8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

Date of Report (date of earliest event reported): December 29, 2005

TUT SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

Delaware	000-25291	94-2958543
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification Number)

6000 SW Meadows Drive, Suite 200

Lake Oswego, Oregon 97035

(Address of principal executive offices) (Zip Code)

(971) 217-0400

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01 Entry into a Material Definitive Agreement.

Acceleration of Options

On December 29, 2005, the Board of Directors (the “Board”) of Tut Systems, Inc. (the “Company”) approved full acceleration of unvested stock options with an exercise price of $3.02 or greater previously granted under the Company’s 1998 Stock Option Plan and 1999 Non-statutory Stock Option Plan held by Company officers and employees. Options to purchase approximately 876,550 shares of the Company’s common stock, including approximately 126,390 shares held by the Company’s named executive officers, are subject to acceleration effective as of December 29, 2005. As a condition of the acceleration, and to avoid any unintended personal benefits, the Company also imposed a holding period on shares underlying the accelerated options that will require all optionees to refrain from selling any shares acquired upon the exercise of the options until the date on which such shares would have vested under the options’ original vesting terms, or, if earlier, the optionee’s last day of employment or upon a “change in control” as defined in any termination agreement between the individual option holder and the Company. The table below sets forth information regarding accelerated options held by the Company’s directors and named executive officers:

Directors & Named Executive Officers(1)	Aggregate Number of Shares Issuable under Accelerated Options	Weighted Average Exercise Price Per Share(2)
Salvatore D’Auria	77,780	$5.88
Randall Gausman	19,440	$5.88
Robert Noonan	29,170	$5.88
Directors & Executive Officers as a Group (7 persons)	126,390	$5.88
All Other Employees	750,160	$3.62
Total	876,550	$3.95

⁽¹⁾ The Company did not accelerate any options granted to non-employee Directors.

⁽²⁾ The closing price of the Company’s common stock on the day the Board approved the acceleration was $3.10.

The Board decided to accelerate vesting of these options based in part on the anticipated effects of Financial Accounting Standards Board Statement No. 123 (revised 2004), “Share Based Payment” (SFAS 123R), which becomes effective for the Company’s first quarter of fiscal 2006, commencing on January 1, 2006. The acceleration of the vesting of these options minimizes future compensation expense that the Company would recognize in its financial statements with respect to these options as a result of SFAS 123R. Absent the acceleration of these options, upon the effectiveness of SFAS 123R, the Company would have been required to recognize approximately $2.1 million in pre-tax compensation expense, including $0.4 million attributable to options held by executive officers, from these options over their remaining vesting terms. By accelerating the vesting of these previously unvested options, the share-based compensation expense under SFAS 123R will only be reflected in the Company’s footnote disclosures for the year ended December 31, 2005, as permitted under the transition guidance provided by the Financial Standards Accounting Board. Further, the Company believes that any potential future share-based compensation expense related to these options would be immaterial to the Company’s financial results. However, the Company makes no assurance that these actions will avoid the recognition of future compensation expense in connection with these options. A copy of the form of Acknowledgement of Amendment to Option Agreements is filed with this Current Report on Form 8-K as Exhibit 99.1.

Employees and officers may benefit from the accelerated vesting of their stock options in the event they terminate their employment with or service to the Company prior the completion of the original vesting terms as they would have the ability to exercise certain options that would have otherwise been forfeited. No share-based compensation expense will be recorded with respect to these options unless an employee or officer actually benefits from this modification. For those employees and officers who do benefit from the accelerated vesting, the Company is required to record additional share-based compensation expense equal to the intrinsic value of the option on the date of modification (i.e., December 29, 2005). The closing market price per share of the Company’s common stock on December 29, 2005 was $3.10 and the exercise price of the approximately 876,550 in unvested options on that date ranged from $3.02 to $6.16, with a weighted exercise price of $3.95. The Company estimates the potential additional share-based compensation expense that the Company may be required to record with respect to these options would be immaterial to the Company’s financial results.

Modification of Bank Line of Credit

On December 29, 2005, the Company entered into the First Loan Modification Agreement (the “Modification Agreement”) with Silicon Valley Bank (the “Bank”). The Modification Agreement amended the Loan and Security Agreement dated as of September 23, 2004 between the Company and the Bank in order to (i) increase the maximum line of credit limit from $7,000,000 to $10,000,000, (ii) extend the maturity date of any loans made thereunder to September 23, 2007 and (iii) allow for Equipment Loans up to an additional $1,250,000. This description of the Modification Agreement is qualified in its entirety by the full text of the Modification Agreement, a copy of which is filed with this Current Report on Form 8-K as Exhibit 99.2.

Item 9.01 Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired. Not applicable.

(b) Pro forma financial information. Not applicable.

(c) Shell company transactions. Not applicable.

(d) Exhibits.

Exhibit Number	Description
99.1	Form of Acknowledgement of Amendment to Option Agreements
99.2	First Loan Modification Agreement

SIGNATURES

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

January 5, 2006	By:	/S/    RANDALL K. GAUSMAN
		Randall K. Gausman, Vice-President, Finance and Administration, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer and Duly Authorized Officer)

EXHIBIT INDEX

Exhibit Number	Description
99.1	Form of Acknowledgement of Amendment to Option Agreements
99.2	First Loan Modification Agreement

EX-99.1

Exhibit 99.1

TUT SYSTEMS, INC.

1998 STOCK PLAN AND 1999 NONSTATUTORY STOCK OPTION PLAN

ACKNOWLEDGEMENT OF AMENDMENT TO STOCK OPTION AGREEMENTS

The outstanding stock option agreements (the “Prior Agreements”) under the Tut Systems, Inc. (the “Company”) 1998 Stock Plan and the Tut Systems, Inc. 1999 Nonstatutory Stock Option Plan (the “Plans”) for options with an exercise price equal to or in excess of $3.02 by and between the Company and                                                           (the “Optionee”) were amended on December 29, 2005 by action of the Company’s Board of Directors as follows:

1. Vesting Acceleration. The vesting provisions set forth in the Prior Agreements are amended to include the following:

“Notwithstanding anything in this Agreement to the contrary, all unvested options with an exercise price equal to or greater than $3.02 (the “Accelerated Options”) shall become vested and exercisable as of December 29, 2005.”

2. Transfer Restrictions. Except for the escrow described in Section 3 below, none of the shares subject to the Accelerated Options (the “Restricted Shares”) nor any beneficial interest therein may be transferred, encumbered or otherwise disposed of in any way (other than by will or pursuant to the laws of descent and distribution) until the dates upon which the Accelerated Options would have otherwise vested in accordance with the vesting schedule in effect under the Prior Agreements. On the vesting dates specified in the Prior Agreement and regardless of whether Optionee actually remains in service with the Company as an employee, director or member of the Board of Directors, that number of Restricted Shares that would have vested on such dates under the Prior Agreements shall be released from this transfer restriction.

3. Escrow of Restricted Shares.

(a) To ensure that the transfer restrictions of this Amendment are enforced, upon exercise of an Accelerated Option, the Company shall deliver and deposit with the Corporate Secretary of the Company (the “Escrow Holder”) the share certificates representing the Restricted Shares. The Restricted Shares and stock assignment shall be held by the Escrow Holder, pursuant to the Joint Escrow Instructions of the Company and Optionee attached hereto as Exhibit A, until such time as the transfer restrictions expire.

(b) The Escrow Holder shall not be liable for any act it may do or omit to do with respect to holding the Restricted Shares in escrow while acting in good faith and in the exercise of its judgment.

(c) When all or a portion of the Restricted Shares have been released from the transfer restriction, upon request the Escrow Holder shall deliver the certificate to the Optionee or to the Optionee’s brokerage account.

(d) Subject to the terms hereof, the Optionee shall have all the rights of a shareholder with respect to the Restricted Shares while they are held in escrow, including without limitation, the right to vote the Restricted Shares and to receive any cash dividends declared thereon. If, from time to time during the period of transfer restriction, there is (i) any stock dividend, stock split or other change in the Restricted Shares, or (ii) any merger or sale of all or substantially all of the assets or other acquisition of the Company, any and all new, substituted or additional securities to which the Optionee is entitled by reason of the Optionee’s ownership of the Restricted Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as “Restricted Shares” for purposes of this Amendment.

4. Legends. The share certificate evidencing the Restricted Shares, if any, issued hereunder shall be endorsed with the following legend (in addition to any legend required under applicable state securities laws):

“THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.”

5. Option Agreements. To the extent not expressly amended hereby, the Prior Agreements remain in full force and effect.

6. Entire Agreement. This Amendment, taken together with the Prior Agreements (to the extent not expressly amended hereby) and any duly authorized written or electronic agreement entered into by and between the Company and the Optionee relating to the stock option grants evidenced by the Prior Agreements, represent the entire agreement of the parties, supersede any and all previous contracts, arrangements or understandings between the parties with respect to the stock option grants evidenced by the Prior Agreements, and may not be modified adversely to the Purchaser’s interest except by means of a writing signed by the Company and Purchaser.

TUT SYSTEMS, INC.

By

Acknowledged:

OPTIONEE

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EXHIBIT A

JOINT ESCROW INSTRUCTIONS

                                    ,         

Corporate Secretary

Tut Systems, Inc.

6000 SW Meadows Drive, Suite 200

Lake Oswego, Oregon 97035

Dear                     :

1. As Escrow Agent for both Tut Systems, Inc., a Delaware corporation (the “Company”), and the undersigned purchaser of stock of the Company (the “Purchaser”), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Amended Stock Option Agreement (“Agreement”) between the Company and the undersigned, in accordance with the following instructions:

2. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as Purchaser’s attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated, including but not limited to the filing with any applicable state blue sky authority of any required applications for consent to, or notice of transfer of, the securities. Subject to the provisions of this paragraph 2, Purchaser shall exercise all rights and privileges of a shareholder of the Company while the stock is held by you.

3. Upon written or e-mail request of the Purchaser, you shall deliver to Purchaser or his or her brokerage account a certificate or certificates representing so many shares of stock as are not then subject to the transfer restrictions set forth in the Agreement. Within 10 business days after Purchaser ceases to be an employee of the Company or a member of its Board of Directors, you shall deliver to Purchaser or his or her brokerage account a certificate or certificates representing the balance of shares held pursuant to the Agreement.

4. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of the same to Purchaser and shall be discharged of all further obligations hereunder.

5. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto.

6. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith.

7. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction.

8. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder.

9. You shall not be liable for the outlawing of any rights under the statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you.

10. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor.

11. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint a successor Escrow Agent.

12. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments.

13. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings.

14. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by

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registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses or at such other addresses as a party may designate by ten days’ advance written notice to each of the other parties hereto.

COMPANY:	Tut Systems, Inc.
	6000 SW Meadows Drive, Suite 200
	Lake Oswego, Oregon 97035
PURCHASER:
ESCROW AGENT:	Corporate Secretary
	Tut Systems, Inc.
	6000 SW Meadows Drive, Suite 200
	Lake Oswego, Oregon 97035

15. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement.

16. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns.

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17. These Joint Escrow Instructions shall be governed by, and construed and enforced in accordance with, the internal substantive laws, but not the choice of law rules, of California.

Very truly yours,

TUT SYSTEMS, INC.

By

Title

PURCHASER:

Signature

Print Name

ESCROW AGENT:

Corporate Secretary

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EX-99.2

Exhibit 99.2

FIRST LOAN MODIFICATION AGREEMENT

This First Loan Modification Agreement (this “Loan Modification Agreement”) is entered into as of December 29, 2005, by and between SILICON VALLEY BANK, a California-chartered bank with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at 4700 Carillon Point, Kirkland, Washington 98033 (“Bank”) and TUT SYSTEMS, INC., a Delaware corporation with offices at 6000 SW Meadows Drive, Suite 200, Lake Oswego, Oregon 97035 (“Borrower”).

1. DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS. Among other indebtedness and obligations which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated as of September 23, 2004, evidenced by, among other documents, a certain Loan and Security Agreement dated as of September 23, 2004 (the “Loan Agreement”). Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement.

2. DESCRIPTION OF COLLATERAL. Repayment of the Obligations is secured by the Collateral as described in the Loan Agreement (together with any other collateral security granted to Bank, the “Security Documents”).

Hereinafter, the Security Documents, together with all other documents evidencing or securing the Obligations shall be referred to as the “Existing Loan Documents”.

3. DESCRIPTION OF CHANGE IN TERMS.

Modifications to Loan Agreement.

(a) The Loan Agreement shall be amended by adding the following new Section 1.1A after Section 1.1:

“1.1A Equipment Loan. From the date of this Agreement through December 31, 2006 (the “Equipment Loan Availability End Date”), Silicon shall make advances in minimum amounts of $150,000.00 (each an “Equipment Loan”) to Borrower upon Borrower’s request in accordance with the procedures set forth in Section 1.5 below (together with such additional supporting documentation as may be required by Silicon) in an aggregate amount not to exceed the lesser of (a) $1,250,000.00, or (b) 100% of the documented cost of Eligible Equipment (provided 25% in the aggregate of which may be in connection with transferable software licenses, taxes, delivery or other soft costs which may be determined to be acceptable by Silicon in its good faith business judgment). As used herein, “Eligible Equipment” means Equipment of Borrower subject to a first perfected security interest in favor of Silicon that has been purchased within 90 days of the requested Equipment Loan and which in all instances Silicon, in its good faith business judgment, deems eligible for borrowing. Commencing on the last day of the month during which an Equipment Loan is funded and on the last day of each month thereafter through the applicable Equipment Loan Maturity Date, Borrower shall repay each Equipment Loan to Silicon in monthly installments of principal based upon the principal amount of the Equipment Loan and a thirty-six (36) month straight-line amortization schedule, plus interest on the outstanding amount of the Equipment Loan at the rate set forth in this Agreement (each an “Equipment Loan Payment”). As used herein, “Equipment Loan Maturity Date” means thirty-five (35) months from the date of the first such principal payment on an Equipment Loan. Each Equipment Loan Payment

shall be due on and payable commencing on the last day of each month after the initial advance under an Equipment Loan until the applicable Equipment Loan Maturity Date.”

(b) The Loan Agreement shall be amended by deleting Section 1.2 thereof in its entirety and inserting in lieu thereof the following:

“1.2 Interest. All Loans, the Equipment Loan and all other monetary Obligations arising under this Agreement shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement. Interest shall be payable monthly, on the last day of the month. Unless otherwise paid by Borrower in compliance with the terms hereof, interest may, in Silicon’s reasonable discretion and upon notice, be charged to Borrower’s loan account, and the same shall thereafter bear interest at the same rate as the other Loans or the Equipment Loan, as applicable. Silicon may, in its reasonable discretion and upon notice, charge interest to Borrower’s Deposit Accounts maintained with Silicon.”

(c) The Loan Agreement shall be amended by deleting Section 1.3 thereof in its entirety and inserting in lieu thereof the following:

“1.3 Overadvances. If at any time or for any reason the total of all outstanding Loans and all other monetary Obligations arising hereunder (including the outstanding amount of extensions of credit under Sections 1.6, 1.7 and 1.8, but specifically excluding the amount of all Equipment Loans and any interest, fees, and expenses relating thereto) exceeds the Credit Limit (an “Overadvance”), Borrower shall within two (2) Business Days pay the amount of the excess to Silicon. Without limiting Borrower’s obligation to repay to Silicon the amount of any Overadvance, Borrower agrees to pay Silicon interest on the outstanding amount of any Overadvances, on demand, at the Default Rate.”

(d) The Loan Agreement shall be amended by deleting Section 1.5 thereof in its entirety and inserting in lieu thereof the following:

“1.5 Loan Requests. To obtain a Loan or an Equipment Loan, Borrower shall make a request to Silicon by facsimile or telephone. Such requests received after 12:00 Noon will not be considered by Silicon until the next Business Day. Silicon may rely on any telephone request for a Loan or an Equipment Loan given by a person whom Silicon reasonably believes is an authorized officer of Borrower, and Borrower will indemnify Silicon for any loss Silicon suffers as a result of that reliance.”

(e) The Loan Agreement shall be amended by deleting the preamble of Section 3 thereof in its entirety and inserting in lieu thereof the following:

“In order to induce Silicon to enter into this Agreement and to make Loans and advances under the Equipment Loan and except as disclosed on the Representations and Warranties Certificate, Borrower represents and warrants to Silicon as follows, and Borrower covenants that the following representations are true, as of the date hereof, and as of the date of any request for a Loan, an Equipment Loan or other financial accommodation hereunder, will continue to be true, and that Borrower will at all times comply with all of

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the following covenants, throughout the term of this Agreement and until all Obligations have been paid and performed in full:”

(f) The Loan Agreement shall be amended by deleting Section 3.11 thereof in its entirety and inserting in lieu thereof the following:

“3.11 Use of Proceeds. All proceeds of all Loans and the Equipment Loan shall be used solely for lawful business purposes. Borrower is not purchasing or carrying any “margin stock” (as defined in Regulation U of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan or the Equipment Loan will be used to purchase or carry any “margin stock” or to extend credit to others for the purpose of purchasing or carrying any “margin stock.””

(g) The Loan Agreement shall be amended by deleting section 6.1 thereof in its entirety and inserting in lieu thereof the following:

“6.1 Maturity Date. This Agreement shall continue in effect as to Loans and the Equipment Loan until the respective maturity dates set forth on the Schedule (the “Maturity Date”), subject to Section 6.2 below.”

(h) The Loan Agreement shall be amended by deleting the following text appearing in Section 7.1(b) in its entirety:

“(b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or”

and inserting in lieu thereof the following:

“(b) Borrower shall fail to pay when due any Loan, any Equipment Loan, any interest on either of the foregoing or any other monetary Obligation; or”

(i) The Loan Agreement shall be amended by deleting the following text appearing in Section 7.1(c) in its entirety:

“(c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit and Borrower shall have failed to pay the excess within 2 Business Days;”

and inserting in lieu thereof the following:

“(c) the total Loans and other Obligations outstanding at any time hereunder (including the outstanding amount of extensions of credit under Sections 1.6, 1.7 and 1.8, but specifically excluding the amount of all Equipment Loans and any interest, fees, and expenses relating thereto) shall exceed the Credit Limit and Borrower shall have failed to pay the excess within 2 Business Days;”

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(j) The Loan Agreement shall be amended by deleting the following text appearing in Section 7.1 in its entirety:

“Silicon may cease making any Loans hereunder during any of the above cure periods, and thereafter if an Event of Default has occurred and is continuing.”

and inserting in lieu thereof the following:

“Silicon may cease making any Loans and advances under the Equipment Loan during any of the above cure periods, and thereafter if an Event of Default has occurred and is continuing.”

(k) The Loan Agreement shall be amended by deleting the following text appearing in Section 7.2(a) in its entirety:

“(a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other document or agreement;”

and inserting in lieu thereof the following:

“(a) Cease making Loans and advances under the Equipment Loan, or otherwise extending credit to Borrower under this Agreement or any other document or agreement;”

(l) The Loan Agreement shall be amended by deleting the definition of “Obligations” appearing in Section 8 in its entirety and inserting in lieu thereof the following:

““Obligations” means all present and future Loans, Equipment Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to Silicon, whether evidenced by this Agreement or any note or other instrument or document, including, without limitation, the Borrower’s obligations pursuant to the IP Security Agreement, whether arising from an extension of credit, opening of a letter of credit, banker’s acceptance, foreign exchange contracts, loan, Cash Management Services, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Silicon in Borrower’s debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorney’s fees, expert witness fees, audit fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other present or future instrument or agreement between Borrower and Silicon.”

(m) The Loan Agreement shall be amended by deleting Section 1 of the Schedule thereto in its entirety and inserting in lieu thereof the following:

“Section 1		Credit Limit
(Section 1.1):		An amount not to exceed the lesser of (A) or (B), below:
(A)	(i)	$10,000,000.00 (the “Maximum Credit Limit”); minus
	(ii)	the aggregate amounts then undrawn on all outstanding letters of credit, foreign exchange contracts, or any other accommodations

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		issued or incurred, or caused to be issued or incurred by Silicon for the account and/or benefit of the Borrower.
(B)	(i)	80% of the amount of the Borrower’s Eligible Accounts, net of any offsets related to each specific Account Debtor, including, without limitation, Deferred Revenue; provided, however, Silicon will not net Deferred Revenue when Borrower is on “streamline reporting status” pursuant to Section 6, below; plus
	(ii)	the lesser of (a) 25% of Borrower’s Eligible Inventory (valued at the lower of actual cost or fair market value) or (b) $2,000,000.00; provided, however, in no event shall advances based upon Borrower’s Eligible Inventory exceed 30% of the amount of Borrower’s Eligible Accounts; minus
	(iii)	the aggregate amounts then undrawn on all outstanding letters of credit, foreign exchange contracts, or any other accommodations issued or incurred, or caused to be issued or incurred by Silicon for the account and/or benefit of the Borrower.
		Silicon may, from time to time, modify the advance rates set forth herein in its good faith business judgment upon 10 day prior written notice to Borrower based on changes in collection experience with respect to the Accounts or other issues or factors relating to the Accounts or the Collateral.
		Letter of Credit/Foreign Exchange Contract Sublimit (Section 1.6, and 1.7):
		$500,000.00
		Cash Management Services Sublimit (Section 1.8):
		$500,000.00”

(n) The Loan Agreement shall be amended by deleting Section 2 of the Schedule thereto in its entirety and inserting in lieu thereof the following:

“Section 2 INTEREST.

Interest Rate (Section 1.2):

(i) For all Loans hereunder: A rate equal to the Base Rate plus 1.50% per annum; provided, however, in the event Borrower is on “streamline reporting status” pursuant to Section 6, below, such rate shall be reduced to a rate equal to the Base Rate plus 0.50% per annum, to be effective as of the first day of any month in which Borrower is on “streamline reporting status”.

(ii) For all Equipment Loans hereunder: A rate equal to the Base Rate plus 2.00% per annum; provided, however, in the event Borrower is on “streamline reporting status” pursuant to Section 6, below, such rate shall be reduced to a rate equal to the Base Rate

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plus 1.00% per annum, to be effective as of the first day of any month in which Borrower is on “streamline reporting status”.

Interest in all circumstances shall be calculated on the basis of a 360-day year for the actual number of days elapsed. As used herein, “Base Rate” means the greater of (i) 4.25%, or (ii) the rate announced from time to time by Silicon as its “prime rate;” it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon. The interest rate applicable to the Obligations shall change on each date there is a change in the Base Rate.

Minimum Monthly Interest (Section 1.2): Not applicable.”

(o) The Loan Agreement shall be amended by deleting the following text appearing in Section 3 of the Schedule thereto:

“Early Termination Fee: If this Agreement is voluntarily or involuntarily terminated prior to its maturity, the Borrower shall pay to Silicon a termination fee in the amount equal to $70,000.00, provided that no such termination fee shall be charged if the credit facility hereunder is replaced or transferred to another division of Silicon. The termination fee shall be due and payable upon prepayment by the Borrower in the case of voluntary prepayments or upon demand by Silicon in the event of involuntary prepayment, and if not paid immediately shall bear interest at a rate equal to the highest rate applicable to any of the Obligations.”

and inserting in lieu thereof the following:

“Early Termination Fee: If this Agreement is voluntarily or involuntarily terminated prior to its maturity, the Borrower shall pay to Silicon a termination fee in the amount equal to $100,000.00, provided that no such termination fee shall be charged if the credit facility hereunder is replaced or transferred to another division of Silicon. In addition to and supplemental of the foregoing $100,000,00 fee, if the Equipment Loan is voluntarily or involuntarily prepaid prior to its maturity, the Borrower shall pay to Silicon a termination fee in the amount equal to 1.00% of the outstanding principal balance of all Equipment Loans (the “Equipment Loan Termination Fee”), provided that the Equipment Loan Termination Fee shall not be charged if the Equipment Loan hereunder is replaced or transferred to another division of Silicon. The termination fees in all instances shall be due and payable upon prepayment by the Borrower in the case of voluntary prepayments or upon demand by Silicon in the event of involuntary prepayment, and if not paid immediately shall bear interest at a rate equal to the highest rate applicable to any of the Obligations.”

(p) The Loan Agreement shall be amended by deleting the following text appearing in Section 4 of the Schedule thereto:

“Section 4	MATURITY DATE
(Section 6.1):	Two years from the date of this Agreement”

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and inserting in lieu thereof the following:

“Section 4	MATURITY DATE
(Section 6.1):	For all Loans:     September 23, 2007
	For each Equipment Loan:     thirty-six (36) months from the date of the Equipment Loan

(q) The Loan Agreement shall be amended by deleting Section 5 of the Schedule thereto in its entirety and inserting in lieu thereof the following:

“Section 5	FINANCIAL COVENANTS
(Section 5.1):	Borrower shall comply with the following covenant.

Compliance shall be determined as of the end of each month, except as otherwise specifically provided below:

a. Minimum Tangible Net Worth:

Borrower shall maintain a Tangible Net Worth of not less $16,000,000.00 as of the end of any calendar month (increasing in all instances by fifty (50%) percent of Borrower’s Net Income on a monthly basis plus fifty (50%) of the net cash proceeds of any additional issuances of equity after December 31, 2005 plus fifty (50%) of the principal amount of the net cash proceeds of any and all Subordinated Debt incurred by Borrower after December 31, 2005), from the date of this Agreement until the termination of this Agreement.

In no event shall the amount of this Minimum Tangible Net Worth covenant be decreased.

Definitions. For purposes of the foregoing financial covenants, the following term shall have the following meaning:

“Liabilities” shall have the meaning ascribed thereto by generally accepted accounting principles.

“Net Income” shall mean, as calculated on a consolidated basis for Borrower and any subsidiaries for any period as at any date of determination, the net profit, after provision for taxes, of Borrower and its subsidiaries for such period taken as a single accounting period.

“Tangible Net Worth” shall mean the excess of total assets over total Liabilities, determined in accordance with generally accepted accounting principles, with the following adjustments:

(A) there shall be excluded from assets: (i) notes, accounts receivable and other obligations owing to the Borrower from its officers or other Affiliates, and (ii) all assets which would be classified as intangible assets under generally accepted accounting principles, including without limitation goodwill, licenses, patents, trademarks, trade names, copyrights, capitalized software and organizational costs, licenses and franchises

(B) there shall be excluded from Liabilities: Subordinated Debt.”

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4. FEES. Borrower shall pay to Bank (i) a fee of $30,000.00 on the date of this Agreement in connection with the extension/modification of the Loans, (ii) an additional fee of $50,000.00 on or before September 23, 2006 in connection with the extension/modification of the Loans, and (iii) an additional fee of $12,500.00 on the date of this Agreement in connection with the Equipment Loan, each of which fees shall be deemed fully earned as of the date hereof. Borrower shall also reimburse Bank for all reasonable and documented legal fees and expenses incurred in connection with this amendment to the Existing Loan Documents.

5. RATIFICATION OF INTELLECTUAL PROPERTY SECURITY AGREEMENT. Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and conditions of a certain Intellectual Property Security Agreement dated as of September 23, 2004, and acknowledges, confirms and agrees that said Intellectual Property Security Agreement contains an accurate and complete listing of all Intellectual Property Collateral as to which an application or registration has been filed with the United States Copyright Office or the United States Patent and Trademark Office (except as disclosed to Bank in writing), and shall remain in full force and effect.

6. RATIFICATION OF PERFECTION CERTIFICATE. Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and disclosures contained in certain Representations and Warranties Certificates dated as of September 23, 2004, and acknowledges, confirms and agrees the disclosures and information Borrower provided to Bank in the Representations and Warranties Certificates have not changed, as of the date hereof, except as set forth in a certain Perfection Certificate of even date delivered by Borrower to Bank. To the extent there is any inconsistency between the disclosures and information set forth in the Representations and Warranties Certificates and the disclosures and information set forth in the Perfection Certificate, the disclosures and information set forth in the Perfection Certificate shall control.

7. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.

8. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Obligations.

9. NO DEFENSES OF BORROWER. Borrower hereby acknowledges and agrees that, as of the date hereof, Borrower has no offsets, defenses, claims, or counterclaims against Bank with respect to the Obligations, or otherwise.

10. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Obligations, Bank is relying upon Borrower’s representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank’s agreement to modifications to the existing Obligations pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Obligations. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Obligations. It is the intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker will be released by virtue of this Loan Modification Agreement.

11. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank.

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This Loan Modification Agreement is executed and shall be governed under the laws of the State of California as of the date first written above.

BORROWER:		BANK:
TUT SYSTEMS, INC.		SILICON VALLEY BANK
By:	/s/    RANDALL K. GAUSMAN	By:	/s/    BRUCE HELBERG
Name:	Randall K. Gausman	Name:	Bruce Helberg
Title:	Vice President, Finance and Administration	Title:	S.R.M.
	Chief Financial Officer and Secretary

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