                                       --------  -------    --------     ---------
  Gross margin .......................   12,348      975        (680)       12,643
                                       --------  -------    --------     ---------
  Operating expenses:
    Sales and marketing ..............   10,523    3,636         --         14,159
    Research and development .........    7,618    3,899         --         11,517
    General and administrative .......    4,429    1,406         --          5,835
    In-process research and
     development .....................    2,600      --          --          2,600
    Amortization of intangibles ......       52      --        4,602(B)      4,654
    Noncash compensation expense .....      455      221         --            676
                                       --------  -------    --------     ---------
      Total operating expenses .......   25,677    9,162       4,602        39,441
                                       --------  -------    --------     ---------
  Loss from operations ...............  (13,329)  (8,187)     (5,282)      (26,798)
  Interest expense ...................     (608)     (62)        --           (670)
  Interest income ....................    2,203       76         --          2,279
  Other income, net ..................        1      --          --              1
                                       --------  -------    --------     ---------
  Loss before income taxes ...........  (11,733)  (8,173)     (5,282)      (25,188)
  Income tax expense .................        1        3         --              4
                                       --------  -------    --------     ---------
  Net loss ...........................  (11,734)  (8,176)     (5,282)      (25,192)
  Dividend accretion on preferred
   stock .............................     (235)     --          --           (235)
                                       --------  -------    --------     ---------
  Net loss attributable to common
   stockholders ...................... $(11,969) $(8,176)   $ (5,282)    $ (25,427)
                                       ========  =======    ========     =========
  Net loss per share attributable to
   common stockholders, basic and
   diluted ........................... $  (1.12) $ (1.03)                $   (2.26)
                                       ========  =======                 =========
  Shares used in computing net loss
   per share attributable to common
   stockholders, basic and diluted....   10,729    7,964         511        11,240
                                       ========  =======    ========     =========
  </TABLE>
  
      The accompanying notes are an integral part of these unaudited combined
                               financial statements.
  
                                        F-21
  <PAGE>
  
                                 TUT SYSTEMS, INC.
  
            NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
                                   (in thousands)
  
  NOTE 1--BASIS OF PRESENTATION:
  
    The pro forma financial information gives effect to Tut's acquisition of
  FreeGate, consummated on February 14, 2000 in a business combination to be
  accounted for as a purchase. All the outstanding common and preferred stock of
  FreeGate was converted into shares of Tut common stock, and all outstanding
  stock options to purchase shares of FreeGate common shares and options to be
  issued to FreeGate stockholders and options holders.
  
    The pro forma financial information has been prepared on the basis of
  assumptions described in the following notes and include assumptions relating
  to the allocation of the consideration paid for the assets and liabilities of
  FreeGate based on preliminary estimates of their fair value. The actual
  allocation of such consideration may differ from that reflected in the pro
  forma financial statements after valuations after the closing of the FreeGate
  acquisition have been completed. Tut does not expect that the final allocation
  of the purchase price will differ materially from the preliminary allocation.
  
    The Unaudited Pro Forma Combined Statement of Operations for the year ended
  December 31, 1999 gives effect to this transaction as if it had taken place on
  January 1, 1999. The Unaudited Pro Forma Combined Balance Sheet as of December
  31, 1999 gives effect to the transaction as if it had taken place on December
  31, 1999.
  
    The pro forma financial information is not necessarily indicative of what the
  actual financial results would have been had the transaction taken place on
  January 1, 1999 and do not purport to indicative the results of future
  operations.
  
  NOTE 2--PURCHASE PRICE ALLOCATION:
  
    The unaudited pro forma combined information reflects a total purchase price
  of $24.7 million from 510,931 shares of common stock, approximately 19,600
  options to acquire common stock and acquisition related expenses, consisting
  primarily of investment advisory, legal and other professional fees. The
  Company valued the options using the Black-Scholes option pricing model,
  applying an average expected life of 4 years, a weighted average risk free
  rate of 6%, an expected dividend yield of zero percent, a volatility of 80%
  and a deemed fair value of common stock of $41.81.
  
    The Company's allocation of aggregate purchase price to the tangible and
  identifiable assets acquired in connection with this acquisition has been based
  on a preliminary analysis by the Company and the goodwill, patents and current
  technology are being amortized over an estimated useful life of five years and
  assembled workforce is being amortized over an estimated useful life of three
  years. The allocation is summarized below (in thousands):
  
  <TABLE>
       <S>                                                               <C>
       Net liabilities assumed.......................................... $(1,560)
       Current technology...............................................   2,900
       In-process research and development..............................     800
       Assembled workforce..............................................   1,500
       Patents..........................................................     500
       Goodwill.........................................................  20,509
                                                                         -------
         Total purchase price........................................... $24,649
                                                                         =======
       FreeGate's liabilities assumed are derived as follows:
       Total stockholders' deficit...................................... $(1,835)
       Receivable from stockholders.....................................     275
                                                                         -------
         Total.......................................................... $(1,560)
                                                                         =======
  </TABLE>
  
                                        F-22
  <PAGE>
  
                                 TUT SYSTEMS, INC.
  
      NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION--(Continued)
                                   (in thousands)
  
    The amount allocated to in-process research and development represents the
  purchased in-process technology for projects that, as of the date of the
  acquisition, had not yet reached technological feasibility and had no
  alternative future use. Based on preliminary assessments, the value of these
  projects was determined by using the income approach, which discounts expected
  future cash flows to present value. The discount rate used in the present value
  calculations were typically derived from a weighted average cost of capital
  analysis adjusted upwards to reflect additional risks inherent in the
  development life cycle. These risk factors are reflected in the discount rate
  used of 30%. Tut expects that the pricing model for products and intellectual
  property licenses related to the acquisition of FreeGate will be considered
  standard within the high-technology communications industry. Tut does not
  expect, however, to achieve expense reductions as a result of integrating the
  acquired in-process technology. Therefore, the valuation assumptions do not
  include any anticipated cost savings. Tut expects that products incorporating
  the acquired technology from this acquisition will be completed and begin to
  generate cash flows over a six to nine month period after integration.
  Development of these technologies, however, remains a significant risk due to
  the remaining effort to achieve technical viability, rapidly changing customer
  markets, uncertain standards for new products and significant competitive
  threats from numerous companies. Efforts to develop the acquired technology into
  commercially viable products consists principally of planning, designing and
  testing activities necessary to determine that the product can meet market
  expectations, including functionality and technical requirements. Failure to
  bring these products to market in a timely manner could result in a loss of
  market share, or a lost opportunity to capitalize on emerging markets, and could
  harm our business and operating results.
  
    The amounts allocated to in-process research and development will be charged
  to the statement of operations in the period the acquisition is consummated.
  
  NOTE 3--UNAUDITED PRO FORMA COMBINED NET LOSS PER SHARE:
  
    The net loss per share and shares used in computing the net loss per share
  for the year ended December 31, 1999 are based upon the Tut historical weighted
  average common shares outstanding together with the shares issued in the
  transaction as if such shares were issued January 1, 1999. Common stock
  issuable upon the exercise of Tut stock options and warrants has been excluded
  as the effect would be anti-dilutive. In addition to the shares used in
  computing the net loss per share above, pro forma net loss per share is
  calculated using the convertible preferred stock outstanding as if such shares
  were converted to common stock at the time of issuance or January 1, 1999 for
  the stock issued in the transaction.
  
  NOTE 4--PURCHASE ADJUSTMENTS:
  
    The following adjustments were applied to the combined financial statements:
  
    (A) To reflect the issuance of shares in the acquisition and to record
        estimated transaction costs and other assets and liabilities at their
        fair values.
  
    (B) To record amortization of goodwill and other intangibles.
  
    The amount allocated to in-process research and development has not been
  included in the unaudited pro forma combined statement of operations as it is
  nonrecurring. This amount will be expensed in the period the acquisition is
  consummated.
  
                                        F-23
  <PAGE>
  
                                     SIGNATURE
  
       Pursuant to requirements of the Securities Exchange Act of 1934, Tut
  Systems, Inc. has duly caused this report to be signed on its behalf by the
  undersigned thereunto duly authorized.
  
                                      TUT SYSTEMS, INC.
  
  Dated:  February 18, 2000           By: /s/ Nelson B. Caldwell
                                         ----------------------
                                         Nelson B. Caldwell, Vice President and
                                         Chief Financial Officer
metadata_documents: [{"type": "8-K", "sequence": "1", "description": "FORM 8-K", "secsgml_size_bytes": 86535}]
metadata_filer: {"company-data": {"conformed-name": "TUT SYSTEMS INC", "cik": "0000878436", "assigned-sic": "3661", "irs-number": "942958543", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "8-K", "act": "34", "file-number": "000-25291", "film-number": "549713"}, "business-address": {"street1": "2495 ESTAND WAY", "city": "PLEASANT HILL", "state": "CA", "zip": "94523", "phone": "9256826510"}, "mail-address": {"street1": "2495 ESTAND WAY", "city": "PLEASANT HILL", "state": "CA", "zip": "94523"}}
text: SECURITIES AND EXCHANGE COMMISSION
                              Washington, D.C. 20549
  
                                     Form 8-K
  
                 Current Report Pursuant to Section 13 or 15(d) of
                        the Securities Exchange Act of 1934
  
                                 February 14, 2000
                 Date of Report (Date of earliest event reported)
  
                                 TUT SYSTEMS, INC.
              (Exact name of registrant as specified in its charter)
  Delaware                           0-25291                           94-2958543
  ------------------------------    -------------------------------    -------------------------------
  (State or other jurisdiction of       (Commission File Number)               (I.R.S. Employer
          incorporation)                                                      Identification No.)
  2495 ESTAND WAY
                         PLEASANT HILL, CALIFORNIA  94523
           (Address of principal executive offices, including zip code)
  
                                  (925) 682-6510
               (Registrant's telephone number, including area code)
  
                                        N/A
              (Former name or address, if changed since last report)
  Item 2.  Acquisition or Disposition of Assets
           ------------------------------------
  
       Pursuant to an Agreement and Plan of Reorganization dated as of November
  16, 1999 (the "Agreement") among Tut Systems, Inc., a Delaware corporation
  ("Tut"), Fortress Acquisition Corporation, a Delaware corporation and a wholly
  owned subsidiary of Tut ("Sub"), FreeGate Corporation ("FreeGate"), U.S. Bank
  Trust, as Escrow Agent and, with respect to Article VII only, James Mongiello,
  as Stockholder Representative, on February 14, 2000 (the "Closing"), Tut
  acquired FreeGate by means of a merger of FreeGate with and into Sub (the
  "Merger").  As a result of the Merger, each share of FreeGate capital stock was
  converted into shares of Tut Common Stock according to the following exchange
  ratios: 0.017617 shares of Tut Common Stock for each share of FreeGate common
  stock, 0.001516 shares of Tut Common Stock for each share of Series A Preferred
  Stock, 0.009476 shares of Tut Common Stock for each share of Series B Preferred
  Stock, 0.021478 shares of Tut Common Stock for each share of Series C Preferred
  Stock,  0.037903 shares of Tut Common Stock for each share of Series D Preferred
  Stock. All options and warrants to purchase shares of FreeGate capital stock
  were cancelled upon the Closing.  The Company issued options to purchase Tut
  Common Stock in substitution for 1,113,000 cancelled options at an exchange
  ratio of 0.017617 shares of Tut Common Stock for each one share of FreeGate
  common stock subject to those options.  At the Closing, ten percent of the
  shares issued pursuant to the Merger were deposited into an escrow account to
  secure the indemnification obligations of FreeGate (the "Escrow Fund").  The
  Escrow fund is to be governed by the terms set forth in the Agreement at Tut's
  cost and expense.  The Escrow Fund shall be the sole source of funds available
  for the fulfillment of any indemnification obligations of FreeGate to Tut and
  Sub.
  
       The provisions of the Agreement described in this report are qualified in
  their entirety by reference to the actual text of that agreement, included as an
  exhibit to this report.
  
  Item 7.  Financial Statements and Exhibits.
  
       (a) Financial Statements of Business Acquired.
  
           The audited financial statements for the years ended December 31, 1998
  and 1999 of Freegate Corporation.
  
       (b) Pro Forma Financial Information.
  
           The unaudited pro forma combined statement of operations for the year
  ended December 31, 1999 gives effect to the transaction as if it had taken place
  on January 1, 1999. The unaudited pro forma combined balance sheet as of
  December 31, 1999 gives effect to the transaction as if it had taken place on
  December 31, 1999. The unaudited pro forma financial information is not
  necessarily indicative of the results or financial position that would actually
  have been reported had the sale and purchase transactions underlying the pro
  forma adjustments actually been consummated on such dates nor is it necessarily
  indicative of future operating results or financial position.
  
       (c) Exhibits.
  
           The following exhibits are filed herewith:
  2.1  Agreement and Plan of Reorganization dated as of November 16,
                 1999, as amended, by and among Tut Systems, Inc., Fortress
                 Acquisition Corporation, FreeGate Corporation, U.S. Bank Trust,
                 as Escrow Agent, and, with respect to Article VII only, James
                 Mongiello, as stockholder representative.*
  
  ______________________
  *  Certain exhibits to, and schedules delivered in connection with, the
     Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Tut
     agrees to supplementally furnish to the Commission a copy of any such exhibit
     or schedule upon request.
  
                                        -2-
  Item 7(a)       Financial Statements of Business Acquired:
  
                                FREEGATE CORPORATION
  
                                 TABLE OF CONTENTS
  Page
                                                                              ----
  Report of Independent Accountants.......................................... F-2
  
  Independent Auditors' Report............................................... F-3
  
  Balance Sheets............................................................. F-4
  
  Statements of Operations................................................... F-5
  
  Statements of Stockholder's Equity (Deficit)............................... F-6
  
  Statements of Cash Flows................................................... F-7
  
  Notes to Financial Statements.............................................. F-8
  F-1
  REPORT OF INDEPENDENT ACCOUNTANTS
  
  To the Stockholders and Board of Directors of
  FreeGate Corporation
  
    In our opinion, the accompanying balance sheet as of December 31, 1999 and
  the related statements of operations, of cash flows, and of stockholders'
  equity (deficit) present fairly, in all material respects, the financial
  position of FreeGate Corporation at December 31, 1999, and the results of its
  operations and its cash flows for the year then ended in conformity with
  accounting principles generally accepted in the United States. These financial
  statements are the responsibility of the Company's management; our
  responsibility is to express an opinion on these financial statements based on
  our audit. We conducted our audit of these statements in accordance with
  auditing standards generally accepted in the United States, which require that
  we plan and perform the audit to obtain reasonable assurance about whether the
  financial statements are free of material misstatement. An audit includes
  examining, on a test basis, evidence supporting the amounts and disclosures in
  the financial statements, assessing the accounting principles used and
  significant estimates made by management, and evaluating the overall financial
  statement presentation. We believe that our audit provides a reasonable basis
  for the opinion expressed above.
  
                                            /s/ PricewaterhouseCoopers LLP
  
  San Jose, California
  February 14, 2000
  
                                        F-2
  INDEPENDENT AUDITORS' REPORT
  
  The Board of Directors of
  FreeGate Corporation
  
    We have audited the accompanying balance sheet of FreeGate Corporation (the
  "Company") as of December 31, 1998, and the related statements of operations,
  stockholders' equity, and cash flows for the year then ended. These financial
  statements are the responsibility of the Company's management. Our
  responsibility is to express an opinion on these financial statements based on
  our audit.
  
    We conducted our audit in accordance with generally accepted auditing
  standards. Those standards require that we plan and perform the audit to obtain
  reasonable assurance about whether the financial statements are free of
  material misstatement. An audit includes examining, on a test basis, evidence
  supporting the amounts and disclosures in the financial statements. An audit
  also includes assessing the accounting principles used and significant
  estimates made by management, as well as evaluating the overall financial
  statement presentation. We believe that our audit provides a reasonable basis
  for our opinion.
  
    In our opinion, the financial statements referred to above present fairly, in
  all material respects, the financial position of FreeGate Corporation as of
  December 31, 1998, and the results of its operations and its cash flows for the
  year then ended, in conformity with generally accepted accounting principles.
  
    The accompanying financial statements have been prepared assuming the Company
  will continue as a going concern. As discussed in Note 1 to the financial
  statements, the Company has incurred net losses and negative operating cash
  flows since inception that cause substantial doubt about its ability to
  continue as a going concern. Management's plans in regard to these matters are
  also described in Note 1. Continuation of the Company as a going concern is
  dependent upon management's ability to obtain additional financing and the
  successful development and marketing of its products. The financial statements
  do not include any adjustments that might result from the outcome of this
  uncertainty.
  
                                                                      /s/ KPMG LLP
  
  Mountain View, California
  April 23, 1999, except
   as to Note 7, which is
   as of November 1, 1999
  
                                        F-3
  FREEGATE CORPORATION
  
                                   BALANCE SHEETS
                      (in thousands, except per share amounts)
  December 31,
                                                               ------------------
                                                                 1998      1999
                                                               --------  --------
  ASSETS
  Current assets:
    Cash and cash equivalents ................................ $  6,120  $    130
    Accounts receivable, net of allowance for doubtful
     accounts of $201 and $132, respectively .................      557       403
    Inventory ................................................      497       210
    Prepaid expenses and other current assets ................       80       224
                                                               --------  --------
      Total current assets ...................................    7,254       967
  Property and equipment, net ................................      661       394
  Other assets ...............................................       50        52
                                                               --------  --------
      Total assets ........................................... $  7,965  $  1,413
                                                               ========  ========
  
         LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
  Current liabilities:
    Accounts payable ......................................... $    306  $    465
    Accrued liabilities ......................................      690       734
    Notes payable ............................................      --        895
    Capital lease obligations ................................      281       323
    Deferred revenue .........................................      112       418
                                                               --------  --------
      Total current liabilities ..............................    1,389     2,835
  Capital lease obligations, net of current portion ..........      547       279
  Deferred revenue, net of current portion....................      220       134
                                                               --------  --------
      Total liabilities ......................................    2,156     3,248
                                                               --------  --------
  Commitments and contingencies (Note 5)
  
  Stockholders' equity (deficit):
    Convertible preferred stock, $0.0001 par value:
     Series A: 2,500 shares authorized; 2,500 shares issued
      and outstanding as of December 31, 1998 and 1999;
      liquidation preference of $300 .........................      --        --
     Series B: 5,200 shares authorized; 5,067 shares issued
      and outstanding as of December 31, 1998 and 1999;
      liquidation preference of $3,800 .......................      --        --
     Series C: 5,000 shares authorized; 4,706 shares issued
      and outstanding as of December 31, 1998 and 1999;
      liquidation preference of $8,000........................      --        --
     Series D: 5,000 shares authorized; 4,442 shares issued
      and outstanding as of December 31, 1998 and 1999,
      respectively; liquidation preference of $13,325 ........      --        --
    Restricted common stock, $0.0001 par value; 35,000 shares
     authorized; 9,272 and 10,048 shares issued and
     outstanding as of December 31, 1998 and 1999,
     respectively ............................................      --        --
    Additional paid-in capital ...............................   25,779    26,443
    Notes receivable from stockholders .......................     (143)     (275)
    Accumulated deficit ......................................  (19,827)  (28,003)
                                                               --------  --------
      Total stockholders' equity (deficit)....................    5,809    (1,835)
                                                               --------  --------
        Total liabilities and stockholders' equity (deficit).. $  7,965  $  1,413
                                                               ========  ========
  The accompanying notes are an integral part of these financial statements.
  
                                        F-4
  FREEGATE CORPORATION
  
                              STATEMENTS OF OPERATIONS
                      (in thousands, except per share amounts)
  Years Ended
                                                                December 31,
                                                              -----------------
                                                                1998     1999
                                                              --------  -------
  Revenue ................................................... $  2,824  $ 2,134
  Cost of revenue ...........................................    1,819    1,159
                                                              --------  -------
  Gross profit ..............................................    1,005      975
                                                              --------  -------
  Operating expenses:
    Sales and marketing .....................................    5,771    3,636
    Research and development ................................    4,178    3,899
    General and administrative ..............................    1,807    1,406
    Noncash expense..........................................       17      221
                                                              --------  -------
      Total operating expenses ..............................   11,773    9,162
                                                              --------  -------
  Loss from operations ......................................  (10,768)  (8,187)
  Interest expense...........................................     (100)     (62)
  Interest income............................................      207       76
                                                              --------  -------
  Loss before income taxes ..................................  (10,661)  (8,173)
  Income taxes ..............................................        1        3
                                                              --------  -------
  Net loss .................................................. $(10,662) $(8,176)
                                                              ========  =======
    Net loss per share, basic and diluted ................... $  (1.73) $ (1.03)
                                                              ========  =======
  Shares used in computing basic and diluted net loss per
   share.....................................................    6,149    7,964
                                                              ========  =======
  The accompanying notes are an integral part of these financial statements.
  
                                        F-5
  FREEGATE CORPORATION
  
                   STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
  
                      YEARS ENDED DECEMBER 31, 1998 AND 1999
                                  (in thousands)
  Convertible Preferred Stock
                    -------------------------------------------------------
                                                                             Restricted                  Notes
                      Series A      Series B      Series C      Series D    common stock   Additional  Receivable
                    ------------- ------------- ------------- ------------- --------------  Paid-In       from     Accumulated
                    Shares Amount Shares Amount Shares Amount Shares Amount Shares  Amount  Capital   Stockholders   Deficit
                    ------ ------ ------ ------ ------ ------ ------ ------ ------  ------ ---------- ------------ -----------
  Balances,
  December 31,
  1997............  2,500   $ --  5,067   $ --  4,706   $ --    --    $ --   8,963   $ --   $12,338      $ --       $ (9,165)
  Issuance of
  Series D
  preferred stock,
  net of issuance
  costs of $90....    --      --    --      --    --      --  4,442     --     --      --    13,235        --            --
  Repurchase of
  common stock....    --      --    --      --    --      --    --      --    (790)    --       (72)       --            --
  Issuance of
  common stock--
  options
  exercised.......    --      --    --      --    --      --    --      --     964     --       221        --            --
  Issuance of
  common stock in
  exchange for
  legal services..    --      --    --      --    --      --    --      --     135     --        40        --            --
  Warrants issued
  in connection
  with capital
  lease...........    --      --    --      --    --      --    --      --     --      --        17        --            --
  Issuance of
  notes receivable
  from
  stockholders....    --      --    --      --    --      --    --      --     --      --       --        (143)          --
  Net loss........    --      --    --      --    --      --    --      --     --      --       --         --        (10,662)
                    -----   ----  -----   ----  -----   ----  -----   ----  ------   ----   -------      -----      --------
  Balances,
  December 31,
  1998............  2,500     --  5,067     --  4,706     --  4,442     --   9,272     --    25,779       (143)      (19,827)
  Repurchase of
  common stock....    --      --    --      --    --      --    --      --    (400)    --       (49)       --            --
  Issuance of
  common stock--
  options
  exercised.......    --      --    --      --    --      --    --      --     886              354        --            --
  Issuance of
  common stock in
  exchange for
  services........    --      --    --      --    --      --    --      --     290     --        69        --            --
  Warrants issued
  under capital
  lease...........    --      --    --      --    --      --    --      --     --      --        17        --            --
  Warrants issued
  under financing
  activity........    --      --    --      --    --      --    --      --     --      --       273        --            --
  Issuance of
  notes receivable
  from
  stockholders....    --      --    --      --    --      --    --      --     --      --       --        (132)          --
  Net loss........    --      --    --      --    --      --    --      --     --      --       --         --         (8,176)
                    -----   ----  -----   ----  -----   ----  -----   ----  ------   ----   -------      -----      --------
  Balances,
  December 31,
  1999............  2,500   $ --  5,067   $ --  4,706   $ --  4,442   $ --  10,048   $ --   $26,443      $(275)     $(28,003)
                    =====   ====  =====   ====  =====   ====  =====   ====  ======   ====   =======      =====      ========
  Total
                    Stockholders'
                       Equity
                      (Deficit)
                    -------------
  Balances,
  December 31,
  1997............     $ 3,173
  Issuance of
  Series D
  preferred stock,
  net of issuance
  costs of $90....      13,235
  Repurchase of
  common stock....         (72)
  Issuance of
  common stock--
  options
  exercised.......         221
  Issuance of
  common stock in
  exchange for
  legal services..          40
  Warrants issued
  in connection
  with capital
  lease...........          17
  Issuance of
  notes receivable
  from
  stockholders....        (143)
  Net loss........     (10,662)
                    -------------
  Balances,
  December 31,
  1998............       5,809
  Repurchase of
  common stock....         (49)
  Issuance of
  common stock--
  options
  exercised.......         354
  Issuance of
  common stock in
  exchange for
  services........          69
  Warrants issued
  under capital
  lease...........          17
  Warrants issued
  under financing
  activity........         273
  Issuance of
  notes receivable
  from
  stockholders....        (132)
  Net loss........      (8,176)
                    -------------
  Balances,
  December 31,
  1999............     $(1,835)
                    =============
  The accompanying notes are an integral part of these financial statements.
  
                                        F-6
  FREEGATE CORPORATION
  
                              STATEMENTS OF CASH FLOWS
                                   (in thousands)
  Years Ended
                                                                 December 31,
                                                               -----------------
                                                                 1998     1999
                                                               --------  -------
  Cash flows from operating activities:
   Net loss .................................................. $(10,662) $(8,176)
   Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization ............................      352      418
    Noncash warrant expense ..................................       17      221
    Common stock issued for services .........................       40       69
    Changes in operating assets and liabilities:
     Accounts receivable .....................................     (390)     154
     Inventory ...............................................     (359)     287
     Prepaid expenses and other assets .......................      --      (146)
     Accounts payable ........................................       58      159
     Accrued liabilities .....................................      211       44
     Deferred revenue ........................................      314      220
                                                               --------  -------
      Net cash used in operating activities ..................  (10,419)  (6,750)
                                                               --------  -------
  Cash flows from investing activities:
   Purchase of property and equipment ........................     (369)    (151)
   Notes receivable from stockholders ........................      200      (10)
                                                               --------  -------
      Net cash used in investing activities ..................     (169)    (161)
                                                               --------  -------
  Cash flows from financing activities:
   Proceeds from sale of equipment under sale/leaseback
    arrangement ..............................................      378       55
   Proceeds from sale of preferred stock .....................   13,235      --
   Proceeds from exercise of stock options ...................       78      222
   Principal payments of capital leases ......................     (152)    (226)
   Repurchase of common stock ................................      (72)     (49)
   Proceeds from bridge loan financing .......................      --       919
                                                               --------  -------
      Net cash provided by financing activities                  13,467      921
                                                               --------  -------
  Net increase (decrease) in cash and cash equivalents .......    2,879   (5,990)
  Cash and cash equivalents at beginning of year .............    3,241    6,120
                                                               --------  -------
  Cash and cash equivalents at end of year ................... $  6,120  $   130
                                                               ========  =======
  Supplemental disclosure of cash flow information:
   Cash paid during year for interest ........................ $     92  $    79
                                                               ========  =======
   Noncash financing activity:
    Warrants issued in connection with bridge loan............ $    --   $   273
                                                               ========  =======
    Warrants issued in connection with capital lease.......... $     17  $    17
                                                               ========  =======
    Common stock issued for services ......................... $     40  $    69
                                                               ========  =======
    Stock options issued in exchange for notes receivable .... $    143  $   132
                                                               ========  =======
  The accompanying notes are an integral part of these financial statements.
  
                                        F-7
  FREEGATE CORPORATION
  
                           NOTES TO FINANCIAL STATEMENTS
  
  1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  
   (a) Description of business
  
    FreeGate Corporation (the "Company") was incorporated in the state of
  Delaware on December 26, 1995. FreeGate Corporation provides "all-in-one"
  Internet and Intranet connectivity solutions for small to medium sized
  businesses and branch offices. These solutions combine E-mail, web access and
  publishing, electronic file transfer, remote access, virtual private
  networking, firewall security, and LAN/router capabilities in an affordable,
  reliable turnkey system for a nontechnical audience.
  
    Beyond this integrated Internet and Intranet functionality, the Company
  provides a remote provisioning and management system that opens up business
  opportunities for value-added Internet applications and services, with
  increased security and reliability.
  
   (b) Basis of presentation
  
    The Company has incurred net losses and negative operating cash flows since
  inception that raise substantial doubt about its ability to continue as a going
  concern. The accompanying financial statements have been prepared assuming the
  Company continues in existence as a going concern. Continuation of the Company
  as a going concern is dependent upon the successful conclusion of the merger
  agreement signed in November 1999 (see Note 7).
  
   (c) Use of estimates
  
    The preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the reported amounts of assets and liabilities and disclosure of
  contingent assets and liabilities at the date of the financial statements and
  reported results of operations during the reporting period. Actual results
  could differ from those estimates.
  
   (d) Revenue recognition
  
    On October 1, 1997, the Company adopted Statement of Position (SOP) 97-2,
  Software Revenue Recognition. The adoption of SOP 97-2 did not have a material
  effect on the Company's operating results. SOP 97-2 generally requires revenue
  earned on software arrangements involving multiple elements to be allocated to
  each element based on the relative fair values of the elements. The fair value
  of an element must be based on evidence that is specific to the vendor. If a
  vendor does not have evidence of the fair value of all elements in a multiple-
  element arrangement, all revenue from the arrangement is deferred until such
  evidence exists or until all elements are delivered.
  
    Product revenue is generally recognized upon delivery or if sales are made to
  a distributor, with right of return, upon sell through, provided the Company
  deems the receivable to be collectible. Revenue allocated to maintenance is
  recognized ratably over the maintenance term.
  
   (e) Concentrations of credit risk
  
    Financial instruments that subject the Company to concentrations of credit
  risk consist primarily of cash and cash equivalents, accounts receivable, and a
  note receivable. The Company maintains all of its cash with one financial
  institution in the United States. Cash equivalents are comprised of money
  market funds. The Company's policy limits the amount of credit exposure in any
  one-debt issue. Management believes the financial risks associated with these
  financial instruments are minimal. The notes receivable are due from
  stockholders of the Company and management believes that the risk of credit
  loss is low. With respect to accounts receivable, the Company performs credit
  evaluations of its customers and maintains reserves for potential credit
  losses.
  
                                        F-8
  FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
    Significant customer information is as follows:
  Percentage
                                                       of
                                                      Total         Accounts
                                                    Revenues       Receivable
                                                   -------------   -------------
                                                   1998    1999    1998    1999
                                                   -----   -----   -----   -----
  Customer A.................................    46%     19%     --      --
       Customer B.................................    10%     --      21%     --
       Customer C.................................    --      16%     --      41%
  (f) Capitalized software
  
    Costs related to the research and development for new software products and
  enhancements to existing software products are expensed as incurred until
  technological feasibility of the product has been established, at which time
  such costs are capitalized subject to expected recoverability. As of December
  31, 1999, the Company had not capitalized any development costs related to
  software products.
  
   (g) Inventory
  
    Inventory as of December 31, 1999, consisted of finished goods and raw
  materials valued at the lower of cost, using the first in first out method, or
  market.
  
   (h) Property and equipment
  
    Property and equipment are stated at cost less accumulated depreciation and
  amortization. Depreciation is calculated using the straight-line method over
  the estimated useful lives of the equipment, generally three years. Assets
  under capital leases are amortized over the shorter of the lease terms or the
  estimated useful lives of the assets.
  
   (i) Income taxes
  
    The Company utilizes the asset and liability method of accounting for income
  taxes. Under the asset and liability method, deferred tax assets and
  liabilities are recognized for the future tax consequences attributable to
  differences between the financial statement carrying amounts of existing assets
  and liabilities and their respective tax bases and operating loss and tax
  credit carryforwards. Deferred tax assets and liabilities are measured using
  enacted tax rates expected to apply to taxable income in the years in which
  those temporary differences are expected to be recovered or settled. A
  valuation allowance is recorded to reduce deferred tax assets to an amount that
  is more likely than not to be realized. The effect on deferred tax assets and
  liabilities of a change in tax rates is recognized in income in the period that
  includes the enactment date.
  
   (j) Stock-based compensation
  
    The Company accounts for its employee stock option plan in accordance with
  the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
  for Stock Issued to Employees, and related interpretations. As such,
  compensation expense is recorded on the date of grant only if the current
  market price of the underlying stock exceeds the exercise price. Statement of
  Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
  Compensation, permits entities to recognize as expense over the vesting period
  the fair value of all stock-based awards on the date of grant. Alternatively,
  SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion
  No. 25 and provide pro forma net income or loss disclosures for employee
  options granted as if the fair value-based method defined in SFAS No. 123 had
  been applied. The Company has elected to apply the provisions of APB Opinion
  No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
  
                                        F-9
  FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
   (k) Accumulated other comprehensive income
  
    In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
  130, Reporting Comprehensive Income. SFAS No. 130 establishes standards of
  reporting and display of comprehensive income and its components of net income
  and "Other Comprehensive Income" in a full set of general-purpose financial
  statements. Other comprehensive income refers to revenues, expenses, gains, and
  losses that are not included in net income but rather are recorded directly in
  stockholders' equity. SFAS No. 130 was adopted by the Company in 1998 but the
  Company has no elements of other comprehensive income.
  
   (l) Impairment of long-lived assets
  
    In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
  Assets and for Long-Lived Assets to Be Disposed Of, management evaluates the
  Company's long-lived assets for impairment whenever events or changes in
  circumstances indicate that the carrying value of an asset may not be
  recoverable. As of December 31, 1999, the Company does not consider any assets
  to be impaired.
  
   (m) Net loss per share
  
    Basic net loss per share is computed using the weighted-average number of
  vested outstanding shares of common stock. Diluted net loss per share is
  computed using the weighted-average number of shares of vested common stock
  outstanding and when dilutive, unvested common stock outstanding, potential
  common shares from options and warrants to purchase common and preferred stock
  using the treasury stock method and from convertible securities using the as-
  if-converted basis. All potential common shares have been excluded from the
  computation of diluted net loss per share for all periods presented because the
  effect would be antidilutive.
  
    Diluted net loss per share does not include the effect of the following (in
  thousands):
  1998    1999
                                                                 ------- -------
  Shares issuable under common stock options....................   1,563   1,839
  Shares of unvested common stock subject to repurchase.........   2,017   2,579
  Shares issuable pursuant to warrants to purchase common and
   convertible preferred stock..................................      89     426
  Shares of convertible preferred stock on an "as-if-converted"
   basis........................................................  16,715  16,715
  The weighted-average exercise price of stock options outstanding was $0.24
  and $0.53 as of December 31, 1998 and 1999, respectively. The weighted-average
  purchase price of unvested stock was $0.11 and $0.41 as of December 31, 1998
  and 1999, respectively. The weighted-average exercise price of warrants was
  $1.14 and $2.61 as of December 31, 1998 and 1999, respectively.
  
   (n) Recent Accounting Pronouncements
  
    In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
  Instruments and Hedging Activities. FreeGate is required to adopt SFAS No. 133
  in fiscal 2001. SFAS No. 133 establishes methods of accounting for derivative
  financial instruments and hedging activities related to those instruments as
  well as other hedging activities. To date, the Company has not entered into any
  derivative financial instruments or hedging activities.
  
    In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
  Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
  Statements," which provides guidance on the recognition, presentation, and
  disclosure of revenue in financial statements filed with the SEC. SAB 101
  
                                        F-10
  FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
  outlines the basic criteria that must be met to recognize revenue and provides
  guidance for disclosures related to revenue recognition policies. Management
  believes that the impact of SAB 101 will not have a material effect on the
  financial position or results of the operations of the Company.
  
  2. BALANCE SHEET COMPONENTS
  
   (a) Cash and cash equivalents
  
    The Company considers all highly liquid investments with an original maturity
  of 90 days or less to be cash equivalents. Cash equivalents as of December 31,
  1998 and 1999, consisted of money market funds totaling $5,961,043 and nil,
  respectively.
  
   (b) Inventory
  
    Inventory consisted of the following as of December 31, 1998 and 1999 (in
  thousands)
  December
                                                                            31,
                                                                         ---------
                                                                         1998 1999
                                                                         ---- ----
  Finished goods................................................... $400 $164
       Raw materials....................................................   97   46
                                                                         ---- ----
                                                                         $497 $210
                                                                         ==== ====
  (c) Property and Equipment
  
    Property and equipment consisted of the following as of December 31, 1998 and
  1999 (in thousands):
  December 31,
                                                                   --------------
                                                                    1998    1999
                                                                   ------  ------
  Property and equipment, net:
         Computer equipment and purchased software................ $1,007  $1,158
         Office equipment.........................................    229     229
                                                                   ------  ------
                                                                    1,236   1,387
         Less: Accumulated depreciation and amortization..........   (575)   (993)
                                                                   ------  ------
                                                                   $  661  $  394
                                                                   ======  ======
  Computer equipment and purchased software as of December 31, 1998 and 1999,
  included equipment under capital leases of approximately $1,037,000 and
  $1,191,000 respectively, and related accumulated amortization of approximately
  $283,000 and $847,000, respectively.
  
   (d) Accrued liabilities
  
    Accrued liabilities consisted of the following as of December 31, 1998 and
  1999 (in thousands):
  December
                                                                           31,
                                                                        ---------
                                                                        1998 1999
                                                                        ---- ----
  Accrued compensation............................................ $146 $119
       Accrued warranty................................................   64  149
       Legal and professional fees.....................................  135  199
       Other...........................................................  345  267
                                                                        ---- ----
                                                                        $690 $734
                                                                        ==== ====
  F-11
  FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
  3. STOCKHOLDERS' EQUITY
  
   (a) Convertible preferred stock
  
    The rights, preferences, and privileges of the holders of Series A, B, C, and
  D convertible preferred stock are as follows:
  
    . The holders of Series D convertible preferred stock shall be entitled to
      receive dividends, at a rate of $0.18 per share, per annum in preference
      to holders of Series A, B, and C convertible preferred stock payable when
      and if declared by the Company's Board of Directors. The holders of
      Series A, B, and C convertible preferred stock are entitled to receive
      dividends at the rate of $0.0075, $0.045, and $0.102, per share,
      respectively, per annum, payable when and if declared by the Company's
      Board of Directors in preference and priority to any payments of
      dividends to holders of the Company's common stock. The dividend rights
      are not cumulative.
  
    . The holders of Series D convertible preferred stock have a liquidation
      preference of $3.00 per share in preference to the holders of Series A,
      B, and C convertible preferred stock. Subject to Series D rights, the
      holders of Series A, B, and C convertible preferred stock have a
      liquidation preference of $0.12, $0.75, and $1.70 per share,
      respectively. After payment of the liquidation preference, all remaining
      assets of the Company shall be distributed among holders of convertible
      preferred stock and common stock pro rata on an "as-if-converted" basis.
      Distributions to holders of convertible preferred stock are limited to an
      aggregate of $0.24, $1.50, $3.40, and $6.00 per share to holders of
      Series A, B, C, and D convertible preferred stock, respectively. After
      payment of the maximum liquidation distribution to holders of convertible
      preferred stock, any remaining assets of the Company will be distributed
      pro rata to holders of common stock.
  
    . Each share of convertible preferred stock is convertible into one share
      of common stock. Conversion will occur automatically upon an initial
      public offering with a price of not less than $4.50 per share and
      proceeds in excess of $30,000,000.
  
    . Holders of Series A, B, C, and D convertible preferred stock vote equally
      with shares of common stock on an "as-if-converted" basis.
  
    . Holders of Series A, B, C, and D convertible preferred stock possess
      certain registration rights and the right to participate in future
      financings.
  
    No dividends have been declared or paid on convertible preferred stock or
  common stock since inception of the Company.
  
   (b) Common stock
  
    During 1996, the Company issued 6,000,000 shares of common stock to the
  Company's founders in exchange for certain rights and services. The fair value
  assigned to the rights and services was equivalent to the fair value of the
  common stock on the issuance date as determined by the Board of Directors. Upon
  issuance, the Company had the right to repurchase 50% of these shares at $0.005
  per share. Subject to continued employment of the founders, the repurchase
  right expired in December 1996 for 25% of the shares and, for the remaining
  shares, expired ratably over 36 months through December 1999. Under certain
  circumstances, the shares may immediately vest upon a change in control of the
  Company.
  
    Stock issued to the founders, as well as stock issued upon exercise of stock
  options under the 1996 Stock Option Plan, is subject to vesting. The Company
  reserves the right of first refusal to purchase all vested shares of common
  stock. All unvested shares of common stock may be repurchased by the Company at
  the original issuance price upon an employee's termination of employment. The
  repurchase right expires when the Company's stock becomes publicly traded or
  upon a change in control of the Company. As of December 31, 1998 and 1999,
  2,017,832 and 2,579,419 shares of outstanding common stock, respectively, are
  unvested and, therefore, subject to repurchase by the Company.
  
                                        F-12
  FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
    By decision of the Board of Directors in November 1999, however, these
  options will vest immediately on the closing date of the merger of the Company.
  
   (c) 1996 Stock Option Plan
  
    The Company's 1996 Stock Option Plan (the "Plan") authorizes the granting of
  incentive and nonstatutory common stock options to employees and nonemployees
  at exercise prices no less than 85% of the fair market value of the common
  stock on the grant date, as determined by the Board of Directors. The options
  may be exercised immediately upon issuance and generally have a term of 10
  years. The common stock issued upon the exercise of stock options vests 25%
  after one year of service and thereafter ratably over 36 months of service.
  Upon termination of service, an employee's unvested shares may be repurchased
  by the Company at the option exercise price. Approximately 5,000,000 shares of
  common stock have been reserved for issuance under the Plan.
  
   (d) Accounting for stock-based compensation
  
    Under APB Opinion No. 25, the Company has recorded no compensation costs
  related to its stock option plan for the year ended December 31, 1999, because
  the exercise price of each employee option equals or exceeds the market value
  of the underlying common stock as of the grant date for each employee stock
  option. Had compensation cost for the Company's plans been determined
  consistent with the fair value approach enumerated in SFAS No. 123, the
  Company's pro forma net loss would have been as follows (in thousands, except
  per share amounts):
  1998     1999
                                                                 -------  ------
  Net loss attributable to common stockholders--as
        reported...............................................  $10,662  $8,176
       Net loss attributable to common stockholders--pro
        forma..................................................   10,677   8,408
       Net loss per share attributable to common stockholders--
        as reported............................................    (1.73)  (1.03)
       Net loss per share attributable to common stockholders--
        pro forma..............................................    (1.74)  (1.06)
  The fair value of employee options granted was estimated on the date of grant
  using the minimum-value method. The fair value of nonemployee options granted
  was estimated on the date of grant using the Black-Scholes option-pricing
  model. There were no nonemployee options granted in 1998. The following
  weighted-average assumptions were used in these calculations: risk-free
  interest rate of approximately 5.3% and 6.1% for the years ended 1998 and 1999,
  respectively; expected life of five years and ten years for the years ended
  December 31, 1998 and 1999, respectively; no dividends and expected volatility
  of 0% and 65% for employee and nonemployee options, respectively.
  
    The weighted average fair values of options granted in 1998 and 1999 was
  $0.07 and $0.24, respectively.
  
                                        F-13
  FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
    A summary of activity under the Company's option plan for the period from
  January 1, 1998 to December 31, 1999, is presented below (in thousands, except
  per share amounts):
  Options
                                                                    Outstanding
                                                                  ----------------
                                                                          Weighted
                                                         Options          Average
                                                        Available         Exercise
                                                        for Grant Shares   Price
                                                        --------- ------  --------
  Balances as of January 1, 1998 ......................     805    1,232   $0.15
    Granted ...........................................  (1,286)   1,286    0.30
    Exercised .........................................     --      (444)   0.18
    Canceled ..........................................     511     (511)   0.23
    Unvested stock repurchased ........................     790      --     0.09
                                                         ------   ------
  Balances as of December 31, 1998.....................     820    1,563    0.24
    Granted ...........................................  (2,554)   2,554    0.46
    Exercised .........................................     --      (941)   0.19
    Canceled ..........................................   1,337   (1,337)   0.29
    Unvested stock repurchased ........................     400      --     0.13
                                                         ------   ------
  Balances as of December 31, 1999.....................       3    1,839   $0.53
                                                         ======   ======
  In addition to the 1996 stock option plan, the Company granted options of
  475,000 and 235,000 for the years ended December 31, 1998 and 1999,
  respectively.
  
    A breakdown of the Company's outstanding options as of December 31, 1999 is
  presented below (in thousands, except per share data):
  Outstanding                       Exercisable
                      --------------------------------------   ---------------------
                                   Weighted
                                   Average        Weighted                Weighted
       Range of       Number      Remaining       Average      Number     Average
       Exercise         of       Contractual      Exercise       of       Exercise
         Price        Shares     Life (Years)      Price       Shares      Price
     -------------    ------     ------------     --------     ------     --------
  $0.075       69          6.68          $0.075         69       $0.075
            $0.170       71          7.55          $0.170         71       $0.170
            $0.300      586          9.31          $0.300        586       $0.300
            $0.700    1,113          9.92          $0.700      1,113       $0.700
                      -----                                    -----
     $0.075-$0.700    1,839          9.51          $0.529      1,839       $0.529
                      =====                                    =====
  F-14
  FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
   (e) Warrants
  
    Warrants outstanding are as follows (in thousands, except per share amounts):
  Warrants Outstanding
                                                   ------------------------------
                                                          Weighted Average
                                                   Shares  Exercise Price  Amount
                                                   ------ ---------------- ------
  Balance at December 31, 1997.................   75        $1.03       $   77
     Warrants granted.............................   14         1.70           25
                                                    ---                    ------
     Balance at December 31, 1998.................   89         1.14          102
     Warrants granted.............................  337         3.00        1,012
                                                    ---                    ------
     Balance at December 31, 1999.................  426        $2.61       $1,114
                                                    ===                    ======
  The Company issued warrants in 1996 and 1997 for the purchase of 52,668
  shares of Series B convertible preferred stock and 22,058 shares of Series C
  convertible preferred stock, respectively. The Series B convertible preferred
  stock warrants will expire on the later of June 17, 2003, or three years from
  the effective date of an initial public offering. The Series C preferred stock
  warrants will expire on the later of September 1, 2004, or three years from the
  effective date of an initial public offering. In addition, the warrants expire
  immediately upon either of the following:
  
    . An initial public offering whereby the per share sale price to the public
      is $3.40 or higher, or if requested by the underwriter.
  
    . A merger or sale of substantially all of the Company's assets.
  
    In connection with a credit facility, the Company issued warrants in 1998 for
  the purchase of 14,706 shares of Series C convertible stock at an exercise
  price of $1.70 per share. The fair value of the preferred stock warrants at the
  date of grant was $1.17 and will expire on the later of February 1, 2005 or
  three years from the effective date of an initial offering. In addition, the
  warrants expire immediately upon either of the following:
  
    . An initial public offering whereby the per share sale price to the public
      is $4.50 or higher,or if requested by the underwriter.
  
    . A merger or sale of substantially all of the Company's assets.
  
    In connection with a capital lease, the Company issued warrants in 1999 for
  the purchase of 8,333 shares of Series D convertible preferred stock at an
  exercise price of $3.00 per share. The fair value of the Series D convertible
  preferred stock warrants at the date of grant was $2.07. The Company determined
  the fair value of Series D warrants using the Black-Scholes model with the
  following assumptions: risk free interest rate of 6.1%; expected life of seven
  years; volatility of 65%; and no dividend yield. The Series D preferred stock
  warrants will expire on the later of January 1, 2006 or three years from the
  effective date of an initial public offering. In addition, the warrants expire
  immediately upon either of the following:
  
    . An initial public offering whereby the per share sale price to the public
      is $3.40 or higher, or if requested by the underwriter.
  
    . A merger or sale of substantially all of the Company's assets.
  
    In connection with short-term note payable agreements entered into during
  1999, the Company issued 329,079 Series D preferred stock warrants at a price of
  $3.00 per share. The fair value of preferred stock warrants at the date of the
  grant was $0.67. The Company determined the fair value of the Series D warrants
  using the Black-Scholes model with the following assumptions: risk free interest
  rate of 6.1%; expected life of seven years; volatility of 65% and no
  
                                        F-15
  FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
  dividend yield. The warrants are immediately exercisable and expire on the
  earliest of (i) September 23, 2000; (ii) the effective date of the Company,
  completing an initial public offering; (iii) on a sale or transfer by the
  Company of all or substantially all of its assets; or (iv) the acquisition of
  the Company by another entity.
  
  4. INCOME TAXES
  
    Income tax expense for the years ended December 31, 1998 and 1999, consisted
  of state income tax. The difference between the statutory income tax rate of
  34% and the Company's effective tax rate is primarily due to the valuation
  allowance provided for deferred tax assets. The Company has provided a
  valuation allowance due to the uncertainty of generating future taxable income
  that would allow for the realization of such deferred tax assets.
  
    The types of temporary differences that give rise to significant portions of
  the deferred tax assets and liabilities as of December 31, 1998 and 1999 are as
  follows (in thousands):
  December 31,
                                                                -----------------
                                                                 1998      1999
                                                                -------  --------
  Deferred tax assets:
         Accruals and reserves................................. $   356  $    422
         Deferred start-up costs...............................     667       643
         Deferred revenue......................................     141        54
         Research credit carryforwards.........................     722       957
         Net operating loss carryforwards......................   7,406     9,549
         Fixed assets..........................................       9         9
                                                                -------  --------
           Total gross deferred tax assets.....................   9,301    11,634
         Less: Valuation allowance.............................  (9,301)  (11,634)
                                                                -------  --------
           Total deferred tax assets                            $   --   $    --
                                                                =======  ========
  The change in valuation allowance for the years ended December 31, 1998 and
  1999, was $5,038,000 and $2,333,000 respectively.
  
    The Company has net operating loss carryforwards for federal and state tax
  purposes of approximately $24,000,000 and $20,500,000, respectively. The
  federal carryforwards expire from 2010 to 2018. The state net operating loss
  carryforwards expire in 2003. The Company also has tax credit carryforwards of
  approximately $591,000 and $366,000 for federal and state tax purposes,
  respectively, which expire from 2001 to 2003.
  
    The Internal Revenue Code of 1986, and applicable state tax laws, impose
  substantial restrictions on the ability of the Company to utilize net operating
  loss and tax credit carryforwards in the event of an ownership change, as
  defined. During 1997, the Company underwent an ownership change, and, as a
  result, the federal and state tax losses and tax credit carryovers incurred
  through that date are subject to an annual limitation.
  
  5. COMMITMENTS AND CONTINGENCIES
  
   Lease Obligations
  
    The Company leases certain equipment and its facilities under various
  noncancelable operating leases. In addition, the Company has entered into
  capital lease arrangements for certain office and computer equipment.
  
                                        F-16
  FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
    Future minimum lease payments under operating and capital leases as of
  December 31, 1999, are as follows (in thousands):
  Years Ending December 31,                   Capital Leases Operating Leases
       -------------------------                   -------------- ----------------
  2000.......................................      $359             $469
       2001.......................................       230              482
       2002.......................................        71              352
                                                       -----           ------
       Total minimum lease payments...............       660           $1,303
                                                                       ======
       Less: Amount representing interest.........       (58)
                                                       -----
       Present value of minimum lease payments....       602
       Less: Current portion......................      (323)
                                                       -----
         Long-term lease obligations..............     $ 279
                                                       =====
  Rent expense was $452,184 and $467,439 for the years ended December 31, 1998
  and 1999, respectively.
  
   Notes payable
  
    The Company entered into short-term note payable agreements with various
  lenders on September 23, 1999 for $987,000. The notes bear interest of 10% and
  are payable in full on March 23, 2000. The principal amount outstanding on
  these notes at December 31, 1999 is $895,000.
  
  6. SEGMENT INFORMATION
  
    The Company has adopted the provisions of SFAS No. 131, Disclosure about
  Segments of an Enterprise and Related Information. SFAS No. 131 establishes
  standards for reporting information about operating segments. The method for
  determining what information to report is based on the way that management
  organizes the operating segments within the Company for making operating
  decisions and assessing financial performance. The Company's chief operating
  decision-maker is considered to be the Company's Chief Executive Officer (CEO).
  The consolidated financial information reviewed by the CEO is identical to the
  information presented in the accompanying statements of operations. Therefore,
  the Company operates in a single operating segment.
  
    The CEO does not receive discrete financial information about individual
  components of the Company's operations. The CEO reviews financial information
  presented on a consolidated basis accompanied by disaggregated information
  about revenue by geographic region for purposes of making operating decisions
  and assessing financial performance.
  
    Information regarding product revenue and geographic areas for the years
  ended December 31, 1998 and 1999 are as follows (in thousands):
  1998   1999
                                                                     ------ ------
  Product and service:
         Product.................................................... $2,747  1,880
         Maintenance................................................     77    254
                                                                     ------ ------
                                                                     $2,824 $2,134
                                                                     ====== ======
       Geographic:
         United States.............................................. $1,219 $1,605
         Japan......................................................  1,303    425
         Canada.....................................................    266     40
         Other......................................................     36     64
                                                                     ------ ------
                                                                     $2,824 $2,134
                                                                     ====== ======
  F-17
  FREEGATE CORPORATION
  
                     NOTES TO FINANCIAL STATEMENTS--(Continued)
  
  7. SUBSEQUENT EVENTS
  
    On November 16, 1999, the Company entered into a definitive merger agreement
  with Tut Systems, Inc. in which the stockholders of the Company received
  common stock of the acquiring company in exchange for all of the outstanding
  shares of preferred stock, common stock, shares issuable under common stock
  options, and shares issuable under warrants for common stock and preferred
  stock. In accordance with the definitive agreement, the Company's stockholders
  are to receive 510,931 shares of the acquirer's common stock and approximately
  19,600 options to acquire Tut Systems, Inc. common stock. The acquirer has
  also agreed to pay for all investment banking fees and related closing costs
  of approximately $1,200,000. The acquisition closed on February 14, 2000.
  
                                       F-18
  Item 7(b) Pro Forma Financial Information:
  
                                 TUT SYSTEMS, INC.
  
                 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
  
    The following unaudited pro forma combined financial statements for Tut
  Systems, Inc. (the "Company") consist of the Unaudited Pro Forma Combined
  Statement of Operations for the year ended December 31, 1999 and the Unaudited
  Pro Forma Combined Balance Sheet as of December 31, 1999. This pro forma
  financial information gives effect to Tut's acquisition of FreeGate
  Corporation ("FreeGate") in a business combination to be accounted for as a
  purchase, which was consummated on February 14, 2000. In exchange for the
  acquisition of all of FreeGate's outstanding capital stock, Tut issued
  FreeGate stockholders 510,931 shares of its common stock and reserved
  approximately 19,600 additional shares for issuance upon the exercise of stock
  options of FreeGate which will be converted into options to purchase shares of
  Tut stock.
  
    The unaudited pro forma combined balance sheet gives effect to this
  acquisition as if it had occurred on December 31, 1999, by consolidating the
  balance sheet of FreeGate with the balance sheet of Tut, at December 31, 1999.
  
    The unaudited pro forma combined statement of operations gives effect to this
  acquisition as if it had occurred on January 1, 1999, by consolidating the
  results of operations of FreeGate for the year ended December 31, 1999 with the
  results of operations of Tut for the year ended December 31, 1999.
  
    The unaudited pro forma combined statement of operations is not necessarily
  indicative of the operating results that would have been achieved had the
  transactions been in effect as of the beginning of the periods presented and
  should not be construed as being representative of future operating results.
  
    The historical financial statements of the Company and FreeGate are included
  elsewhere in this Prospectus and the unaudited pro forma combined financial
  information presented herein should be read in conjunction with those financial
  statements and related notes.
  
                                        F-19
  TUT SYSTEMS, INC.
  
                     UNAUDITED PRO FORMA COMBINED BALANCE SHEET
                                   (in thousands)
  December 31, 1999
                                      --------------------------------------------
                                        Tut     FreeGate  Adjustments    Pro Forma
                                      --------  --------  -----------    ---------
  ASSETS
  Current assets:
    Cash and cash equivalents........ $ 13,405  $    130   $    --       $ 13,535
    Short-term investments ..........   18,831       --         --         18,831
    Accounts receivable, net ........   11,742       403        --         12,145
    Inventories .....................    8,401       210        --          8,611
    Prepaid expenses and other ......    3,746       224        --          3,970
                                      --------  --------   --------      --------
      Total current assets ..........   56,125       967        --         57,092
  Property and equipment, net .......    3,476       394        --          3,870
  Intangible assets, net ............    1,774       --      25,409 (A)    27,183
  Other assets ......................    3,981        52       --           4,033
                                      --------  --------   --------      --------
      Total assets .................. $ 65,356  $  1,413   $ 25,409      $ 92,178
                                      ========  ========   ========      ========
  
     LIABILITIES AND STOCKHOLDERS'
            EQUITY (DEFICIT)
  
  Current liabilities:
    Accounts payable ................ $  5,859  $    465   $    --       $  6,324
    Accrued expenses and other
     payables .......................    3,551       734      1,200 (A)     5,485
    Lines of credit .................    1,529       --         --          1,529
    Notes payable....................      --        895        --            895
    Capital lease obligations .......      --        323        --            323
    Deferred revenue ................      770       418        --          1,188
                                      --------  --------   --------      --------
      Total current liabilities .....   11,709     2,835      1,200        15,744
  Capital lease obligations, net of
   current portion ..................      --        279        --            279
  Deferred revenue, net of current
   portion ..........................    2,125       134        --          2,259
                                      --------  --------   --------      --------
      Total liabilities .............   13,834     3,248      1,200        18,282
                                      --------  --------   --------      --------
  Stockholders' equity (deficit):
    Common stock ....................       12       --           1 (A)        13
    Additional paid in capital ......  108,969    26,443    (26,443)(A)   132,417
                                                             23,448 (A)
    Notes receivable from
     stockholders ...................      --       (275)       --           (275)
    Deferred stock compensation .....     (972)      --         --           (972)
    Accumulated deficit .............  (56,487)  (28,003)    28,003 (A)   (57,287)
                                                               (800)(A)
                                      --------  --------   --------      --------
      Total stockholders' equity
       (deficit) ....................   51,522    (1,835)    24,209        73,896
                                      --------  --------   --------      --------
        Total liabilities and
         stockholders' equity
         (deficit)................... $ 65,356  $  1,413   $ 25,409      $ 92,178
                                      ========  ========   ========      ========
  The accompanying notes are an integral part of these unaudited combined
                               financial statements.
  
                                        F-20
  TUT SYSTEMS
  
                UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
                      (in thousands, except per share amounts)
  Year Ended December 31, 1999
                                       -------------------------------------------
                                         Tut     FreeGate  Adjustments   Pro Forma
                                       --------  --------  -----------   ---------
  Revenue:
    Product .......................... $ 26,266  $ 2,134       $ --       $ 28,400
    License and royalty ..............    1,541      --          --          1,541
                                       --------  -------    --------     ---------
                                         27,807    2,134         --         29,941
  Cost of goods sold .................   15,459    1,159         680(B)     17,298
                                       --------  -------    --------     ---------
  Gross margin .......................   12,348      975        (680)       12,643
                                       --------  -------    --------     ---------
  Operating expenses:
    Sales and marketing ..............   10,523    3,636         --         14,159
    Research and development .........    7,618    3,899         --         11,517
    General and administrative .......    4,429    1,406         --          5,835
    In-process research and
     development .....................    2,600      --          --          2,600
    Amortization of intangibles ......       52      --        4,602(B)      4,654
    Noncash compensation expense .....      455      221         --            676
                                       --------  -------    --------     ---------
      Total operating expenses .......   25,677    9,162       4,602        39,441
                                       --------  -------    --------     ---------
  Loss from operations ...............  (13,329)  (8,187)     (5,282)      (26,798)
  Interest expense ...................     (608)     (62)        --           (670)
  Interest income ....................    2,203       76         --          2,279
  Other income, net ..................        1      --          --              1
                                       --------  -------    --------     ---------
  Loss before income taxes ...........  (11,733)  (8,173)     (5,282)      (25,188)
  Income tax expense .................        1        3         --              4
                                       --------  -------    --------     ---------
  Net loss ...........................  (11,734)  (8,176)     (5,282)      (25,192)
  Dividend accretion on preferred
   stock .............................     (235)     --          --           (235)
                                       --------  -------    --------     ---------
  Net loss attributable to common
   stockholders ...................... $(11,969) $(8,176)   $ (5,282)    $ (25,427)
                                       ========  =======    ========     =========
  Net loss per share attributable to
   common stockholders, basic and
   diluted ........................... $  (1.12) $ (1.03)                $   (2.26)
                                       ========  =======                 =========
  Shares used in computing net loss
   per share attributable to common
   stockholders, basic and diluted....   10,729    7,964         511        11,240
                                       ========  =======    ========     =========
  The accompanying notes are an integral part of these unaudited combined
                               financial statements.
  
                                        F-21
  TUT SYSTEMS, INC.
  
            NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
                                   (in thousands)
  
  NOTE 1--BASIS OF PRESENTATION:
  
    The pro forma financial information gives effect to Tut's acquisition of
  FreeGate, consummated on February 14, 2000 in a business combination to be
  accounted for as a purchase. All the outstanding common and preferred stock of
  FreeGate was converted into shares of Tut common stock, and all outstanding
  stock options to purchase shares of FreeGate common shares and options to be
  issued to FreeGate stockholders and options holders.
  
    The pro forma financial information has been prepared on the basis of
  assumptions described in the following notes and include assumptions relating
  to the allocation of the consideration paid for the assets and liabilities of
  FreeGate based on preliminary estimates of their fair value. The actual
  allocation of such consideration may differ from that reflected in the pro
  forma financial statements after valuations after the closing of the FreeGate
  acquisition have been completed. Tut does not expect that the final allocation
  of the purchase price will differ materially from the preliminary allocation.
  
    The Unaudited Pro Forma Combined Statement of Operations for the year ended
  December 31, 1999 gives effect to this transaction as if it had taken place on
  January 1, 1999. The Unaudited Pro Forma Combined Balance Sheet as of December
  31, 1999 gives effect to the transaction as if it had taken place on December
  31, 1999.
  
    The pro forma financial information is not necessarily indicative of what the
  actual financial results would have been had the transaction taken place on
  January 1, 1999 and do not purport to indicative the results of future
  operations.
  
  NOTE 2--PURCHASE PRICE ALLOCATION:
  
    The unaudited pro forma combined information reflects a total purchase price
  of $24.7 million from 510,931 shares of common stock, approximately 19,600
  options to acquire common stock and acquisition related expenses, consisting
  primarily of investment advisory, legal and other professional fees. The
  Company valued the options using the Black-Scholes option pricing model,
  applying an average expected life of 4 years, a weighted average risk free
  rate of 6%, an expected dividend yield of zero percent, a volatility of 80%
  and a deemed fair value of common stock of $41.81.
  
    The Company's allocation of aggregate purchase price to the tangible and
  identifiable assets acquired in connection with this acquisition has been based
  on a preliminary analysis by the Company and the goodwill, patents and current
  technology are being amortized over an estimated useful life of five years and
  assembled workforce is being amortized over an estimated useful life of three
  years. The allocation is summarized below (in thousands):
  Net liabilities assumed.......................................... $(1,560)
       Current technology...............................................   2,900
       In-process research and development..............................     800
       Assembled workforce..............................................   1,500
       Patents..........................................................     500
       Goodwill.........................................................  20,509
                                                                         -------
         Total purchase price........................................... $24,649
                                                                         =======
       FreeGate's liabilities assumed are derived as follows:
       Total stockholders' deficit...................................... $(1,835)
       Receivable from stockholders.....................................     275
                                                                         -------
         Total.......................................................... $(1,560)
                                                                         =======
  F-22
  TUT SYSTEMS, INC.
  
      NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION--(Continued)
                                   (in thousands)
  
    The amount allocated to in-process research and development represents the
  purchased in-process technology for projects that, as of the date of the
  acquisition, had not yet reached technological feasibility and had no
  alternative future use. Based on preliminary assessments, the value of these
  projects was determined by using the income approach, which discounts expected
  future cash flows to present value. The discount rate used in the present value
  calculations were typically derived from a weighted average cost of capital
  analysis adjusted upwards to reflect additional risks inherent in the
  development life cycle. These risk factors are reflected in the discount rate
  used of 30%. Tut expects that the pricing model for products and intellectual
  property licenses related to the acquisition of FreeGate will be considered
  standard within the high-technology communications industry. Tut does not
  expect, however, to achieve expense reductions as a result of integrating the
  acquired in-process technology. Therefore, the valuation assumptions do not
  include any anticipated cost savings. Tut expects that products incorporating
  the acquired technology from this acquisition will be completed and begin to
  generate cash flows over a six to nine month period after integration.
  Development of these technologies, however, remains a significant risk due to
  the remaining effort to achieve technical viability, rapidly changing customer
  markets, uncertain standards for new products and significant competitive
  threats from numerous companies. Efforts to develop the acquired technology into
  commercially viable products consists principally of planning, designing and
  testing activities necessary to determine that the product can meet market
  expectations, including functionality and technical requirements. Failure to
  bring these products to market in a timely manner could result in a loss of
  market share, or a lost opportunity to capitalize on emerging markets, and could
  harm our business and operating results.
  
    The amounts allocated to in-process research and development will be charged
  to the statement of operations in the period the acquisition is consummated.
  
  NOTE 3--UNAUDITED PRO FORMA COMBINED NET LOSS PER SHARE:
  
    The net loss per share and shares used in computing the net loss per share
  for the year ended December 31, 1999 are based upon the Tut historical weighted
  average common shares outstanding together with the shares issued in the
  transaction as if such shares were issued January 1, 1999. Common stock
  issuable upon the exercise of Tut stock options and warrants has been excluded
  as the effect would be anti-dilutive. In addition to the shares used in
  computing the net loss per share above, pro forma net loss per share is
  calculated using the convertible preferred stock outstanding as if such shares
  were converted to common stock at the time of issuance or January 1, 1999 for
  the stock issued in the transaction.
  
  NOTE 4--PURCHASE ADJUSTMENTS:
  
    The following adjustments were applied to the combined financial statements:
  
    (A) To reflect the issuance of shares in the acquisition and to record
        estimated transaction costs and other assets and liabilities at their
        fair values.
  
    (B) To record amortization of goodwill and other intangibles.
  
    The amount allocated to in-process research and development has not been
  included in the unaudited pro forma combined statement of operations as it is
  nonrecurring. This amount will be expensed in the period the acquisition is
  consummated.
  
                                        F-23
  SIGNATURE
  
       Pursuant to requirements of the Securities Exchange Act of 1934, Tut
  Systems, Inc. has duly caused this report to be signed on its behalf by the
  undersigned thereunto duly authorized.
  
                                      TUT SYSTEMS, INC.
  
  Dated:  February 18, 2000           By: /s/ Nelson B. Caldwell
                                         ----------------------
                                         Nelson B. Caldwell, Vice President and
                                         Chief Financial Officer