<PAGE>

               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-Q

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

               For the quarterly period ended September 30, 2000

                     Commission File Number:  000 - 25291

                               TUT SYSTEMS, INC.
                               -----------------
            (Exact name of registrant as specified in its charter)

DELAWARE                                                        94-2958543
--------                                                        ----------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

           5964 W. Las Positas Blvd., Pleasanton, California  94588
           --------------------------------------------------------
           (Address of principal executive offices)      (Zip Code)

      Registrant's telephone number, including area code:  (925) 490-3900
                                                           --------------

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                               Yes [ X ]No [   ]

As of October 31, 2000, 15,894,718 shares of the Registrant's Common Stock, par
value $0.001 per share, were issued and outstanding.
<PAGE>

TUT SYSTEMS, INC.

                                   FORM 10-Q

                                     INDEX
PART I.  FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements (unaudited):

         Condensed Consolidated Balance Sheets as of September 30, 2000
         and December 31, 1999..............................................   1

         Condensed Consolidated Statements of Operations for the three
         months and nine months ended September 30, 2000 and
         September 30, 1999.................................................   2

         Condensed Consolidated Statements of Cash Flows for the
         nine months ended September 30, 2000 and September 30, 1999........   3

         Notes to Unaudited Condensed Consolidated Financial Statements.....   4

Item 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations..............................................  10

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.........  24

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings..................................................  24

Item 2.  Changes in Securities and Use of Proceeds..........................  24

Item 3.  Defaults Upon Senior Securities....................................  24

Item 4.  Submission of Matters to a Vote of Security Holders................  24

Item 5.  Other Information..................................................  24

Item 6.  Exhibits and Reports on Form 8-K...................................  25


                                       2
<PAGE>

                               TUT SYSTEMS, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                   (in thousands, except per share amounts)
                                  (unaudited)

<TABLE>
<CAPTION>

                                                                          September 30,      December 31,
                                                                              2000              1999
                                                                          -------------     -------------
<S>                                                                       <C>               <C>

                                  ASSETS
Current assets:
    Cash and cash equivalents                                               $  14,268         $  13,405
    Short-term investments                                                    107,175            18,831
    Accounts receivable, net of allowance for doubtful accounts
      of $543 and $335 in 2000 and 1999, respectively                          30,643            11,742
    Inventories, net                                                           22,267             8,401
    Prepaid expenses and other                                                 14,388             3,746
                                                                            ---------         ---------
      Total current assets                                                    188,741            56,125
    Property and equipment, net                                                10,636             3,476
    Investments ($3,000 of which is restricted, Note 7)                        11,358                 -
    Intangibles and other assets                                               48,658             5,755
                                                                            ---------         ---------
      Total assets                                                          $ 259,393         $  65,356
                                                                            =========         =========

                   LIABILITIES AND STOCKHOLDERS' EQUITY

    Current liabilities:
      Accounts payable                                                      $  15,311         $   5,859
      Accrued liabilities                                                       7,720             3,551
      Line of credit                                                                -             1,529
      Deferred revenue                                                          1,093               770
                                                                            ---------         ---------
        Total current liabilities                                              24,124            11,709
    Deferred revenue, net of current portion                                    1,682             2,125
    Other liabilities                                                             323                 -
                                                                            ---------         ---------
        Total liabilities                                                      26,129            13,834
                                                                            ---------         ---------

    Commitments and contingencies (Note 7)

    Stockholders' equity:
      Common stock,  $0.001 par value, 100,000 shares authorized,
        15,867 and 11,941 shares issued and outstanding in
        2000 and 1999, respectively                                                16                12
    Additional paid in capital                                                298,088           108,969
    Deferred compensation                                                      (1,668)             (972)
    Accumulated other comprehensive income                                        162                 -
    Notes receivable from stockholders                                           (820)                -
    Accumulated deficit                                                       (62,514)          (56,487)
                                                                            ---------         ---------
        Total stockholders' equity                                            233,264            51,522
                                                                            ---------         ---------
        Total liabilities and stockholders' equity                          $ 259,393         $  65,356
                                                                            =========         =========
</TABLE>


  The accompanying notes are an integral part of these condensed consolidated
                             financial statements

                                       1
<PAGE>

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   (in thousands, except per share amounts)
                                  (unaudited)


<TABLE>
<CAPTION>
                                                            Three months ended       Nine months ended
                                                               September 30,           September 30,
                                                           --------------------    --------------------
                                                             2000        1999        2000        1999
                                                           --------    --------    --------    --------
<S>                                                        <C>         <C>         <C>         <C>
Revenues:
    Product                                                $ 27,922    $  7,579    $ 64,431    $ 15,887
    License and royalty                                         645         685       1,624       1,278
                                                           --------    --------    --------    --------
      Total revenues                                         28,567       8,264      66,055      17,165
                                                           --------    --------    --------    --------
Cost of goods sold:
    Product                                                  15,064       4,341      35,435       9,501
    License and royalty                                           -           -           -           3
                                                           --------    --------    --------    --------
      Total cost of goods sold                               15,064       4,341      35,435       9,504
                                                           --------    --------    --------    --------
Gross margin                                                 13,503       3,923      30,620       7,661
                                                           --------    --------    --------    --------
Operating expenses:
    Sales and marketing                                       5,559       2,678      15,163       7,536
    Research and development                                  4,950       2,008      12,181       5,367
    General and administrative                                3,361       1,108       8,077       3,110
    In-process research and development                           -           -         800           -
    Amortization of intangibles                               2,528           -       5,088           -
    Noncash compensation expense                                114         114         342         342
                                                           --------    --------    --------    --------
      Total operating expenses                               16,512       5,908      41,651      16,355
                                                           --------    --------    --------    --------
Loss from operations                                         (3,009)     (1,985)    (11,031)     (8,694)
Interest expense                                                (10)       (152)       (459)       (467)
Interest income and other                                     2,408         571       5,464       1,587
                                                           --------    --------    --------    --------
Loss before income taxes                                       (611)     (1,566)     (6,026)     (7,574)
Income tax expense                                                -           -           1           1
                                                           --------    --------    --------    --------
Net loss                                                       (611)     (1,566)     (6,027)     (7,575)
Dividend accretion on preferred stock                             -           -           -         235
                                                           --------    --------    --------    --------
Net loss attributable to common stockholders               $   (611)   $ (1,566)   $ (6,027)   $ (7,810)
                                                           ========    ========    ========    ========

Net loss per share attributable to common stockholders,
    basic and diluted (Note 3)                             $  (0.04)   $  (0.13)   $  (0.42)   $  (0.75)
                                                           ========    ========    ========    ========

Shares used in computing net loss per share attributable
    to common stockholders, basic and diluted (Note 3)       15,751      11,670      14,519      10,360
                                                           ========    ========    ========    ========
</TABLE>

        The accompanying notes are an integral part of these condensed
                      consolidated financial statements.

                                       2
<PAGE>

                               TUT SYSTEMS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                   Nine months ended
                                                                                     September 30,
                                                                                 ----------------------
                                                                                     2000         1999
                                                                                 ---------    ---------
<S>                                                                              <C>          <C>
Cash flows from operating activities:
   Net loss                                                                      $  (6,027)   $  (7,575)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization                                                   1,550          594
     Provision for allowance for doubtful accounts                                     208          145
     Provision for excess and obsolete inventory                                     1,475          513
     Noncash interest income                                                        (3,425)        (233)
     Noncash compensation expense                                                      342          342
     Amortization of intangible assets and noncash compensation                      7,178            -
     Write-off of in-process research and development                                  800            -
     Gain on sale of other assets                                                     (103)           -
     Change in assets and liabilities:
       Accounts receivable                                                         (19,809)      (5,614)
       Inventories                                                                 (15,140)      (1,510)
       Prepaid expenses and other assets                                            (9,222)      (1,244)
       Accounts payable and accrued liabilities                                     10,559        1,002
       Deferred revenue                                                               (559)         420
                                                                                 ---------    ---------
         Net cash used in operating activities                                     (32,173)     (13,160)
                                                                                 ---------    ---------
Cash flows from investing activities:
   Purchase of property and equipment                                               (7,961)      (1,728)
   Purchase of short-term and long-term investments
    (includes $3,000 of restricted funds)                                         (155,108)     (30,209)
   Purchase of other assets                                                         (4,501)           -
   Proceeds from maturities and sale of short-term investments                      58,831        6,500
   Proceeds from sale of other assets                                                  128            -
   Acquisition of business, net of cash acquired and purchased
     research and development                                                       (1,788)          76
                                                                                 ---------    ---------
         Net cash used in investing activities                                    (110,399)     (25,361)
                                                                                 ---------    ---------
Cash flows from financing activities:
   Payment on lines of credit                                                       (1,529)      (2,844)
   Proceeds from lines of credit                                                         -           34
   Proceeds from issuances of common stock, net                                    145,576       53,856
   Other                                                                              (612)           -
                                                                                 ---------    ---------
         Net cash provided by financing activities                                 143,435       51,046
                                                                                 ---------    ---------
         Net increase in cash and cash equivalents                                     863       12,525
Cash and cash equivalents, beginning of period                                      13,405        4,452
                                                                                 ---------    ---------
Cash and cash equivalents, end of period                                         $  14,268    $  16,977
                                                                                 =========    =========
Supplemental disclosure of cash flow information:
Noncash financing activities:
   Common stock issued in connection with FreeGate and Xstreamis acqusitions     $  41,118    $       -
                                                                                 =========    =========
   Accretion of preferred stock                                                  $       -    $     235
                                                                                 =========    =========
   Conversion of preferred stock to common stock                                 $       -    $  47,802
                                                                                 =========    =========
   Unearned compensation related to stock option grants                          $   1,865    $      -
                                                                                 =========    =========
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.

                                       3
<PAGE>

                               TUT SYSTEMS, INC.
        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                   (in thousands, except per share amounts)

1.   The Company:

          Tut Systems, Inc. (the "Company") was founded in 1983 and began
operations in August 1991. The Company designs, develops and markets advanced
communications products which enable high-speed data access over the copper
infrastructure of telephone companies, as well as the copper telephone wires in
homes, businesses and other buildings. The Company's products incorporate high-
bandwidth access multiplexers, associated modems and routers, Ethernet extension
products and integrated network management software.

2.   Basis of Presentation:

          The accompanying condensed consolidated financial statements as of
September 30, 2000 and December 31, 1999 and for the three and nine months ended
September 30, 2000 and 1999 are unaudited. The unaudited interim condensed
consolidated financial statements have been prepared on the same basis as the
annual financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position and results of operations as of
and for the three and nine months ended September 30, 2000 and 1999 and the
Company's cash flows for the nine months ended September 30, 2000 and 1999.
These condensed consolidated financial statements and notes thereto are
unaudited and should be read in conjunction with the Company's audited financial
statements included in the Company's Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on February 23, 2000. The balance sheet as of
December 31, 1999 was derived from audited financial statements, but does not
include all required disclosures required by generally accepted accounting
principles. The results for the three and nine months ended September 30, 2000
are not necessarily indicative of the expected results for any other interim
period or the year ending December 31, 2000.

3.   Summary of Significant Accounting Policies:

Inventories
------------

          Inventories are stated at the lower of cost, using the standard cost
method, or market.

Net Loss Per Share

          The Company computes net loss per share in accordance with SFAS No.
128, "Earnings per Share." Under the provision of SFAS No. 128, basic and
diluted net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Options, warrants and shares of preferred
stock were not included in the computation of diluted net loss per share because
the effect would be antidilutive.

<TABLE>
<CAPTION>
                                                           Three months ended    Nine months ended
                                                              September 30,        September 30,
                                                           ------------------   -------------------
                                                             2000      1999       2000       1999
                                                           -------   --------   --------   --------
<S>                                                        <C>       <C>        <C>        <C>
Net loss per share attributable to common stockholders,
    basic and diluted:
Net loss attributable to common stockholders               $  (611)  $ (1,566)  $ (6,027)  $ (7,810)
                                                           =======   ========   ========   ========

Net loss per share attributable to common stockholders,
    basic and diluted                                      $ (0.04)  $  (0.13)  $  (0.42)  $  (0.75)
                                                           =======   ========   ========   ========
Shares used in computing net loss per share attributable
    to common stockholders, basic and diluted               15,751     11,670     14,519     10,360
                                                           =======   ========   ========   ========

Antidilutive securities including options, warrants and
    preferred stock not included in net loss per share
    attributable to common stockholders' calculations        2,748      1,455      2,748      1,455
                                                           =======   ========   ========   ========
</TABLE>

                                       4
<PAGE>

                               TUT SYSTEMS, INC.
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (in thousands, except per share amounts)

3.   Summary of Significant Accounting Policies, continued:

Cash, cash equivalents, short-term investments and long-term investments

          Cash, cash equivalents, and short-term investments are stated at cost
or amortized cost, which approximates fair value, and consist primarily of money
market funds, commercial paper, US government agency notes, certificates of
deposits and corporate bonds. The Company includes in cash and cash equivalents
all highly liquid investments which mature within three months of their purchase
date. Investments maturing between three and twelve months from the date of
purchase are classified as short-term investments. Management determines the
appropriate classification of debt securities at the time of purchase and re-
evaluates that designation as of each balance sheet date. As of September 30,
2000, the Company's short-term investments were classified as held-to-maturity
as the Company intended to, and had the ability to hold these securities to
maturity. Held-to-maturity securities are stated at amortized cost, which
approximates fair market value. The estimated fair values of cash equivalents
and short-term investments are based on quoted market prices.

          Long-term investments are stated at cost which approximates fair value
and consists of US government agency notes and corporate bonds. Investments
maturing greater than twelve months from the date of purchase are classified as
long-term investments. The Company monitors this investment for impairment and
makes appropriate reductions in carrying value when necessary.

Comprehensive Loss

          Comprehensive loss includes unrealized gains and losses on other
assets and foreign currency translation adjustment that have been previously
excluded from net loss and reflected instead in stockholders' equity. The
following table sets forth the calculation of comprehensive loss on an interim
basis:

<TABLE>
<CAPTION>
                                                Three months ended       Nine months ended
                                                   September 30,           September 30,
                                                ------------------       -----------------
                                                  2000      1999           2000     1999
                                                --------   -------       -------   -------
<S>                                             <C>        <C>           <C>       <C>
Net loss                                        $   (611)  $(1,566)      $(6,027)  $(7,575)
Unrealized gains on other assets                     177         -           177         -
Foreign currency translation adjustment              (15)        -           (15)        -
                                                --------   -------       -------   -------

Total comprehensive loss                        $   (449)  $(1,566)      $(5,865)  $(7,575)
                                                ========   =======       =======   =======
</TABLE>

Impact of Recently Issued Accounting Standards

          In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The Company, to date, has not engaged in derivative and hedging
activities, and accordingly does not believe that the adoption of SFAS No. 133
will have a material impact on the financial reporting and related disclosures
of the Company. The Company will adopt SFAS No. 133 (as amended by SFAS No. 138)
as required by SFAS No. 137, "Deferral of the Effective Date of the FASB
Statement No. 133," for fiscal 2001.

          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
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.

                                       5
<PAGE>

                               TUT SYSTEMS, INC.
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (in thousands, except per share amounts)

    4.  Balance Sheet Components

                                        September 30,       December 31,
                                            2000                1999
                                        -------------       ------------

   Short-term investments:
       Commercial paper                 $      87,634       $          -
       US government agency notes               5,024                  -
       Certificates of deposits                 5,126              3,095
       Corporate bonds                          9,391             15,736
                                        -------------       ------------
                                        $     107,175       $     18,831
                                        =============       ============

   Long-term investments:
       US government agency notes       $       8,196       $          -
       Corporate bonds                          3,162                  -
                                        -------------       ------------
                                        $      11,358       $          -
                                        =============       ============

   Inventories, net:
       Finished goods                   $      16,120       $      6,731
       Raw material                             6,147              1,670
                                        -------------       ------------
                                        $      22,267       $      8,401
                                        =============       ============

   Prepaid expenses and other:
       Non-trade accounts receivable    $       7,987       $      1,324
       Prepaid expenses                         5,698              2,422
       Other                                      703                  -
                                        -------------       ------------
                                        $      14,388       $      3,746
                                        =============       ============

   Property and equipment:
       Leasehold improvements           $       5,539       $        469
       Computers and software                   5,367              2,661
       Test equipment                           3,008              1,795
       Office equipment                           666                631
                                        -------------       ------------
                                               14,580              5,556
       Less: accumulated depreciation
         and amortization                      (3,944)            (2,080)
                                        -------------       ------------
                                        $      10,636       $      3,476
                                        =============       ============

   Intangible and other assets:
       Goodwill                         $      34,298       $      1,446
       Completed technology and patents        10,580                  -
       Assembled workforce                      3,300                380
                                        -------------       ------------
                                               48,178              1,826
       Less: accumulated amortization          (5,129)               (17)
                                        -------------       ------------
       Net intangibles                         43,049              1,809
       Other                                    5,609              3,946
                                        -------------       ------------
                                        $      48,658       $      5,755
                                        =============       ============


                                       6
<PAGE>

                               TUT SYSTEMS, INC.
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (in thousands, except per share amounts)

4.   Balance Sheet Components, continued:

                                                 September 30,  December 31,
                                                      2000          1999
                                                 -------------  ------------
           Accrued liabilities:
             Accrued compensation                $     2,359    $    1,488
             Accrued marketing costs                   1,015             -
             Accrued sales tax                           674             -
             Accrued warranty costs                      440             -
             Customer deposit                              -         1,000
             Other                                     3,232         1,063
                                                 -------------  ------------
                                                 $     7,720    $    3,551
                                                 =============  ============

5.   Royalty Obligation:

          The Company has acquired the rights, title and interests in two
patents from a founder and stockholder of the Company. Under a previous
agreement, the Company was required to pay on-going royalties based on the net
sales price of products sold utilizing the patented technology. In February
1999, the Company paid the founder $2,500 as a lump sum payment for all its
future royalty obligations, which the Company is amortizing ratably over five
years. This period represents the estimated life of the patented technology. As
of September 30, 2000, the balance of this payment remaining to be amortized was
$1,700, $1,200 of which is included in other assets and $500 of which is
included in prepaid expenses and other assets at September 30, 2000.

6.   Follow on Offering, Initial Public Offering and Conversion of Redeemable
     Convertible Preferred Stock and Warrant:

          In January 1999, the Company completed its initial public offering and
issued 2,875 shares of its common stock at a price of $18.00 per share.  The
Company received approximately $46,900 in cash, net of underwriting discounts,
commissions and other offering costs.  Additionally, prior to the initial public
offering, a warrant to purchase 667 shares of Series G convertible preferred
stock at an exercise price of $10.00 per share was exercised for approximately
$6,700.  Simultaneously with the closing of the initial public offering, all of
the Company's convertible preferred stock and redeemable convertible preferred
stock was automatically converted into an aggregate of 8,120 shares of common
stock.

          In March 2000, the Company completed a follow-on offering and issued
2,500 shares of its common stock at a price of $60.00 per share. The Company
received approximately $141,700 in cash net of underwriting discounts,
commissions and other offering costs.

                                       7
<PAGE>

                               TUT SYSTEMS, INC.
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                   (in thousands, except per share amounts)

7.   Commitments and Contingencies:

          The Company leases office, manufacturing and warehouse space under
noncancelable operating leases that expire through 2002. On March 3, 1998, the
Company extended its existing lease for its former headquarters location for
three years beginning June 1, 1998 to May 31, 2001. In July 2000, the Company
subleased this former headquarters location when the Company moved to its new
headquarters in Pleasanton, California. During December 1998, the Company leased
additional space for three years beginning June 1, 1998 to May 31, 2001. The
additional lease contains an option to extend for an additional two years at a
rate to be determined. In connection with the business combinations in 1999, the
Company assumed operating leases which expire in April and December 2001.

          In July 2000, the Company relocated its principal administrative and
engineering facilities from Pleasant Hill, California to Pleasanton, California.
The lease for the Pleasanton facility expires April 2007, with an option to
renew for five years.  Under the terms of the lease agreement, the Company was
required to issue a letter of credit in the amount of $1,800.  The letter of
credit is collateralized by restricted funds in the amount of $3,000, which are
included in long-term investments.  The letter of credit is reduced annually by
$250 provided the Company is not in default under the terms of the lease
agreement.

8.   Segment Information:

          The Company currently operates in a single business segment as there
is only one measurement of profitability for its operations. Revenues are
attributed to the following countries based on location of customers:

                                     Three months ended       Nine months ended
                                        September 30,           September 30,
                                     -------------------     -------------------
                                       2000        1999        2000        1999
                                     -------     -------     -------     -------

          United States              $22,549     $ 4,177     $39,876     $11,501
          International:
            Korea                        498           -      12,791           -
            All other countries        5,520       4,087      13,388       5,664
                                     -------     -------     -------     -------
                                     $28,567     $ 8,264     $66,055     $17,165
                                     =======     =======     =======     =======

          Three customers accounted for 24%, 16% and 11%, respectively, of the
Company's revenue for the three months ended September 30, 2000. In addition,
three customers accounted for 19%, 13% and 12%, respectively, of the Company's
revenue for the nine months ended September 30, 2000.  For the three months and
the nine months ended September 30, 1999, one customer accounted for more than
10% of the Company's revenue.

9.   Business Combinations:

          On February 14, 2000, the Company acquired FreeGate Corporation
("FreeGate") for a total of $25,500. The purchase price consisted of 511 shares
of the Company's common stock and approximately 20 options to acquire the
Company's common stock as well as acquisition related expenses, consisting
primarily of investment advisory, legal and other professional fees. This
acquisition was accounted for as a purchase business combination.

                                       8
<PAGE>

                               TUT SYSTEMS, INC.
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

          The allocation of the purchase price was based on the estimated fair
value of the goodwill and intangibles of $24,700 and in-process research and
development of $800. The amounts allocated to intangibles were determined based
on an appraisal completed by an independent third party using established
valuation techniques.

          On May 26, 2000, the Company acquired Xstreamis, plc ("Xstreamis"), a
United Kingdom based holding company, for a total of $19,800.  The purchase
price consisted of 439 shares of the Company's common stock and 11 options to
acquire the Company's common stock, $100 in cash and $600 in acquisition related
expenses, consisting primarily of legal and other professional fees.  This
acquisition was accounted for as a purchase business combination, and the name
of the acquired company was changed to Xstreamis Limited.

          The Company is obligated to register the shares of common stock
exchanged in the transaction and to maintain the effectiveness of the related
registration statement until the earlier of an aggregate of ninety (90) days or
the sale of all securities so registered.  In addition, the Company is obligated
to use commercially reasonable efforts to keep the registration statement
effective for an aggregate of at least forty-five (45) days prior to January 1,
2001.  In the event the registration statement is not effective for the
specified time period the Company may be required to repurchase any unsold
shares.

          The allocation of the purchase price was based on the estimated fair
value of the goodwill and assembled workforce of $12,600 and completed
technology of $7,200. The amounts allocated to the assembled workforce and to
the completed technology were determined based on an appraisal completed by an
independent third party using established valuation techniques.

          The following unaudited pro forma consolidated information gives
effect to the acquisitions of FreeGate and Xstreamis as if they had occurred on
January 1, 2000 and January 1, 1999, respectively, by consolidating the results
of operations of FreeGate and Xstreamis with the results of operations of the
Company for the three and nine months ended September 30, 2000 and 1999,
respectively. The pro forma results exclude the $800 nonrecurring write-off of
in-process research and development related to the FreeGate acquisition.

<TABLE>
<CAPTION>
                                                                             Three months ended       Nine months ended
                                                                                September 30,           September 30,
                                                                            --------------------    --------------------
                                                                              2000        1999        2000        1999
                                                                            --------    --------    --------    --------
<S>                                                                         <C>         <C>         <C>         <C>
Revenue                                                                     $ 28,567    $  8,701    $ 66,146    $ 18,765
Net loss attributable to common stockholders                                $   (611)   $ (5,083)   $ (9,359)   $(16,832)
Net loss per share attributable to common stockholders, basic and diluted   $  (0.04)   $  (0.40)   $  (0.64)   $  (1.49)
</TABLE>

          On April 28, 2000, the Company acquired certain assets of OneWorld
Systems, Inc. for $2,400 in cash. The allocation of the purchase price was based
on the fair market value of the assets at the date of acquisition of $300 of
property and equipment and $2,100 of goodwill and assembled workforce.

          In August 2000, the Company entered into a nonbinding letter of intent
to acquire ActiveTelco, Inc. ("ActiveTelco") Corporation for approximately
$35,000, consisting of an aggregate of 340 shares of the Company's common stock
and options to purchase shares of the Company's common stock as well as
acquisition related expenses consisting primarily of legal and other
professional fees. This transaction is expected to be treated as a purchase for
accounting purposes. ActiveTelco provides an Internet telephony platform that
enables Internet and telecommunications service providers to integrate and
deliver Web-based telephony applications such as unified messaging, long-
distance service, voicemail and fax delivery, call forwarding, call conferencing
and callback services.

          In consideration for promises made in connection with ActiveTelco
signing the letter of intent, the Company has agreed to make a loan to
ActiveTelco in the amount of $500.  The loan will bear interest at 7% per annum
and matures one year from issuance.  In the event that Tut withdraws from the
Proposed Acquisition, the loan will be forgiven.  In the event that ActiveTelco
withdraws from the Proposed Acquisition, the loan shall become due and payable
immediately.

                                       9
<PAGE>

Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

          The following discussion of the financial condition and results of
operations should be read in conjunction with the Condensed Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
Quarterly Report on  Form 10-Q.  This discussion contains, in addition to
historical information, forward-looking statements that involve risks and
uncertainties including but not limited to statements regarding customer and
geographic mix, gross margins and operating costs and expenses.  Our actual
results could differ materially from the results discussed in the forward-
looking statements.  Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below, as well as those
discussed in our Registration Statements on Form S-1, as filed with the SEC on
September 20, 2000, and those discussed in our other reports and filings with
the SEC.  We disclaim any obligation to update information contained in any
forward-looking statement.

Overview

          We design, develop and market multi-service broadband access systems
that enable service providers to deliver high-speed data access over the
existing copper telephone infrastructure found in multi-tenant unit, or MTU,
complexes, such as apartment buildings, hotels, business parks and commercial
office buildings. Our systems enable service providers to deliver high speed
Internet access, as well as enhanced capabilities, such as subscriber
management, community based web pages, firewall protection and virtual private
networking, as well as small business email and web servers.

          We commenced operations in August 1991. Through the third quarter of
1998, substantially all of our revenue was derived from the sale of our XL
Ethernet LAN extension products to the corporate and university segments of the
multi-commercial unit, or MCU, market. In early 1997, we introduced the first
products in our Expresso product line aimed at service provider markets. During
the first quarter of 1998, we began licensing our HomeRun technology to certain
leading semiconductor, computer hardware and consumer electronics manufacturers
for incorporation into integrated circuits and consumer products including PCs,
peripherals, modems and other Internet appliances. In the third and fourth
quarters of 1998, we commenced selling our Expresso GS products, which are
configured for local loop applications, and Expresso MDU products, which
incorporate our HomeRun technology to a broader range of service providers,
primarily those serving apartment complexes, hotels, university dormitories and
military complexes in the multi-dwelling unit, or MDU, market. In the first
quarter of 1999, we commenced selling Expresso MDU products incorporating our
LongRun technology and Expresso MDU Lite into additional segments of the MDU
market. During the fourth quarter of 1999, we commenced selling our Expresso SMS
2000 and companion Expresso OCS system providing subscriber management,
bandwidth management, credit card billing and other functions to the MDU market.
During the first quarter of 2000, we commenced selling our OneGate Internet
server appliances, acquired as a result of our FreeGate acquisition, to the MCU
market.

          We generate revenue primarily from the sale of products and, to a
lesser extent, through the licensing of our HomeRun technology. We recognize
revenue from product sales upon shipment if collection of the resulting
receivable is probable and product returns are reasonably estimated. Revenue on
products shipped on a trial basis is recognized upon customer acceptance.
Service revenue relating to customer maintenance fees for ongoing customer
support is recognized ratably over the period of the contract. Our products
generally carry a one year to two year warranty from the date of purchase.
Estimated sales returns and warranty costs, based on historical experience by
product, are recorded at the time revenue is recognized. License and royalty
revenue consists of nonrefundable up-front license fees, some of which may
offset initial royalty payments, and royalties. Currently, the majority of our
license and royalty revenue is comprised of non-refundable license fees paid in
advance. Such revenue is recognized ratably over the period during which post-
contract customer support is expected to be provided or upon delivery and
transfer of agreed upon technical specifications in contracts where essentially
no further support obligations exist. Future license and royalty revenue is
expected to consist primarily of royalties based on products sold by our
licensees. We do not expect that such license and royalty revenue will
constitute a substantial portion of our revenue in future periods.

          Sales price reductions on some of our products may be necessary to
remain competitive. Although we have historically been able to offset most price
declines with reductions in our manufacturing costs, there can be no assurance
that we will be able to offset further price declines with cost reductions. In
addition, some of our licensees may sell products based on our technology to our
competitors or potential competitors. There can be no assurance that our HomeRun
technology will be successfully deployed on a widespread basis or that such
licensing will not result in an erosion of the potential market for our
products.

          Sales to customers outside of the United States accounted for
approximately 39.6% and 33.0% of revenue for the nine months ended September 30,
2000 and 1999, respectively and for approximately 21.1% and 49.5% of revenue for
the three months ended September 30, 2000 and 1999, respectively. On average, we
expect international sales to increase in absolute dollars in the
                                       10
<PAGE>

future and to represent approximately one-third or less of our revenue. However,
actual results, both geographically and in absolute dollars, may vary from
quarter to quarter depending on the timing of orders placed by significant
customers. To date, substantially all international sales have been denominated
in U.S. dollars.

          We expect to continue to evaluate product line expansion and new
product opportunities, engage in extensive research, development and engineering
activities and focus on cost-effective design of our products. Accordingly, we
will continue to make significant expenditures on sales and marketing, and
research and development activities.

          In June 1999, we acquired PublicPort, Inc. in exchange for 168,679
shares of our common stock. This transaction was treated as a pooling of
interests for accounting purposes. PublicPort was located in Ann Arbor,
Michigan. PublicPort designed and developed subscriber management systems that
enabled businesses in the MDU market to provide mobile computer users access to
the public Internet or private corporate networks without having to reconfigure
their computer's network access software.

          In November 1999, we acquired Vintel Communications, Inc. for $4.8
million, consisting of $500,000 cash, 116,370 shares of our common stock and
approximately 40,000 options to acquire our common stock. This transaction was
treated as a purchase for accounting purposes. Vintel was located in Oakland,
California. Vintel designed and developed high-performance integrated service
routers that allowed service providers to offer bundles of services, including
voice-over-IP and high speed Internet services over a common IP infrastructure
to customers in the MTU market.

          In February 2000, we acquired FreeGate Corporation for approximately
$25.5 million, consisting of 510,931 shares of our common stock, approximately
19,600 options to acquire our common stock, and acquisition related expenses
consisting primarily of investment advisory, legal and other professional fees.
This transaction was treated as a purchase for accounting purposes. FreeGate was
located in Sunnyvale, California. FreeGate designed, developed and marketed
Internet server appliances combining the functions of IP routing, firewall
security, network address translation, secure remote access via virtual private
networking, and email and web servers on a compact, PC-based platform.

          In April 2000, we acquired certain assets of OneWorld Systems, Inc.
for approximately $2.4 million in cash. This transaction was treated as a
purchase of assets for accounting purposes.

          In May 2000, we acquired Xstreamis Limited ("Xstreamis"), formerly
Xstreamis, plc, for $19.8 million, consisting of 439,137 shares of our common
stock, 10,863 options to acquire our common stock, $100,000 in cash and
acquisition related expenses consisting primarily of legal and other
professional fees. This transaction was treated as a purchase for accounting
purposes. Xstreamis is located in the United Kingdom. Xstreamis provides policy-
driven traffic management for high-performance, multimedia networking solutions
including routing, switching and bridging functions.

          In August 2000, we entered into a nonbinding letter of intent to
acquire ActiveTelco, Inc. for approximately $35 million, consisting of an
aggregate of 340,000 shares and options to purchase shares of our common stock
and acquisition related expenses consisting primarily of legal and other
professional fees. This transaction is expected to be treated as a purchase for
accounting purposes. ActiveTelco provides an Internet telephony platform that
enables Internet and telecommunications service providers to integrate and
deliver Web-based telephony applications such as unified messaging, long-
distance service, voicemail and fax delivery, call forwarding, call conferencing
and callback services.

          While we expect to derive benefits from sales of product lines
acquired through some of these acquisitions and designed, developed and marketed
as a result of these acquisitions, there can be no assurance that we will be
able to sustain or expand sales of those products or complete the development
and commercial deployment of products expected as a result of these
acquisitions.

          Through these completed and anticipated transactions, we have added
approximately 80 people to our workforce. The costs associated with personnel
including rent for additional facilities and related general and administrative
costs as well as costs associated with research and development, and sales and
marketing activities will substantially increase our operating costs when
compared to related costs expended in 1999.

          We have incurred net operating losses to date and, as of September 30,
2000, had an accumulated deficit of $62.5 million. Our ability to generate
income from operations will be primarily dependent on increases in sales volume,
reductions in manufacturing costs and the growth of high-speed data access
solutions in the service provider and MTU markets.  In view of our limited
history of product revenue from new markets, reliance on growth in deployment of
high-speed data access solutions and the unpredictability of orders and
subsequent revenue, we believe that period to period comparisons of our
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. Failure to generate

                                       11
<PAGE>

significant revenue from new products, whether due to lack of market acceptance,
competition, technological change or otherwise, or the inability to reduce
manufacturing costs, will harm our business, financial condition and results of
operations.

Results of Operations

          The following table sets forth items from our statements of operations
as a percentage of total revenue for the periods indicated:

<TABLE>
<CAPTION>
                                                Three months ended        Nine months ended
                                                  September 30,             September 30,
                                                -----------------        ------------------
                                                 2000        1999         2000         1999
                                                -----------------        ------------------
<S>                                             <C>         <C>          <C>          <C>
Total revenues                                  100.0 %     100.0 %      100.0 %      100.0 %
Total cost of goods sold                         52.7        52.5         53.6         55.4
                                                -----       -----        -----        -----
    Gross margin                                 47.3        47.5         46.4         44.6
Operating expenses:
    Sales and marketing                          19.5        32.4         23.0         43.9
    Research and development                     17.3        24.3         18.4         31.3
    General administrative                       11.8        13.4         12.2         18.1
    In-process research and development           -           -            1.2          -
    Amortization of intangibles                   8.8         -            7.7          -
    Noncash compensation expenses                 0.4         1.4          0.5          2.0
                                                -----       -----        -----        -----
      Total operating expenses                   57.8        71.5         63.1         95.3
                                                -----       -----        -----        -----
Loss from operations                            (10.5)      (24.0)       (16.7)       (50.7)
Interest expense                                  -          (1.8)        (0.7)        (2.7)
Interest income and other                         8.4         6.9          8.3          9.2
                                                -----       -----        -----        -----
Loss before income taxes                         (2.1)      (18.9)        (9.1)       (44.2)
Income tax expense                                -           -            -            -
                                                -----       -----        -----        -----
Net loss                                         (2.1)      (18.9)        (9.1)       (44.2)
Dividend accretion on preferred stock             -           -            -            1.4
                                                -----       -----        -----        -----
Net loss attributable to common stockholders     (2.1)%     (18.9)%       (9.1)%      (45.5)%
                                                =====       =====        =====        =====
</TABLE>

     Three and Nine Months Ended September 30, 2000 and 1999

          Revenue. We generate revenue primarily from the sale of products and,
to a lesser extent, through the licensing of our HomeRun technology. Our total
revenue increased to $28.6 million and $66.1 million for the three and nine
months ended September 30, 2000, respectively, from $8.3 million and $17.2
million for the three and nine months ended September 30, 1999, respectively.
The increase in 2000 was primarily due to an increase in sales of Expresso MDU
products. License and royalty revenue was $0.6 million and $1.6 million for the
three and nine months ended September 30, 2000, respectively, and $0.7 million
and $1.3 million for the three and nine months ended September 30, 1999,
respectively. There was one new license and royalty agreement signed in the
second quarter of 2000. There were no similar agreements signed in the first
and third quarters of 2000.

          Cost of Goods Sold/Gross Margin. Cost of goods sold consists of raw
materials, contract manufacturing, personnel costs, test and quality assurance
for products, and cost of licensed technology included in the products. Our cost
of goods sold increased to $15.1 million and $35.4 million for the three and
nine months ended September 30, 2000, respectively, from $4.3 million and $9.5
million for the three and nine months ended September 30, 1999, respectively.
The increase in 2000 was primarily due to increased production of our Expresso
MDU products.  Our gross margin on an absolute basis increased to $13.5 million
and $30.6 million for the three and nine months ended September 30, 2000,
respectively, from $3.9 million and $7.7 million for the three and nine months
ended September 30, 1999, respectively.  Gross margin as a percentage of revenue
was 47.3% and 46.4% of revenue for the three and nine months ended September 30,
2000, respectively, as compared to 47.5% and 44.6% of revenue for the three
months and nine months ended September 30, 1999, respectively. The increase in
gross margin as a percentage of revenue during the nine months ended
September 30, 2000 was primarily due to cost reductions related to our more
mature Expresso MDU products. The slight decrease in gross margin as a
percentage of revenue during the three

                                       12
<PAGE>

months ended September 30, 2000 was primarily due to changes in product mix of
revenues offset by cost reductions related to our more mature Expresso MDU
products during the third quarter of 2000.

          Sales and Marketing. Sales and marketing expense primarily consists of
personnel costs, including commissions and costs related to customer support,
travel, trade-shows, promotions, and outside services.  Our sales and marketing
expenses increased to $5.6 million and $15.2 million for the three and nine
months ended September 30, 2000, respectively, from $2.7 million and $7.5
million for the three and nine months ended September 30, 1999, respectively.
The increase in 2000 was primarily due to increased hiring of sales and
marketing personnel. Additional increases were related to travel, attendance at
trade shows, increases in personnel related to customer support activities and
expanded efforts in international markets.

          Research and Development. Research and development expense primarily
consists of personnel costs related to engineering and technical support,
contract consultants, outside testing services, equipment and supplies
associated with enhancing existing products and developing new products.
Research and development costs are expensed as incurred. Our research and
development expenses increased to $5.0 million and $12.2 million for the three
and nine months ended September 30, 2000, respectively, from $2.0 million and
$5.4 million for the three and nine months ended September 30, 1999,
respectively. The increase in 2000 was primarily due to further development of
the Expresso MDU products, development of HomeRun-related products, continued
development of the subscriber management system portion of the Expresso MDU
product line and development of the Company's IntelliPop platform. The research
and development expenses of PublicPort, Vintel, FreeGate, and Xstreamis were
consolidated with our expenses for the periods subsequent to the respective June
1999, November 1999, February 2000 and May 2000 acquisitions. Additionally, in
the nine months ended September 30, 2000, we amortized $1.4 million of deferred
compensation to research and development related to restricted stock granted to
certain FreeGate and OneWorld employees. At September 30, 2000, approximately
$1.0 million of deferred compensation related to the restricted stock granted to
certain FreeGate and OneWorld employees remains to be amortized and is included
as a reduction of equity in the balance sheet. We intend to recognize the
expense ratably over the remaining period in which the restrictions lapse,
currently estimated at ten and thirteen months each for FreeGate and OneWorld,
respectively. We intend to increase our investment in research and development
programs in future periods for the purpose of enhancing current products to
provide advanced Internet service applications for both domestic and
international markets, reducing the cost of current products, and developing and
acquiring new products.

          General and Administrative. General and administrative expense
primarily consists of personnel costs for administrative officers and support
personnel and legal, accounting and consulting fees. Our general and
administrative expenses increased to $3.4 million and $8.1 million for the three
and nine months ended September 30, 2000, respectively, from $1.1 million and
$3.1 million for the three and nine months ended September 30, 1999,
respectively. The increase in 2000 was primarily due to additions of
administrative personnel and increases in other costs related to our growth. We
intend to increase general and administrative expenditures and infrastructure
costs as we expand our business.

          In-Process Research and Development. Amounts expensed as in-process
research and development were $800,000 in the first quarter of 2000 and were
related to in-process research and development purchased from FreeGate. There
were no such costs in 1999. The fair value of such technology currently under
development was determined by using the income approach, which discounts
expected future cash flows to present value. The discount rates used in the
present value calculations were typically derived from a weighted average cost
of capital analysis, adjusted upward to reflect additional risks inherent in the
development life cycle. These risk factors are reflected in the discount rate
used of 30%. We expect that the pricing model for products and intellectual
property licenses related to our acquisition of FreeGate is considered
standard within the high-technology communications industry. We do 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. Our estimated cost to complete technology at the time
of acquisition was approximately $1.6 million. We have begun incorporating the
acquired technology from this acquisition into products that we expect will
begin to generate cash flows over the next six to nine months. 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 finalize development of 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.

          Regarding our purchase of FreeGate, actual results to date have been
consistent, in all material respects, with our assumptions at the time of the
acquisition as they relate to the value of purchased in-process research and
development.  The assumptions primarily consist of an expected completion date
for the in-process projects, estimated costs to complete the projects and
revenue and expense projections once the products have entered the market.
There have been no product shipments to date from acquired technologies,
therefore, it is difficult to determine the accuracy of overall revenue
projections early in the technology or product lifecycle. Failure to achieve the
expected levels of revenue and net income from these products may negatively
impact the return on investment expected at the time that the acquisition was
completed.

          Amortization of Intangibles. Amortization of intangibles consists of
the periodic amortization of intangible assets related to purchase acquisitions.
These assets consist primarily of acquired workforce, completed technology, and
goodwill and are amortized over their estimated useful lives of 3, 5, and 5
years, respectively. Amortization of intangibles was $2.5 million and $5.1
million for the three and nine months ended September 30, 2000, respectively,
related to intangible assets acquired

                                       13
<PAGE>

from Vintel, FreeGate, OneWorld and Xstreamis. There were no such costs in the
three and nine months ended September 30, 1999.

          Noncash Compensation Expense. Noncash compensation expense in the
three and nine months ended September 30, 2000 and 1999 consisted of the
recognition of expense related to certain employee stock option grants, based on
the difference between the deemed fair value of common stock and the option
exercise price at the date of grant. Our noncash compensation expense was
$114,000 and $342,000 for the three and nine months ended September 30, 2000 and
1999. We intend to recognize the remaining $630,000 in noncash compensation
expense related to employee stock options ratably over the remaining vesting
period of the related options. Such deferred expense has been recorded as a
reduction of equity in the balance sheet.

          Interest Expense. Interest expense consists of interest expense
associated with credit facilities. Our interest expense was $10,000 and $459,000
for the three and nine months ended September 30, 2000, respectively and
$152,000 and $467,000 for the three and nine months ended September 30, 1999,
respectively. The decrease in 2000 was primarily due to our paying down the
principal owed on our credit facilities.

          Interest Income and Other. Interest income and other consists of
interest income on cash balances and gains on investing activities, offset by
losses on investing activities. Our interest income and other was $2.4 million
and $5.5 million for the three and nine months ended September 30, 2000,
respectively and $571,000 and $1.6 million for the three and nine months
ended September 30, 1999, respectively. The increase in 2000 was primarily due
to interest income on higher average cash balances.

Liquidity and Capital Resources

          Since our inception, we have financed our operations primarily through
the sale of equity securities. From inception through May 1998, we sold
preferred equity securities for an aggregate of $46.2 million net of offering
costs. In January 1999, we completed our initial public offering and issued
2,875,000 shares of our common stock at a price of $18.00. We received
approximately $46.9 million in cash, net of underwriting discounts, commissions
and other offering costs. We also received approximately $6.7 million as a
result of the exercise of a warrant to purchase 666,836 shares of Series G
convertible preferred stock at a price of $10.00 per share. In March 2000, we
completed our follow-on offering and issued 2,500,000 shares of our common stock
at a price of $60.00. We received approximately $141.7 million in cash, net of
underwriting discounts, commissions and other offering costs.

          As of September 30, 2000, we had cash, cash equivalents, short-term
and long-term investments of $132.8 million compared to $32.2 million as of
December 31, 1999.

          The net increase in cash, cash equivalents and short-term and long-
term investments of $100.6 million during the nine months ended September 30,
2000 resulted primarily from net proceeds of our follow-on offering of $141.7
million and $3.8 million of cash proceeds from the issuance of common stock
related to stock options. This increase was offset by a use of cash in operating
activities of $32.2 million, the purchase of property and equipment of $8.0
million, the purchase of other assets of $4.5 million which includes the
acquisition of OneWorld assets for $2.4 million, and the payoff of borrowings
under a credit facility of $1.6 million.

          In the first quarter of 2000, we entered into a lease for
administrative and engineering facilities. Under the terms of the lease, we were
required to issue a letter of credit in the amount of $1.8 million. The letter
of credit is collateralized by restricted funds in the amount of $3.0 million,
which are included in long-term investments as of September 30, 2000. The letter
of credit is reduced annually by $250,000 provided we are not in default under
the terms of the lease agreement.

          For future periods, we generally anticipate significant increases in
working capital on a period to period basis primarily as a result of planned
increased product sales and higher relative levels of inventory. We will also
continue to expend significant amounts on property and equipment related to the
expansion of systems infrastructure and office equipment to support our growth.
We also expect to continue to expend significant amounts on lab and test
equipment to support on-going research and development efforts.

          We believe that our cash, cash equivalents and short-term and long-
term investment balances will be sufficient to satisfy our cash requirements for
at least the next 12 months.

          During the three and nine months ended September 30, 2000 and 1999, we
incurred non-cash expenses related to dividend accretion and purchase
acquisitions, including amortization of intangibles and write-off of in-process
research and development. The table below sets forth, for the periods presented,
supplemental information concerning our operating results which excludes these
non-cash charges. We believe that the exclusion of these non-cash items from net
income is a widely accepted indicator of our historical financial performance.
The accompanying supplemental financial information is presented for
informational purposes only and should not be considered as a substitute for the
historical financial information presented in accordance with generally accepted
accounting principles. This measure of profitability as defined herein may not
be comparable to similarly titled measures reported by other companies. The
Statements of Operations data has been derived from interim unaudited financial
statements.

                                       14
<PAGE>

<TABLE>
<CAPTION>
                                                                           Three months ended       Nine months ended
                                                                              September 30,           September 30,
                                                                          --------------------    --------------------
                                                                            2000        1999        2000        1999
                                                                          --------    --------    --------    --------
<S>                                                                       <C>         <C>         <C>         <C>
Computation of alternative measure of net income (loss) per share:
   Net loss attributable to common stockholders                           $   (611)   $ (1,566)   $ (6,027)   $ (7,810)
   Adjustments for certain noncash expenses related to
     purchase and acquisition and dividend accretion:
     Amortization of intangibles                                             2,528           -       5,088           -
     In-process research and development                                         -           -         800           -
     Dividend accretion of preferred stock                                       -           -           -         235
                                                                          --------    --------    --------    --------
   Net income (loss) under alternative measure                            $  1,917    $ (1,566)   $   (139)   $ (7,575)
                                                                          ========    ========    ========    ========

   Net income (loss) per share under alternative measure                  $   0.11    $  (0.13)   $  (0.01)   $  (0.68)
                                                                          ========    ========    ========    ========

Shares used in computing alternative measure net income
   (loss) per share, basic and diluted (1)                                  17,346      11,670      14,519      11,152
                                                                          ========    ========    ========    ========
(1)   Calculation of alternative measure shares, basic and diluted:
Shares used in computing net loss per share attributable to
   common stockholders, basic and diluted                                   15,751      11,670      13,869      10,360

Adjustment to reflect the assumed conversion of preferred stock                  -           -           -         792
                                                                          --------    --------    --------    --------
Shares used in computing alternative measure net income (loss)
   per share, basic                                                         15,751      11,670      14,519      11,152
                                                                          --------    --------    --------    --------

Adjustment to reflect dilutive shares for alternative measure
   net income                                                                1,595           -           -           -
                                                                          --------    --------    --------    --------

Shares used in computing alternative measure net income (loss)
   per share, diluted                                                       17,346      11,670      14,519      11,152
                                                                          ========    ========    ========    ========
</TABLE>

Year 2000 Compliance

     We have addressed computer networks year 2000 compliance in our systems,
accounting software, computer hardware and existing products, and have
communicated with our significant third party vendors with respect to their
respective states of readiness. In order to assess year 2000 compliance of our
products and systems, we identified those systems critical to our operations and
the operations of our technologies and, based upon tests to such products and
systems, believed that all of our systems and technologies, to the extent
developed, were materially compliant. We expended approximately $70,000 to
assess and address the year 2000 problem. Although it is now past January 1,
2000, and we have not experienced any adverse impact from the transition to the
Year 2000, we cannot assure you that we or our suppliers and customers have not
been affected in a manner that is not yet apparent. In addition, some computer
programs that were date sensitive to the Year 2000 may not have been programmed
to process the Year 2000 as a leap year, and any negative consequential effects
remain unknown. As a result, we will continue to monitor our Year 2000
compliance and the Year 2000 compliance of our suppliers and customers.

Impact of Recently Issued Accounting Standards

          In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. To date, we have not engaged in derivative and hedging
activities, and accordingly does not believe that the adoption of SFAS No. 133
will have a material impact on our financial reporting and related disclosures.
We will adopt SFAS No. 133 (as amended by SFAS No. 138) as required by SFAS No.
137, "Deferral of the Effective Date of the FASB Statement No. 133," for fiscal
2001.

                                       15
<PAGE>

          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
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Our management
believes that the impact of SAB 101 will not have a material effect on our
financial position or results of operations.

Risk Factors

          YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH
ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE MAKING AN
INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE
ONLY ONES FACING US. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO
US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS.
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS "FORWARD-LOOKING" STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH BELOW AND ELSEWHERE IN THIS QUARTERLY REPORT
ON FORM 10-Q.

We have a history of losses and expect future losses.

          We have incurred substantial net losses and experienced negative cash
flow each quarter since our inception. We incurred net losses attributable to
common stockholders of $6.0 million for the nine months ended September 30, 2000
and $7.8 million for the nine months ended September 30, 1999. As of September
30, 2000, we had an accumulated deficit of $62.5 million. We expect that we will
continue to incur losses in 2000. We may incur losses in future periods as well.

To achieve or sustain profitability, we must increase sales of our Expresso
products, reduce manufacturing costs and successfully introduce enhanced
versions of our existing and new products.

          We may never achieve or sustain profitability. We have spent
substantial amounts of money on the development of our Expresso products,
HomeRun technology and software products. We intend to continue increasing
certain of our operating expenditures, including our sales and marketing,
research and development and general and administrative expenditures. We cannot
assure you that we will generate a sufficient level of revenue to offset these
expenditures, or that we will be able to adjust spending in a timely manner to
respond to any unanticipated decline in revenue due to the fact that our
expenditures for sales and marketing, research and development, and general
administrative functions are, in the short term, relatively fixed. Our ability
to increase revenue or achieve profitability in the future will primarily depend
on our ability to increase sales of our Expresso products, reduce manufacturing
costs and successfully introduce and sell enhanced versions of our existing
products and new products.

A number of factors could cause our quarterly and annual financial results to be
worse than expected, which could result in a decline in our stock price.

          Our annual and quarterly operating results have fluctuated in the past
and may fluctuate significantly in the future as a result of numerous factors,
some of which are outside of our control. These factors include:

          .    market acceptance of our products;

          .    competitive pressures, including pricing pressures from our
               partners and competitors;

          .    the timing or cancellation of orders from, or shipments to,
               existing and new customers;

          .    the timing of new product and service introductions by us, our
               customers, our partners or our competitors;

          .    variations in our sales or distribution channels;

          .    variations in the mix of products offered by us;

          .    changes in the pricing policies of our suppliers;

          .    the availability and cost of key components; and

                                       16
<PAGE>

          .    the timing of personnel hiring.

          We may also experience substantial period to period fluctuations in
future operating results and declines in gross margin as a result of the erosion
of average selling prices for high-speed data access products and services due
to a number of factors, including competition and rapid technological change. We
anticipate that average selling prices for our products will decrease over time
due to competitive pressures and volume pricing agreements. Decreasing average
selling prices could cause us to experience decreased revenue despite an
increase in the number of units sold. We cannot assure you that we will be able
to sustain our gross margins in the future, improve our gross margins by
offering new products or increased product functionality, or offset future price
declines with cost reductions.

          As a result of these and other factors, it is possible that in some
future period our operating results will be below the expectations of securities
analysts and investors. In that event, the trading price of our common stock
would likely decline.

Changes in capital markets may negatively impact our business.

          Due to recent changes in the capital markets including increased
volatility in equity markets and tightening of lending in the credit markets, we
believe that our accounts receivable are exposed to a greater risk that
customers will alter their payment practices to conserve capital. These changes
may lead to increases in outstanding receivables, longer payback periods and
increased risk of default. We also believe that certain of our customers will
alter their deployment plans to meet the constraints imposed by changes in the
capital markets. If we are not able to increase sales to other customer segments
and/or sales are otherwise delayed, we may experience volatility in expected
sales growth patterns which would increase the risk of declining sales growth in
any particular quarter.

Difficulties in forecasting product sales could negatively impact our business.

          We base our expense levels in part upon our expectations concerning
future revenue and these expense levels are relatively fixed in the short-term.
Orders for our products, however, may vary from quarter to quarter. In some
circumstances, customers may delay purchasing our current products in favor of
next-generation products. In addition, our new products are generally subject to
technical evaluations that typically last 60 to 90 days. If orders forecasted
for a specific customer for a particular quarter do not occur in that quarter,
our revenue for that quarter would be reduced. If we have lower revenue in a
quarter than expected, we may not be able to reduce our spending in the short-
term in response to this shortfall and reduced revenue would have a direct
impact on our results of operations for that quarter. Further, we purchase
components and contract manufacture our products based on forecasts of sales. If
orders for products exceed our forecasts, we may have difficulty meeting
customers orders in a timely manner, which could damage our reputation or result
in lost sales.

A majority of our sales comes from a small number of customers; if we lose any
of these customers, our sales could decline significantly.

          The majority of our annual sales come from a small number of our
customers. Our 10 largest customers accounted for 78% of net sales for the nine
months ended September 30, 2000 and 62% of net sales in 1999. Because we are
dependent upon continued revenue from our 10 largest customers, any material
delay, cancellation or reduction of orders from these or other major customers
could cause our sales to decline significantly. Trigem Infocomm, Inc., Reflex
Communications, Inc. and Darwin Networks, Inc. accounted for 19%, 13% and 12%,
respectively, of our net sales for the nine months ended September 30, 2000.
Rycom CCI, Inc. accounted for more than 10%, respectively, of our annual net
sales in 1999. There is no guarantee that we will be able to retain any of our
10 largest customers or any other accounts. In addition, our customers may
materially reduce the levels of services ordered from us at any time. This could
cause a significant decline in our net sales and we may not be able to reduce
the accompanying expenses at the same time.

We depend on contract manufacturers to manufacture all of our products and rely
upon them to deliver high-quality products in a timely manner.

          We do not manufacture any of our products, but instead rely on
contract manufacturers to assemble, test and package our products. We cannot
assure you that these contract manufacturers and suppliers will be able to meet
our future requirements for manufactured products, components and subassemblies.
Any interruption in the operations of one or more of these contract
manufacturers would harm our ability to meet our scheduled product deliveries to
customers. We also intend to regularly introduce new products and product
enhancements, which will require that we rapidly achieve volume production by
coordinating our efforts with those of our suppliers and contract manufacturers.
The inability of our contract manufacturers to provide us with adequate supplies
of high-quality products or the loss of a current contract manufacturer would
cause a delay in our ability to fulfill customer orders while we obtain a
replacement manufacturer and would harm our business, operating results and
financial condition. In addition, our inability to accurately forecast the
actual demand for our products could result in supply, manufacturing or testing
capacity constraints. These constraints could result in delays in the delivery
of our products or the loss of existing or potential customers, either of which
could harm our business, operating results or financial condition.

          We currently purchase all of our raw materials and components used in
our products through our contract manufacturers. Components are purchased
pursuant to purchase orders based on forecasts, but neither we nor our contract
manufacturers have any guaranteed supply arrangements with these suppliers. The
availability of many of these components is dependent in part on our ability to
provide our contract manufacturers and their suppliers with accurate forecasts
of our future needs. If we or our manufacturers were unable to obtain a
sufficient supply of components from current sources, we could

                                       17
<PAGE>

experience difficulties in obtaining alternative sources or in altering product
designs to use alternative components. For example, we are experiencing, and may
continue experiencing in the future, difficulty obtaining flash memory.
Resulting delays and reductions in product shipments could damage customer
relationships and could harm our business, financial condition or results of
operations. In addition, any increases in component costs that are passed on to
our customers could reduce demand for our products.

We rely on third parties to test all of our products and a failure to adequately
control quality could harm our business.

          Substantially all of our products are assembled and tested by our
contract manufacturers. Although we perform random spot testing on manufactured
products, we rely on our contract manufacturers for assembly and primary testing
of our products. Any quality assurance problems could increase the costs of
manufacturing, assembling or testing our products and could harm our business,
financial condition and results of operation. Moreover, defects in products that
are not discovered in the quality assurance process could damage customer
relationships and result in product returns or liability claims, each of which
could harm our business, financial condition and results of operations.

We purchase several key components from single or limited sources and could lose
sales if these sources fail to fill our needs.

          We currently purchase all of the raw materials and components used in
our products through our contract manufacturers. In procuring components, our
contract manufacturers rely on some suppliers that are the sole source of those
components, and we are dependent upon supply from these sources to meet our
needs. For example, all of the field programmable gate array supplies used in
our products are purchased from Xilinx. Our products are also dependent on
various sole source offerings from Dallas Semiconductor, Intel, Metalink US,
Motorola, Oki Semiconductor, Osicom Technologies, SaRonix, Siemens and Wind
River Systems. If there is any interruption in the supply of any of the key
components currently obtained from a single or limited source, obtaining these
components from other sources could take a substantial period of time which
could cause us to redesign our products or could disrupt our operations and harm
our business in any given period.

Our market is subject to rapid technological change and if we do not address
these changes, our products will become obsolete, harming our business and
ability to compete.

          The markets for high-speed data access products are characterized by
rapid technological developments, frequent enhancements to existing products and
new product introductions, changes in end user requirements and evolving
industry standards. In addition, the market for high-speed data access products
is dependent in large part on the increased use of the Internet. Issues
concerning the use of the Internet, including security, lost or delayed packets,
and quality of service, may negatively affect the development of the market for
our products. We cannot assure you that we will be able to respond quickly and
effectively to technological change. If we do not address these technological
changes and challenges by regularly introducing new products, our product line
will become obsolete, which would harm our business, financial condition and
results of operations.

Our success depends on our ability to continually introduce new products that
achieve broad market acceptance.

          We must also continually improve the performance, features and
reliability of our products, particularly in response to competitive product
offerings. To remain competitive we need to introduce products in a timely
manner that incorporate or are compatible with these new technologies as they
emerge. We may have only a limited amount of time to penetrate certain markets
and we cannot assure you that we will be successful in achieving widespread
acceptance of our products before competitors offer products and services
similar or superior to our products. Any delay in product introduction could
adversely affect our ability to compete and cause our operating results to be
below our expectations or the expectations of public market analysts or
investors. In addition, when we announce new products or product enhancements
that have the potential to replace or shorten the life cycle of our existing
products, customers may defer purchasing our existing products.

          These actions could harm our operating results by unexpectedly
decreasing sales, increasing our inventory levels of older products and exposing
us to greater risk of product obsolescence.

Our success depends on continued market acceptance of our Expresso products.

          We must devote a substantial amount of human and capital resources in
order to maintain commercial acceptance of our Expresso products and to expand
offerings of the Expresso product line in the MDU and MCU markets and to further
penetrate these markets. Historically, the majority of our Expresso products
have been sold into the MDU market. Our future success depends on the ability to
continue to penetrate this market and to expand our penetration into the MCU
market. Our

                                       18
<PAGE>

success also depends on our ability to educate existing and potential customers
and end users about the benefits of our Fast Copper technology, including
HomeRun and LongRun, and about the development of new products to meet changing
and expanding demands of service providers, MTU owners and corporate customers.
The continued success of our Expresso products will also depend on the ability
of our service provider customers to market and sell high-speed data services to
end users. We cannot assure you that our Expresso products will achieve or
maintain broad commercial acceptance within the MDU market, MCU market, or in
any other market we enter.

The market in which we operate is highly competitive and we may not be able to
compete effectively.

          The market for multi-service broadband access systems is intensely
competitive and we expect that this market will become increasingly competitive
in the future. Our most immediate competitors include 3Com, Cisco, Copper
Mountain, Elastic Networks, Paradyne and a number of other public and private
companies.  Many of these competitors are offering or may offer technologies and
services that directly compete with some or all of our high-speed access
products and related software products. In addition, the market in which we
compete is characterized by increasing consolidation, and we cannot predict with
certainty how industry consolidation will affect us or our competitors.

          Many of our competitors and potential competitors have substantially
greater name recognition and technical, financial and marketing resources than
we do and we can give you no assurance that we will be able to compete
effectively in our target markets. These competitors may be able to undertake
more extensive marketing campaigns, adopt more aggressive pricing policies and
devote substantially more resources to developing new products than we can. In
addition, our HomeRun licensees may sell products based on our HomeRun
technology to our competitors or potential competitors. This licensing may cause
an erosion in the potential market for our products. We cannot assure you that
we will have the financial resources, technical expertise or marketing,
manufacturing, distribution and support capabilities to compete successfully.
This competition could result in price reductions, reduced profit margins and
loss of market share, which could harm our business, financial condition and
results of operations.

Our copper-wire based solutions face severe competition from other technologies
and the commercial acceptance of any competing solutions could harm our business
and ability to compete.

          The market for high-speed data access products and services is
characterized by several competing technologies, including fiber optic cables,
coaxial cables, satellites and other wireless facilities. These competing
solutions provide fast access, high reliability and are cost-effective for some
users.  Because many of our products are based on the use of copper telephone
wire, and because there are physical limits to the speed and distance over which
data can be transmitted over this wire, our products may not be a viable
solution for customers requiring service at performance levels beyond the
current limits of copper telephone wire. To the extent that telecommunications
service providers choose to install fiber optic cable or other transmission
media in the last mile, or to the extent that homes and businesses install other
transmission media within buildings, we expect that demand for our products that
are based on copper telephone wires will decline. Commercial acceptance of any
one of these competing solutions or any technological advancement or product
introduction that provides faster access, greater reliability, increased cost-
effectiveness or other advantages over technologies that utilize existing
telephone copper wires could decrease the demand for our products and reduce
average selling prices and gross margins associated with our products. The
occurrence of any one or more of these events could harm our business, financial
condition and results of operations.

Manufacturing or design defects in our products could harm our reputation and
business.

          Any defect or deficiency in our products could reduce the
functionality, effectiveness or marketability of our products. These defects or
deficiencies could cause orders for our products to be canceled or delayed,
reduce revenue, or render our product designs obsolete. In that event, we would
be required to devote substantial financial and other resources for a
significant period of time in order to develop new product designs. We cannot
assure you that we would be successful in addressing any manufacturing or design
defects in our products or in developing new product designs in a timely manner,
if at all. Any of these events, individually or in the aggregate, could harm our
business, financial condition and results of operations.

We must maintain and develop strategic partnerships with third parties to
increase market penetration of our HomeRun technology.

          We have established relationships with several strategic partners,
including our collaborative arrangement through the Home Phoneline Network
Alliance, or the Home PNA, with leading semiconductor, computer hardware and
consumer electronics manufacturers. We have also licensed our HomeRun technology
to members of the Home PNA and others. In this regard, the widespread market
acceptance of our HomeRun technology for home networking applications is
dependent on the

                                       19
<PAGE>

development and marketing of HomeRun-enabled integrated circuits and consumer
products by our licensees and their customers. We cannot assure you that our
HomeRun technology will continue to be deployed on a widespread basis and future
sales of products containing our HomeRun technology cannot be predicted. The
amount and timing of resources that our licensees devote to developing and
marketing HomeRun-enabled products is not within our control. We cannot assure
you that these licensees will continue to develop and market products as
expected or that significant license and royalty revenue will be forthcoming in
the future. If any of our licensees fails to commercialize or market products
incorporating HomeRun technology, our revenue may not grow as expected and we
may be required to undertake unforeseen additional responsibilities or to devote
additional resources to development, commercialization or marketing of HomeRun,
all of which could harm our business, financial condition and results of
operations.

Changing industry standards may reduce the demand for our products, which will
harm our business.

          We will not be competitive unless we continually introduce new
products and product enhancements that address changing industry standards. The
emergence of new industry standards, whether through adoption by official
standards committees or widespread use by telephone companies or other service
providers, could require redesign of our products. If these standards become
widespread and our products are not in compliance, our customers and potential
customers may not purchase our products, which would harm our business,
financial condition and results of operations. The rapid development of new
standards increases the risk that competitors could develop products that make
our products obsolete. Any failure by us to develop and introduce new products
or enhancements directed at new industry standards could harm our business,
financial condition and results of operations. In addition, selection of
competing technologies as standards by standards setting bodies such as the Home
PNA could negatively affect our reputation in the market regardless of whether
our products are standard compliant or demand for our products does not decline.
This selection could be interpreted by the press and others as having a negative
impact on our business which could negatively impact the market price of our
stock.

We may not be able to effectively integrate our recent acquisitions into our
existing business.

          In June 1999, we acquired PublicPort, Inc., in November 1999, we
acquired Vintel Communications, Inc., and in February 2000, we acquired FreeGate
Corporation. In addition, in April 2000, we acquired certain assets of OneWorld
Systems, Inc., and in May 2000 we acquired Xstreamis, plc, a United Kingdom
based holding company. In August 2000, we announced a non-binding letter of
intent to acquire ActiveTelco, Inc. We will need to overcome significant issues
in order to realize any benefits from these transactions. These issues include:

          .    integrating the operations of the geographically dispersed
               businesses acquired into our own operations;

          .    incorporating acquired technology, rights and products into our
               products and services;

          .    developing new products and services that utilize the assets of
               all entities;

          .    the potential disruption of our ongoing business and the
               distraction of our management; and

          .    the potential impairment of relationships with employees,
               suppliers and customers.

We may engage in future acquisitions of companies, technologies or products and
the failure to integrate any future acquisitions could harm our business.

          As a part of our business strategy, we expect to make additional
acquisitions of, or significant investments in, complementary companies,
products or technologies. Any future acquisitions would be accompanied by the
risks commonly encountered in acquisitions of companies. These risks include:

          .    difficulties in assimilating the operations and personnel of the
               acquired companies;

          .    diversion of management's attention from ongoing business
               concerns;

          .    the potential inability to maximize our financial and strategic
               position through the successful incorporation of acquired
               technology and rights into our products and services;

          .    additional expense associated with amortization of acquired
               intangible assets;

          .    maintenance of uniform standards, controls, procedures and
               policies; and


                                       20
<PAGE>

          .    impairment of existing relationships with employees, suppliers
               and customers as a result of the integration of new personnel.

          We cannot assure you that we will be able to successfully integrate
any business, products, technologies or personnel that we may acquire in the
future, and our failure to do so could harm our business, operating results and
financial condition.

If we fail to manage our growth effectively, our business could be harmed.

          Our growth has placed, and in the future may continue to place, a
significant strain on our engineering, managerial, administrative, operational,
financial and marketing resources and increased demands on our systems and
controls. To exploit the market for our products, we must develop new and
enhanced products while managing anticipated growth in sales by implementing
effective planning and operating processes. To manage our anticipated growth, we
must, among other things, continue to implement and improve our operational,
financial and management information systems, hire and train additional
qualified personnel, continue to expand and upgrade core technologies and
effectively manage multiple relationships with various customers, suppliers and
other third parties. We cannot assure you that our systems, procedures or
controls will be adequate to support our operations or that our management will
be able to achieve the rapid execution necessary to exploit fully the market for
our products or systems. If we are unable to manage our growth effectively, our
business, financial condition and results of operations could be harmed.

We depend on international sales for a significant portion of our revenue, which
could subject our business to a number of risks.

          Sales to customers outside of the United States accounted for
approximately 39.6% and 33.0% of revenue for the nine months ended September 30,
2000 and 1999, respectively and for approximately 21.1% and 49.5% of revenue for
the three months ended September 30, 2000 and 1999, respectively. There are a
number of risks arising from our international business, including:

          .    longer receivables collection periods;

          .    increased exposure to bad debt write-offs;

          .    risk of political and economic instability;

          .    difficulties in enforcing agreements through foreign legal
               systems;

          .    unexpected changes in regulatory requirements;

          .    import or export licensing requirements;

          .    reduced protection for intellectual property rights in some
               countries; and

          .    currency fluctuations.

          We expect sales to customers outside of the United States to continue
to account for a significant portion of our revenue. However, we can give you no
assurance that foreign markets for our products will not develop more slowly
than currently anticipated. Any failure to increase sales to customers outside
of the United States could harm our business, financial condition and results of
operations.

          We also expend product development and other resources in order to
meet regulatory and technical requirements of foreign countries. We are
depending on sales of our products in these foreign markets in order to recoup
the costs associated with developing products for these markets.

Fluctuations in currency exchange rates may harm our business.

          All of our foreign sales are invoiced in U.S. dollars. As a result,
fluctuations in currency exchange rates could cause our products to become
relatively more expensive for international customers and reduce demand for our
products. We anticipate that foreign sales will generally continue to be
invoiced in U.S. dollars. Accordingly, we do not currently engage in foreign
currency hedging transactions. As we expand our current international
operations, however, we may allow payment in foreign currencies and exposure to
losses in foreign currency transactions may increase. To reduce this exposure,
we may purchase forward foreign exchange contracts or use other hedging
strategies. However, we cannot assure you that any currency hedging strategy
would be successful in avoiding exchange related losses.

                                       21
<PAGE>

If we fail to protect our intellectual property, or if others use our
proprietary technology without authorization, our competitive position may
suffer.

          Our future success and ability to compete is dependent in part upon
our proprietary technology. We rely on a combination of copyright, patent,
trademark and trade secrets laws and nondisclosure agreements to establish and
protect our proprietary technology. We currently hold 20 United States patents
and have 18 United States patent applications pending. However, we cannot assure
you that patents will be issued with respect to pending or future patent
applications or that our patents will be upheld as valid or will prevent the
development of competitive products or that any actions we have taken will
adequately protect our intellectual property rights.

          We generally enter into confidentiality agreements with our employees,
consultants, resellers, customers and potential customers, strictly limit access
to and distribution of our software, and further limit the disclosure and use of
other of our proprietary information. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise obtain
or use our products or technology. We also cannot assure you that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States.

We may be subject to intellectual property infringement claims that are costly
to defend and could harm our business and ability to compete.

          We are also subject to the risk of adverse claims and litigation
alleging infringement of the intellectual property rights of others. We cannot
assure you that third parties will not assert infringement claims in the future
with respect to our current or future products. Any such assertion, regardless
of its merit, could require us to pay damages or settlement amounts and could
require us to develop non-infringing technology or acquire licenses to the
technology that is the subject of asserted infringement. This litigation or
potential litigation could result in product delays, increased costs or both. In
addition, the cost of any litigation and the resulting distraction of our
management resources could harm our business, results of operations or financial
condition. We also cannot assure you that any licenses of technology necessary
for our business will be available or that, if available, these licenses can be
obtained on commercially reasonable terms. Our failure to obtain these licenses
could harm our business, results of operations and financial condition.

If our products do not comply with complex government regulations, our products
may not be sold, preventing us from increasing our revenue or achieving
profitability.

          We and our customers are subject to varying degrees of federal, state
and local regulation. Our products must comply with various regulations and
standards defined by the Federal Communications Commission. The FCC has issued
regulations that set installation and equipment standards for communications
systems. Our products are also required to meet certain safety requirements. For
example, certain of our products must be certified by Underwriters Laboratories
in order to meet federal safety requirements relating to electrical appliances
to be used inside the home. In addition, certain products must be Network
Equipment Building Standard certified before they may be deployed by certain of
our customers. Any delay in or failure to obtain these approvals could harm our
business, financial condition or results of operations. Outside of the United
States, our products are subject to the regulatory requirements of each country
in which our products are manufactured or sold. These requirements are likely to
vary widely. If we do not obtain timely domestic or foreign regulatory approvals
or certificates we would not be able to sell our products where these
regulations apply, which may prevent us from sustaining our revenue or achieving
profitability.

          In addition, regulation of our customers may adversely impact our
business, operating results and financial condition. For example, FCC regulatory
policies affecting the availability of data and Internet services and other
terms on which telecommunications companies conduct their business may impede
our penetration of certain markets. In addition, the increasing demand for
communications systems has exerted pressure on regulatory bodies worldwide to
adopt new standards, generally following extensive investigation of competing
technologies. The delays inherent in this governmental approval process may
cause the cancellation, postponement or rescheduling of the installation of
communications systems by our customers, which in turn may harm the sale of
products by us to these customers.

Our success is dependent on our ability to provide adequate customer support.

          Our ability to achieve our planned sales growth and retain current and
future customers will depend in part upon the quality of our customer support
operations. Our customers generally require significant support and training
with respect to our products, particularly in the initial deployment and
implementation stage. As our systems and products become more complex,

                                       22
<PAGE>

we believe our ability to provide adequate customer support will be increasingly
important to our success. We have limited experience with widespread deployment
of our products to a diverse customer base, and we cannot assure you that we
will have adequate personnel to provide the levels of support that our customers
may require during initial product deployment or on an ongoing basis. In
addition, we rely on a third party for a substantial portion of our customer
support functions. Our failure to provide sufficient support to our customers
could delay or prevent the successful deployment of our products. Failure to
provide adequate support could also have an adverse impact on our reputation and
relationship with our customers, could prevent us from gaining new customers and
could harm our business, financial condition or results of operations.

If we lose key personnel or are unable to hire additional qualified personnel as
necessary, we may not be able to successfully manage our business.

          We depend on the performance of Matthew Taylor, our Chief Technical
Officer, and Salvatore D'Auria, our President, Chief Executive Officer and
Chairman of the Board, and on other senior management and technical personnel
with experience in the data communications, telecommunications and high-speed
data access industries. The loss of any one of them could harm our ability to
execute our business strategy. Additionally, we do not have employment contracts
with the majority of our executive officers and we only maintain a "key person"
life insurance policy on Matthew Taylor. We believe that our future success will
depend in large part upon our continued ability to identify, hire, retain and
motivate highly skilled employees, who are in great demand. We cannot assure you
that we will be able to do so.

We or our suppliers and customers may have been adversely affected by the
transition to the Year 2000 in a manner that is not yet apparent.

          Although it is now past January 1, 2000 and February 29, 2000 and we
have not experienced any adverse impact from the transition to the Year 2000, we
cannot assure you that we or our suppliers and customers have not been affected
in a manner that is not yet apparent. As a result, we will continue to monitor
our Year 2000 compliance and the Year 2000 compliance of our suppliers and
customers.

Our stock price has fluctuated and is likely to continue to fluctuate, and you
may not be able to resell your shares at or above the offering price.

          The trading price of our common stock has been and is likely to
continue to be highly volatile. Our stock price could fluctuate widely in
response to factors such as the following:

          .    actual or anticipated variations in operating results;

          .    announcements of technological innovations, new products or new
               services by us or by our partners, competitors or customers;

          .    changes in financial estimates or recommendations by stock market
               analysts regarding us or our competitors;

          .    conditions or trends in the telecommunications industry,
               including regulatory developments;

          .    growth of the Internet;

          .    announcements by us of significant acquisitions, strategic
               partnerships, joint ventures or capital commitments;

          .    additions or departures of key personnel;

          .    future equity or debt offerings or our announcements of these
               offerings; and

          .    general market and general economic conditions.

          In addition, in recent years, the stock market in general, and the
Nasdaq National Market and the securities of Internet and technology companies
in particular, have experienced extreme price and volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating
performance of these technology companies. These market and industry factors may
harm our stock price, regardless of our operating results. In addition, trading
prices of the stocks of many technology companies are at or near historic highs
and reflect price-earnings ratios substantially above historic levels. These
trading prices and price-earnings ratios may not be sustained.

                                       23
<PAGE>

Our charter, bylaws, retention and change of control plans and Delaware law
contain provisions that could delay or prevent a change in control.

          Certain provisions of our charter and bylaws and our retention and
change of control plans (the "Plans") may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of us. The provisions of the charter and bylaws
and the Plans could limit the price that certain investors may be willing to pay
in the future for shares of our common stock. Our charter and bylaws provide for
a classified board of directors, eliminate cumulative voting in the election of
directors, restrict our stockholders from acting by written consent and calling
special meetings, and provide for procedures for advance notification of
stockholder nominations and proposals. In addition, our board of directors has
the authority to issue up to 5,000,000 shares of preferred stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The issuance of preferred stock, while providing flexibility in
connection with possible financings or acquisitions or other corporate purposes,
could have the effect of making it more difficult for a third party to acquire a
majority of our outstanding voting stock. The Plans provide for severance
payments and accelerated option vesting in the event of termination of
employment following a change of control. The provisions of the charter and
bylaws, and the Plans, as well as Section 203 of the Delaware General
Corporation Law, to which we are subject, could discourage potential acquisition
proposals, delay or prevent a change of control and prevent changes in our
management.

Future sales of our common stock could depress our stock price.

          Sales of a substantial number of shares of our common stock in the
public market, or the appearance that these shares are available for sale, could
harm the market price of our common stock. These sales also may make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that we deem appropriate. As of September 30, 2000,
we had 15,866,917 shares outstanding. Of these shares, 15,284,141 shares of
common stock are currently available for sale in the public market, some of
which are subject to volume and other limitations under securities laws.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          Our exposure to market risk for changes in interest rates relate
primarily to our investment portfolio. We place our investments with high credit
issuers almost entirely in short-term securities with maturities of three to
twelve months. Our portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity. We have no
investments denominated in foreign country currencies and therefore are not
subject to this type of foreign exchange risk.

                          Part II  OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

          None

Item 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

          None

Item 3.  DEFAULTS UPON SENIOR SECURITIES

          None

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          None

Item 5.  OTHER INFORMATION

          None

                                       24
<PAGE>

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits

          2.1       Agreement and Plan of Reorganization dated as of October 15,
                    1999, by and among Tut Systems, Inc., Vintel Acquisition
                    Corp., and Vintel Communications, Inc. (3)
          2.2       Agreement and Plan of Reorganization dated as of June 8,
                    1999, by and among Tut Systems, Inc. Public Port Acquisition
                    Corporation, and Public Port, Inc. (2)
          2.3       Agreement and Plan of Reorganization dated as of November
                    16, 1999, by and among Tut Systems, Inc., Fortress
                    Acquisition Corporation and FreeGate Corporation. (4)
          2.4       Asset Purchase Agreement by and between Tut Systems, Inc.
                    and OneWorld Systems, Inc. dated as of February 3, 2000. (5)
          2.5       Amendment No. 1 to Asset Purchase Agreement by and between
                    Tut Systems, Inc. and One World Systems, Inc. dated as of
                    February 17, 2000. (5)
          2.6       Agreement for the sale and purchase of the entire issued
                    share capital of Xstreamis, plc, by and among Tut Systems,
                    Inc. the shareholders of Xstreamis, plc, and Philip
                    Corbishley. (6)
          3.1       Restated Certificate of Incorporation of Registrant, as
                    currently in effect. (1)
          3.2       Second Amended and Restated Certificate of Incorporation of
                    Registrant. (1)

          3.3       Bylaws of Registrant. (1)
          4.1       Specimen Common Stock Certificate. (1)
          27.1      Financial Data Schedule.
                    --------
(1)  Incorporated by reference to our Registration Statement on Form S-1 (File
     No. 333-60419) as declared effective by the Securities and Exchange
     Commission on January 28, 1999.
(2)  Incorporated by reference to our Quarterly Report on Form 10-Q for the
     quarter ended June 30, 1999.
(3)  Incorporated by reference to our Quarterly Report on Form 10-Q for the
     quarter ended September 30, 1999.
(4)  Incorporated by reference to our Current Report on Form 8-K dated February
     14, 2000.
(5)  Incorporated by reference to our Annual Report on Form 10-K dated February
     23, 2000.
(6)  Incorporated by reference to our Current Report on Form 8-K dated June 9,
     2000.

     (b)  Reports on Form 8-K.

          The Company filed the following Current Reports on Forms 8-K during
          the quarter ended September 30, 2000:

               Amendment No. 1 to Current Report on 8-K/A dated August 8, 2000,
               to amend the Current Report filed on June 9, 2000, which included
               information related to the Company's acquisition of Xstreamis,
               plc on May 26, 2000.  The Company indicated in such report that
               it would file certain financial statements by amendment, as
               permitted under Item 7 of Form 8-K. The purpose of this amendment
               was to include such financial statements.

                                       25
<PAGE>

                                   SIGNATURE

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

                              TUT SYSTEMS, INC.
Date: November 14, 2000
                              /s/ NELSON CALDWELL
                              --------------------------------------------------
                              Nelson Caldwell
                              Vice President, Finance and Chief
                              Financial Officer (Principal Financial
                              and Accounting Officer and Duly
                              Authorized Officer)

                                       26
<PAGE>

                                 EXHIBIT INDEX
                                 -------------

Exhibit
Number

2.1       Agreement and Plan of Reorganization dated as of October 15, 1999, by
          and among Tut Systems, Inc., Vintel Acquisition Corp., and Vintel
          Communications, Inc. (3)
2.2       Agreement and Plan of Reorganization dated as of June 8, 1999, by and
          among Tut Systems, Inc. Public Port Acquisition Corporation, and
          Public Port, Inc. (2)
2.3       Agreement and Plan of Reorganization dated as of November 16, 1999, by
          and among Tut Systems, Inc., Fortress Acquisition Corporation and
          FreeGate Corporation. (4)
2.4       Asset Purchase Agreement by and between Tut Systems, Inc. and OneWorld
          Systems, Inc. dated as of February 3, 2000. (5)
2.5       Amendment No. 1 to Asset Purchase Agreement by and between Tut
          Systems, Inc. and One World Systems, Inc. dated as of February 17,
          2000. (5)
2.6       Agreement for the sale and purchase of the entire issued share capital
          of Xstreamis, plc, by and among Tut Systems, Inc. the shareholders of
          Xstreamis, plc, and Philip Corbishley. (6)
9.1       Restated Certificate of Incorporation of Registrant, as currently in
          effect. (1)
9.2       Second Amended and Restated Certificate of Incorporation of
          Registrant. (1)
9.3       Bylaws of Registrant. (1)
4.1       Specimen Common Stock Certificate. (1)
27.1      Financial Data Schedule.
------
(1)  Incorporated by reference to our Registration Statement on Form S-1 (File
     No. 333-60419) as declared effective by the Securities and Exchange
     Commission on January 28, 1999.
(2)  Incorporated by reference to our Quarterly Report on Form 10-Q for the
     quarter ended June 30, 1999.
(3)  Incorporated by reference to our Quarterly Report on Form 10-Q for the
     quarter ended September 30, 1999.
(4)  Incorporated by reference to our Current Report on Form 8-K dated February
     14, 2000.
(5)  Incorporated by reference to our Annual Report on Form 10-K dated February
     23, 2000.
(6)  Incorporated by reference to our Current Report on Form 8-K dated June 9,
     2000.

                                       27