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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

Commission File Number: 000-25291

TUT SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (925) 460-3900

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

(Title of Class)

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  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes  ¨  No  x

The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $29,311,461 as of March 27, 2003 based on the closing price of the common stock as reported on The Nasdaq National Market for March 27, 2003. There were 19,805,041shares of the Registrant’s common stock issued and outstanding on March 27, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information called for by Part III is incorporated by reference to the definitive proxy statement for the annual meeting of the stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2002.

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TUT SYSTEMS, INC.

ANNUAL REPORT ON FORM 10-K

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PART I

IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, but are not limited to, statements about (1) the development of our Astria^™ VSS system and the system’s ability to distribute content, provide video service management, multi-tier Internet protocol (IP) multicasting and digital subscriber line access multiplexer (DSLAM) aggregation capabilities, (2) our expectation that residential and commercial demand for broadband services will continue to increase, (3) our assumption that incumbent local exchange providers’ and international post, telephone and telegraph companies’ intend (and are able) to offer bundled services, (4) our expectation that the video trunking market will expand, (5) our ability to incorporate technologies from our Astria product line into our video trunking products, (6) our ability to expand and further specialize our video trunking products, (7) Astria CP’s ability to encode and transcode content into MPEG-4 and Windows Media, thereby providing service providers with more competitive offerings for their end-users, (8) our expectation that our Expresso^™ product line will continue to be deployed for high-speed Internet access (HSIA)-based multi-tenant unit (MTU) applications, (9) our expectation that our IntelliPOP 5000 system will be deployed for high-speed data and video applications in commercial environments, (10) our Signature-Switch^™ technology’s ability to provide an attractive solution to our customers, (11) our ability to maintain and grow our video-based independent operating company (IOC) business, (12) our ability to partner with third parties in order to expand our presence into new markets, (13) our expectation that small and medium-sized IOCs in the U.S. will remain our near-term market for Astria products, (14) our belief that our products can serve a substantial market for digital video and high-speed data access products outside of the U.S., (15) our expectation that we will continue to make significant investments into our research and development activities, (16) our expectation that we will release our Astria VSS system in the second quarter of 2003, (17) our expectation that the Astria VSS system will be a more cost-effective solution for service providers than such providers’ present alternatives and (18) our plans, objectives, expectations and intentions and other statements contained in this Annual Report on Form 10-K that are not historical facts. When used in this Annual Report on Form 10-K, the words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “seeks,” “should,” “will” or the negative of these terms or similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. These forward-looking statements reflect current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions. As a result, actual results may differ materially from the forward-looking statements contained herein. Such risks and uncertainties include those set forth in Part II, Item 7— “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Additional Risk Factors that Could Affect our Operating Results and the Market Price of our Stock” and those identified in the introduction to Part II, Item 7. In particular, see “Additional Risk Factors that Could Affect our Operating Results and the Market Price of our Stock—We have a history of losses and expect to continue to incur losses in the future,” “—Our operating results may fluctuate significantly, which could cause our stock price to decline,” and “—We are and continue to be affected by poor general economic conditions that have resulted in significantly reduced sales levels and, if such adverse economic conditions continue or worsen, our business, operating results and financial condition will continue to be negatively impacted.” All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph.

ITEM 1.    BUSINESS

Overview

Our principal executive offices are located at 5200 Franklin Drive, Suite 100, Pleasanton, California, 94588. Our telephone number is (925) 460-3900. We were incorporated in California in August 1983, began operations in August 1991, and reincorporated in Delaware in September 1998. Our financial information is set forth in Item

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8 to this annual report, which is incorporated herein by reference. A discussion of factors potentially affecting our operations is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Additional Risk Factors that Could Affect our Operating Results and the Market Price of our Stock,” in Item 7, which is incorporated herein by reference.

We design, develop, and sell video content processing systems optimized for the provisioning of public broadcast digital TV services across telephone company and cable company facilities, digital video trunking systems for applications across TV broadcast, government and education facilities, and broadband data transmission systems for application over existing private campus or building facilities.

Historically, most of our sales were derived from our broadband data transmission systems. In order to expand upon our broadband product and market strategies, we entered into an agreement to acquire VideoTele.com, Inc. (VTC) from Tektronix, Inc. (Tektronix). On November 7, 2002, we completed the acquisition of VTC for approximately $7,154,888, consisting of an aggregate of 3,283,597 shares of our common stock valued at $3,611,957, acquisition related expenses consisting primarily of legal and other professional fees of $320,000, a note payable to Tektronix in the amount of $3,222,931 and assumed other liabilities of approximately $1,776,000. This transaction was treated as a purchase for accounting purposes. VTC offers digital head-end (DHE) solutions enabling home entertainment delivery via the broadband Internet. With this acquisition of VTC, we extended our product offerings to include video content processing and video trunking systems. Among the benefits that we are seeking from the acquisition are to:

The acquisition of VTC has resulted in a significant change in the structure, organization and priorities of Tut, including: (1) changes in our organizational structure and employee staffing; (2) establishment of significant operations in Lake Oswego, Oregon, at the prior headquarters location of VTC; (3) the designation of Douglas Shafer, the former President and Chief Executive Officer of VTC, as Vice President, Finance and Administration, Chief Financial Officer and Secretary of Tut Systems; (4) an expansion of our sales and marketing efforts to include VTC products; and (5) a reprioritization of our research and development budget to include the research and development of products acquired by us in our acquisition of VTC.

Based on over 20 years of video expertise, our content processing systems combine advanced video compression technology and coding techniques to transform a variety of video content from multiple sources into a complete service package of standard MPEG (Moving Picture Experts Group) video streams for delivery over fiber, copper, or coaxial cable networks. Our high-performance, cost-effective systems are based on the MPEG-1 and MPEG-2 standards. We are developing software programs that can upgrade these products to the new MPEG-4 standard that will provide lower encoding rates and more advanced interactivity than previous MPEG standards provided. Our systems support a variety of standard Internet and other protocols that allow high-quality digital video content to be transmitted over a wide variety of public telephone, public cable and private broadband networks. To facilitate interoperability with the existing base of fiber and DSL (digital subscriber line) systems, we have developed a video services switch that supports asynchronous transfer mode (ATM) or Internet protocol (IP) format conversion and video replication.

Our video trunking systems take advantage of our advanced content processing technology for private network applications such as broadcast video backhaul, video surveillance, and video conferencing in which digital video signals are “trunked,” or transmitted, over long distance networks. Our broadband data transmission

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systems combine advanced IP service differentiation and management technology with both proprietary and standards based copper line transmission technologies into complete IP system packages for high-speed Internet access (HSIA) and other data services within venues such as hotels, apartment complexes, and campus networks.

Our target customers for our content processing systems are telephony-based incumbent local exchange companies (ILECs), such as the former Regional Bell Operating Companies (RBOCs), IOCs, and international Post, Telephone, and Telegraph (PTT) companies that aim to deliver advanced video services over their existing copper or coaxial cable infrastructures. Including sales by VTC prior to our acquisition of VTC, over 30 content processing systems have been sold and deployed since 1999 serving over 50 IOCs in the United States. Target customers for our video trunking systems include TV broadcasters, government agencies, and educational institutions. Target customers for our broadband data systems are regional competitive carriers and systems integrators, ILECs, and private educational and commercial entities.

Our products are typically used to convert video or data signals to an appropriate format for delivery over existing fiber and copper facilities. Our Astria^TM content processor is typically used by carriers at a digital TV head-end location to process upwards of 200 or more TV channels into a consistent, reliable, constant-bit-rate MPEG-2 format for subsequent delivery over any broadband access network to residential subscribers. Our Astria VSS system now under development is intended to receive encoded content from fiber backbone networks and distribute it to local DSL access multiplexers (DSLAMs) or to fiber-to-the-home (FTTH) networks. Our M2 video trunking product line uses the same video compression technology that is used within the Astria product line, but M2 products are packaged in a smaller form factor for private video backhaul applications. Our IntelliPOP broadband data platform, powered by our proprietary Signature Switch technology, provides for advanced quality of service (QoS) management across multiple digitized voice, video, and data applications while providing scalability to support from tens to thousands of residential or commercial subscribers per system. Our Subscriber Management System (SMS) and Expresso product lines provide for plug and play installation, subscriber authentication, web portal redirection, IP address management and other features required by increasingly sophisticated hotel and apartment multi-tenant unit (MTU) applications. Our XL product line enables Ethernet networks to be extended over distances of up to 20,000 feet over ordinary telephone wire.

Industry Background

Continued Growth in Residential and Commercial Demand for Broadband Services

In recent years, there has been a dramatic increase in demand by businesses and consumers for high-speed data access to the Internet and to private corporate networks. This demand is being driven by the growth in the number of users who are accessing networks for a variety of applications, including communications via the Internet and corporate intranets, electronic commerce, and telecommuting. As an example of the growth in high-speed access, research carried out by London-based industry analyst Point Topic estimates that the worldwide installed base of DSL lines almost doubled in 2002, from 18.8 million to 36.3 million lines.

In addition to an increasing demand for broadband data services, there has been substantial consumer demand for advanced digital-based television services that until recently could only be delivered over broadband fiber, coaxial cable, or satellite facilities. As an example of growth in demand for advanced television services, satellite-delivered digital television to U.S. households has risen dramatically over the last seven years from under 1 million subscribers to over 19 million subscribers at the end of 2002.

Worldwide Telecommunications Deregulation and New Technology Spawns Competition for Bundled Services

An open regulatory framework for telecommunication (telecom) services and advances in broadband technology have led to cable television companies offering voice services and HSIA services to their traditional base of cable TV subscribers. By bundling multiple voice, video, and data services into a single service package, cable-based multi-system operators (MSOs) reduce their infrastructure, marketing and sales cost per revenue dollar and increase their customer retention rate while increasing revenue from these customers in absolute terms. MSOs’ success in gaining

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new telephone customers at the expense of the ILECs has been dramatic, with subscription rates in certain United States regions exceeding 25% of local residential telephone subscribers. The success of the MSOs is creating increasing pressure on the ILECs to offer similar bundled packages of voice, data, and video services. With continuing advances in DSL video compression technologies, a competitive service package, including digital broadcast video, can be delivered over the ILECs’ embedded base of telephone lines. If the ILECs do not respond to these MSO offerings with similarly competitive offerings, they may be left with an underutilized and expensive network as their voice and data customers migrate to competitive offerings.

Smaller rural IOCs in the United States are already achieving success with bundled voice/data/video offerings by providing broadcast TV service using MPEG-2 over asynchronous DSL (ADSL) and very high-speed DSL (VDSL). With higher-speed ADSL-2 standards now in place and lower bit rate MPEG-4 compression technologies being introduced to the market, it will soon be possible to deliver three channels of video plus HSIA service plus normal telephone service over a single telephone line. These technological advancements, plus the competitive threat from the MSOs, could lead the larger ILEC carriers and PTTs into also offering bundled services.

Characteristics of the Market for Digital TV Head-ends among Telecommunication Companies

Digital TV head-ends (DHEs) are deployed in metropolitan areas to a) receive both national broadcast TV channels via satellite and local TV channels via off-air antennas and b) to process these signals for carriage over fiber, coaxial, and/or copper network facilities. The total DHE market tends to be fragmented into two sub-markets: a head-end market for cable-based MSOs using statistical multiplexing and quadrature amplitude modulation (QAM) over hybrid fiber coax (HFC) networks, and a head-end market for telecommunication companies (telcos) using constant bit rate (CBR) multiplexing and IP or ATM protocols over fiber and copper networks. There are rural telcos that use both cable and copper networks for their TV services and these telcos might use a combination of head-end products.

For the telco head-end market, a basic head-end requirement is to provide high quality digital encoding of local analog TV signals and digital “turnaround” of satellite TV signals. Digital turnaround content processing takes variable bit rate signals as input and “turns them around” into constant bit rate IP or ATM streams for subsequent delivery over ADSL or VDSL access networks. Since most of the TV channels in any service bundle are national in scope, certain telco head-end customers are deploying a major head-end in one location, placing these national channels over a regional or statewide fiber network, and then using remote “mini” head-ends deployed throughout the state to add local channels to the lineup as appropriate in individual towns or cities.

For telcos using ADSL for video service delivery, a key DHE requirement is for low bit rate encoding and digital turnaround to maximize the available market. In other words, today’s ADSL systems can deliver service speeds of up to 8 Mbps, but only for customers that are within 6,000 to 8,000 feet of the DSLAM or digital loop carrier (DLC) that is providing the ADSL service. A service speed of 8 Mbps is enough to provide 2 TV channels at 3.5 Mbps each plus a 1 Mbps HSIA channel. If the video encoding rate could be dropped to 2 Mbps, then 5 Mbps of ADSL speed would be sufficient and customers as far as 11,000 to 13,000 feet from the DSLAM/DLC could receive service. Thus, the lower bit rate signals available through advanced video encoding techniques will greatly expand the market reach of an ADSL-based video service.

Video Trunking Market Characteristics

The video trunking market is characterized by the need to deliver a small number of private or public video signals over a private broadband network or privately leased facility. The particular video source may be a signal from a local TV station that needs to be brought back to a regional or statewide DHE that is 100 miles away. The video source may be a signal received from an outdoor surveillance camera that needs to reach a decoder or personal computer (PC) for viewing hundreds of miles away, or the video source may be a signal from a university seminar that needs to feed 15 remote classroom sites.

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The video trunking market is characterized by tradeoffs between the cost of long-distance broadband facilities and the cost of low-bit-rate encoders to reduce the need for bandwidth. As advanced video encoding techniques find their way into products and lower the need for bandwidth, this market will also expand.

Private Broadband Network Market Characteristics

The market for our broadband data systems is characterized by the need to transport high-speed data signals across private buildings or campus locations in which the only available transmission facility is composed of ordinary telephone wires. Applications within this market include the need to connect hotel guests to HSIA service over the hotel’s telephone wires, the need to connect video surveillance cameras, back office PCs, and ticket machines found across a railroad station to a backbone network, and the need to connect two local area networks (LANs) across a business campus without having to run new wires or cables.

The customers for our broadband data products include end users such as universities and commercial enterprises, regional system integrators who often bundle our products with other products for a complete turnkey solution, and regional competitive carriers who use our products to offer HSIA services to hotel guests and/or apartment tenants.

The Tut Systems Solution Set

We design, develop, and sell video content processing systems optimized for the provisioning of public broadcast digital TV services across telephone company and cable company facilities, video trunking digital video applications across TV broadcast, government and education facilities, and broadband data transmission systems for application over existing private campus or building facilities.

We use our technical strengths, skills, and experience in video-based applications to develop highly reliable, high performance systems for processing and converting either analog video or pre-encoded digital video signals into the proper format for transmission over fiber, coaxial cable, or copper facilities. The format of the output signals from our systems varies according to application and can be either MPEG-1 and MPEG-2 format in either IP, ATM, IP-over-ATM, or digital video broadcasting asynchronous serial interface (DVB-ASI) protocols over copper, fiber or coaxial interfaces. Our video systems are designed to international standards to facilitate interoperation with companion systems and software from third-party vendors to form a complete end-to-end system for the customer. For some customers, we provide systems integration services to our customers to ensure that the entire video system, including third-party satellite antennas, set-top boxes, and operational software, works seamlessly together.

Our broadband data products provide our customers with reliable, high-performance, cost-effective broadband transport and with enhanced capabilities such as subscriber management, bandwidth management, plug-and-play installation, portal redirection, IP address management, service authorization and network address translation. Our products are designed with the specific requirements of the target market in mind and provide the following benefits to our customers:

Video Content Processing Systems

Astria Content Processor (CP)

Our Astria CP is a third-generation, chassis-based platform that has been purposefully designed for the digital TV marketplace. The Astria CP uses patent-pending QualView^TM applications to deliver high quality video when converting satellite-based variable bit rate video and audio to groomed CBR content for delivery over access networks. This QualView digital turnaround (DTA) application, coupled with Astria-based MPEG encoding and network protocol processing, offers service providers a robust platform that adapts all digital head-end video and audio content for distribution over a variety of access networks.

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The Astria CP platform can process up to 200 video and audio channels per chassis, depending on the type of processing required. The platform integrates with IP, ATM, IP over ATM, or DVB-ASI networks providing ultimate flexibility when designing a commercial video delivery system. Astria CP is populated with flexible Quad Stream Processor (QSP) modules that can be configured and reconfigured with a simple software download to enable a variety of video processing functions. For example, on a digital turnaround application one QSP can be utilized to de-multiplex a multi program transport stream (MPTS) from a satellite. The de-multiplexed channel or single program transport stream (SPTS) can then be routed to another QSP for bit rate reduction that is required for transport over a DSL access network. Each Astria QSP module contains 4 separately configurable QSPs and each Astria CP chassis supports up to 11 modules for a total possible QSP count of 44 per chassis.

In many cases, the Astria CP enables DHE systems to be deployed without the need to decode the received digital satellite signals to analog baseband signals. This ability reduces the amount of equipment required in the head end, as well as the likelihood of inducing noise into the video and audio streams. In addition, bit rate reduction can be done while maintaining video quality using Qualview applications running on the QSPs. These applications contain sophisticated algorithms that are specifically designed to make intelligent use of the uplink encoding decisions that were imposed on the original content before it was transmitted over the satellite link.

Today the Astria CP outputs content in standard MPEG-1 or MPEG-2 formats. We are developing software to allow Astria CP to encode and transcode content into MPEG-4 and Windows Media formats. Transcoding will enable MPEG-2 input streams that may be received from a satellite link to be transcoded into either MPEG-4 or Windows Media formats. This will enable head-ends to deliver MPEG-2 ans MPEG-4 signals simultaneously to subscriber set top boxes. This capability will enable head-end providers to reach the next stage in bit rate reduction without having to hardware upgrade their complete head-end, thus preserving the customer’s original investment. In the future it will also allow video streams to be easily viewed from the large base of PCs running Windows Media or MPEG-4 players. It will also enable service providers to take advantage of the content bundling features in MPEG-4 to insert local and/or personalized content directly into particular video streams.

Astria Remote Content Processor (RCP)

For service providers delivering digital TV over regional or statewide backbone networks, our Astria RCP provides an affordable way to distribute video signals sourced from a single digital head-end.

The Astria RCP accepts pre-processed MPEG-2 video from a centralized Astria CP via ATM or Ethernet fiber networks (rings or point-to-point links) and performs appropriate protocol conversion for delivery of the video streams over a variety of access platforms, including ADSL, VDSL, cable TV (CATV) and FTTH. This flexibility allows service providers to place Astria RCPs at the edge of a fiber optic transport network and deliver aggregated, and localized content enabling customization of a channel line-up to a specific region or community. The ability to add/drop channels into the line-up at the edge of the transport network allows service providers to incorporate local programming, advertising, and emergency alert system (EAS) content. This creates a complete mix of content that is relevant to local subscribers.

Astria Video Services Switch (VSS)

Our Astria VSS that is under development is intended to provide video service management, multi-tier IP multicasting, and DSLAM aggregation capabilities to support cost-effective delivery of advanced video services in a common format across a variety of embedded and emerging access networks. VSS will simultaneously deliver over 200 broadcast video channels, 100 video-on-demand (VOD) channels, and high-speed Internet access to upwards of 2,000 subscribers per system node, making it potentially one of the industry’s most powerful and robust video delivery systems. The VSS product line is based on industry standard fiber interfaces that use a service provider’s embedded network infrastructure of ATM-based DSLAMs and DLCs while providing a path to new IP-based DSLAMs, DLCs, FTTH systems.

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Aveon^TM Element Management System

Our Aveon Element Management System enables the service provider to configure and monitor Astria CP and RCP systems across wide area networks. The ability to use Aveon to create a single network view of the system gives service providers a simple to use yet powerful tool for controlling all aspects of operating a video network from a single management location.

Video Trunking Systems

Our M2-T300 product line incorporates a flexible architecture to support multiple input or output video channels. It is based on a 5-slot, 7-inch high chassis with a variety of encoding, decoding and network options available. A number of encoding options are available ranging from MPEG-1 at 400 kbps to MPEG-2 4:2:2  @ML at 40 Mbps. Network options include DVB/ASI for satellite operations, ATM options for terrestrial switched applications, or DS-3/E-3 for point-to-point applications. An embedded web server controls and manages the M2 product line via an intuitive web-based graphical user interface, enabling administration of the product from any location on an IP network.

Our M2-400 product line now under development, and scheduled to be available in the second quarter of 2003, is intended to supercede our M2-T300 products. It is intended to be our premier video trunking system for delivering mission critical, high-quality MPEG video in real-time for private network applications. The M2-400 system will be the latest in a long line of video trunking products that began with the devices first used to transport video over long distances via fiber optics from the 1980 Winter Olympics in Lake Placid, New York to broadcast studios located in New York City. As with the M2-T300, each M2-400 chassis is designed to hold multiple encoders, decoders and network interfaces. Whereas the M2-T300 product line only supported DVB/ASI and ATM interfaces, the M2-400 is also being designed to support a 100/1000 Base-T Ethemet network interface. The web-based management of the M2-T300 is being extended to the M2-400 and the M2-400 is also designed to integrate with third-party scheduling software for video conferencing applications.

Private Broadband Data Systems

For high-speed video or data applications across private networks, our IntelliPOP 5000 product line offers a compact, easy-to-deploy stackable VDSL system that can grow from 12 ports to over one hundred ports per system. Up to 26 Mbps of transport capacity can be provided over ordinary telephone lines at distances up to 3,500 feet.

For HSIA MTU applications, our Expresso line of products, using proprietary HomeRun or LongRun transmission technology, provide low-cost, plug and play Ethernet solutions that can deliver HSIA to multiple nodes over a single pair of copper wire simultaneously being used for telephone service.

Our XL line of Ethernet extension products is often used by individual enterprises to extend their Ethernet networks over distances that can not be accommodated by standard Ethernet wiring. Various XL products operate over distances of up to 20,000 feet and at bit rates up to 10 Mbps, all over a single pair of ordinary telephone wires.

Our transport products are augmented by our Expresso SMS which authenticates users, manages bandwidth and IP addresses, and processes credit card or password information for billing purposes. SMS systems are typically found in hotels that offer HSIA service to guests, in campus housing complexes to manage HSIA access, and in wireless “hot spots” such as hotel lobbies and Internet cafes.

Overall System Level Design Criteria

Our various systems and product lines are designed to incorporate technical standards developed by worldwide organizations, including International Telecommunications Union, Institute of Electrical and Electronic Engineers, American National Standards Institute, or ANSI, European Telecommunications Standards Institute, or ETSI, and the Full-Service VDSL (FS-VDSL) Committee. Important capabilities supported by these

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standards include ATM QoS, MPEG encoding, Internet Group Management Protocol (IGMP), Dynamic Host Configuration Protocol (DHCP), Network Address Translation (NAT), and IP protocol stack/encapsulation over ATM. To build upon these standards and to further enhance our products’ service capabilities, we use proprietary rate control techniques and other bandwidth management techniques to allow service providers to efficiently create and deploy new service packages for additional revenue opportunities.

Our Signature Switch^TM technology in particular manages bandwidth all the way to and from the end-user appliance or application. The added flexibility afforded by the Signature Switch technology can allow instantaneous creation and manipulation of bandwidth guarantees so that consumers can purchase bandwidth on demand for their critical applications. Most importantly, we believe that Signature Switch technology can be extended to support a variety of wholesale and retail business models by enabling a “wholesale” service provider to partition subscribers, and particular applications and devices with a subscriber’s premises, among multiple “retail” service providers in a secure and guaranteed manner. We are currently investigating several opportunities for embedding Signature Switch into new products for service providers.

Strategy

Our objective is to be the dominant provider of advanced video-based content processing solutions for the delivery of broadcast and on-demand video services to residential customers over telephony networks. Key elements of our business strategy are as follows:

Continue Our Market Leadership in Digital TV Head-end Markets

Today, Tut Systems enjoys over a seventy-five percent market share in the market for digital TV head-ends among telephone companies in the United States. Over 30 Astria systems have been deployed as of December 31, 2002 serving over 50 IOCs. Our strategy is to maintain this leadership position with continued enhancements to the Astria product line as larger telephone companies, both domestic and international, begin to introduce bundled voice/data/video services. The Astria product line is designed to support the standards, feature requirements, and business objectives of the FS-VDSL Committee of major ILECs and PTTs. It is also designed to take rapid advantage of new technologies emerging such as MPEG-4 video compression.

To deliver a complete end-to-end video solution, we are partnering with leading industry vendors that provide key system elements such as broadband access systems, set-top boxes, VOD systems and service software that, together with our Astria content processor products, provide a complete video solution. Therefore, our business development and strategic marketing efforts will focus on working with such partners to facilitate a cost-effective, ready-to-deploy, high-performance solution based on FS-VDSL architecture and business requirements. Our strategy with these partners is to allow any video content (e.g., broadcast TV, video- on-demand, streaming media from the Internet) to be carried over any network (IP or ATM, fiber, coax, or copper) to any device (e.g., TV, PC, personal digital assistant).

Grow Our Market Position in Video Trunking Markets

Our M2 product line of video trunking products has achieved success among US and Chinese government organizations for video surveillance and for video conferencing and broadcast applications. We intend to incorporate technologies developed for our Astria product line into our video trunking products for continued success among our current customers. We intend to partner with other industry vendors for applications among new potential customers, such as large corporations and educational institutions. We intend to expand and further specialize our video trunking products to the surveillance and broadcast TV backhaul applications and we will seek new distribution channels for the M2 product line.

Continue Penetration of Private Broadband Markets with Expresso and IntelliPOP5000 Products

We believe that our Expresso product line will continue to be deployed for HSIA-based MTU applications and that our IntelliPOP 5000 system will be deployed for high-speed data and video applications in commercial

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environments. Our MTU marketing efforts stress that the Signature Switch technology embedded in the IntelliPOP 5000 offers a high performance VDSL system for commercial applications in terms of delivering guaranteed QoS bandwidth per user, per device, and/or per application. Our Expresso SMS subscriber management system is being marketed to and deployed in hotel fixed-line applications and in 802.11b wireless “hot spot” applications.

Continue to Develop Advanced Service Capabilities of our Products and Systems

A combination of business needs and regulatory requirements compels many large, incumbent carriers to support both a wholesale and retail service model across multiple voice, video and data services. We believe that we can facilitate such a business model through our Signature Switch technology. As our Signature Switch technology evolves and becomes embedded in products for ILEC applications, it may provide a more flexible and effective alternative to monolithic, first-generation, transport-only broadband access systems. By enabling the key functions of service selection and service management to be distributed closer to the edge of a service provider’s network, Signature Switch can provide the service provider with greater control over the number and type of broadband services that can be delivered on both a wholesale and retail basis.

Expand Sales Efforts to focus on Large Incumbent Service Providers

We will continue to maintain and grow our video-based IOC business directly and our data-based MTU business through competitive service providers, integrators and distributors worldwide. Additionally, we are strengthening our direct sales force to focus on major domestic and international ILECs who see a need for full-service broadband deployment. Our primary focus is on the largest service providers in North America and Europe. We will use and add distributors, agents, and partners internationally as needed to penetrate specific countries or markets.

Core Technologies and Products

We continue to build upon our core competencies in video compression and IP-based data systems to deliver high quality digital broadcast and interactive video systems to support our expanded focus on the markets for residential bundled video and data services. Our products enable the delivery of broadcast video, video-on-demand, video conferencing and high-speed Internet data services as a bundled service offering over existing copper telephone lines or FTTH networks.

Video Content Processing Systems

Astria CP

The Astria CP is based on a highly-reliable, carrier-grade 16-slot chassis that supports a variety of interface and processing modules necessary to enable a complete digital head-end. All modules are software configurable to support multiple applications. The control CPU and power supply are available in redundant configurations for the highest reliability applications. Power supplies are available in AC or DC configurations. Software licenses are available to enable the various forms of de-multiplexing, encoding, decoding, rate shaping, and rate converting that are covered by either our patents and/or third-party patents.

The Astria CP supports a variety of interfaces that enable service providers to both leverage their existing network infrastructure and migrate to newer infrastructures. Encoder input interfaces may be analog or digital. Digital interfaces may be MPEG over asynchronous serial interface (ASI), digital head-end extended interface (DHEI), ATM, or IP protocols. Output streams may be directed over IP, ATM, IP or ATM, or DVB-ASI networks. The CP also supports a variety of coding and processing techniques, including direct encoding of analog streams, rate converting of digital streams from variable bit rate to CBR, rate shaping high bit rate streams to lower bit rates, and protocol conversion between ATM and IP formats. The wide variety of options available with Astria lowers the total cost of operations to a service provider in that a single platform can be used to support the many different applications that a typical service provider needs, and this platform can be upgraded to support new applications, such as MPEG-4, in the future.

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Astria RCP

The Astria RCP is similar to the CP in form but is intended for remote, not head-end deployments. Service providers can deploy a centralized Astria CP feeding multiple Astria RCPs over a fiber ring network. The RCP can encode local analog video channels and convert ATM backbone traffic to local IP traffic, or vice versa, but it is not designed to process digital satellite-fed signals.

Astria VSS

Our Astria VSS system is under development and scheduled for release in the second quarter of 2003. It is a carrier-class, network equipment building specification-level 3 (NEBS-3) chassis with 4 input slots and 10 output slots for network interface modules. The network modules that will be available upon first release include a quad optical carrier - level 3 (OC-3c) module and an OC-12c module with a gigabit ethernet (GbE) module scheduled for later release. Redundant control modules will be available and all modules are planned to be hot swappable for maximum reliability and uptime. The Astria VSS is purposely designed to support the distribution of broadcast video signals, and it is expected to be significantly more cost-effective for the service provider than the present alternative of using high-end, general-purpose IP routers or ATM switches for broadcast video distribution.

Our VSS system is designed to remove the complexity of networking for service providers and allows service providers to mix and match IP and ATM equipment from different vendors into a consistent, cost-effective service platform. For example, Astria VSS is designed take MPEG video streams off of an ATM-based fiber ring and simultaneously distribute these signals to an embedded base of ATM DSLAMs, new Ethernet DLCs, and IP-based passive optical networks (PONs) all while interfacing to a local IP-based VOD server.

In addition to simply distributing video streams across multiple access infrastructures, the VSS may provide enhanced value through support of IGMP multicasting. This may allow the present version of “dumb” DSLAMs to support broadcast TV by effectively doing all of the required TV channel changing behind the DSLAM. Thus older DSLAMs do not need to be upgraded to support advanced services. The VSS can also aggregate all of the high-speed Internet traffic to/from the DSLAM and thereby reduce the overall network cost of backbone facilities.

Video Trunking Systems

The M2-400 currently under development is designed to be our premier product in the video trunking product line. The M2-400 design is based on a small, modular chassis capable of supporting multiple MPEG-2 encoders, decoders, and/or satellite interfaces. Its key features will include low latency of encoded streams, support for tele-text and closed captioning, software provisioning of bit rate, MPEG format, and video resolution, and a software upgrade path to MPEG-4. Any combination of up to 10 encoders and/or 20 decoders can be deployed within a single 7” high chassis. Both AC and DC power options will be available. Compressed streams may be outputted in ATM or IP over ATM formats over DS-3 or OC-3 links or in IP format over 10, 100, or 1000 Mbps Ethernet links.

Private Broadband Data Systems

IntelliPOP 5000

The IntelliPOP 5000 system includes the IntelliPOP 5212 12-port Service Gateway, IntelliPOP 5224 24-port Service Gateway, IntelliPOP 5102 Service Access Unit and the 5112 Service Adapter. A comprehensive Tut Management System (TMS) allows full utilization of the Signature Switch based service management aspects of IntelliPOP. The IntelliPOP 5212 Service Gateway is a compact, stackable service platform based on VDSL technology that combines the functionality of an edge router, a high-speed switch and an access multiplexer with powerful bandwidth management tools to distribute multiple IP-based services to individual tenants throughout a small or mid- sized commercial building. The IntelliPOP 5212 Service Gateway incorporates 12 VDSL-based line-side ports, each of which can deliver up to 15 Mbps of symmetric bandwidth to an IntelliPOP 5102 customer premises unit. The IntelliPOP 5102 Service Access Unit includes two standard Ethernet ports for interfacing with a variety of end-user devices and/or networks.

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Expresso System Products

Our Expresso MDU products are designed for incumbent carriers and other service providers to offer high-speed advanced data services to large numbers of end users over private copper network infrastructures. The Expresso MDU platform has been designed for deployment in residential locations, such as in the basement wiring room of an apartment building or hotel. Expresso MDU is AC-powered and, when integrated with our HomeRun^™ or LongRun^™ technology, provides owners of private copper networks with an easily deployable and scalable means to distribute high-speed data access to tenants over the copper telephone wires found in MTUs.

HomeRun creates a cost-effective Ethernet local area network, or LAN, over the random topology of home telephone wires, without disturbing existing telephone service. With HomeRun, multiple devices can share peripherals and/or a single high-speed Internet access connection on a 1 Mbps Ethernet LAN. HomeRun is designed to operate at distances up to 500 feet.

LongRun shares similar modulation techniques with HomeRun but operates at lower baseband frequencies to provide improved performance in the presence of intra-system crosstalk and coverage of longer distances that may be found in many apartment, hotel, and university dormitory complexes. LongRun is intended to operate at distances up to 2,500 feet.

An Expresso MDU system consists of a compact, modular central-site shelf with a simple network management protocol (SNMP) management card, and optional multiplexing cards, and up to 17 symmetric DSL (SDSL), HomeRun or LongRun line cards. To provide service to small apartment buildings spread across a garden-style complex in which there is no central wiring point, we developed the Expresso MDU Lite and the Expresso LongRun MDU Lite. The Expresso MDU Lite contains either eight ports of HomeRun or eight ports of LongRun. Multiple units may be connected together to support more than eight subscribers, and these units may be connected back to a central point via LongRun copper-based products, coax-based cable modems, or radio-based modems.

Our Expresso SMS 2000 and companion Expresso OCS (operations center software) system provide plug-and-play functionality, subscriber management, network address translation, credit card billing, and other functions for the MTU market. The Expresso SMS 2000 system runs on a Red Hat Linux operating system, is typically located on the premises of an MTU complex and supports up to 800 simultaneous user sessions per unit. The centralized Expresso OCS system is a software package that runs on a standard personal computer platform. Each Expresso OCS system can manage up to 300 remote Expresso SMS systems, providing central credit card billing interfaces, accounting records, and access to the accounting and policy databases most often used by competitive local exchange carriers (CLECs) and Internet service providers.

XL Products

We utilize proprietary technology along with commercially available components to build high-speed data access products. In the XL600 product series, we applied our noise reduction and signal processing expertise to build a 10Mbps, 600 foot Ethernet LAN extension product to operate over a single pair of copper telephone wires. In the XL 4000 product, we also applied our noise reduction and signal processing expertise to enable a 10 Mbps Ethernet LAN extension at distances up to 4,000 feet over a single copper pair. For other XL products, we pioneered the use of rate adaptive SDSL technology in products that extend transmission distances up to 24,700 feet without the use of repeaters.

Customers and Markets

We develop, market and focus our sales efforts to service providers for video content processing systems, to service providers and systems integrators for video trunking systems and to system integrators for private broadband systems.

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Service Providers

Over 50 independent operating companies in the United States now use our Astria products to deliver digital TV over xDSL and other broadband networks. Our customers include a cross-section of small, medium and large telecommunications companies in the United States and Europe. VTC’s first commercially deployed digital head-end was at Chibardun Telephone Cooperative in Dallas, Wisconsin in 2000. In 2002, Telenor AS, Norway’s largest telecommunications provider, with more than 1.8 million customers, launched digital TV services over its ADSL and VDSL networks using an Astria CP.

We expect the small to medium size IOCs in the United States to remain the primary near-term market for Astria products as the larger ILECs and PTTs continue to investigate the market for DSL-based video services.

System Integrators

We market our private broadband data systems to domestic and international system integrators who in turn market and sell our products to educational and government institutions, to small to large commercial enterprises, and to regional competitive service providers and national carriers. Our systems integrators range from small local companies to volume distributors such as Ingram Micro, to country-specific integrators such as Rikei in Japan, and to international integrators such as Enterasys and Siemens in Europe.

Marketing, Sales and Customer Support

Marketing

We seek to increase demand for our products and to expand both the visibility of the company and our products in the market. In addition to customer-specific sales efforts, our marketing activities include attendance at major industry tradeshows and conferences, the distribution of sales and product literature, operation of a web site, direct marketing and ongoing communications with our customers, the press, and industry analysts. As appropriate, we enter into cooperative marketing and/or development agreements with strategic partners that may include key customers, semiconductor manufacturers, radio, fiber, or video equipment manufacturers, set-top box manufacturers, and others.

Sales

We sell our products through multiple sales channels in the United States, including a select group of regional value added resellers, system integrators and distributors, data networking catalogs and directly to service providers. Internationally, we sell and market our products through sales agents, systems integrators and distributors. In 1999, we opened a sales office in the United Kingdom, and, with the acquisition of VideoTele.com, we now have a sales presence in China. For the year ended December 31, 2002, we derived approximately 43% of our revenue from customers outside of the United States. We believe that our products can serve a substantial market for digital video and high-speed data access products outside of the United States.

Customer Support

We believe that consistent high-quality service and support is a key factor in attracting and retaining customers. Service and technical support of our products is coordinated by our customer support organization. Our Systems Application Engineers, located in each of our sales regions, support pre-sales and post-sales activities. Customers can also access technical information and receive technical support via our web site.

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Research and Development

Our research and development efforts are focused on enhancing our existing products and developing new products through our emphasis on early stage system engineering. The product development process begins with a comprehensive functional product specification based on input from the sales and marketing organizations. We incorporate feedback from end users and distribution channels, and through participation in industry events, industry organizations and standards development bodies, such as the FS-VDSL Committee and MPEG-4 Industry Forum. Key elements of our research and development strategy include:

As a result of our acquisition of VTC, we have curtailed developments directly related to VDSL-line technologies while initiating new development efforts related to video compression technologies.

Expenditures for research and development in fiscal 2002 were $12,337,000, compared to $15,044,000 in fiscal 2001 and $17,149,000 in fiscal 2000. We anticipate that we will continue to have significant research and development expenditures in the future to provide a continuing flow of innovative, high-quality products to enhance our competitive position.

Manufacturing

We do not manufacture any of our own products. We rely on contract manufacturers to assemble, test and package our products. We require International Organization for Standardization (ISO) 9002 registration for these contract manufacturers as a condition of qualification. We monitor each contractor’s manufacturing process performance through audits, testing and inspections. Each contractor’s quality is also rigorously assessed through incoming testing and inspection of packaged products received from each contractor. In addition, we monitor the reliability of our products through in-house repair, reliability audit testing and field data analysis.

We currently purchase a substantial portion of the raw materials and components used in our products through contract manufacturers. We forecast our product requirements to maintain sufficient product inventory to ensure that we can meet the required delivery times demanded by our customers. Our future success will depend in significant part on our ability to obtain manufacturing on time, at low costs and in sufficient quantities to meet demand.

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Competition

Within our traditional market for private broadband products, intense price competition in certain areas of the Asia-Pacific has decreased our market opportunity significantly in these areas. Our sales declines in the North American market for private broadband data systems have less to do with competition and more to do with the deteriorating economics of the CLEC market, which has reduced customer demand from this segment of the market. To maintain a competitive position in our traditional market, we have focused our product efforts on cost reduction, feature enhancements for particular vertical markets, and working with large, established systems integrators in Europe.

The service provider market for video systems, represented by the incumbent carriers, is characterized by small IOCs that tend to readily adopt new technologies and enter new markets, and the larger incumbents, such as the RBOCs and PTTs, that take longer to make decisions and deploy new technology and services. Both markets are equally competitive with many of the competitive factors influencing procurement decisions external to the technology and outside of our control, such as:

In order to continue to be competitive in service provider markets, we believe that our company must continue to adhere to the following principles: