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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



(Mark One)

|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended March 31, 2005.



or



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
 to
.



Commission File Number (000-25865)



Copper Mountain Networks, Inc.

(Exact name of registrant as specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 33-0702004                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)



10145 Pacific
Heights Blvd, Suite 530, San Diego, California 92121

(858) 410-7100

(Address, including zip code, and telephone number, including area code, of principal executive offices)



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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES x NO ̈



The number of shares outstanding of the issuers common stock, $.001 par value, as of April 30, 2005 was 7,777,301.



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COPPER MOUNTAIN NETWORKS,
INC.

INDEX



|              |  |                       |  |                                                                                       |  |     
|------------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|              |  |                       |  |                                                                                       |  | Page
|Part I.       |  | Financial Information |  |                                                                                      
|              |  |                       | 
|              |  | Item 1.               |  | Financial Statements                                                                  |  |     
|              |  |                       | 
|              |  |                       |  | Condensed Balance Sheets at March 31, 2005 and December 31, 2004                      |  | 3   
|              |  |                       | 
|              |  |                       |  | Condensed Statements of Operations for the three months ended March 31, 2005 and 2004 |  | 4   
|              |  |                       | 
|              |  |                       |  | Condensed Statement of Stockholders Equity for the three months ended March 31, 2005 |  | 5   
|              |  |                       | 
|              |  |                       |  | Condensed Statements of Cash Flows for the three months ended March 31, 2005 and 2004 |  | 6   
|              |  |                       | 
|              |  |                       |  | Notes to Condensed Financial Statements                                               |  | 7   
|              |  |                       | 
|              |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12  
|              |  |                       | 
|              |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 21  
|              |  |                       | 
|              |  | Item 4.               |  | Controls and Procedures                                                               |  | 22  
|              |  |                      
|Part II.      |  | Other Information     |  |                                                                                      
|              |  |                       | 
|              |  | Item 1.               |  | Legal Proceedings                                                                     |  | 23  
|              |  |                       | 
|              |  | Item 5.               |  | Other Information                                                                     |  | 24  
|              |  |                       | 
|              |  | Item 6.               |  | Exhibits                                                                              |  | 24  
|              |  |                      
|Signatures    |  |                       |  | 25                                                                                   
|              |  |                      
|Exhibit Index |  |                       |  | 26                                                                                   



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PART I  FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------



COPPER MOUNTAIN NETWORKS, INC.

CONDENSED BALANCE SHEETS

(in thousands)



|                                           |  |               |          |   |                  |   |          |  
|------------------------------------------ |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                           |  | March 31,2005 |          |   | December 31,2004 |  
|                                           |  | (Unaudited)   |          |   |                  |  
|ASSETS                                     |  |               |          |   |                  |   |          |  
|Current assets:                            |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                  |  | $             | 6,193    |   |                  | $ | 10,183   |  
|Short-term marketable investments          |  |               |         |   |                  |   | 2,247    |  
|Accounts receivable                        |  |               | 237      |   |                  |   | 887      |  
|Inventory, net                             |  |               | 211      |   |                  |   | 150      |  
|Other current assets                       |  |               | 660      |   |                  |   | 662      |  
|                                           |  |               |          |   |                  |   |          |  
|Total current assets                       |  |               | 7,301    |   |                  |   | 14,129   |  
|Property and equipment, net                |  |               | 806      |   |                  |   | 1,271    |  
|Other assets                               |  |               |         |   |                  |   | 300      |  
|                                           |  |               |          |   |                  |   |          |  
|Total assets                               |  | $             | 8,107    |   |                  | $ | 15,700   |  
|                                           |  |               |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |               |          |   |                  |   |          |  
|Current liabilities:                       |  |               |          |   |                  |   |          |  
|Accounts payable                           |  | $             | 457      |   |                  | $ | 856      |  
|Accrued restructuring costs                |  |               |         |   |                  |   | 419      |  
|Accrued liabilities                        |  |               | 1,901    |   |                  |   | 2,719    |  
|                                           |  |               |          |   |                  |   |          |  
|Total current liabilities                  |  |               | 2,358    |   |                  |   | 3,994    |  
|Accrued restructuring costs                |  |               |         |   |                  |   | 488      |  
|Other accrueds                             |  |               | 9        |   |                  |   | 163      |  
|Stockholders equity:                      |  |               |          |   |                  |   |          |  
|Common stock                               |  |               | 8        |   |                  |   | 8        |  
|Additional paid in capital                 |  |               | 261,264  |   |                  |   | 262,642  |  
|Deferred compensation                      |  |               | (1,261   | ) |                  |   | (2,500   | )
|Accumulated deficit                        |  |               | (254,271 | ) |                  |   | (249,095 | )
|                                           |  |               |          |   |                  |   |          |  
|Total stockholders equity                 |  |               | 5,740    |   |                  |   | 11,055   |  
|                                           |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity |  | $             | 8,107    |   |                  | $ | 15,700   |  
|                                           |  |               |          |   |                  |   |          |  



See accompanying notes
to condensed financial statements



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COPPER MOUNTAIN NETWORKS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                                                                                                                        |  |                             |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                                                        |  | Three Months EndedMarch 31, |       
|                                                                                                                                                        |  | 2005                        |        |   | 2004 |  
|Net revenue                                                                                                                                             |  | $                           | 317    |   |      | $ | 1,989  |  
|Cost of revenue                                                                                                                                         |  |                             | 273    |   |      |   | 647    |  
|                                                                                                                                                        |  |                             |        |   |      |   |        |  
|Gross margin                                                                                                                                            |  |                             | 44     |   |      |   | 1,342  |  
|Operating expenses:                                                                                                                                     |  |                             |        |   |      |   |        |  
|Research and development                                                                                                                                |  |                             | 2,121  |   |      |   | 3,391  |  
|Sales and marketing                                                                                                                                     |  |                             | 492    |   |      |   | 1,489  |  
|General and administrative                                                                                                                              |  |                             | 1,974  |   |      |   | 1,612  |  
|Amortization of deferred stock compensation*                                                                                                            |  |                             | (139   | ) |      |   | 594    |  
|Restructuring charges                                                                                                                                   |  |                             | 815    |   |      |   |       |  
|                                                                                                                                                        |  |                             |        |   |      |   |        |  
|Total operating expenses                                                                                                                                |  |                             | 5,263  |   |      |   | 7,086  |  
|                                                                                                                                                        |  |                             |        |   |      |   |        |  
|Loss from operations                                                                                                                                    |  |                             | (5,219 | ) |      |   | (5,744 | )
|Other income (expense):                                                                                                                                 |  |                             |        |   |      |   |        |  
|Interest and other income                                                                                                                               |  |                             | 43     |   |      |   | 41     |  
|Interest expense                                                                                                                                        |  |                             |       |   |      |   | (3     | )
|                                                                                                                                                        |  |                             |        |   |      |   |        |  
|Net loss                                                                                                                                                |  | $                           | (5,176 | ) |      | $ | (5,706 | )
|                                                                                                                                                        |  |                             |        |   |      |   |        |  
|Basic and diluted net loss per share                                                                                                                    |  | $                           | (0.73  | ) |      | $ | (0.99  | )
|                                                                                                                                                        |  |                             |        |   |      |   |        |  
|Basic and diluted common equivalent shares                                                                                                              |  |                             | 7,094  |   |      |   | 5,778  |  
|                                                                                                                                                        |  |                             |        |   |      |   |        |  
|                                                                                                                                                       
|*  The following table shows how the Companys deferred stock compensation would be allocated to cost of revenue
and the respective expense categories: | 
|                                                                                                                                                        |  |                            
|Cost of revenue                                                                                                                                         |  | $                           |       |   |      | $ | 10     |  
|Research and development                                                                                                                                |  |                             | (134   | ) |      |   | 147    |  
|Sales and marketing                                                                                                                                     |  |                             | (154   | ) |      |   | 42     |  
|General and administrative                                                                                                                              |  |                             | 149    |   |      |   | 395    |  
|                                                                                                                                                        |  |                             |        |   |      |   |        |  
|Total                                                                                                                                                   |  | $                           | (139   | ) |      | $ | 594    |  
|                                                                                                                                                        |  |                             |        |   |      |   |        |  



See accompanying notes
to the financial statements



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COPPER MOUNTAIN NETWORKS, INC.

CONDENSED STATEMENT OF STOCKHOLDERS EQUITY

(in thousands)

(unaudited)



|                                                                   |  |                 |   |                           |        |   |                      |   |         |                    |  |   |                          |   |  |   |          |   |  |   |        |  
|------------------------------------------------------------------ |  | --------------- | - | ------------------------- | ------ | - | -------------------- | - | ------- | ------------------ |  | - | ------------------------ | - |  | - | -------- | - |  | - | ------ | -
|                                                                   |  | Common Stock    |   | Additional Paid inCapital |        |   | DeferredCompensation |   |         | AccumulatedDeficit |  |   | TotalStockholdersEquity |  
|                                                                   |  | Number ofShares |   |                           | Amount |   |                      |   |        
|Balance at January 1, 2005                                         |  | 7,933           |   |                           | $      | 8 |                      | $ | 262,642 |                    |  | $ | (2,500                   | ) |  | $ | (249,095 | ) |  | $ | 11,055 |  
|Adjustment of deferred compensation related to options outstanding |  |                |   |                           |        |  |                      |   | (57     | )                  |  |   | 57                       |   |  |   |         |   |  |   |       |  
|Amortization related to deferred stock compensation                |  |                |   |                           |        |  |                      |   |        |                    |  |   | (139                     | ) |  |   |         |   |  |   | (139   | )
|Cancellation of restricted stock                                   |  | (142            | ) |                           |        |  |                      |   | (1,321  | )                  |  |   | 1,321                    |   |  |   |         |   |  |   |       |  
|Net loss                                                           |  |                |   |                           |        |  |                      |   |        |                    |  |   |                         |   |  |   | (5,176   | ) |  |   | (5,176 | )
|                                                                   |  |                 |   |                           |        |   |                      |   |         |                    |  |   |                          |   |  |   |          |   |  |   |        |  
|Balance at March 31, 2005                                          |  | 7,791           |   |                           | $      | 8 |                      | $ | 261,264 |                    |  | $ | (1,261                   | ) |  | $ | (254,271 | ) |  | $ | 5,740  |  
|                                                                   |  |                 |   |                           |        |   |                      |   |         |                    |  |   |                          |   |  |   |          |   |  |   |        |  



See accompanying notes
to condensed financial statements



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COPPER MOUNTAIN NETWORKS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                            |  |                              |        |   |      |   |        |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                            |  | Three Months Ended March 31, |       
|                                                                            |  | 2005                         |        |   | 2004 |  
|Cash flows from operating activities:                                       |  |                              |        |   |      |   |        |  
|Net loss                                                                    |  | $                            | (5,176 | ) |      | $ | (5,706 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                              |        |   |      |   |        |  
|Depreciation and amortization                                               |  |                              | 465    |   |      |   | 470    |  
|Non-cash compensation                                                       |  |                              | (139   | ) |      |   | 594    |  
|Changes in operating assets and liabilities:                                |  |                              |        |   |      |   |        |  
|Accounts receivable                                                         |  |                              | 650    |   |      |   | 409    |  
|Inventory                                                                   |  |                              | (61    | ) |      |   | (314   | )
|Other current assets and other assets                                       |  |                              | 302    |   |      |   | (218   | )
|Accounts payable and accrued liabilities                                    |  |                              | (1,371 | ) |      |   | (247   | )
|Accrued restructuring costs                                                 |  |                              | (907   | ) |      |   | (403   | )
|                                                                            |  |                              |        |   |      |   |        |  
|Net cash used in operating activities                                       |  |                              | (6,237 | ) |      |   | (5,415 | )
|                                                                            |  |                              |        |   |      |   |        |  
|Cash flows from investing activities:                                       |  |                              |        |   |      |   |        |  
|Purchases of marketable investments                                         |  |                              |       |   |      |   | (2,333 | )
|Maturities of marketable investments                                        |  |                              | 2,247  |   |      |   | 5,331  |  
|Purchases of property and equipment                                         |  |                              |       |   |      |   | (182   | )
|                                                                            |  |                              |        |   |      |   |        |  
|Net cash provided by investing activities                                   |  |                              | 2,247  |   |      |   | 2,816  |  
|                                                                            |  |                              |        |   |      |   |        |  
|Cash flows from financing activities:                                       |  |                              |        |   |      |   |        |  
|Payments on capital leases and equipment notes payable                      |  |                              |       |   |      |   | (89    | )
|Proceeds from issuance of common stock, net                                 |  |                              |       |   |      |   | 17     |  
|                                                                            |  |                              |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                         |  |                              |       |   |      |   | (72    | )
|                                                                            |  |                              |        |   |      |   |        |  
|Net decrease in cash and cash equivalents                                   |  |                              | (3,990 | ) |      |   | (2,671 | )
|Cash and cash equivalents at beginning of period                            |  |                              | 10,183 |   |      |   | 13,003 |  
|                                                                            |  |                              |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                  |  | $                            | 6,193  |   |      | $ | 10,332 |  
|                                                                            |  |                              |        |   |      |   |        |  
|Supplemental information:                                                   |  |                              |        |   |      |   |        |  
|Interest paid                                                               |  | $                            |       |   |      | $ | 3      |  
|                                                                            |  |                              |        |   |      |   |        |  



See accompanying notes
to condensed financial statements



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NOTE 1 - General



In managements opinion, the accompanying unaudited financial statements for Copper Mountain Networks, Inc. (the Company) for the three months ended
March 31, 2005 and 2004 have been prepared in accordance with generally accepted accounting principles for interim financial statements and include all adjustments that the Company considers necessary for a fair presentation of its financial
position, results of operations, and cash flows for such periods. However, the accompanying financial statements do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial
statements. This quarterly report and the accompanying financial statements should be read in conjunction with the Companys audited financial statements and notes thereto presented in its Annual Report on Form 10-K for the year ended December
31, 2004 (the 2004 Annual Report). Footnotes which would substantially duplicate the disclosures in the Companys audited financial statements for the year ended December 31, 2004 contained in the 2004 Annual Report have been
omitted. The interim financial information contained in this quarterly report is not necessarily indicative of the results to be expected for any other interim period or for the full year ending December 31, 2005.



Management Plans



The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The
Company is experiencing difficulty in generating sufficient cash flow to meet its obligations and sustain its operations, which raises substantial doubt about its ability to continue as a going concern. As shown in the financial statements, the
Company incurred significant losses of $5.2 million from continuing operations for the three months ended March 31, 2005. The Company currently funds its operations with its cash, cash equivalents and marketable investments. During the three months
ended March 31, 2005 the Company used approximately $6.2 million in cash to fund its operations. At March 31, 2005 the Company had $6.2 million of cash, cash equivalents and short term investments.



On February 11, 2005 the Company announced that it had signed a definitive
merger agreement with Tut Systems, Inc. of Lake Oswego, Oregon (Tut Systems). Under this agreement, Tut Systems will acquire all of the Companys outstanding shares of common stock in a stock-for-stock transaction. Upon closing, Tut
Systems will issue approximately 2.5 million shares of its common stock to the Companys stockholders. Subject to approval of the transaction by the Companys stockholders and to other customary closing conditions, the transaction is
expected to close in the second quarter of 2005. The Company expects that its business activities in the future will be severely limited as the Company conserves its resources and prepares for the consummation of the merger with Tut Systems. The
Company cannot assure that the merger with Tut Systems or any other transaction will be approved and consummated.



As a result of the reduction in the number of its employees and corresponding curtailing of its business operations that the Company announced in January
2005 and executed in the first quarter of 2005, the Company currently believes that it has sufficient cash and cash equivalents to fund its limited remaining operations through August 2005.



If the merger with Tut Systems is not completed before the end of August 2005
or at all, the Company will have to further reduce its expenses, seek additional financing or both. The Company expects that such additional financing would not be available at that time and that it would be required to cease its operations and
liquidate its business. In that event, the Company believes that it is likely that it would file for or be forced to resort to bankruptcy protection. If the Company were to file for bankruptcy protection, it is possible that it would be unable to
pay, or provide for the payment of, all of its liabilities and obligations, and, therefore, there would be no assets available for distribution to its stockholders.



Concentration of Credit Risk



A relatively small number of customers account for a significant percentage of the Companys revenues. The Company expects that the sale of its
products to a limited number of customers may continue to account for a high percentage of revenues for the foreseeable future. The Companys revenues for the three months ended March 31, 2005 include revenue recognized from three significant
customers totaling $129,000, or 41%; $63,000, or 20%; and $34,000, or 11% of net revenue. The Companys revenues for the



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three months ended March 31, 2004 include revenue recognized from three significant customers totaling $0.4 million, or 18%; $0.3 million, or 14%; and $0.3
million, or 13% of net revenue.



The Company performs ongoing
credit evaluations of its customers as it deems appropriate, and generally requires no collateral. The Company had significant accounts receivable balances due from three customers individually representing 54%, 19%, and 14% of total accounts
receivable at March 31, 2005.



The Company from time to time
maintains a substantial portion of its cash and cash equivalents in money market accounts with one financial institution. The Company invests its excess cash in debt instruments of the U.S. Treasury, governmental agencies and corporations with
strong credit ratings. The Company has established guidelines relative to diversification and maturities that attempt to maintain safety and liquidity.



Inventory



Inventory is stated at the lower of cost (which approximates actual costs on a first-in, first-out basis) or market. During the three months ended March
31, 2005 the Company sold CE200 access concentrators and related line cards that had been previously written down by $0.1 million. During the three months ended March 31, 2004 the Company sold CE200 access concentrators and related line cards that
had been previously written down by $0.1 million.



Property and Equipment



Property and equipment is stated at cost and depreciated
using the straight-line method over the estimated useful lives of the assets, ranging from two to five years, or lease terms for leasehold improvements. For the quarter ended March 31, 2005, depreciation expense was $0.5 million. This expense
included $0.2 million in additional depreciation expense resulting from a change in the estimated life of property and equipment as a result of lease terminations and reduced operations.



Deferred Stock Compensation



The deferred stock compensation expense line item in the Companys income statement includes the amortization of deferred stock compensation from
grants of restricted stock and from re-priced stock options. The compensation expense for the restricted stock awards is fixed at the time of grant. Amortization of restricted stock deferred stock compensation net of credits from the cancellation of
restricted stock for the three months ended March 31, 2005 resulted in a net credit of $86,000. The deferred stock compensation expense related to the re-priced options is re-measured at the end of each reporting period and may fluctuate depending
on the price of the Companys common stock. The re-measurement of the compensation expense during the three months ended March 31, 2005 resulted in a credit of $53,000 as a result of the decline in the Companys stock price.



Stock-Based Compensation



The Company has elected to follow Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees to account for its employee stock option plans. Under APB Opinion No. 25, when the exercise price of the Companys employee stock options is not less than
the fair value price of the underlying stock on the date of grant, no compensation expense is recognized in the Companys financial statements. The amount of the compensation expense is amortized to expense in accordance with FASB
Interpretation No. 44 over the vesting period of the individual options, generally four years.



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Had compensation cost for the Companys stock-based compensation plans been determined consistent
with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the Companys pro forma amounts would have been as indicated below (in thousands, except per share data):



|                                                                                                                                   |  |                             |        |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                                                                   |  | Three Months EndedMarch 31, |       
|                                                                                                                                   |  | 2005                        |        |   | 2004 |  
|Net loss as reported                                                                                                               |  | $                           | (5,176 | ) |      | $ | (5,706  | )
|Add: Stock-based employee compensation included in net loss, net of related tax effects                                            |  |                             | (53    | ) |      |   | 224     |  
|Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                             | 246    |   |      |   | (480    | )
|                                                                                                                                   |  |                             |        |   |      |   |         |  
|Pro forma net loss under SFAS No. 123                                                                                              |  | $                           | (4,983 | ) |      | $ | (5,962  | )
|                                                                                                                                   |  |                             |        |   |      |   |         |  
|Basic and diluted net loss per share as reported                                                                                   |  | $                           | (0.73  | ) |      | $ | (0.99   | )
|                                                                                                                                   |  |                             |        |   |      |   |         |  
|Pro forma basic and diluted net loss per share under SFAS No. 123                                                                  |  | $                           | (0.70  | ) |      | $ | (1.03   | )
|                                                                                                                                   |  |                             |        |   |      |   |         |  
|Assumptions:                                                                                                                       |  |                             |        |   |      |   |         |  
|Dividend Yield                                                                                                                     |  |                             |       |   |      |   |        |  
|Volatility factor                                                                                                                  |  |                             |       |   |      |   | 52      | %
|Risk free interest rate                                                                                                            |  |                             |       |   |      |   | 1.25    | %
|Expected Life of Option                                                                                                            |  |                             |       |   |      |   | 2 years |  



There were no stock options granted
during the three months ended March 31, 2005. The weighted-average estimated fair value of stock options granted during the three months ended March 31, 2004 was $4.80 per share. For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the vesting period.



Warranty Reserves



The Company provides limited warranties on certain of its
products for periods of up to one year. The Company recognizes warranty reserves when products are shipped based upon an estimate of total warranty costs, and such reserves are included in accrued liabilities. The estimate of such costs is based
upon historical and anticipated requirements (in thousands).



|                 |  |                          |                             |           |   |                             |   |                                  |   |     |                          |  |   |   
|---------------- |  | ------------------------ | --------------------------- | --------- | - | --------------------------- | - | -------------------------------- | - | --- | ------------------------ |  | - | --
|                 |  | Balance atJanuary 1,2005 |                             | Additions |   | DeductionsFor CostsIncurred |   | DeductionsFor ChangeIn Estimates |   |     | Balance at March 31,2005
|                 |  |                          | Charged toCosts andExpenses |           |   |                            
|Accrued warranty |  | $                        | 125                         |           |  |                             |  |                                  | $ | (50 | )                        |  | $ | 75



Revenue Recognition



Revenue is recognized when all four of the following criteria are met:
(i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable and; (iv) collectibility is reasonably assured. Sales returns are estimated based on
historical experience and managements expectations and are recorded at the time product revenue is recognized.



Annual service and support arrangements can be purchased by customers for products no longer under warranty and are generally billed quarterly. Revenue
from service and support arrangements is recognized ratably over the respective service period or as services are performed.



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The Company may extend limited stock rotation, product return and price protection rights to certain
distributors and resellers. The Company may not be able to estimate product returns if the relationship with the distributor is new or if there is limited historical basis to determine product returns.



NOTE 2-Management Estimates and Assumptions



The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Some
examples include provisions for returns; bad debts; excess inventory and adverse purchase commitments; restructuring; and the ultimate outcome of litigation. Actual results could differ from those estimates.



NOTE 3  Net Loss Per Share



Basic net income (loss) per share is computed by dividing the net income (loss) for the
period by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of shares of common stock
and dilutive common stock equivalents outstanding during the period. Common stock equivalents of 0.2 million and 0.9 million for the three month periods ending March 31, 2005 and 2004, respectively, were excluded from the calculation because of
their anti-dilutive effect.



NOTE 4 - Composition of Certain Balance Sheet
Captions (in thousands)



|                                      |  |               |         |   |                  |   |         |  
|------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                      |  | March 31,2005 |         |   | December 31,2004 |  
|                                      |  | (Unaudited)   |         |   |                  |  
|Inventory:                            |  |               |         |   |                  |   |         |  
|Raw materials                         |  | $             | 32,358  |   |                  | $ | 32,371  |  
|Work in process                       |  |               |        |   |                  |   |        |  
|Finished goods                        |  |               | 958     |   |                  |   | 1,070   |  
|Allowance for excess and obsolescence |  |               | (33,105 | ) |                  |   | (33,291 | )
|                                      |  |               |         |   |                  |   |         |  
|                                      |  | $             | 211     |   |                  | $ | 150     |  
|                                      |  |               |         |   |                  |   |         |  
|Accrued liabilities:                  |  |               |         |   |                  |   |         |  
|Accrued compensation                  |  | $             | 587     |   |                  | $ | 687     |  
|Accrued paid time off                 |  |               | 308     |   |                  |   | 549     |  
|Accrued warranty                      |  |               | 75      |   |                  |   | 125     |  
|Deferred revenue                      |  |               | 144     |   |                  |   | 176     |  
|Other                                 |  |               | 787     |   |                  |   | 1,182   |  
|                                      |  |               |         |   |                  |   |         |  
|                                      |  | $             | 1,901   |   |                  | $ | 2,719   |  
|                                      |  |               |         |   |                  |   |         |  



NOTE 5  Restructuring



The Company has had three restructurings since March 2001. These
restructurings resulted in the Company adopting business plans to re-size its business to reflect current and expected business conditions. As a result of the adoption of these plans, the Company recorded total charges of approximately $21.7
million. These charges primarily relate to: consolidation of the Companys continuing operations resulting in impairment of assets; anticipated losses on disposition of assets and excess lease costs; and the elimination of job responsibilities,
resulting in costs incurred for employee severance.



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The remaining balance of the accrued restructuring charges are as follows (in thousands):



|                   |  |                |  |                          |     |        |   |                             |  |   |                         |   |  |   |  
|------------------ |  | -------------- |  | ------------------------ | --- | ------ | - | --------------------------- |  | - | ----------------------- | - |  | - | -
|                   |  | Cash/ Non-cash |  | Balance atJanuary 1,2005 |     | Charge |   | Payment ofexcess leasecosts |  |   | Balance atMarch 31,2005
|Excess lease costs |  | Cash           |  | $                        | 907 |        | $ | 815                         |  | $ | (1,722                  | ) |  | $ | 



NOTE 6  Litigation and Claims



In December 2001, the Company and certain of its officers and directors
were named as defendants in a class action shareholder complaint filed in the United States District Court for the Southern District of New York, now captioned In re Copper Mountain Networks, Inc. Initial Public Offering Securities
Litigation, Case No. 01-CV-10943. In the amended complaint, the plaintiffs allege that the Company, certain of its officers and directors and the underwriters of its initial public offering (IPO) violated section 11 of the Securities
Act of 1933 based on allegations that the Companys IPO registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The
amended complaint also contains a claim for violation of section 10(b) of the Securities Exchange Act of 1934 based on allegations that this omission constituted deceit on investors. The plaintiffs seek unspecified monetary damages and other relief.
Similar complaints collectively referred to here as the IPO Lawsuits, were filed in the same court against hundreds of other public companies (Issuers) who conducted IPOs between 1998 and 2000.



On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes before United
States Judge Shira Scheindlin of the Southern District of New York. On July 15, 2002, the Company joined in a global motion to dismiss the IPO Lawsuits filed by all of the Issuers (among others). On October 9, 2002, the Court entered an order
dismissing our named officers and directors from the IPO Lawsuits without prejudice, pursuant to an agreement tolling the statute of limitations with respect to these officers and directors until September 30, 2003. On February 19, 2003, the court
issued a decision denying the motion to dismiss the claims against the Company and almost all of the Issuers, and denying the motion to dismiss the Section 10(b) claims against the Company and many of the other issuers.



In June 2003, the Issuers reached a tentative settlement agreement with the plaintiffs that
would, among other things, result in the dismissal with prejudice of all claims against the issuers and their officers and directors in the IPO Lawsuits. In addition, the tentative settlement guarantees that, in the event that the Plaintiffs recover
less than $1 billion in settlement or judgment against the Underwriter defendants in the IPO Lawsuits, the Plaintiffs will be entitled to recover the difference between the actual recovery and $1 billion from the insurers for the Issuers. In
September 2003, in connection with the tentative settlement, those officers and directors who had entered tolling agreements (described above) agreed to extend those agreements so that they would not expire prior to any settlement being finalized.
In June 2004, the Company executed a final settlement agreement with the plaintiffs. On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes, and granting preliminary approval of the settlement subject to
modification of certain bar orders contemplated by the settlement. In addition, the settlement is still subject to statutory notice requirements as well as final judicial approval.



No assurances can be made that the Company will be successful in settling or defending against these claims. If the Company is not
successful in settling or defending against these claims, the Company could be forced to make significant payments to our stockholders and their lawyers, and such payments could have a material adverse effect on the Companys business,
financial condition and results of operations if not covered by the Companys insurance carrier. Even if such claims are not successful, the litigation could result in substantial costs and divert managements attention and resources,
which could adversely affect the Companys business, results of operations and financial position.



The Company is party to other legal proceedings and claims in the ordinary course of business. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, management
is unable to ascertain the ultimate aggregate amount of monetary liability, amounts which may be covered by insurance, or the financial impact with respect to these matters as of March 31, 2005.



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However, management believes that the final resolution of these matters, individually and in the aggregate, will not have a material adverse impact upon the
Companys financial position, results of operations or cash flows.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



Forward Looking Statements



This document contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as may, will, should, expect, plan, anticipate, believe, estimate, predict,
potential or continue, the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.



Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual
results or to changes in our expectations.



Readers are also
urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made under the caption
Managements Discussion and Analysis of Financial Condition and Results of Operations and under the caption Risk Factors included herein and in the Companys Annual Report on Form 10-K for the year ended December
31, 2004 and other reports and filings made with the Securities and Exchange Commission.



Overview



We were
founded in 1996 as a provider of high-speed digital subscriber line, or DSL, based communications products. We have developed and sold a broad set of products to enable efficient and scalable deployment of advanced voice, video, and data services
over existing network infrastructure.



In January 2005 we
announced that, after an extensive evaluation of strategic alternatives, we had initiated actions to lay off most of our remaining employees by March 22, 2005, retaining a limited team of employees to provide customer support and handle matters
related to the ongoing exploration of strategic alternatives.



On February 11, 2005 we announced that we had signed a definitive merger agreement with Tut Systems, Inc. (Tut Systems). Under this agreement, Tut Systems will acquire all of our outstanding shares of common stock in a
stock-for-stock transaction. Upon closing, Tut Systems will issue approximately 2.5 million shares of its common stock to our stockholders. Subject to approval of the transaction by our stockholders and to other customary closing conditions, the
transaction is expected to close in the second quarter of 2005.



We expect that our business activities in the future will be severely limited as we conserve our resources and prepare for the consummation of the merger with Tut Systems. We cannot assure you that the merger with Tut Systems or any other
transaction will be approved and consummated. If the merger with Tut Systems is not consummated, and assuming that we are unable to secure an alternative sale of our business, we will most likely cease our business operations entirely and pursue a
liquidation, which may be effected through a bankruptcy filing.



Currently, our revenue is generated primarily from sales of and service on our CopperEdge 200 DSL concentrators, or CE200, and the related wide area network (WAN) modules and line modules, as well as from CE200 system software upgrade
licenses. Additionally, we license network management software, which provides monitoring and management capabilities for the CE200, revenues from which have not been material to date.



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For the three months ended March 31, 2005, sales to our three largest customers accounted for
approximately 72% of our revenue, of which sales to LDMI, Florida Digital, and Graybar (a reseller) accounted for approximately 41%, 20%, and 11% of our revenue, respectively. While the level of sales to any specific customer is anticipated to vary
from period to period, we expect that we will continue to have significant customer concentration for the foreseeable future. Our customers buying patterns are unpredictable. Future sales, if any, to the significant customers mentioned above
are likely to be substantially less than historical sales. The loss of any one of our major customers or the delay of significant orders from such customers, even if only temporary, could, among other things, reduce or delay our net revenue.



We sell our products directly to telecommunications service
providers and through distributors. We generally recognize revenue from product sales upon shipment if collection of the resulting receivable is probable and product returns are reasonably estimated. No revenue is recognized on products shipped on a
trial basis. Estimated sales returns, based on historical experience by product, are recorded at the time the product revenue is recognized. To date, significant revenues generated from international sources are entirely comprised of sales to
Versatel.



Our gross margin has been affected by many factors,
including competitive pricing pressures, fluctuations in manufacturing volumes, costs of components and sub-assemblies, costs from our contract manufacturers, the mix of products or system configurations sold and the volume and timing of sales of
follow-on line cards for systems shipped in prior periods. As of March 31, 2005, we had a substantial amount of fully reserved finished goods and component inventory. Our reserve had been established based on our projection, which indicated certain
inventories would not be used or would be sold below their original cost. In the future, we could utilize fully reserved components to complete product, which could result in higher gross margins. The gross margin realized will be highly dependent
upon our cost to complete the units, including the cost of additional components and costs from our contract manufacturers for assembly, and our ability to sustain pricing at current levels, which may prove to be difficult given the severe pricing
pressures that we are currently experiencing. In addition, our overall gross margin realized on sales of our products may fluctuate widely and will be highly dependent upon sales mix, utilization of fully reserved inventory, if any, and the prices
at which our customers are willing to purchase our products.



We outsource most of our manufacturing and supply chain management operations, and we conduct manufacturing engineering, quality assurance, program management, documentation control and product repairs at our facility in San Diego,
California. Accordingly, a significant portion of our cost of revenue during the periods presented consists of payments to our contract manufacturers, which in 2005 was principally with Plexus Corporation. We selected our manufacturing partner with
the goal of ensuring a reliable supply of high quality finished products and of lowering per unit product costs as a result of manufacturing economies of scale. However, we cannot assure you that we will achieve or maintain the volumes required to
realize these economies of scale or when or if such cost reductions will occur. The failure to obtain such cost reductions could materially adversely affect our gross margins and operating results.



Research and development expenses consist primarily of salaries and related
personnel expenses, consultant fees and prototype expenses related to the design, development and testing of our products and enhancement of our network management software.



Sales and marketing expenses consist of salaries, commissions and related expenses for personnel engaged in marketing, sales
and field service support functions.



General and
administrative expenses consist primarily of salaries and related expenses for executive, finance, human resources, management information systems and administrative personnel, professional fees and other general corporate expenses.



We have had three restructurings since March 2001. These restructurings
involved re-sizing our business to reflect current and expected business conditions. As a result of the adoption of these restructurings, we recorded total charges of approximately $21.7 million. These charges primarily relate to:



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consolidation of our continuing operations resulting in impairment of assets; anticipated losses on disposition of assets and excess lease costs; and the
elimination of job responsibilities, resulting in costs incurred for employee severance.



The remaining balances of the accrued restructuring charges are as follows (in thousands):



|                   |  |               |  |                          |     |        |   |                             |  |   |                         |   |  |   |  
|------------------ |  | ------------- |  | ------------------------ | --- | ------ | - | --------------------------- |  | - | ----------------------- | - |  | - | -
|                   |  | Cash/Non-cash |  | Balance atJanuary 1,2005 |     | Charge |   | Payment ofexcess leasecosts |  |   | Balance atMarch 31,2005
|Excess lease costs |  | Cash          |  | $                        | 907 |        | $ | 815                         |  | $ | (1,722                  | ) |  | $ | 



Critical Accounting Policies



Our discussion and analysis of our financial condition
and results of operations are based upon our consolidated financial statements, which are prepared in accordance with generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the
reporting period. Examples include estimated restructuring costs, excess inventory and adverse purchase commitments, provisions for returns, bad debts, warranty costs, and the ultimate realizability of investments and the ultimate outcome of
litigation. Actual results could differ from those estimates.



We have several critical accounting policies that are both important to the portrayal of our financial condition and results of operations and require managements most difficult, subjective and complex judgments. Typically, the
circumstances that make these judgments complex and difficult have to do with making estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are as follows:



Revenue is recognized when all four of the following criteria are met: (i)
persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable and; (iv) collectibility is reasonably assured. Sales returns are estimated based on
historical experience and managements expectations and are recorded at the time product revenue is recognized. Annual service and support arrangements can be purchased by customers for products no longer under warranty and are generally billed
quarterly. Revenue from service and support arrangements is recognized ratably as services are performed. We may extend limited stock rotation, product return and price protection rights to certain distributors and resellers. The Company may not be
able to estimate product returns if the relationship with the distributor is new or if there is limited historical basis to determine product returns.



Inventory is stated at the lower of cost (which approximates actual costs on a first-in, first-out basis) or market. We estimate the market value of our
inventory based upon anticipated future demand for our products.



We provide limited warranties on certain of our products, typically for periods of up to one year. We recognize warranty reserves when products are shipped based upon an estimate of total warranty costs, and such reserves are included in
accrued liabilities. The estimate of such costs is based upon historical and anticipated requirements.



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Results of Operations



The following table sets forth, as a percentage of net revenue, certain statement of operations data for the periods indicated.



|                                              |  |                             |    |  |        |   
|--------------------------------------------- |  | --------------------------- | -- |  | ------ | --
|                                              |  | Three Months EndedMarch 31, |   
|                                              |  | 2005                        |    |  | 2004   |   
|Net revenue                                   |  | 100.0                       | %  |  | 100.0  | % 
|Cost of revenue                               |  | 86.1                        |    |  | 32.5   |   
|                                              |  |                             |    |  |        |   
|Gross margin                                  |  | 13.9                        |    |  | 67.5   |   
|Operating expenses:                           |  |                             |    |  |        |   
|Research and development                      |  | 669.1                       |    |  | 170.5  |   
|Sales and marketing                           |  | 155.2                       |    |  | 74.9   |   
|General and administrative                    |  | 622.7                       |    |  | 81.0   |   
|Amortization of deferred stock compensation   |  | (43.8                       | )  |  | 29.9   |   
|Restructuring and other non-recurring charges |  | 257.1                       |    |  |       |   
|                                              |  |                             |    |  |        |   
|Total operating expenses                      |  | 1,660.3                     |    |  | 356.3  |   
|Loss from operations                          |  | (1,646.4                    | )  |  | (288.8 | ) 
|Interest and other income, net                |  | 13.6                        |    |  | 1.9    |   
|                                              |  |                             |    |  |        |   
|Net loss                                      |  | (1,632.8                    | )% |  | (286.9 | )%
|                                              |  |                             |    |  |        |   



Three Months Ended March 31,
2005 vs. Three Months Ended March 31, 2004



Net
Revenue.Net revenue decreased from $2.0 million for the three months ended March 31, 2004 to $0.3 million for the three months ended March 31, 2005. Sales to our three largest customers for the three months ended March 31, 2005, LDMI, Florida
Digital, and Graybar (a reseller) were $129,000, $63,000, and $34,000, respectively. Sales to our three largest customers for the three months ended March 31, 2004, ITC/Deltacom, Graybar (a reseller), and Mpower Communications, were $0.4 million,
$0.3 million, $0.3 million, respectively. Software and service sales during the three months ended March 31, 2005 and 2004 were approximately $0.1 million and $1.1 million, respectively.



Gross Margin.Our gross margin decreased from $1.3 million for the three months ended March 31, 2004 to $44,000 for
the three months ended March 31, 2005. The decrease in gross margin was primarily the result of a decrease in total sales including high margin software and service sales during the three months ended March 31, 2005 compared to the same period in
the prior year. During the three months ended March 31, 2005 and 2004, the Company sold CE200 access concentrators and related line cards that had been previously written down by $0.1 million and $0.1 million, respectively.



Research and Development.Our research and development expenses
decreased from $3.4 million for the three months ended March 31, 2004 to $2.1 million for the three months ended March 31, 2005. During the three months ended March 31, 2005, compensation costs decreased by $0.4 million compared to the same period
in the prior year as a result of lower headcount. In addition, consulting expenses and the purchase of prototype materials decreased $0.2 million and $0.4 million, respectively, over the same period.



Sales and Marketing.Our sales and marketing expenses decreased from
$1.5 million for the three months ended March 31, 2004 to $0.5 million for the three months ended March 31, 2005. This decrease was primarily the result of a decrease in personnel costs of $0.6 million as a result of lower headcount, a $0.2 million
decrease in travel expenses and a $0.1 million decrease in consulting services.



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General and Administrative.Our general and administrative expenses increased from $1.6 million
for the three months ended March 31, 2004 to $2.0 million for the three months ended March 31, 2005. This increase was primarily the result of an increase in consulting and accounting expenses of $0.4 million primarily related to achieving
compliance with internal controls over financial reporting requirements and an increase in legal expenses of $0.2 million primarily related to the anticipated merger. These increases were partially offset by a $0.1 million decrease in personnel
costs as a result of lower headcount.



Deferred Stock
Compensation. Our deferred stock compensation expense decreased from $0.6 million for the three months ended March 31, 2004 to a credit of $0.1 million for the three months ended March 31, 2005. This decrease was primarily the result of the
amortization of deferred stock compensation related to restricted stock net of cancellations of restricted stock and the re-measurement of the deferred stock compensation related to unexercised options that were re-priced in 2002. The amortization
of restricted stock deferred stock compensation net of credits from the cancellation of restricted stock for the three months ended March 31, 2005 resulted in a net credit of $86,000. The re-measurement of the compensation expense resulted in a
credit of $53,000 during the current quarter as a result of the significant decline in the Companys stock price.



Interest and Other Income.Our interest and other income increased from $41,000 for the three months ended March 31, 2004 to $43,000 for the three
months ended March 31, 2005. This increase was primarily the result of an increased rate of return on investments.



Interest Expense.Our interest expense decreased from $3,000 for the three months ended March 31, 2004 to zero for the three months ended March 31,
2005. The amounts that had been outstanding under capital lease and equipment notes payable facilities have been paid in full.



Liquidity and Capital Resources



Currently, we are not generating sufficient revenue to fund our operations. We expect our operating losses and net operating cash outflows to continue. On
March 7, 2001, August 2, 2001, and July 11, 2002, we announced that we had adopted business plans to re-size our business to reflect current and expected business conditions. In January 2005 we announced that, after an extensive evaluation of
strategic alternatives, we had initiated actions to lay off most of our remaining employees by March 22, 2005, retaining a limited team of less than ten employees to provide customer support and handle matters related to the ongoing exploration of
strategic alternatives. In light of the pending acquisition by Tut Systems, however, we have elected to also maintain a limited number of engineering employees to continue development of our products. At March 31, 2005, we had cash and cash
equivalents of $6.2 million.



During the first quarter of 2005,
we entered into a termination agreement with the landlord of our Palo Alto, California facility. This termination eliminated the remaining gross rent obligation of approximately $3.6 million. In return for the landlords agreement to terminate
the lease, we paid the landlord total consideration of $1.7 million, which included a cash payment of $1.4 million and surrender of lease deposits of $0.3 million.



In our Annual Report on Form 10-K for the year ended 2004 we stated that as a result of the reduction in the number of our
employees and corresponding curtailing of our business operations that we announced in January 2005, we believe that we have sufficient cash and cash equivalents to fund our limited remaining operations through August 2005. As a result of the
execution of this announced reduction in the number of employees and corresponding curtailing of business operations, we continue to believe that we have sufficient cash and cash equivalents to fund our limited remaining operations through August
2005.



We cannot assure you that the merger with Tut Systems or
any other transaction will be approved and consummated in that time, or at all. If the merger with Tut Systems is not completed in that time or at all, we will have to further reduce our expenses, seek additional financing and/or seek an alternative
sale of our business. We expect that such additional financing would not be available, that the probability that we would find an alternative sale of our business is low, and that we would be required to cease our operations and liquidate our
business. In that event, we believe that it is likely that we would file for or be forced to resort to bankruptcy protection. If we were to file for bankruptcy protection, it is possible that we would be



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unable to pay, or provide for the payment of, all of our liabilities and obligations, and, therefore, there would be no assets available for distribution to
our stockholders.



These estimates reflect various assumptions,
including the assumption that sales of our existing products will decrease sharply from 2004, that testing, continued development and commercialization of our new VantEdge product will be curtailed and that we will not incur significant additional
expense related to litigation. Any of these assumptions may prove to be incorrect.



Cash used in operating activities for the three months ended March 31, 2005 and 2004 was $6.2 million and $5.4 million, respectively. The increase in cash used in operating activities for the three months ended March
31, 2005 compared to the same period in the prior year was primarily the result of increased non-recurring payments related to the early termination of excess facilities, offset by a decrease in operating expenses and deferred stock compensation
expenses.



Cash provided by investing activities for the three
months ended March 31, 2005 and 2004 was $2.2 million and $2.8 million, respectively. The decrease in cash provided by investing activities for the three months ended March 31, 2005 compared to the same period in the prior year was primarily the
result of a decrease in net maturities of marketable investments.



Cash used in financing activities for the three months ended March 31, 2005 and 2004 was zero and $0.1 million, respectively. The decrease in cash used in financing activities for the three months ended March 31, 2005 compared to the same
period in the prior year was primarily due to a decrease in cash used to repay equipment loans.



Risk Factors That May Affect Results of Operations and Financial Condition



You should carefully consider the following risk factors and the other information included before investing in our common stock. Our business and results
of operations could be seriously harmed by any of the following risks. The trading price of our common stock could decline due to any of these risks, and you may lose part or all of your investment.



If the merger with Tut Systems is not completed, it is likely that we will
file for or be forced into bankruptcy by our creditors and no assets may be available for distribution to our stockholders.



In our Annual Report on Form 10-K for the year ended 2004 we stated that as a result of the reduction in the number of our employees and corresponding
curtailing of our business operations that we announced in January 2005, we believe that we have sufficient cash and cash equivalents to fund our limited remaining operations through August 2005. As a result of the execution of this announced
reduction in the number of employees and corresponding curtailing of business operations, we continue to believe that we have sufficient cash and cash equivalents to fund our limited remaining operations through August 2005.



If the merger with Tut Systems is not completed in that time or at all, we
expect that we will have to cease our operations and liquidate our business. In that event, we believe that it is likely that we will file for or be forced to resort to bankruptcy protection. If we were to file for bankruptcy protection, it is
possible that we would be unable to pay, or provide for the payment of, all of our liabilities and obligations, and, therefore, there would be no assets available for distribution to our stockholders. The precise nature, amount and timing of any
distribution, if any, to our stockholders would depend on and could be delayed by, among other things, litigation and sales of our non-cash assets and claim settlements with creditors for direct and contingent liabilities and could take up to three
years to complete.



The merger with Tut Systems may not be
completed. Even if our stockholders approve the merger, the merger may not be completed. If for any reason the merger is not completed, it is likely that we could be required to file for or be forced to resort to bankruptcy protection.



The completion of the merger is subject to numerous
conditions; some or all of these conditions may not be met. In addition to the conditions to the merger set forth in the merger agreement, one of our stockholders, D.E. Shaw Laminar Portfolios, L.L.C., has filed a Schedule 13D with the Securities
and



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Exchange Commission disclosing that it may take steps to challenge the merger. Even if stockholders holding a majority of the outstanding shares of our
common stock vote to approve the merger, we cannot guarantee that the merger will be completed. If the merger is not completed, we would likely not be able to sell our assets or business to another buyer on terms as favorable as those provided in
the merger agreement, or at all, which would mean that it is likely that we could be required to file for or be forced to resort to bankruptcy protection.



Failure to complete the merger could cause our stock price to decline.



If the merger with Tut Systems is not completed, our stock price may decline due to any or all of the following potential
consequences:



| |  |  | We may not be able to dispose of our assets or business for values equaling or exceeding the value represented by the merger; in particular, our assets will likely be substantially
diminished in value from those reported as of March 31, 2005 due to further depletion of our cash and cash equivalents;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We would likely be forced to liquidate our business, which we may do through filing for bankruptcy protection;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | Our costs related to the merger, such as legal, accounting and financial advisor fees, must be paid even if the merger is not completed; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may have difficulty retaining our key remaining personnel.
| | - |  | -------------------------------------------------------------



In addition, if the merger is not completed, our stock price may decline to the extent that the current market price of our common stock reflects a market
assumption that the merger will be completed.



We believe
that the price of our common stock is based in large part on the price of Tut Systems common stock; the price of Tut Systems common stock may be affected by factors different from those affecting the price of our common stock.



If the merger with Tut Systems is completed, the holders of our common stock
will become holders of Tut Systems common stock. In addition, prior to the completion of the merger and unless the merger agreement with Tut Systems is terminated, we believe that the price of our common stock will be determined in part by the
expectation that the merger will be completed and that our stockholders will become stockholders of Tut Systems and that the price of our common stock will be affected by the price of Tut Systems common stock.



Tut Systems current operations differ somewhat from our operations, and
Tut Systems results of operations and the price of Tut Systems common stock may be affected by factors different from those that affect our results of operations and the price of our common stock before the merger. Such factors include Tut
Systems actual results of operations and investor expectations in regard to those results of operations.



If the merger with Tut Systems is not completed, we expect that our stock will be delisted from the Nasdaq National Market.



If the merger with Tut Systems is not completed, we expect that we will be
unable to satisfy the requirements for continued listing of our common stock on the Nasdaq National Market. In order to be eligible for continued listing, the Company must, among other things, meet certain minimum requirements with respect to net
tangible assets, market value of the companys securities held by non-affiliates and minimum bid prices per share, and must also maintain an operating business. If the merger with Tut Systems is not completed, we believe that it is likely that
we will cease our business operations and file for or be forced to resort to bankruptcy protection. Additionally, on May 9, 2005, we received a notice from the staff of the Nasdaq Stock Market indicating that, for the last 30 days, our shares of
common stock have not maintained a minimum market value of publicly held shares of $5,000,000 as required by Marketplace Rule 4450(a)(2). If we cannot demonstrate compliance by August 8, 2005, our shares will be subject to delisting. If Nasdaq
delists our common stock from the Nasdaq National Market, the trading price and liquidity of our common stock may be materially impaired and our ability to raise additional necessary capital could be adversely affected.



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Our directors and officers have interests in the merger that may be different from the interests of
our stockholders generally.



Our directors and officers
have various interests in the merger in addition to any interest that they may have as stockholders. These interests include the agreement by Tut Systems to continue to indemnify and insure our directors and officers for various claims. In addition,
two of our executive officers have entered into agreements providing for the payment of bonuses in connection with the consummation of the merger with Tut Systems.



Our existing customers have delayed and/or stopped placing orders for our products and may continue to do so
indefinitely.



If the merger with Tut Systems is not
completed, the amount of funds we will have available for payment of our liabilities and obligations and for distribution to our stockholders will be dependant in part upon whether our existing customers continue to place orders for our products and
services. Our existing customers have delayed and/or stopped placing orders and in the future may cancel, delay or stop placing orders for many reasons, including:



| |  |  | our reduction in the number of our employees;
| | - |  | ---------------------------------------------



| |  |  | the announcement of the merger with Tut Systems;
| | - |  | ------------------------------------------------



| |  |  | our inability to meet the financial and operating criteria that our customers require their vendors to meet;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | the product requirements of these customers;
| | - |  | --------------------------------------------



| |  |  | the financial and operational success of these customers;
| | - |  | ---------------------------------------------------------



| |  |  | the success of these customers services deployed using our products; and
| | - |  | -------------------------------------------------------------------------



| |  |  | the attractiveness of our products compared to our competitors products.
| | - |  | -------------------------------------------------------------------------



As a result of the combination of these reasons, we expect that future sales, if any, to our existing customers will be substantially less than
historical sales.



We may not succeed in reducing our
expenses to the extent we expect or deem necessary.



If
the merger with Tut Systems is not completed, the amount of funds we will have available for payment of our liabilities and obligations and for distribution to our stockholders will be dependant in part upon the extent to which we are able to reduce
our expenses. The reduction in our workforce, announced in January 2005 and executed in the first quarter of 2005, and corresponding scaling back of our operations may not result in the savings that we expect. Moreover, many of our remaining
expenses are fixed and cannot easily be reduced. We may also become subject to unplanned expense, whether as a result of the resolution of existing litigation or new claims. Any of these unexpected expenses could further reduce any assets available
to our creditors and stockholders in the event that the merger with Tut Systems is not completed.



We have been named as a defendant in securities class action litigation that could result in substantial costs and divert managements attention
and resources.



In December 2001, we and certain of our
officers and directors were named as defendants in a class action shareholder complaint filed in the United States District Court for the Southern District of New York, now captioned In re Copper Mountain Networks, Inc. Initial Public Offering
Securities Litigation, Case No. 01-CV-10943. In the amended complaint, the plaintiffs allege that we, certain of our officers and directors and the underwriters of our initial public offering (IPO) violated section 11 of the
Securities Act



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of 1933 based on allegations that our IPO registration statement and prospectus failed to disclose material facts regarding the compensation to be received
by, and the stock allocation practices of, the IPO underwriters. The amended complaint also contains a claim for violation of section 10(b) of the Securities Exchange Act of 1934 based on allegations that this omission constituted deceit on
investors. The plaintiffs seek unspecified monetary damages and other relief. Similar complaints, collectively referred to here as the IPO Lawsuits, were filed in the same court against hundreds of other public companies
(Issuers) who conducted IPOs between 1998 and 2000.



On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of New York. On July 15, 2002, we joined in a global motion to dismiss the IPO Lawsuits filed
by all of the Issuers (among others). On October 9, 2002, the Court entered an order dismissing our named officers and directors from the IPO Lawsuits without prejudice, pursuant to an agreement tolling the statute of limitations with respect to
these officers and directors until September 30, 2003. On February 19, 2003, the Court issued a decision denying the motion to dismiss the Section 11 claims against us and almost all of the Issuers, and denying the motion to dismiss the Section
10(b) claims against us and many of the other issuers.



In June
2003, the Issuers reached a tentative settlement agreement with the plaintiffs that would, among other things, result in the dismissal with prejudice of all claims against the Issuers and their officers and directors in the IPO Lawsuits. In
addition, the tentative settlement guarantees that, in the event that the Plaintiffs recover less than $1 billion in settlement or judgment against the Underwriter defendants in the IPO Lawsuits, the Plaintiffs will be entitled to recover the
difference between the actual recovery and $1 billion from the insurers for the Issuers. In September 2003, in connection with the tentative settlement, those officers and directors who had entered tolling agreements (described above) agreed to
extend those agreements so that they would not expire prior to any settlement being finalized. In June 2004, the Company executed a final settlement agreement with the plaintiffs. On February 15, 2005, the Court issued a decision certifying a class
action for settlement purposes, and granting preliminary approval of the settlement subject to modification of certain bar orders contemplated by the settlement. In addition, the settlement is still subject to statutory notice requirements as well
as final judicial approval.



We cannot assure you that we will
be successful in settling or defending against these claims. If we are not successful in settling or defending against these claims, we could be forced to make significant payments to our stockholders and their lawyers, and such payments could have
a material adverse effect on our business, financial condition and results of operations if not covered by our insurance carrier. Even if such claims are not successful, the litigation could result in substantial costs and divert managements
attention and resources, which could adversely affect our business, results of operations and financial position.



Claims against us alleging our infringement of a third partys intellectual property could result in significant expense to us and result in our
loss of significant rights.



The telecommunications
industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert patent, copyright, trademark and other intellectual property
rights to technologies that are important to our business. Any claims asserting that our products infringe or may infringe proprietary rights of third parties, if determined adversely to us, could have a material adverse effect on our business,
financial condition or results of operations. In addition, in our agreements, we agree to indemnify our customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. As the
number of entrants in our market increases and the functionality of our products is enhanced and overlaps with the products of other companies, we may become subject to claims of infringement or misappropriation of the intellectual property rights
of others. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays or require us to enter into royalty or licensing
agreements, any of which could have a material adverse effect upon our operating results. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. Legal action claiming patent infringement may be
commenced against us. We cannot assure you that we would prevail in such litigation given the



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complex technical issues and inherent uncertainties in patent litigation. In the event a claim against us was successful and we could not obtain a license to
the relevant technology on acceptable terms or license a substitute technology or redesign our products to avoid infringement, our business, financial condition and results of operations would be materially adversely affected.



If our products contain defects, we may be subject to significant
liability claims from our customers, distribution partners and the end-users of our products and incur significant unexpected expenses and lost sales.



Our products have in the past contained, and may in the future contain, undetected or unresolved errors when first introduced or as new versions are
released. Despite extensive testing, errors, defects or failures may be found in our current or future products or enhancements after commencement of commercial shipments. If this happens, we may experience delay in or loss of market acceptance and
sales, product returns, diversion of development resources, injury to our reputation or increased service and warranty costs, any of which could have a material adverse effect on our business, financial condition and results of operations. Moreover,
because our products are designed to provide critical communications services, we may receive significant liability claims. We attempt to include in our agreements with customers and distribution partners provisions intended to limit our exposure to
liability claims. Our customers and distribution partners may not be willing to agree to such provisions, and in any event such provisions may not be effective in any or all cases or under any or all scenarios, and they may not preclude all
potential claims resulting from a defect in one of our products or from a defect related to the installation or operation of one of our products. Although we maintain product liability insurance covering certain damages arising from implementation
and use of our products, our insurance may not cover any claims sought against us. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. As a result, any such claims, whether or not
successful could seriously damage our reputation and our business.



Certain provisions in our corporate charter and bylaws may discourage take-over attempts and thus depress the market price of our stock.



Provisions in our certificate of incorporation, as amended and restated, may have the effect of delaying or preventing a change of control or changes in
our management. These provisions include:



| |  |  | the right of our Board of Directors to elect a director to fill a vacancy created by the expansion of our Board of Directors;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability of our Board of Directors to alter our bylaws without getting stockholder approval;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the ability of our Board of Directors to issue, without stockholder approval, up to 5,000,000 shares of preferred stock with terms set by our Board of Directors; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the requirement that at least 10% of the outstanding shares are needed to call a special meeting of stockholders.
| | - |  | -----------------------------------------------------------------------------------------------------------------



Each of these provisions could discourage potential take-over attempts and
could adversely affect the market price of our common stock.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------



We are exposed to changes in interest rates primarily from our debt arrangements and our investments in certain marketable securities. Under our current
policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve, which represents our expectation for
a reasonably possible near-term change in such rates, would not materially affect the fair value of our interest sensitive financial instruments at March 31, 2005.



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##### Table of Contents

|Item 4. | Controls and Procedures
|------- | -----------------------



Evaluation of disclosure controls and procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, has conducted
an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on
that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly
report has been made known to them in a timely fashion.



Changes in internal controls. There has been no change in our internal control over financial reporting during the fiscal quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. Management notes that with the departure of the former Vice President of Finance in the first quarter, the Company no longer has a Certified Public Accountant on staff. Because of current limited business
activities and expected consummation of the merger with Tut Systems, management does not intend to add a person with such credentials to its staff.



Material weakness identified. During the financial reporting cycle for the first quarter of 2005, the Company noted a material weakness in its
internal control over financial reporting related to an error in a worksheet used to calculate the amortization of deferred compensation which was not identified in the preparation or review of the account reconciliation for the three months ended
March 31, 2005. Prompted by the Companys auditors, the Company reviewed the calculation, discovered the error, and corrected the error prior to the filing of its March 31, 2005 Quarterly Report on Form 10-Q. The material weakness that was
identified does not impact any prior reported financial results.



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##### Table of Contents



PART II - OTHER
INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------



Reference is made to the descriptions of legal proceedings contained in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004.



IPO Litigation. In December 2001, we and certain of our officers and
directors were named as defendants in a class action shareholder complaint filed in the United States District Court for the Southern District of New York, now captioned In re Copper Mountain Networks, Inc. Initial Public Offering Securities
Litigation, Case No. 01-CV-10943. In the amended complaint, the plaintiffs allege that the we, certain of our officers and directors and the underwriters of our initial public offering (IPO) violated Section 11 of the Securities Act
of 1933 based on allegations that our IPO registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The amended complaint also
contains a claim for violation of section 10(b) of the Securities Exchange Act of 1934 based on allegations that this omission constituted deceit on investors. The plaintiffs seek unspecified monetary damages and other relief. Similar complaints,
collectively referred to here as the IPO Lawsuits, were filed in the same court against hundreds of other public companies (Issuers) who conducted IPOs between 1998 and 2000.



On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes
before United States Judge Shira Scheindlin of the Southern District of New York. On July 15, 2002, we joined in a global motion to dismiss the IPO Cases filed by all of the Issuers (among others). On October 9, 2002, the Court entered an order
dismissing our named officers and directors from the IPO Lawsuits without prejudice, pursuant to an agreement tolling the statute of limitations with respect to these officers and directors until September 30, 2003. On February 19, 2003, the Court
issued a decision denying the motion to dismiss the Section 11 claims against us and almost all of the Issuers, and denying the motion to dismiss the Section 10(b) claims against us and many of the other issuers.



In June 2003, Issuers reached a tentative settlement agreement with the
plaintiffs that would, among other things, result in the dismissal with prejudice of all claims against the Issuers and their officers and directors in the IPO Lawsuits. In addition, the tentative settlement guarantees that, in the event that the
Plaintiffs recover less than $1 billion in settlement or judgment against the Underwriter defendants in the IPO Lawsuits, the Plaintiffs will be entitled to recover the difference between the actual recovery and $1 billion from the insurers for the
Issuers. In September 2003, in connection with the tentative settlement, those officers and directors who had entered tolling agreements (described above) agreed to extend those agreements so that they would not expire prior to any settlement being
finalized. In June 2004, we executed a final settlement agreement with the plaintiffs. On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes, and granting preliminary approval of the settlement subject
to modification of certain bar orders contemplated by the settlement. In addition, the settlement is still subject to statutory notice requirements as well as final judicial approval.



No assurances can be made that we will be successful in settling or defending against these claims. If we are not successful
in settling or defending against these claims, we could be forced to make significant payments to our stockholders and their lawyers, and such payments could have a material adverse effect on our business, financial condition, and results of
operations if not covered by our insurance carrier. Even if such claims are not successful, the litigation could result in substantial costs and divert managements attention and resources, which could adversely affect our business, results of
operations and financial position.



We are party to other legal
proceedings and claims in the ordinary course of business. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, management is unable to ascertain the ultimate aggregate amount of monetary
liability, amounts which may be covered by insurance, or the financial impact with respect to these matters as of March 31, 2005. However, management believes that the final resolution of these matters, individually and in the aggregate, will not
have a material adverse impact upon our financial position, results of operations or cash flows.



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Item 5. Other Information



On May
9, 2005, we received a notice from the staff of the Nasdaq Stock Market (the Nasdaq Staff) indicating that, for the last 30 days, our shares of common stock have not maintained a minimum market value of publicly held shares of $5,000,000
as required by Marketplace Rule 4450(a)(2). Receipt of this notice does not result in immediate delisting of our shares of common stock; however, if we cannot demonstrate compliance by August 8, 2005, the Nasdaq Staff will provide written
notification that our shares of common stock will be delisted from the Nasdaq National Market.



Item 6. Exhibits



Exhibits



|     |  |                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|2.1  |  | Agreement and Plan of Merger and Reorganization, dated February 11, 2005 among Tut Systems, Inc., Copper Mountain Networks, Inc. and Wolf Acquisition Corp. (1)
|     | 
|10.1 |  | Retention and Incentive Bonus Agreement between Copper Mountain Networks, Inc. and Richard Gilbert dated February 10, 2005. (1)                                
|     | 
|10.2 |  | Retention and Incentive Bonus Agreement between Copper Mountain Networks, Inc. and Michael Staiger dated February 10, 2005. (1)                                
|     | 
|10.3 |  | Retention Agreement between Copper Mountain Networks, Inc. and Mark Skurla dated February 10, 2005. (1)                                                        
|     | 
|10.4 |  | Amendment #2 to the Restricted Stock Bonus Amended Grant Notice for Richard Gilbert dated February 10, 2005. (1)                                               
|     | 
|10.5 |  | Amendment #2 to the Restricted Stock Bonus Amended Grant Notice for Michael Staiger dated February 10, 2005. (1)                                               
|     | 
|31.1 |  | Certification by Richard S. Gilbert pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                 
|     | 
|31.2 |  | Certification by Michael O. Staiger pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                 
|     | 
|32.1 |  | Certifications by Richard S. Gilbert and Michael O. Staiger pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.                     

---

|(1) | Filed as an exhibit to the Registrants report on Form 8-K filed with the Securities and Exchange Commission on February 14, 2005 and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



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



|                   |  |  |  |                               
|------------------ |  |  |  | ------------------------------
|                   |  |  |  | Copper Mountain Networks, Inc.
|                   |  | 
|Date: May 10, 2005 |  |  |  | /s/ Richard S. Gilbert        
|                   |  |  |  | Richard S. Gilbert            
|                   |  |  |  | Chairman and                  
|                   |  |  |  | Chief Executive Officer       



| |  |  |  |                            
| |  |  |  | ---------------------------
| |  | 
| |  |  |  | /s/ Michael O. Staiger     
| |  |  |  | Michael O. Staiger         
| |  |  |  | Executive Vice President,  
| |  |  |  | Chief Financial Officer and
| |  |  |  | Secretary                  



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EXHIBIT INDEX



|        |  |                                                                                                                                                                
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                
|        | 
|2.1     |  | Agreement and Plan of Merger and Reorganization, dated February 11, 2005 among Tut Systems, Inc., Copper Mountain Networks, Inc. and Wolf Acquisition Corp. (1)
|        | 
|10.1    |  | Retention and Incentive Bonus Agreement between Copper Mountain Networks, Inc. and Richard Gilbert dated February 10, 2005. (1)                                
|        | 
|10.2    |  | Retention and Incentive Bonus Agreement between Copper Mountain Networks, Inc. and Michael Staiger dated February 10, 2005. (1)                                
|        | 
|10.3    |  | Retention Agreement between Copper Mountain Networks, Inc. and Mark Skurla dated February 10, 2005. (1)                                                        
|        | 
|10.4    |  | Amendment #2 to the Restricted Stock Bonus Amended Grant Notice for Richard Gilbert dated February 10, 2005. (1)                                               
|        | 
|10.5    |  | Amendment #2 to the Restricted Stock Bonus Amended Grant Notice for Michael Staiger dated February 10, 2005. (1)                                               
|        | 
|31.1    |  | Certification by Richard S. Gilbert pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                 
|        | 
|31.2    |  | Certification by Michael O. Staiger pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                 
|        | 
|32.1    |  | Certifications by Richard S. Gilbert and Michael O. Staiger pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.                     

---

|(1) | Filed as an exhibit to the Registrants report on Form 8-K filed with the Securities and Exchange Commission on February 14, 2005 and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



26