UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K





(Mark
One)





x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the fiscal year ended December 31, 2009


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 000-30715





CoSine
Communications, Inc.


(Exact
name of registrant as specified in its charter)





Delaware
              94-3280301(State
      or other jurisdiction of  incorporation
      or organization)
              (I.R.S.
      Employer Identification
      Number)61
      East Main Street, Suite B
                Los
      Gatos, California
              95030(Address
      of principal executive offices)
              (Zip
      Code)





Registrant’s
telephone number including area code:


(408)
399-6494





Securities
Registered Pursuant to Section 12(b) of the Act:


None





Securities
Registered Pursuant to Section 12(g) of the Act:


Common
Stock, $.0001 Par Value


(Title
of each class)





Indicate by check mark if the
Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ̈Nox





Indicate by check mark if the
Registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes ̈Nox





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.  YesxNo ̈





Indicate
by check mark whether the Registrant has submitted electronically and posted on
its Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the Registrant was
required to submit and post such files).  Yes  ̈  No  ̈





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





Indicate
by check mark whether the Company is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a small reporting company. See definition of
“large accelerated filer,” “accelerated filer” and “small reporting company” in
Rule 12b-2 of the Exchange Act:





Largeacceleratedfiler ̈
            Acceleratedfiler ̈Non-acceleratedfiler ̈(Donotcheckifasmallerreportingcompany)
            Small reporting company x





Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
xNo
o





The
aggregate market value of the voting and non voting common equity held by
non-affiliates of the Registrant was $5,953,830 based on the number of shares
held by non-affiliates as of March 1, 2010, and based on the reported last sale
price of common stock on June 30, 2009, which is the last business day of the
Registrant’s most recently completed second fiscal quarter. Shares of stock held
by officers, directors and 5 percent or more stockholders have been excluded in
that such persons may be deemed to be affiliates.  This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.





As of
March 1, 2010, there were 10,090,635 shares of the Registrant’s Common Stock
outstanding.





DOCUMENTS INCORPORATED BY
REFERENCE





Portions
of the Proxy Statement for our 2010 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-K.










COSINE
COMMUNICATIONS, INC.





FORM
10-K


Year
Ended December 31, 2009





TABLE
OF CONTENTS





PagePart
      IItem
      1.
                Business
                3Item
      1A
                Risk
      Factors
                5Item
      1B
                Unresolved
      Staff Comments
                9Item
      2.
                Properties
                9Item
      3.
                Legal
      Proceedings
                9Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                10Part
      IIItem
      5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                10Item
      6.
                Selected
      Financial Data
                12Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                13Item
      7A.
                Quantitative
      and Qualitative Disclosures about Market Risk
                18Item
      8.
                Financial
      Statements and Supplementary Data
                20Item
      9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosures
                35Item
      9A.
                Controls
      and Procedures
                35Item
      9B.
                Other
      Information
                36Part
      IIIItem
      10.
                Directors,
      Executive Officers and Corporate Governance
                36Item
      11.
                Executive
      Compensation
                37Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                37Item
      13.
                Certain
      Relationships and Related Transactions and Director
      Independence
                37Item
      14.
                Principal
      Accountant Fees and Services
                37Part
      IVItem
      15.
                Exhibits
      and Financial Statement Schedules
                37Signatures
                38Exhibit
      Index
                39




2





FOWARD
LOOKING STATEMENTS





For
purposes of this Annual Report, the terms “CoSine,” "Company," "we," "us" and
"our" refer to CoSine Communications, Inc. In addition to historical
information, this Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties that could cause our actual
results to differ materially.  Factors that might cause or contribute
to such differences include, but are not limited to, those discussed in
Item 1A. Risk Factors. When used in this report, the words "anticipate,"
"believe," "plan," "expect," "future," "intend" and similar expressions are
generally intended to identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect
management’s opinions only as of the date hereof.  We undertake no
obligation to revise or publicly release the results of any revision to these
forward-looking statements.  Readers should carefully review the risk
factors described in other documents that we file from time to time with the
Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q
that we file in fiscal year 2010.





PART
I





Item
1.  Business





Overview





CoSine
Communications, Inc. was incorporated in California on April 14, 1997 and in
August 2000 was reincorporated in the State of Delaware. Until the end of fiscal
year 2004, we were a provider of carrier network equipment products and services
offering a portfolio of communications products and services to business and
consumer customers.  We formally discontinued our communications
platform products and product operations in fiscal year 2004, sold our patent
portfolio and intellectual property rights in fiscal year 2006 and ceased all
our related customer support services as of December 31, 2006.  We are
currently attempting to redeploy our existing assets by identifying and
acquiring, or investing in, one or more operating businesses with existing or
prospective taxable income, or from which we can realize capital gains, that can
be offset by use of our net operating loss carry-forwards
(“NOLs”).  No candidate for acquisition or investment has yet been
identified, and no assurance can be given that we will find suitable candidates,
and if we do, that we will be able to utilize our existing NOLs.





Current
Business





In
July 2005, after discontinuing our product lines, we completed a comprehensive
review of strategic alternatives, including a sale of the Company, a sale or
licensing of intellectual property, a redeployment of our assets into new
business ventures, or a winding-up and liquidation of the business and a return
of capital.  Based on that review of strategic alternatives, our board
of directors approved a strategy to enhance stockholder value by redeploying our
existing assets and resources to identify and acquire one or more operating
businesses, while continuing to support our existing customers.  With
the termination of our customer service operations effective December 31, 2006,
our business focused solely on the redeployment of our existing assets to
acquire one or more operating businesses with existing or prospective taxable
income that can be offset by use of our NOLs.  Recently, our board of
directors expanded our business strategy to include identifying and making
strategic investments in operating businesses with the potential for
generating  taxable income and/or capital gains which can also be
offset by use of our NOLs.  No candidate for acquisition or investment
has yet been identified, and no assurance can be given that we will find
suitable candidates, and if we do, that we will be able to utilize our existing
NOLs.





To
protect our NOLs, on September 1, 2005, we entered into a stockholders rights
plan which provided for a dividend distribution of one preferred share purchase
right for each outstanding share of our common stock which, when exercisable,
would allow its holder to purchase from us one one-hundredth of a share of our
Series A Junior Participating Preferred Stock, par value $0.0001, for a purchase
price of $3.00. Each fractional share of this preferred stock would give the
stockholder approximately the same dividend, voting and liquidation rights as
does one share of our common stock.  The purchase rights become
exercisable after the acquisition or attempted acquisition of 5% or more of our
outstanding common stock without the prior approval of our board of directors.
The dividend was paid to our stockholders of record at the close of business on
September 12, 2005.  Our board of directors adopted the stockholders
rights plan to protect stockholder value by protecting our stockholders from
coercive takeover practices or takeover bids that are inconsistent with their
best interests, and by protecting our ability to carry forward our
NOLs.





We
amended the stockholders rights plan effective as of August 31, 2007 and as of
August 6, 2009. Those amendments extended the expiration date of the purchase
rights from September 1, 2007 until September 1, 2009 and from September 2, 2009
until September 1, 2011 respectively, unless earlier redeemed, exchanged, or
amended by the board of directors. The amendments were not made in response to
any pending takeover bid for us.


3





To
further protect our NOLs, at our 2005 Annual Meeting of Stockholders, the
stockholders approved an amendment to our Certificate of
Incorporation.  The amendment restricts certain acquisitions of our
securities which could impair or limit our ability to utilize our NOLs. Although
the transfer restrictions imposed on our securities are intended to reduce the
likelihood of an impermissible ownership change, no assurance can be given that
such restrictions would prevent all transfers that would result in an
impermissible ownership change. This amendment generally restricts and requires
prior approval of our board of directors of direct and indirect acquisitions of
our equity securities if such an acquisition will affect the percentage of our
capital stock that is treated as owned by a 5% stockholder. The restrictions
will generally only affect persons trying to acquire a significant interest in
our common stock in order to help assure the preservation of our
NOLs.





In
efforts to reduce our operating expenses while executing our redeployment
strategy, on June 15, 2007, our board of directors approved an agreement (the
“Services Agreement”) with SP Corporate Services, LLC (“SP”) pursuant to which
SP provides us, on a non-exclusive basis, a full range of executive, financial
and administrative support services and personnel, including the services of a
Chief Executive Officer, Chief Financial Officer, Secretary, Principal Executive
Officer, and Principal Accounting Officer, maintenance of our corporate office
and records, periodic reviews of transactions in our stock to assist in
preservation of our NOLs, and related executive, financial, accounting, and
administrative support services. Under the Services Agreement, we pay SP a
monthly fee of $17,000 in exchange for SP's services. SP is responsible for
compensating and providing all applicable employment benefits to any SP
personnel in connection with providing services under the Services Agreement. We
reimburse SP for reasonable and necessary business expenses of ours incurred by
SP, and we are responsible for payment of fees related to audit, tax, legal,
stock transfer, insurance broker, investment advisor, and banking services
provided to us by third party advisors. The Services Agreement has a term of one
year and automatically renews for successive one year periods unless otherwise
terminated by either party. The Services Agreement is also terminable by us upon
the death of Terry R. Gibson or his resignation as our Chief Executive Officer,
Chief Financial Officer or Secretary of the Company. Under the Services
Agreement, SP and its personnel are entitled to the same limitations on
liability and indemnity rights available under our charter documents to any
other person performing such services for us. During fiscal year 2007, prior to
the effectiveness of the Services Agreement, we incurred approximately $24,500
per month in performing the services which are to be performed by SP under the
Services Agreement. The Service Agreement became effective as of July 1, 2007
and currently has a term through June 30, 2010, unless renewed.





SP
is an affiliate of Steel Partners Holdings L.P., the largest stockholder of
CoSine.  Jack Howard, a director of CoSine, is the President of SP and
the President of Steel Partners, LLC, the manager of Steel Partners Holdings
L.P..  Terry Gibson, a director of CoSine, is a Managing Director of
SP.





Pursuant
to the Services Agreement, Terry R. Gibson serves as our Chief Executive
Officer, Chief Financial Officer, Secretary, Principal Executive Officer, and
Principal Accounting Officer as an employee of SP.  SP is responsible
for compensating Mr. Gibson, including providing him with all applicable
employment benefits to which he may be entitled, for his serving as our Chief
Executive Officer, Chief Financial Officer, Secretary, Principal Executive
Officer, and Principal Accounting Officer and for any other services he may
provide to us under the Services Agreement.





Prior
Business





Until
September 2004, we developed, marketed and sold a communications platform
designed to enable carrier network service providers to rapidly deliver a
portfolio of communications services to business and consumer
customers.  We formally discontinued our communications platform
products in fiscal year 2004, sold our patent portfolio and intellectual
property rights in fiscal year 2006 and ceased all our related customer support
services as of December 31, 2006.





Competition





Our
current business involves the redeployment of our existing assets to acquire, or
invest in,  one or more operating businesses with existing or
prospective taxable income, or from which we can realize capital gains, that can
be offset by use of our NOLs.  No candidate for acquisition or other
investment has yet been identified, and no assurance can be given that we will
find suitable candidates, and if we do, that we will be able to utilize our
existing NOLs.  We are encountering competition from other entities
also seeking to acquire profitable businesses and investments.  Such
entities include private equity companies, venture capital funds, blank check
companies, leveraged buyout funds, as well as operating businesses seeking
acquisitions.  Many of these entities are well established and have
extensive experience identifying and effecting business combinations directly or
through affiliates.  Moreover, many of these entities possess greater
financial, technical, human, and other resources than us.


4





Employees





We
had no employees at December 31, 2009.  Mr. Gibson, our sole executive
officer, is an employee of SP.





Executive
Officers of the Registrant





Terry
R. Gibson, 56, has served as our Chief Executive Officer since January 16, 2005,
as our Secretary since September 23, 2004, and as our Executive Vice President
and Chief Financial Officer since joining us in 2002.  Mr. Gibson is a
Managing Director of SP, an affiliate of Steel Partners Holdings L.P., our
largest shareholder.  Pursuant to a service agreement between the
Company and SP, effective July 1, 2007, Mr. Gibson terminated his employment
with us and joined SP as a Managing Director, however, he continues to serve as
our Chief Executive Officer, Chief Financial Officer, Secretary, Principal
Executive Officer, and Principal Accounting Officer as an employee of
SP.  Prior to joining us, Mr. Gibson served as Chief Financial Officer
of Calient Networks, Inc. from May 2000 to December 2001.  He served
as Chief Financial Officer of Ramp Networks, Inc. from March 1999 to May 2000
and as Chief Financial Officer of GaSonics, International, from June 1996
through March 1999.  He has also served as Vice President and
Corporate Controller of Lam Research Corporation from February 1991 through June
1996.  Mr. Gibson holds a B.S. in Accounting from the University of
Santa Clara.





Available
Information





Our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of
the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, are
available, free of charge, on our Investor Relations web site at www.cosinecom.com/investorrelations.aspxas soon as
practicable after  such materials are filed with or furnished to the
Securities Exchange Commission.  The information posted on our web
site is not incorporated into this Annual Report.





Item
1A.  Risk
Factors





Our
future results and the market price for our stock are subject to numerous risks,
many of which are driven by factors that we cannot control or predict. The
following discussion, as well as other sections of this Annual Report on Form
10-K including Item 7 – Management's Discussion and Analysis of Financial
Condition and Results of Operations, describes certain risk factors related to
our business.  You should carefully consider the risk factors
described below in conjunction with the other information in this
document.




RISKS
RELATED TO OUR BUSINESS




We may continue to incur operating
losses and negative cash flow.





We have
sold or disposed of all our revenue generating operations and
assets.  At December 31, 2009, we had an accumulated deficit of $517
million.  Our ability to generate net income and to achieve
profitability and positive cash flow depends on the amount of interest paid on
the investment of our cash in cash equivalents and other short term investments
and on our success in identifying and acquiring, or investing in, one or more
operating businesses.





We
are executing an asset redeployment strategy.  There can be no
assurance that the redeployment strategy will be successful.




We have
sold or disposed of all our revenue generating operations and
assets.  We are currently attempting to redeploy our existing assets,
consisting of cash and cash equivalents, by identifying and acquiring, or
investing in, one or more operating businesses with existing or prospective
taxable income, or from which we can realize capital gains, that can be offset
by use of our net operating loss carry-forwards (“NOLs”).  No
candidate for acquisition or investment has yet been identified, and no
assurance can be given that we will find suitable candidates, and if we do, that
we will be able to utilize our existing NOLs.




We may
not be able to successfully identify suitable acquisition or investment. We have
been working without success since 2005 to identify and consummate suitable
acquisitions or investments. In identifying, evaluating and selecting a target
business for acquisition or investment, we expect to encounter competition from
other entities having business objectives similar to ours including other blank
check companies, private equity groups, venture capital funds, and operating
businesses seeking strategic acquisitions. Many of these entities are
well-established and have extensive experience identifying and effecting
business combinations directly or through affiliates. Moreover, many of these
competitors possess greater financial, technical, human and other resources than
we which will give them a competitive advantage in pursuing the acquisition of,
or investment in, certain target businesses. Even if we identify an appropriate
acquisition or investment opportunity, we may be unable to negotiate favorable
terms for that acquisition.


5


If we are
not successful in executing our redeployment strategy we will continue to incur
operating losses and negative cash flow and may at some point decide to
liquidate and return the net proceeds to our stockholders. However, we believe
we have adequate cash resources to continue to realize our assets and discharge
our liabilities as a company through 2010.




We
will incur significant costs in connection with our evaluation of potential
acquisition and investment candidates.





As part
of our plan to redeploy our assets, our management is seeking, analyzing and
evaluating potential acquisition and investment candidates. We will incur
significant costs, such as due diligence and legal and other professional fees
and expenses, as part of these redeployment and other investments efforts.
Notwithstanding these efforts and expenditures, we cannot give any assurance
that we will identify an appropriate acquisition or investment opportunity in
the near term, or at all.





We
will likely have no operating history in our new line of business or other
investments, which are yet to be determined, and therefore we will be subject to
the risks inherent in establishing a new business.





We have
not identified what our new line of business will be and, therefore, we cannot
fully describe the specific risks presented by such a business. It is likely
that we will have had no operating history in the new line of business and it is
possible that the target company may have a limited operating history in its
business. Accordingly, there can be no assurance that our future operations will
generate operating or net income, and as such our success will be subject to the
risks, expenses, problems, and delays inherent in establishing a new line of
business for us. The ultimate success of such new business cannot be
assured.





The
reporting requirements under rules adopted by the Securities and Exchange
Commission relating to shell companies may delay or prevent us from making
certain acquisitions.





We are
deemed to be a "shell company" under rules adopted by the Securities and
Exchange Commission.  The rules are designed to ensure that investors
in shell companies that acquire operations have timely access to the same kind
of information as is available to investors in public companies generally. The
rules require a shell company to include extensive registration-level
information on Form 8-K to report the acquisition of a business.  The
extensive registration-level information includes a detailed description of an
acquired company’s business and properties, management, executive compensation,
related party transactions, legal proceedings and historical market price
information, as well as audited historical financial statements and management’s
discussion and analysis of financial condition and results of operations. The
revised Form 8-K rules also require a shell company to file pro forma financial
statements giving effect to the acquisition not later than four business days
after completion of the acquisition, instead of 75 days as required by non-shell
companies.





Complying
with the shell company rules of the Securities and Exchange Commission may
increase the difficulty of our ability to identify and acquire an operating
business adversely affecting our ability to successfully implement our
redeployment strategy.  The time and additional costs that may be
incurred by some acquisition prospects to prepare such detailed disclosures and
obtain audited financial statements may significantly delay or essentially
preclude consummation of an otherwise desirable acquisition by us, or deter
potential targets from negotiating with us.





We
may be unable to realize the benefits of our net operating loss carry-forwards
("NOLs").





NOLs may
be carried forward to offset federal and state taxable income in future years
and eliminate income taxes otherwise payable on such taxable income, subject to
certain adjustments. Based on current federal corporate income tax rates, our
NOLs and other carry-forwards could provide a benefit to us, if fully utilized,
of significant future tax savings. However, our ability to use these tax
benefits in future years will depend upon the amount of our otherwise taxable
income. If we do not have sufficient taxable income in future years to use the
tax benefits before they expire, we will lose the benefit of these NOLs
permanently. Consequently, our ability to use the tax benefits associated with
our substantial NOLs will depend significantly on our success in identifying
suitable acquisition or investment candidates, and once identified, successfully
consummating an acquisition of or investment in these
candidates.


6


Additionally,
if we underwent an ownership change, the NOLs would be subject to an annual
limit on the amount of the taxable income that may be offset by our NOLs
generated prior to the ownership change. If an ownership change were to occur,
we may be unable to use a significant portion of our NOLs to offset taxable
income. In general, an ownership change occurs when, as of any testing date, the
aggregate of the increase in percentage points is more than 50 percentage points
of the total amount of a corporation's stock owned by "5-percent stockholders,"
within the meaning of the NOLs limitations, whose percentage ownership of the
stock has increased as of such date over the lowest percentage of the stock
owned by each such "5-percent stockholder" at any time during the three-year
period preceding such date. In general, persons who own 5% or more of a
corporation's stock are "5-percent stockholders," and all other persons who own
less than 5% of a corporation's stock are treated, together, as a single, public
group "5-percent stockholder," regardless of whether they own an aggregate of 5%
of a corporation's stock.





The
amount of NOLs that we have claimed has not been audited or otherwise validated
by the U.S. Internal Revenue Service (“IRS”). The IRS could challenge our
calculation of the amount of our NOLs or our determinations as to when a prior
change in ownership occurred and other provisions of the Internal Revenue Code
may limit our ability to carry forward our NOLs to offset taxable income in
future years. If the IRS was successful with respect to any such challenge, the
potential tax benefit of the NOLs to us could be substantially
reduced.





Certain
transfer restrictions implemented by us to preserve our net operating loss
carryforwards may not be effective or may have some unintended negative
effects.





On
November 15, 2005, at our 2005 Annual Meeting of Stockholders, our stockholders
approved an amendment to our Amended and Restated Certificate of Incorporation
to restrict certain acquisitions of our securities in order to help assure the
preservation of our NOLs. The amendment generally restricts direct and indirect
acquisitions of our equity securities if such acquisition will affect the
percentage of our capital stock that is treated as owned by a "5-percent
stockholder."





Although
the transfer restrictions imposed on our capital stock are intended to reduce
the likelihood of an impermissible ownership change, there is no guarantee that
such restrictions would prevent all transfers that would result in an
impermissible ownership change. The transfer restrictions also will require any
person attempting to acquire a significant interest in us to seek the approval
of our board of directors. This may have an "anti-takeover" effect because our
board of directors may be able to prevent any future takeover. Similarly, any
limits on the amount of capital stock that a stockholder may own could have the
effect of making it more difficult for stockholders to replace current
management. Additionally, because the transfer restrictions will have the effect
of restricting a stockholder's ability to dispose of or acquire our common
stock, the liquidity and market value of our common stock might
suffer.





We
could be required to register as an investment company under the Investment
Company Act of 1940, which could significantly limit our ability to operate and
acquire an established business.





The
Investment Company Act of 1940 (the "Investment Company Act") requires
registration, as an investment company, for companies that are engaged primarily
in the business of investing,  reinvesting,  owning,
holding, or trading securities. We have sought to qualify for an exclusion from
registration including the exclusion available to a company that does not own
"investment securities" with a value exceeding 40% of the value of its total
assets on an unconsolidated basis, excluding government securities and cash
items. This exclusion, however, could be disadvantageous to us and/or our
stockholders. If we were unable to rely on an exclusion under the Investment
Company Act and were deemed to be an investment company under the Investment
Company Act, we would be forced to comply with substantive requirements of the
Investment Company Act, including: (i) limitations on our ability to borrow;
(ii) limitations on our capital structure; (iii) restrictions on acquisitions of
interests in associated companies; (iv) prohibitions on transactions with
affiliates; (v) restrictions on specific investments; (vi) limitations on our
ability to issue stock options; and (vii) compliance with reporting, record
keeping, voting, proxy disclosure, and other rules and regulations. Registration
as an investment company would subject us to restrictions that would
significantly impair our ability to pursue our fundamental business strategy of
acquiring and operating an established business. In the event the SEC or a court
took the position that we were an investment company, our failure to register as
an investment company would not only raise the possibility of an enforcement
action by the SEC or an adverse judgment by a court, but also could threaten the
validity of corporate actions and contracts entered into by us during the period
we were deemed to be an unregistered investment company. Moreover, the SEC could
seek an enforcement action against us to the extent we were not in compliance
with the Investment Company Act during any point in time.


7


If
we cannot obtain director and officer liability insurance in acceptable amounts
for acceptable rates, we may have difficulty recruiting and retaining qualified
directors and officers.





Like most
other public companies, we carry insurance protecting our officers and directors
against claims relating to the conduct of our business. This insurance covers,
among other things, the costs incurred by companies and their management to
defend against and resolve claims relating to management conduct and results of
operations, such as securities class action claims. These claims typically are
expensive to defend against and resolve.  We pay significant premiums
to acquire and maintain this insurance, which is provided by third-party
insurers, and we agree to underwrite a portion of such exposures under the terms
of the insurance coverage.  One consequence of the current economic
downturn and decline in stock prices has been a substantial increase in the
number of securities class actions and similar claims brought against public
corporations and their management, including the company and certain of its
current and former officers and directors. Consequently, insurers providing
director and officer liability insurance have in recent periods sharply
increased the premiums they charge for this insurance, raised retentions (that
is, the amount of liability that a company is required to pay to defend and
resolve a claim before any applicable insurance is provided), and limited the
amount of insurance they will provide. Moreover, insurers typically provide only
one-year policies. The insurance policies that may cover any current securities
claims against us have a $500,000 retention.  As a result, the costs
we incur in defending such claims will not be reimbursed until they exceed
$500,000. The
policies that would cover any future claims may not provide any coverage to us
and may cover the directors and officers only in the event we are unwilling or
unable to cover their costs in defending against and resolving any future
claims. As a result, our costs in defending any future claims could increase
significantly. Particularly in the current economic environment, we cannot
assure you that in the future we will be able to obtain sufficient director and
officer liability insurance coverage at acceptable rates and with acceptable
deductibles and other limitations. Failure to obtain such insurance could
materially harm our financial condition in the event that we are required to
defend against and resolve any future or existing securities class actions or
other claims made against us or our management arising from the conduct of our
operations. Further, the inability to obtain such insurance in adequate amounts
may impair our future ability to retain and recruit qualified officers and
directors.





Our
earnings are sensitive to fluctuations in interest rates.





Our
business no longer generates any revenues as we ceased all customer operations
as of December 31, 2006.  Our net income depends on the amount of
interest paid on the investment of our cash in cash equivalents and other short
term investments.  Accordingly, our earnings are subject to risks and
uncertainties surrounding changes in the interest rate environment.





RISKS
RELATED TO OUR STOCK





Failure
to execute our redeployment strategy could cause our stock price to
decline.




Our stock
price may decline due to any or all of the following potential
occurrences:





·
            we
      may not be able to find suitable acquisition or investment candidates or
      may not be able to acquire suitable candidates with our limited financial
      resources;





·
            we
      may not be able to utilize our existing NOLs to offset future earnings;
      and,





·
            we
      may have difficulty retaining our board of directors or attracting
      suitable qualified candidates should a director
  resign.





We
may issue a substantial amount of our common stock in the future which could
cause dilution to new investors and otherwise adversely affect our stock
price.





A key
element of our growth strategy is to make acquisitions. As part of our
acquisition strategy, we may issue additional shares of common stock as
consideration for such acquisitions. These issuances could be significant. To
the extent that we make acquisitions or other investments and issue our shares
of common stock as consideration or investments, your equity interest in us will
be diluted. Any such issuance will also increase the number of outstanding
shares of common stock that will be eligible for sale in the future. Persons
receiving shares of our common stock in connection with these acquisitions may
be more likely to sell their common stock, which may influence the price of our
common stock. In addition, the potential issuance of additional shares in
connection with anticipated acquisitions could lessen demand for our common
stock and result in a lower price than might otherwise be obtained. We may issue
common stock in the future for other purposes as well, including in connection
with financings, for compensation purposes, in connection with strategic
transactions, or for other purposes.





Our
common stock is no longer listed on the NASDAQ National Market.





Our
common stock currently trades in the over the counter market and is quoted on
the Pink Sheets Electronic Quotation Service under the symbol
“COSN.PK.”  Our common stock had been traded on the NASDAQ National
Market under the symbol COSN from our initial public offering in September 2000
through June 15, 2005, when we were de-listed from the NASDAQ National Market
System.  As a result of the delisting, the liquidity of our stock may
be reduced, our shareholders may experience difficulty in buying or selling our
common stock at competitive prices or at all and the price of our common stock
may decline.


8





Our stock price has been
volatile.





Our stock
price has from time to time experienced significant price and volume
fluctuations unrelated to our operating performance.  Please see Item
5 of this Annual Report for the high and low quarterly closing prices of our
common stock for the last two fiscal years.





Item
1B.  Unresolved
Staff Comments





None.





Item
2.  Properties





Weoccupyapproximately 1,000 square
feet ofsharedoffice space in
Los Gatos, California under an operating lease.   Effective July
1, 2007 our lease payments are made by SP, an affiliated company, in connection
with a management services agreement.





Item
3.  Legal
Proceedings





On
November 15, 2001, we along with 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
CoSine Communications, Inc. Initial Public Offering Securities Litigation, Case
No. 01 CV 10105. The complaint generally alleges that various investment bank
underwriters engaged in improper and undisclosed activities related to the
allocation of shares in our initial public offering. The complaint brings claims
for the violation of several provisions of the federal securities laws against
those underwriters, and also against us and each of the directors and officers
who signed the registration statement relating to the initial public offering.
The plaintiffs seek unspecified monetary damages and other relief. Similar
lawsuits concerning more than 300 other companies' initial public offerings were
filed during 2001, and this lawsuit is being coordinated with those actions in
the Southern District of New York before Judge Shira A. Scheindlin.





On or
about July 1, 2002 an omnibus motion to dismiss was filed in the coordinated
litigation on behalf of the issuer defendants, of which we and our named officer
and directors are a part, on common pleading issues. In October 2002, pursuant
to stipulation by the parties, the Court entered an order dismissing our named
officers and directors from the action without prejudice. On February 19, 2003,
the Court dismissed the Section 10(b) and Rule 10b-5 claims against us but did
not dismiss the Section 11 claims against us.





The
parties have reached a global settlement of the litigation.  On October 5,
2009, the Court entered an Opinion and Order granting final approval of the
settlement.  Under the settlement, the insurers will pay the full
amount of settlement share allocated to the Company, and the Company will bear
no financial liability. The Company, as well as the officer and director
defendants who were previously dismissed from the action pursuant to tolling
agreements, will receive complete dismissals from the case.  Certain
objectors have appealed the Court’s October 5, 2009 final order to the Second
Circuit Court of Appeals. The appeal is still pending.





On
October 9, 2007, a purported CoSine shareholder filed a complaint for violation
of Section 16(b) of the Securities Exchange Act of 1934, which prohibits
short-swing trading, against the Company's IPO underwriters. The complaint,
Vanessa Simmonds v. The Goldman Sachs Group, et al., Case No. C07-1629, filed in
the District Court for the Western District of Washington, seeks the recovery of
short-swing profits. The Company is named as a nominal defendant. No recovery is
sought from the Company. The plaintiff, Vanessa Simmonds, has filed similar
lawsuits in the District Court for the Western District of Washington alleging
short-swing trading in the stock of 54 other companies. On July 25, 2008, a
majority of the named issuer companies, including CoSine, jointly filed a motion
to dismiss plaintiff's claims.   On March 12, 2009, the Court
issued an order granting the motion to dismiss and a judgment in the favor of
the moving issuers.  On April 10, 2009, Ms. Simmonds appealed the
order and judgment dismissing her claims to the United States Court of Appeal
for the Ninth Circuit.  The appeal is pending.





Even if
the above 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.


9





In the
ordinary course of business, we are involved in disputes and legal proceedings
involving contractual obligations, employment relationships, and other
matters.  Except as described above, we do not believe there are any
pending or threatened disputes or legal proceedings that will have a material
impact on our financial position or results of operations.





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





None.





PART
II





Item
5.  Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities





Market
Information





Our
common stock currently trades in the over the counter market and is quoted on
the Pink Sheets Electronic Quotation Service under the symbol
“COSN.PK.”  Our common stock had been traded on the NASDAQ National
Market under the symbol COSN from our initial public offering in September 2000
through June 15, 2005, when we were de-listed from the NASDAQ National Market
System.  There was no public market for our common stock prior to our
September 2000 initial public offering.





The
following table sets forth the high and low sales price of our common stock in
the years ended December 2009 and 2008.  Our common stock was
de-listed from NASDAQ National Market System on June 15, 2005.  The
following table sets forth the range of high and low bid information of our
common stock.  The high and low bid quotations reflect inter-dealer
prices, without retail mark-up, mark-down, or commission, and may not represent
actual transactions.





High
                  
                  
                  Low2008First
      quarter
                  
                  $
                  2.75
                  
                  
                  $
                  2.20Second
      quarter
                  
                  $
                  2.85
                  
                  
                  $
                  2.40Third
      quarter
                  
                  $
                  2.70
                  
                  
                  $
                  2.45Fourth
      quarter
                  
                  $
                  2.35
                  
                  
                  $
                  1.552009First
      quarter
                  
                  $
                  1.80
                  
                  
                  $
                  1.50Second
      quarter
                  
                  $
                  1.75
                  
                  
                  $
                  1.50Third
      quarter
                  
                  $
                  2.05
                  
                  
                  $
                  1.50Fourth
      quarter
                  
                  $
                  2.03
                  
                  
                  $
                  1.85





Stockholders





According
to the records of our transfer agent, at January 25, 2010 we had approximately
225  shareholders of record.  The majority of our shares are
held in approximately 2,800 customer accounts held by brokers and other
institutions on behalf of stockholders.





Dividends





To date,
we have not declared or paid any cash dividends on our common
stock.  Our current policy is to retain future earnings, if any, for
use in the operations, and we do not anticipate paying any cash dividends in the
foreseeable future.


10





Securities
Authorized for Issuance under Equity Compensation Plans





The
following table summarizes equity compensation plans that were approved and not
approved by the stockholders as of December 31, 2009:





EQUITY
COMPENSATION PLAN INFORMATION





Number of Securities
                                            
                                            
                                            
                                            
                                            
                                            Number of Securitiesto be Issued Upon
                                            
                                            
                                            Weighted-Average
                                            
                                            
                                            Remaining Available forExercise of Outstanding
                                            
                                            
                                            Exercise Price of
                                            
                                            
                                            Future Issuance UnderOptions, Warrants and
                                            
                                            
                                            Outstanding Options,
                                            
                                            
                                            Equity CompensationPlan category
                                            
                                            Rights
                                            
                                            
                                            Warrants and Rights
                                            
                                            
                                            Plans (1)Equity
      compensation plans approved by stockholders
                                            
                                            
                                            181,000
                                            (2)
                                            
                                            $
                                            6.66
                                            (2)
                                            
                                            
                                            1,902,735
                                            (3)Equity
      compensation plans not approved by stockholders (4)
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            893,990Total
                                            
                                            
                                            181,000
                                            
                                            
                                            $
                                            6.66
                                            
                                            
                                            
                                            2,796,725





(1)
              These
      numbers exclude shares listed under the column heading "Number of
      Securities to be Issued Upon Exercise of Outstanding Options, Warrants and
      Rights."


(2)
              Includes
      5,000 shares subject to outstanding options under the 1997 Stock Plan,
      132,000 shares subject to outstanding options under the 2000 Stock Plan,
      and 44,000 shares subject to outstanding options under the 2000 Director
      Plan.


(3)
              Includes
      1,898,735 shares available for future issuance under the 2000 Stock Plan,
      and 4,000 shares available for future issuance under the Director
      Plan.


(4)
              The
      only equity compensation plan not approved by stockholders is the 2002
      Stock Plan (the "2002 Plan").  The board of directors adopted
      the 2002 Plan in January 2002 to make available for issuance certain
      shares of our common stock that have been (i) previously issued pursuant
      to the exercise of stock options granted under the 1997 Plan and (ii)
      subsequently reacquired by us pursuant to repurchase rights contained in
      restricted stock purchase agreements or pursuant to optionee defaults on
      promissory notes issued in connection with the exercise of such options
      ("Reacquired Shares").  Under the terms of the 1997 Plan and the
      2000 Plan, these Reacquired Shares would not otherwise have been available
      for reissuance.  No shares that were not previously issued under
      the 1997 Plan and subsequently reacquired by us have been or will be
      reserved for issuance under the 2002 Plan.  A maximum of
      1,000,000 shares may be reserved for issuance under the 2002
      Plan.  An aggregate of 335,791 shares were initially reserved
      for issuance under the 2002 Plan upon its adoption.  These
      shares consisted of Reacquired Shares as of the date of
      adoption.  Additional shares that become Reacquired Shares after
      the date of adoption of the 2002 Plan, up to a maximum of 664,209
      additional shares, will also become available for issuance under the 2002
      Plan.  The provisions of the 2002 Plan are substantially similar
      to those of the 2000 Plan, except that the 2002 Plan does not permit the
      grant of awards to officers or directors and does not permit the grant of
      Incentive Stock Options.  The 2002 Plan provides for the grant
      of nonstatutory stock options to employees (excluding officers) and
      consultants.  Stock options granted under the 2002 Plan will be
      at prices not less than the fair value of the common stock at the date of
      grant.  The term of each option, generally 10 years or less,
      will be determined by CoSine.





Use
of Proceeds of Registered Securities





On
September 25, 2000, in connection with our initial public offering, a
Registration Statement on Form S-1 (File No. 333-35938) was declared effective
by the Securities and Exchange Commission, pursuant to which 1,150,000 shares of
our common stock were offered and sold for our account at a price of $230 per
share, generating gross offering proceeds of $264.5 million.  The
managing underwriters were Goldman, Sachs & Co., Chase Securities Inc.,
Robertson Stephens, Inc. and JP Morgan Securities Inc. Our initial public
offering closed on September 29, 2000.  The net proceeds of the
initial public offering were approximately $242.5 million after deducting
approximately $18.5 million in underwriting discounts and approximately $3.5
million in other offering expenses.





We did
not pay directly or indirectly any of the underwriting discounts or other
related expenses of the initial public offering to any of our directors or
officers, any person owning 10% or more of any class of our equity securities,
or any of our affiliates. We have used approximately $220 million of the
funds from the initial public offering to fund our operations.  We
expect to use the remaining net proceeds for general corporate purposes,
including funding our operations, our working capital needs, and potential
acquisitions pursuant to our redeployment strategy.  Pending further
use of the net proceeds, we have invested them in short-term, interest-bearing
securities.


11





Item
6.  Selected
Financial Data





The
selected financial data below should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
our financial statements and the related notes. The selected statements of
operations data for the years ended December 31, 2009, 2008 and 2007 and the
selected balance sheet data as of December 31, 2009 and 2008, are derived from,
and are qualified by reference to, the audited financial statements included
elsewhere in this Annual Report on Form 10-K.  The selected statements
of operations data for the fiscal years ended prior to December 31, 2007, and
the selected balance sheet data prior to December 31, 2008, are derived from our
audited financial statements that are not included in this Annual Report on Form
10-K.  The historical results presented below are not necessarily
indicative of future results.





Years Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005(In thousands, except per share data)Statements
      of Operations Data:Revenue
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  1,361
                  
                  
                  $
                  3,315Cost
      of revenue
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,663
                  
                  
                  
                  2,049Gross
      profit (loss)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (302
                  )
                  
                  
                  1,266Operating
      expenses:Research
      and development
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  103Sales
      and marketing
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  105General
      and administrative
                  
                  
                  738
                  
                  
                  
                  721
                  
                  
                  
                  781
                  
                  
                  
                  1,316
                  
                  
                  
                  3,227Restructuring
      and impairment charges
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (91
                  )Total
      operating expenses
                  
                  
                  738
                  
                  
                  
                  721
                  
                  
                  
                  781
                  
                  
                  
                  1,316
                  
                  
                  
                  3,344Loss
      from operations
                  
                  
                  (738
                  )
                  
                  
                  (721
                  )
                  
                  
                  (781
                  )
                  
                  
                  (1,618
                  )
                  
                  
                  (2,078
                  )Other
      income (expense):Interest
      income
                  
                  
                  141
                  
                  
                  
                  678
                  
                  
                  
                  1,180
                  
                  
                  
                  1,101
                  
                  
                  
                  678Interest
      expense
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (4
                  )
                  
                  
                  —Other
                  
                  
                  —
                  
                  
                  
                  28
                  
                  
                  
                  —
                  
                  
                  
                  918
                  
                  
                  
                  (46
                  )Total
      other income
                  
                  
                  141
                  
                  
                  
                  706
                  
                  
                  
                  1,180
                  
                  
                  
                  2,015
                  
                  
                  
                  632Income
      (loss) before income tax provision (benefit)
                  
                  
                  (597
                  )
                  
                  
                  (15
                  )
                  
                  
                  399
                  
                  
                  
                  397
                  
                  
                  
                  (1,446
                  )Income
      tax provision (benefit)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  ( 17
                  )
                  
                  
                  ( 52
                  )
                  
                  
                  ( 228
                  )Net
      income (loss)
                  
                  $
                  (597
                  )
                  
                  $
                  (15
                  )
                  
                  $
                  416
                  
                  
                  $
                  449
                  
                  
                  $
                  (1,218
                  )Basic
      net income (loss) per common share
                  
                  $
                  (0.06
                  )
                  
                  $
                  (0.00
                  )
                  
                  $
                  0.04
                  
                  
                  $
                  0.04
                  
                  
                  $
                  (0.12
                  )Diluted
      net income (loss) per common share
                  
                  $
                  (0.06
                  )
                  
                  $
                  (0.00
                  )
                  
                  $
                  0.04
                  
                  
                  $
                  0.04
                  
                  
                  $
                  (0.12
                  )Shares
      used in computing basic net income (loss) per common share
                  
                  
                  10,091
                  
                  
                  
                  10,091
                  
                  
                  
                  10,091
                  
                  
                  
                  10,091
                  
                  
                  
                  10,094Shares
      used in computing diluted net income (loss) per common
    share
                  
                  
                  10,091
                  
                  
                  
                  10,091
                  
                  
                  
                  10,115
                  
                  
                  
                  10,096
                  
                  
                  
                  10,094





Balance
      Sheet Data:Cash,
      cash equivalents and short-term investments
                
                $
                22,564
                
                
                $
                23,152
                
                
                $
                23,119
                
                
                $
                22,857
                
                
                $
                23,166Working
      capital
                
                
                22,362
                
                
                
                23,019
                
                
                
                22,927
                
                
                
                22,477
                
                
                
                22,353Total
      assets
                
                
                22,597
                
                
                
                23,282
                
                
                
                23,231
                
                
                
                23,036
                
                
                
                23,840Total
      stockholders’ equity
                
                
                22,365
                
                
                
                23,022
                
                
                
                22,930
                
                
                
                22,477
                
                
                
                22,603




12





Quarterly
financial information (unaudited):





2009
                    
                    
                    20081st
                      Quarter
                    
                    
                    2nd
                      Quarter
                    
                    
                    3rd
                      Quarter
                    
                    
                    4th
                      Quarter
                    
                    
                    1st
                      Quarter
                    
                    
                    2nd
                      Quarter
                    
                    
                    3rd
                      Quarter
                    
                    
                    4th
                      Quarter(In thousands,
      except per share data)Revenue
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —Gross
      profit (loss)
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Net
      income (loss)
                    
                    $
                    (155
                    )
                    
                    $
                    (151
                    )
                    
                    $
                    (139
                    )
                    
                    $
                    (152
                    )
                    
                    $
                    53
                    
                    
                    $
                    22
                    
                    
                    $
                    2
                    
                    
                    $
                    (92
                    )Basic
      and diluted net income (loss) per  share
                    
                    $
                    (.02
                    )
                    
                    $
                    (.01
                    )
                    
                    $
                    (.01
                    )
                    
                    $
                    (.02
                    )
                    
                    $
                    0.01
                    
                    
                    $
                    0.00
                    
                    
                    $
                    0.00
                    
                    
                    $
                    (.01
                    )





Item
7.  Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





OVERVIEW





Our
current business strategy is to enhance stockholder value by pursuing
opportunities to redeploy our assets through an acquisition of, or investment
in, one or more operating businesses with existing or prospective taxable
income, or from which we can realize capital gains, that can be offset by use of
our net operating loss carry-forwards (“NOLs”).  No candidate for
acquisition or investment has yet been identified, and no assurance can be given
that we will find suitable candidates, and if we do, that we will be able to
utilize our existing NOLs.





Until the
end of fiscal year 2004, we were a provider of carrier network equipment
products and services offering a portfolio of communications products and
services to business and consumer customers.  We formally discontinued
our communications platform products and product operations in fiscal year 2004,
sold our patent portfolio and intellectual property rights in fiscal year 2006
and ceased all our related customer support services as of December 31,
2006.





DUE TO
THE ADOPTION OF OUR REDEPLOYMENT STRATEGY, THE INFORMATION APPEARING BELOW,
WHICH RELATES TO PRIOR PERIODS, MAY NOT BE INDICATIVE OF THE RESULTS THAT MAY BE
EXPECTED FOR ANY SUBSEQUENT PERIODS.  THE YEAR ENDED DECEMBER 31, 2009
PRIMARILY REFLECTS, AND FUTURE PERIODS PRIOR TO A REDEPLOYMENT OF OUR ASSETS ARE
EXPECTED TO PRIMARILY REFLECT, GENERAL AND ADMINISTRATIVE EXPENSES AND
TRANSACTION EXPENSES ASSOCIATED WITH THE CONTINUING ADMINISTRATION OF THE
COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





General





Our
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles.  The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, income and expenses, and
related disclosures of contingent assets and liabilities.  On an
ongoing basis, we evaluate our estimates, including those related to fair
values, income taxes and equity issuances.  Additionally, the audit
committee of our board of directors reviews these critical accounting estimates
at least annually.  We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances.  These estimates form the basis for certain judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources.  Actual results may differ from these
estimates.





The
following accounting policies are significantly affected by the judgments and
estimates we use in the preparation of our financial statements.





Fair
Value Measurements





Effective
January 1, 2008, we adopted amendments to the accounting standards addressing
the measurement of the fair value of our financial assets and financial
liabilities.  The amendments define fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date.


13





The
amendments establish a fair value hierarchy that distinguishes between (1)
market participant assumptions developed based on market data obtained from
independent sources (observable inputs) and (2) an entity’s own assumptions
about market participant assumptions developed based on the best information
available in the circumstances (unobservable inputs).  The fair value
hierarchy consists of three broad levels, which gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3).  The
three levels of the fair value hierarchy under the amendments are described
below:


Level
1:  Quoted prices (unadjusted) in active markets for identical assets or
liabilities.  We used Level 1 assumptions for our cash and cash equivalents
and short term investments, which are traded in an active market.  The
valuations are based on quoted prices that are readily and regularly available
in an active market, and accordingly, a significant degree of judgment is not
required.  As of December 31, 2009 we did not have any short term
investments.


Level
2:  Directly or indirectly observable market based inputs used in models or
other valuation methodologies.  As of December 31, 2009, we did not have
any Level 2 financial assets or liabilities.


Level 3:
Unobservable inputs that are supported by little or no market data and require
the use of significant management judgment.  As of December 31, 2009, we
did not have any Level 3 financial assets or liabilities.





Impact
of Equity Issuances on Operating Results





Equity
issuances have a material impact on our operating results.  The equity
issuances that have affected operating results to date include warrants granted
to customers and suppliers, stock options granted to employees and consultants,
and stock issued in lieu of cash compensation to suppliers.





In prior
years, our cost of revenue, operating expenses and interest expense were
affected significantly by charges related to warrants and options issued for
services.





Income
Taxes





We
account for income taxes using the liability method under which deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. We adopted the
provisions of Accounting Standard Codification No. 740 (ASC 740) on accounting
for uncertain income taxes, on January 1, 2007.  This provision clarifies
the accounting for income taxes by prescribing the minimum recognition threshold
a tax position is required to meet before being recognized in our financial
statements.  The Interpretation also provides guidance for the measurement
and classification of tax positions, interest and penalties, and requires
additional disclosure on an annual basis.  The cumulative effect of the
change had no impact on the balance sheet or statement of operations. Following
implementation, the ongoing recognition of changes in measurement of uncertain
tax positions will be reflected as a component of income tax expense. Interest
and penalties incurred associated with unresolved income tax positions will
continue to be included in other income (expense).





Sources
of Income





Until a redeployment of our assets
occurs, our principal source of income will consist of interest, dividend and
other investment income from cash, cash equivalents and short-term investments,
which is reported as interest income in our statement of
operations.





RESULTS
OF OPERATIONS





Revenue





We
had no revenue in 2009, 2008 or 2007, as we discontinued all service offerings
at December 31, 2006.





Non-Cash
Charges and Credits Related to Equity Issuances





We
amortized $28,000, $34,000 and $39,000 of non-cash charges related to equity
issuances to operating expenses, for the years ended December 31, 2009, 2008 and
2007, respectively.


14





Below is
a reconciliation of non-cash charges related to equity issuances for the years
ended December 31, 2009, 2008, and 2007, affecting our operating expenses, in
thousands:





Years ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Stock-based
      compensation
                  
                  $
                  28
                  
                  
                  $
                  34
                  
                  
                  $
                  39Net
      non-cash charges related to equity issuances
                  
                  $
                  28
                  
                  
                  $
                  34
                  
                  
                  $
                  39





Equity-related
charges, which are largely dependent on our quarterly stock price, may cause our
expenses to materially fluctuate from quarter-to-quarter and
year-to-year.





General
and Administrative Expenses





General
and administrative expenses consist primarily of service contracts and related
expenses for executive, finance, legal, accounting, and human resources
personnel as well as other corporate expenses, including non-cash charges
related to equity issuances.





General
and administrative expenses were $738,000, $721,000, and $781,000 for the years
ended December 31, 2009, 2008, and 2007, respectively.  General and
administrative expense increased by $17,000 for the year ended December 31, 2009
as compared to December 31, 2008.  The increase is due primarily to
increased legal costs related to investigating a potential acquisition during
2009.  General and administrative expense decreased by $60,000 for the
year ended December 31, 2008 as compared to December 31, 2007.  The
decrease is due primarily to our retention of SP Corporate Services, LLC, as of
July 1, 2007, to provide all our executive, financial, and administrative
support services and personnel, including the services of our executive
officers, which had been previously performed during fiscal year 2007 by one
employee and a consultant.





Since
July 1, 2007, our administrative functions have been performed under an
agreement (the “Services Agreement”) with SP Corporate Services, LLC (“SP”)
pursuant to which SP provides us, on a non-exclusive basis, a full range of
executive, financial, and administrative support services and personnel,
including the services of our executive officers. The Service Agreement became
effective as of July 1, 2007.  Pursuant to the Services Agreement,
Terry R. Gibson terminated his employment with us, effective as of June 30,
2007, but continues to serve as our Chief Executive Officer, Chief Financial
Officer, Secretary, Principal Executive Officer, and Principal Accounting
Officer as an employee of SP.  Under the Services Agreement, we pay SP
a monthly fee of $17,000 in exchange for SP's services.  SP is
responsible for compensating and providing all applicable employment benefits to
any SP personnel, including Mr. Gibson, in connection with providing services
under the Services Agreement. We reimburse SP for reasonable and necessary
business expenses of ours incurred by SP, and we are responsible for payment of
fees related to audit, tax, legal, stock transfer, insurance broker, investment
advisor, and banking services provided to us by third party advisors. The
Services Agreement has a term of one year and automatically renews for
successive one year periods unless otherwise terminated by either party. The
Services Agreement is also terminable by us upon the death of Terry R. Gibson or
his resignation as our Chief Executive Officer, Chief Financial Officer, or
Secretary of the Company. Under the Services Agreement, SP and its personnel are
entitled to the same limitations on liability and indemnity rights available
under our charter documents to any other person performing such services for
us.





General
and administrative non-cash charges related to equity issuances were $28,000,
$34,000 and $39,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.





Interest
Income





For the
year ended December 31, 2009, interest income was $141,000 as compared to
$678,000 at December 31, 2008 and $1.18 million at December 31,
2007.  The decrease for the year ended December 31, 2009 as compared
to December 31, 2008 is due to lower interest rates in 2009 as compared to
2008.  The decrease for the year ended December 31, 2008 as compared
to December 31, 2007 is due to lower interest rates in 2008 as compared to
2007.


15




Other
Income





For the
years ended December 31, 2009, 2008, and 2007, respectively, other income was
nil, $28,000 and nil.  Other income in 2008 is composed of the gain on
liquidation of foreign subsidiaries and related activities.





Interest
Expense





For the
years ended December 31, 2009, 2008, and 2007, interest expense was
nil.





Income
Tax Provision





There
were no tax provisions for the years ended December 31, 2009 and 2008,
respectively, as there were pre-tax losses in such years.  The tax
provision credit of ($17,000) for the year ended December 31, 2007 was related
to closure of foreign operations and completion of related tax
settlements.





We have
not recognized any benefit from the future use of net operating loss
carry-forwards for these periods, or for any other periods, since our
incorporation.  We are not recognizing the potential tax benefits of
our net operating loss carry-forwards because we do not have sufficient evidence
that we will generate adequate profits to use them.





Use of
the net operating loss and tax credit carry-forwards may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, and similar state
provisions.  The annual limitation may result in the expiration of net
operating loss and tax credit carry-forwards before utilization.





LIQUIDITY
AND CAPITAL RESOURCES





We have
adopted a strategy of seeking to enhance stockholder value by pursuing
opportunities to redeploy our assets through an acquisition of, or investment
in, one or more operating businesses with existing or prospective taxable
income, or from which we can realize capital gains, that can be offset by use of
our net operating loss carry-forwards. Based on our $22.6 million in cash and
short term investments at December 31, 2009 and on our cost reduction
activities, we believe that we possess sufficient liquidity and capital
resources to fund our operations and working capital requirements for at least
the next 12 months. However, our redeployment of assets strategy raises
substantial doubt as to our ability to continue as a going
concern.  See “Liquidity and Redeployment Strategy” in Note 1 of the
Notes to Financial Statements.  See “Outlook” on page 17 and “Risk
Factors” on pages 5 to 9, which describes our redeployment of assets
strategy.





We will
continue to prepare our financial statements on the assumption that we will
continue as a going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business.  As such,
the financial statements do not include any adjustments to reflect possible
future effects of the recoverability and classification of assets or the amounts
and classification of liabilities that may result from any decisions made with
respect to an assessment of our strategic alternatives.  If at some
point we were to decide to pursue alternative plans, we may be required to
present the financial statements on a different basis.  As an example,
if we were to decide to pursue a liquidation and return of capital, it would be
appropriate to prepare and present financial statements on the liquidation basis
of accounting, whereby assets are valued at their estimated net realizable
values and liabilities are stated at their estimated settlement
amounts.





Cash,
Cash Equivalents and Short-Term Investments





At
December 31, 2009, cash, cash equivalents and short-term investments were $22.6
million, as compared to $23.2 million at December 31, 2008.





Operating
Activities





We
used $500,000 and $40,000 and generated $264,000 in cash from operations in the
years ended December 31, 2009, 2008 and 2007, respectively. The reduction in
cash generated from operations in 2009 and 2008 as compared to 2007 is due to
the decline in interest income.


16




Investing
Activities





We
generated $13.9 million in investing activities for the year ended December 31,
2009 due to net sales of short-term investments. For the year ended December 31,
2008, we used $3.6 million in cash to fund an increase in our short term
investments. For the year ended December 31, 2007, we generated $7.2 million in
cash from investing activities due to net sales and maturities of short-term
investments.





Financing
Activities





We
had no financing activities during the years ended December 31, 2009, 2008, or
2007.





Off-Balance
Sheet Arrangements





We
have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future material affect.





Contractual
Obligations





We have
future financial obligations related to purchase obligations. These obligations
as of December 31, 2009 are summarized as follows, (in thousands of
dollars):





Contractual
                        Obligations
                      
                      Total
                      
                      
                      2010
                      
                      
                      2011
                      
                      
                      2012-2013
                      
                      
                      After
      2013Unconditional
      purchase obligations
                      
                      $
                      102
                      
                      
                      $
                      102
                      
                      
                      $
                      0.0
                      
                      
                      $
                      0.0
                      
                      
                      $
                      0.0Total
      contractual cash obligations
                      
                      $
                      102
                      
                      
                      $
                      102
                      
                      
                      $
                      0.0
                      
                      
                      $
                      0.0
                      
                      
                      $
                      0.0





Our
unconditional purchase obligations relate to executive, financial and
administrative support services, and personnel provided by SP Corporate Services
LLC under an agreement which became effective as of July 1, 2007 (the "Services
Agreement").  Under the Services Agreement, we pay SP Corporate
Services, LLP a monthly fee of $17,000 in exchange for SP Corporate Services,
LLC’s services. The Services Agreement has a term of one year and automatically
renews for successive one year periods unless otherwise terminated by either
party.





OUTLOOK





We
have adopted a strategy of seeking to enhance stockholder value by pursuing
opportunities to redeploy our assets through an acquisition of, or investment
in, one or more operating businesses with existing or prospective taxable
income, or from which we can realize capital gains, that can be offset by use of
our net operating loss carry-forwards (“NOLs”).  As of this date, no
acquisition or investment candidate has been identified, and no assurance can be
given that we will find suitable candidates, and if we do, that we will be able
to utilize our existing NOLs.





At
December 31, 2009, we had $22.6 million in cash and cash
equivalents.  Cash used by operations during the year ended December
31, 2009 was $500,000. We believe we possess sufficient liquidity and capital
resources to fund our operations and working capital requirements for at least
the next 12 months.





Recent
Accounting Pronouncements





In
March 2008, we adopted amendments to the accounting standard addressing
derivatives and hedging.  The amendments change the disclosure
requirements for derivative instruments and hedging activities, requiring
enhanced disclosures about how and why an entity uses derivative instruments,
how instruments are accounted for under U.S. GAAP, and how derivatives and
hedging activities affect an entity’s financial position, financial performance
and cash flows.  The adoption of these amendments required additional
disclosure only, and therefore did not have an impact on our financial position,
results of operations, or cash flows.


17





In
April 2008, the FASB issued authoritative guidance in connection with accounting
for assets acquired and liabilities assumed in a business combination that arise
from contingencies.  The guidance addresses application issues
regarding the initial recognition and measurement, subsequent measurement and
accounting, and disclosure of assets and liabilities arising from contingencies
in a business combination.  Due to the fact that the literature is
applicable to acquisitions completed after January 1, 2009, and the Company did
not have any business combinations with assets and liabilities arising from
contingencies during 2009, the adoption of the authoritative guidance did not
impact the Company’s financial statements and its effects on future periods will
depend on the nature and extent of business combinations that we complete, if
any, after 2009.





In
October 2008, we adopted amendments to the accounting standard addressing
estimating fair value. The amendments provide additional authoritative guidance
to assist both issuers and user of financial statements in determining whether a
market is active or inactive and whether a transaction is
distressed.  The adoption of these amendments did not have an impact
on our financial position, results of operations, or cash flows.





In
June 2009, the Financial Accounting Standards Board (“the FASB”) issued “FASB
Accounting Standards Codification” (the “Codification”) as the single source of
authoritative U.S. generally accepted accounting principles (“U.S. GAAP”)
recognized by the FASB.  The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in one
place.  All existing accounting standard documents were superseded and
all other accounting literature not included in the Codification were considered
non-authoritative.  While the adoption of the Codification as of
September 30, 2009 changes how we reference accounting standards, the adoption
did not have an impact on our financial position, results of operations, or cash
flows.





In
June 2009, we adopted amendments to the accounting standard addressing fair
value of financial instruments in interim reporting periods.  The
amendments provide guidance on the disclosure requirements about fair value of
financial instruments in interim periods.  Such disclosures were
previously required only in annual financial statements.  The adoption
of these amendments did not have an impact on our financial position, results of
operations, or cash flows.





In
June 2009, we adopted amendments to the accounting standard addressing
subsequent events.  The amendments provide guidance on the definition
of what qualifies as a subsequent event – those events or transactions that
occur following the balance sheet date, but before the financial statements are
issued, or are available to be issued – and requires companies to disclose the
date through which subsequent events were evaluated and the basis for
determining that date.  This disclosure should alert all users of
financial statements that a company has not evaluated subsequent events after
that date in the set of financial statements being presented.  The
adoption of these amendments required additional disclosure only, and therefore
did not have an impact on our financial position, results of operations, or cash
flows.





In
June 2009, the FASB issued the consolidation guidance for variable-interest
entities to replace the quantitative-based risks and rewards calculation for
determining which enterprise, if any, has a controlling financial interest in a
variable interest entity with an approach focused on identifying which
enterprise has the power to direct the activities of a variable interest entity
that most significantly impact the entity’s economic
performance.  These new standards will be effective for the Company in
the first quarter of fiscal year 2011.  The Company currently has no
variable-interest entities but will assess the potential impact, if any, these
new standards may have on its financial statements when already effective and
applicable.





Item
7A.  Quantitative
and Qualitative Disclosures about Market Risk





Interest
Rate Sensitivity





We do not
currently use derivative financial instruments for speculative trading or
hedging purposes.  In addition, we maintain our cash equivalents in
government and agency securities, debt instruments of financial institutions and
corporations, and money market funds.  Our exposure to market risks
from changes in interest rates relates primarily to corporate debt
securities.  We place our investments with high quality credit issuers
and, by policy, limit the amount of the credit exposure to any one
issuer.





Our
general policy is to limit the risk of principal loss and ensure the safety of
invested funds by limiting market and credit risk.  All highly-liquid
investments with a maturity of less than three months at the date of purchase
are considered to be cash equivalents, and all investments with maturities of
three months or greater are classified as available-for-sale and considered to
be short-term investments.


18





A
sensitivity analysis was performed on our December 31, 2009 investment portfolio
based on a modeling technique that measures hypothetical fair market value
changes that would result from a parallel shift in the yield curve of plus 100
basis points.  Based on this analysis, a hypothetical 100 basis point
increase in interest rates would result in a $2,000 decrease in the fair value
of our investments as of December 31, 2009.





Exchange
Rate Sensitivity





All of
our revenue, all of our expenses and all of our other income in prior and
current years, if any, are denominated in U.S. dollars.


19


Item
8.  Financial
Statements and Supplementary Data





REPORT
OF BURR PILGER MAYER, INC.   INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


CoSine
Communications, Inc.




We have
audited the accompanying balance sheets of CoSine Communications, Inc. (the
“Company”) as of December 31, 2009 and 2008, and the related statements of
operations, stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2009. The financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor have we been engaged to perform, an audit of the Company's internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of CoSine Communications, Inc. as of
December 31, 2009 and 2008, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2009 in conformity
with accounting principles generally accepted in the United States of
America.





As
discussed in Note 1 to the financial statements, the Company’s actions in
September 2004 in connection with its ongoing evaluation of strategic
alternatives, to terminate most of its employees and discontinue production
activities in an effort to conserve cash, raise substantial doubt about its
ability to continue as a going concern. Management’s plans as to these matters
are also described in Note 1.  The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amount and classification of liabilities that
may result from the outcome of this uncertainty.





/s/ Burr
Pilger Mayer, Inc.





San Jose,
California


March 1,
2010


20





COSINE
COMMUNICATIONS, INC.





BALANCE
SHEETS


(In
thousands, except for share and per share data)





December 31,
                      2009
                    
                    
                    December 31,
                      2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    22,564
                    
                    
                    $
                    9,155Short-term
      investments
                    
                    
                    —
                    
                    
                    
                    13,997Interest
      receivable
                    
                    
                    2
                    
                    
                    
                    96Prepaid
      expenses and other current assets
                    
                    
                    28
                    
                    
                    
                    31Total
      current assets
                    
                    
                    22,594
                    
                    
                    
                    23,279Long
      term deposit
                    
                    
                    3
                    
                    
                    
                    3Total
      assets
                    
                    $
                    22,597
                    
                    
                    $
                    23,282LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                    
                    $
                    172
                    
                    
                    $
                    207Other
      accrued liabilities
                    
                    
                    60
                    
                    
                    
                    53Total
      current liabilities
                    
                    
                    232
                    
                    
                    
                    260Commitments
      and contingencies (Notes 2 and 3)Stockholders'
      equity:Preferred
      stock, no par value, 3,000,000 shares authorized, no
      shares  issued and outstanding
                    
                    
                    —
                    
                    
                    
                    —Common
      stock, $0.0001 par value, 22,000,000 shares authorized; 10,090,635 shares
      issued and outstanding at December 31, 2009 and 2008
                    
                    
                    1
                    
                    
                    
                    1Additional
      paid-in capital
                    
                    
                    539,088
                    
                    
                    
                    539,060Accumulated
      other comprehensive income
                    
                    
                    —
                    
                    
                    
                    88Accumulated
      deficit
                    
                    
                    (516,724
                    )
                    
                    
                    (516,127
                    )Total
      stockholders' equity
                    
                    
                    22,365
                    
                    
                    
                    23,022Total
      liabilities and stockholders' equity
                    
                    $
                    22,597
                    
                    
                    $
                    23,282





See
accompanying notes to financial statements.


21





COSINE
COMMUNICATIONS, INC.





STATEMENTS
OF OPERATIONS


(In
thousands, except for per share data)





Years Ended December 31,2009
                
                
                2008
                
                
                2007Revenue:Product
                
                $
                —
                
                
                $
                —
                
                
                $
                —Service
                
                
                —
                
                
                
                —
                
                
                
                —Total
      revenue
                
                
                —
                
                
                
                —
                
                
                
                —Cost
      of revenue
                
                
                —
                
                
                
                —
                
                
                
                —Gross
      profit (loss)
                
                
                —
                
                
                
                —
                
                
                
                —Operating
      expenses:General
      and administrative (1)
                
                
                738
                
                
                
                721
                
                
                
                781Total
      operating expenses
                
                
                738
                
                
                
                721
                
                
                
                781Loss
      from operations
                
                
                (738
                )
                
                
                (721
                )
                
                
                (781
                )Other
      income (expense):Interest
      income
                
                
                141
                
                
                
                678
                
                
                
                1,180Interest
      expense
                
                
                —
                
                
                
                —
                
                
                
                —Other
                
                
                —
                
                
                
                28
                
                
                
                —Total
      other income
                
                
                141
                
                
                
                706
                
                
                
                1,180(Loss)
      income before income tax benefit
                
                
                (597
                )
                
                
                (15
                )
                
                
                399Income
      tax  (benefit)
                
                
                —
                
                
                
                —
                
                
                
                ( 17
                )Net
      (loss) income
                
                $
                (597
                )
                
                $
                (15
                )
                
                $
                416Basic
      net income (loss) per share
                
                $
                (0.06
                )
                
                $
                (0.00
                )
                
                $
                0.04Diluted
      net income (loss) per share
                
                $
                (0.06
                )
                
                $
                (0.00
                )
                
                $
                0.04Shares
      used to calculate net income (loss) per share:Basic
                
                
                10,091
                
                
                
                10,091
                
                
                
                10,091Diluted
                
                
                10,091
                
                
                
                10,091
                
                
                
                10,115





(1)
              General
      and administrative expenses include $28, $34 and $39 in non-cash charges
      related to equity issuances in 2009, 2008, and 2007,
      respectively.




See
accompanying notes to financial statements.


22





COSINE
COMMUNICATIONS, INC.





STATEMENTS
OF STOCKHOLDERS’ EQUITY


(In
thousands, except share data)


AccumulatedAdditional
                  
                  
                  Other
                  
                  
                  
                  
                  
                  TotalCommon
      Stock
                  
                  
                  Paid-in
                  
                  
                  Comprehensive
                  
                  
                  Accumulated
                  
                  
                  Stockholders’Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Income
                  
                  
                  Deficit
                  
                  
                  EquityBalance
      at December 31, 2006
                  
                  
                  10,090,635
                  
                  
                  $
                  1
                  
                  
                  $
                  538,987
                  
                  
                  $
                  17
                  
                  
                  $
                  (516,528
                  )
                  
                  $
                  22,477Stock
      based compensation
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  39
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  39Components
      of comprehensive income (loss):Net
      income
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  416
                  
                  
                  
                  416Unrealized
      gain on investments, net of tax
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (2
                  )
                  
                  
                  —
                  
                  
                  
                  (2
                  )Total
      comprehensive income (loss)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (2
                  )
                  
                  
                  416
                  
                  
                  
                  414Balance
      at December 31, 2007
                  
                  
                  10,090,635
                  
                  
                  
                  1
                  
                  
                  
                  538,026
                  
                  
                  
                  15
                  
                  
                  
                  (516,112
                  )
                  
                  
                  22,930Stock
      based compensation
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  34
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  34Components
      of comprehensive income (loss):Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (15
                  )
                  
                  
                  (15
                  )Unrealized
      loss on investments, net of tax
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  73
                  
                  
                  
                  —
                  
                  
                  
                  73Total
      comprehensive income (loss)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  73
                  
                  
                  
                  (15
                  )
                  
                  
                  57Balance
      at December 31, 2008
                  
                  
                  10,090,635
                  
                  
                  
                  1
                  
                  
                  
                  539,060
                  
                  
                  
                  88
                  
                  
                  
                  (516,127
                  )
                  
                  
                  23,022Stock
      based compensation
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  28
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  28Components
      of comprehensive income (loss):Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (597
                  )
                  
                  
                  (597
                  )Unrealized
      gain on investments, net of tax
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (88
                  )
                  
                  
                  
                  
                  
                  
                  (88
                  )Total
      comprehensive income (loss)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (88
                  )
                  
                  
                  (597
                  )
                  
                  
                  (685
                  )Balance
      at December 31, 2009
                  
                  
                  10,090,635
                  
                  
                  $
                  1
                  
                  
                  $
                  539,088
                  
                  
                  $
                  —
                  
                  
                  $
                  (516,724
                  )
                  
                  $
                  22,365





See
accompanying notes to financial statements.




23





COSINE
COMMUNICATIONS, INC.





STATEMENTS
OF CASH FLOWS


(In
thousands)





Years Ended December 31,2009
                
                
                2008
                
                
                2007Operating
      activities:Net
      (loss) income
                
                $
                (597
                )
                
                $
                (15
                )
                
                $
                416Adjustments
      to reconcile net (loss) income to net cash (used) generated in operating
      activities:Stock
      compensation expense
                
                
                28
                
                
                
                34
                
                
                
                39Change
      in operating assets and liabilities:Accounts
      receivable trade
                
                
                —
                
                
                
                —
                
                
                
                55Interest
      receivable
                
                
                94
                
                
                
                (23
                )
                
                
                (5
                )Prepaid
      expenses and other current assets
                
                
                3
                
                
                
                5
                
                
                
                20Long-term
      deposits and other assets
                
                
                —
                
                
                
                —
                
                
                
                (3
                )Accounts
      payable
                
                
                (35
                )
                
                
                3
                
                
                
                (116
                )Other
      accrued liabilities
                
                
                7
                
                
                
                (44
                )
                
                
                (142
                )Net
      cash (used) generated in operating activities
                
                
                ( 500
                )
                
                
                (40
                )
                
                
                264Investing
      activities:Purchase
      of short-term investments
                
                
                —
                
                
                
                (30,729
                )
                
                
                (27,318
                )Proceeds
      from sales and maturities of short-term investments
                
                
                13,909
                
                
                
                27,215
                
                
                
                34,556Net
      cash (used in) generated in investing activities
                
                
                13,909
                
                
                
                (3,514
                )
                
                
                7,238Net
      (decrease) increase in cash and cash equivalents
                
                
                13,409
                
                
                
                (3,554
                )
                
                
                7,502Cash
      and cash equivalents at the beginning of the period
                
                
                9,155
                
                
                
                12,709
                
                
                
                5,207Cash
      and cash equivalents at the end of the period
                
                $
                22,564
                
                
                $
                9,155
                
                
                $
                12,709





See
accompanying notes to financial statements.


24


COSINE
COMMUNICATIONS, INC.





NOTES
TO FINANCIAL STATEMENTS








1.  Summary
of Significant Accounting Policies





Description
of Business





CoSine
Communications, Inc. ("CoSine" or the "Company," which may be referred to as
"we," "us," or "our") was incorporated in California on April 14, 1997 and in
August 2000 was reincorporated in the State of Delaware. Until the end of fiscal
year 2004, we were a provider of carrier network equipment products and services
offering a portfolio of communications products and services to business and
consumer customers.  We formally discontinued our communications
platform products and product operations in fiscal year 2004, sold our patent
portfolio and intellectual property rights in fiscal year 2006 and ceased all
our related customer support services as of December 31, 2006.  We are
currently attempting to redeploy our existing assets by identifying and
acquiring, or investing in, one or more operating businesses with existing or
prospective taxable income, or from which we can realize capital gains, that can
be offset by use of our net operating loss carry-forwards
(“NOLs”).  No candidate for acquisition or investment has yet been
identified, and no assurance can be given that we will find suitable candidates,
and if we do, that we will be able to utilize our existing NOLs.





Liquidity
and Redeployment Strategy





The
accompanying financial statements have been prepared in conformity with U.S.
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, at December 31, 2009, we have an
accumulated deficit of $517 million.  As of December 31, 2006, we
ceased our customer service capability.  Our actions in the fourth
quarter of fiscal year 2004 to terminate most of our employees and discontinue
production activities in an effort to conserve cash raise substantial doubt
about our ability to continue as a going concern. We continue to pursue our
redeployment strategy, which involves the acquisition of, or investment in, one
or more operating businesses with existing or prospective taxable income, or
from which we can realize capital gains, that can be offset by use of our
NOLs.  The financial statements do not include any adjustments to
reflect the possible future effects relating to the recoverability and
classification of the recorded asset amounts or amounts and classification of
liabilities that might result from the outcome of this uncertainty.





Use
of Estimates





The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying
notes.  Actual results could differ from these
estimates.  Estimates are used in accounting for, but are not limited
to, fair value measurements, income taxes and equity
issuances.  Estimates and assumptions are reviewed periodically and
the effects of revisions are reflected in the financial statements in the period
of determination.





Significant
Concentrations





Financial
instruments that potentially subject us to concentrations of credit risk
primarily consist of cash, cash equivalents, and short-term investments. We
mitigate investment risk by investing only in government and high quality
corporate securities and by limiting the amount of exposure to any one
issuer.Deposits
held with financial institutions may exceed the amount of insurance provided on
such deposits.We are
exposed to credit risks in the event of default by these institutions to the
extent of the amount recorded on the balance sheet.  We have not
experienced any material losses on deposits of cash and cash
equivalents.





We ceased all customer
service operations effective December 31, 2006.





Guarantees





Wemay enter into certain
types of contracts that require that we indemnify parties against certain third
party claims that may arise. These contracts primarily relate to:
(i) certain agreements with our officers, directors and employees, under
which we may be required to indemnify such persons for liabilities arising out
of their employment relationship, (ii) contracts under which we may be
required to indemnify customers against loss or damage to property or persons as
a result of willful or negligent conduct by our employees or sub-contractors,
(iii) contracts under which we may be required to indemnify customers against
third party claims that our product infringes a patent, copyright or other
intellectual property right and, (iv) procurement or license agreements under
which we may be required to indemnify licensors or vendors for certain claims
that may be brought against them arising from our acts or omissions with respect
to the supplied products or technology.


25





Generally,
a maximum obligation is not explicitly stated.  Because the obligated
amounts associated with this type of agreement are not explicitly stated, the
overall maximum amount of the obligation cannot be reasonably
estimated.  Historically, we have not been obligated to make payments
for these obligations, and no liabilities have therefore been recorded for these
obligations on our  balance sheets as of December 31, 2009 and
2008.





Cash,
Cash Equivalents and Short-Term Investments





We
consider all highly liquid investments purchased with original maturities of
three months or less from the date of purchase to be cash equivalents.
Investments with maturities in excess of three months and less than one year are
considered to be short-term investments.  We determine the appropriate
classification of cash equivalents and investment securities at the time of
purchase.  We have classified our marketable securities as
available-for-sale securities in the accompanying financial
statements.  Available-for-sale securities are carried at fair value,
with unrealized gains and losses reported in a separate component of
stockholders’ equity.  Realized gains and losses and declines in value
judged to be other-than-temporary, if any, on available-for-sale securities are
included in interest income.  Interest on securities classified as
available-for-sale is also included in interest income. The cost of securities
sold is based on the specific identification method.





We invest
excess cash in U.S. government and agency securities, debt instruments of
financial institutions and corporations, and money market funds with strong
credit ratings.  We have established guidelines about the
diversification of our investments and their maturities.




Fair
Value Measurement




On
January 1, 2008, we adopted Accounting Standard Codification 820, Fair Value
measurements and disclosures (ASC 820), which defines fair value,
establishes a framework for using fair value to measure assets and liabilities,
and expands disclosures about fair value measurements. ASC 820 applies whenever
other statements require or permit assets or liabilities to be measured at fair
value. ASC 820 is effective for fiscal years beginning after November 15, 2007,
except for nonfinancial assets and liabilities that are recognized or disclosed
at fair value in the financial statements on a nonrecurring basis, for which
application has been deferred.




26




The
following table summarizes our financial assets measured at fair value on a
recurring basis in accordance with ASC 820 as of December 31, 2009 (in
thousands) with comparative balances as of December 31, 2008:




As of December 31,
2009




Amortized Cost
                
                
                Unrealized Gain /
                  (Loss)
                
                
                Fair Value
                
                
                Quoted Prices in
                  Active Markets for
                  Identical Assets
                  (Level 1)Assets:Cash
      equivalents:Money
      market funds
                
                $
                22,518
                
                
                $
                —
                
                
                $
                22,518
                
                
                $
                22,518Short-term
      investments:Commercial  paper
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —Corporate
      obligations
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                $
                22,518
                
                
                $
                —
                
                
                $
                22,518
                
                
                $
                22,518Liabilities
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —




As of December 31,
2008




AmortizedCost
                
                
                Unrealized Gain /
                  (Loss)
                
                
                Fair Value
                
                
                Quoted Prices in
                  Active Markets for
                  Identical Assets
                  (Level 1)Assets:Cash
      equivalents:Money
      market funds
                
                $
                9,074
                
                
                $
                —
                
                
                $
                9,074
                
                
                $
                9,074Short-term
      investments:Commercial  paper
                
                $
                2,645
                
                
                $
                3
                
                
                $
                2,648
                
                
                $
                2,648Corporate
      obligations
                
                
                4,725
                
                
                
                (12
                )
                
                
                4,713
                
                
                
                4,713U.S.
      governmental  agency notes
                
                
                6,539
                
                
                
                97
                
                
                
                6,636
                
                
                
                6,636Total
                
                $
                13,909
                
                
                $
                88
                
                
                $
                13,997
                
                
                $
                13,997Liabilities
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —




27




Our
financial assets are valued using market prices on active markets (level 1).
Level 1 instrument valuations are obtained from real-time quotes for
transactions in active exchange markets involving identical
assets.  At December 31, 2009, we did not have any assets with
instrument valuations which are not obtained from readily-available pricing
sources for comparable instruments (level 2) or assets without observable market
values that would require a high level of judgment to determine fair value
(level 3).




The
carrying amounts of certain of the Company’s financial
instruments including cash, interest receivable and accounts payable approximate
fair value due to their short maturities.





As of
December 31, 2009 and 2008, there were net unrealized gains of nil and $88,000,
respectively. In 2008, available-for-sale securities had contractual maturities
of one year or less.





We manage
our investments as a single portfolio of highly marketable securities that is
intended to be available to meet our current cash requirements.  We
have no investments in auction rate securities.





The gross
unrealized gain related to our portfolio of available-for-sale securities at
December 31, 2008, were primarily due to increase in fair value of debt
securities as a result of the change in interest rates during 2008.





Stock-Based
Compensation





Effective
January 1, 2006, we adopted the provisions of ASC 718, Compensation – Stock
Compensation (ASC 718).  ASC 718 establishes accounting for
stock-based awards exchanged for employee services.  Accordingly,
stock-based compensation cost is measured at grant date, based on the fair value
of the award, and is recognized as expense over the employee requisite service
period.  All of our stock compensation is accounted for as an equity
instrument.





The
effect of recording stock-based compensation for the years ended December 31,
2009, 2008 and 2007 was $28,000, $34,000 and $39,000 respectively, which
consisted of stock based compensation related to employee stock
options.





Income
Taxes




We
adopted the provisions of ASC 470, Income Taxes (ASC 470), on January 1,
2007.  This Interpretation clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in our financial statements.  The Interpretation
also provides guidance for the measurement and classification of tax positions,
interest and penalties, and requires additional disclosure on an annual
basis.  The cumulative effect of the change was not material. Following
implementation, the ongoing recognition of changes in measurement of uncertain
tax positions will be reflected as a component of income tax expense. Interest
and penalties incurred associated with unresolved income tax positions will
continue to be included in other income (expense).





Net
(Loss) Income Per Share





Basic net
income (loss) per share is calculated based on the weighted average number of
common shares outstanding during the periods presented, less the weighted
average shares outstanding that are subject to our right of
repurchase.  Diluted net loss per share gives effect to the dilutive
effect of common stock equivalents consisting of stock options and warrants
(calculated using the treasury stock method) and convertible preferred
stock.





The
following table presents the calculation of basic and diluted net loss per share
for each year (in thousands, except per share data):




Years ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Numerator:Net
      (loss) income
                  
                  $
                  (597
                  )
                  
                  $
                  (15
                  )
                  
                  $
                  416Denominator:Weighted
      average shares outstanding for basic (loss) income per
    share
                  
                  
                  10,091
                  
                  
                  
                  10,091
                  
                  
                  
                  10,091Add:
      effect of dilutive securities – stock options
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  24Weighted
      average shares used in basic and diluted net (loss)  income per
      share
                  
                  
                  10,091
                  
                  
                  
                  10,091
                  
                  
                  
                  10,115Basic
      net (loss)  income per share
                  
                  $
                  (0.06
                  )
                  
                  $
                  (0.00
                  )
                  
                  $
                  0.04Diluted
      net (loss) income per share
                  
                  $
                  (0.06
                  )
                  
                  $
                  (0.00
                  )
                  
                  $
                  0.04




28





During
all periods presented, we had stock options and warrants outstanding that could
potentially dilute earnings per share in the future, but were excluded from the
computation of diluted
net loss per share, as their effect would have been
antidilutive.  These shares amounted to185,000,165,000, and35,000for the years
ended December 31, 2009, 2008, and 2007 respectively.





Recent
Accounting Pronouncements





In March
2008, we adopted amendments to the accounting standard addressing derivatives
and hedging.  The amendments change the disclosure requirements for
derivative instruments and hedging activities, requiring enhanced disclosures
about how and why an entity uses derivative instruments, how instruments are
accounted for under U.S. GAAP, and how derivatives and hedging activities affect
an entity’s financial position, financial performance and cash
flows.  The adoption of these amendments required additional
disclosure only, and therefore did not have an impact on our financial position,
results of operations, or cash flows.





In April
2008, the FASB issued authoritative guidance in connection with accounting for
assets acquired and liabilities assumed in a business combination that arise
from contingencies.  The guidance addresses application issues
regarding the initial recognition and measurement, subsequent measurement and
accounting, and disclosure of assets and liabilities arising from contingencies
in a business combination.  Due to the fact that the literature is
applicable to acquisitions completed after January 1, 2009, and the Company did
not have any business combinations with assets and liabilities arising from
contingencies during 2009, the adoption of the authoritative guidance did not
impact the Company’s financial statements and its effects on future periods will
depend on the nature and extent of business combinations that we complete, if
any, after 2009.





In
October 2008, we adopted amendments to the accounting standard addressing
estimating fair value. The amendments provide additional authoritative guidance
to assist both issuers and user of financial statements in determining whether a
market is active or inactive and whether a transaction is
distressed.  The adoption of these amendments did not have an impact
on our financial position, results of operations, or cash flows.





In June
2009, the Financial Accounting Standards Board (“the FASB”) issued “FASB
Accounting Standards Codification” (the “Codification”) as the single source of
authoritative U.S. generally accepted accounting principles (“U.S. GAAP”)
recognized by the FASB.  The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in one
place.  All existing accounting standard documents were superseded and
all other accounting literature not included in the Codification were considered
non-authoritative.  While the adoption of the Codification as of
September 30, 2009 changes how we reference accounting standards, the adoption
did not have an impact on our financial position, results of operations, or cash
flows.





In June
2009, we adopted amendments to the accounting standard addressing fair value of
financial instruments in interim reporting periods.  The amendments
provide guidance on the disclosure requirements about fair value of financial
instruments in interim periods.  Such disclosures were previously
required only in annual financial statements.  The adoption of these
amendments did not have an impact on our financial position, results of
operations, or cash flows.





In June
2009, we adopted amendments to the accounting standard addressing subsequent
events.  The amendments provide guidance on the definition of what
qualifies as a subsequent event – those events or transactions that occur
following the balance sheet date, but before the financial statements are
issued, or are available to be issued – and requires companies to disclose the
date through which subsequent events were evaluated and the basis for
determining that date.  This disclosure should alert all users of
financial statements that a company has not evaluated subsequent events after
that date in the set of financial statements being presented.  The
adoption of these amendments required additional disclosure only, and therefore
did not have an impact on our financial position, results of operations, or cash
flows.





In June
2009, the FASB issued the consolidation guidance for variable-interest entities
to replace the quantitative-based risks and rewards calculation for determining
which enterprise, if any, has a controlling financial interest in a variable
interest entity with an approach focused on identifying which enterprise has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance.  These new
standards will be effective for the Company in the first quarter of fiscal year
2011.  The Company currently has no variable-interest entities but
will assess the potential impact, if any, these new standards may have on its
financial statements when already effective and applicable.




29





2.  Leases





We occupy approximately 1,000
square feet of shared office space in Los Gatos, California under an operating
lease.   Effective July 1, 2007 our lease payments are made by
SP, an affiliated company, in connection with a management services
agreement.





Rent
expense was $55,000 for the years ended December 31, 2007, and was calculated on
a straight-line basis





3.  Commitments
and Contingencies





On
November 15, 2001, we along with 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
CoSine Communications, Inc. Initial Public Offering Securities Litigation, Case
No. 01 CV 10105. The complaint generally alleges that various investment bank
underwriters engaged in improper and undisclosed activities related to the
allocation of shares in our initial public offering. The complaint brings claims
for the violation of several provisions of the federal securities laws against
those underwriters, and also against us and each of the directors and officers
who signed the registration statement relating to the initial public offering.
The plaintiffs seek unspecified monetary damages and other relief. Similar
lawsuits concerning more than 300 other companies' initial public offerings were
filed during 2001, and this lawsuit is being coordinated with those actions in
the Southern District of New York before Judge Shira A. Scheindlin.





On or
about July 1, 2002 an omnibus motion to dismiss was filed in the coordinated
litigation on behalf of the issuer defendants, of which we and our named officer
and directors are a part, on common pleading issues. In October 2002, pursuant
to stipulation by the parties, the Court entered an order dismissing our named
officers and directors from the action without prejudice. On February 19, 2003,
the Court dismissed the Section 10(b) and Rule 10b-5 claims against us but did
not dismiss the Section 11 claims against us.





The
parties have reached a global settlement of the litigation.  On October 5,
2009, the Court entered an Opinion and Order granting final approval of the
settlement.  Under the settlement, the insurers will pay the full
amount of settlement share allocated to the Company, and the Company will bear
no financial liability. The Company, as well as the officer and director
defendants who were previously dismissed from the action pursuant to tolling
agreements, will receive complete dismissals from the case.  Certain
objectors have appealed the Court’s October 5, 2009 final order to the Second
Circuit Court of Appeals. The appeal is still pending.





On
October 9, 2007, a purported CoSine shareholder filed a complaint for violation
of Section 16(b) of the Securities Exchange Act of 1934, which prohibits
short-swing trading, against the Company's IPO underwriters. The complaint,
Vanessa Simmonds v. The Goldman Sachs Group, et al., Case No. C07-1629, filed in
the District Court for the Western District of Washington, seeks the recovery of
short-swing profits. The Company is named as a nominal defendant. No recovery is
sought from the Company. The plaintiff, Vanessa Simmonds, has filed similar
lawsuits in the District Court for the Western District of Washington alleging
short-swing trading in the stock of 54 other companies. On July 25, 2008, a
majority of the named issuer companies, including CoSine, jointly filed a motion
to dismiss plaintiff's claims.   On March 12, 2009, the Court
issued an order granting the motion to dismiss and a judgment in the favor of
the moving issuers.  On April 10, 2009, Ms. Simmonds appealed the
order and judgment dismissing her claims to the United States Court of Appeal
for the Ninth Circuit.  The appeal is pending.





Even if
the above 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.





In the
ordinary course of business, we are involved in disputes and legal proceedings
involving contractual obligations, employment relationships, and other
matters.  Except as described above, we do not believe there are any
pending or threatened disputes or legal proceedings that will have a material
impact on our financial position or results of operations.





We also
have unconditional purchase obligations that relate to executive, financial and
administrative support services and personnel provided by SP Corporate Services,
LLC under an agreement which became effective as of July 1, 2007 (the "Services
Agreement”).  Under the Services Agreement, we pay SP Corporate
Services, LLC a monthly fee of $17,000 in exchange for SP Corporate Service
LLC’s services, rent and personnel.  The Services Agreement has a term
of one year and automatically renews for successive one year periods unless
otherwise terminated by either party.  The Services Agreement was
renewed as of July 1, 2009 for an additional one year term.  For 2010,
our total future obligation under this Services Agreement would be $102,000
through June 30, 2010.




30





4.  Stockholders’
Equity





Common
Stock





We have
authorized shares of common stock for future issuance at each year end as
follows (in thousands):





2009
                  
                  
                  2008Stock
      options:Options
      outstanding
                  
                  
                  181
                  
                  
                  
                  161Available
      for future grants
                  
                  
                  2,796
                  
                  
                  
                  2,816Warrants
      outstanding
                  
                  
                  4
                  
                  
                  
                  42,981
                  
                  
                  
                  2,981





1997
Stock Option Plan





In
October 1997, the board of directors adopted the 1997 Stock Plan (“1997 Plan”)
for issuance of common stock and grants of options for common stock to
employees, consultants, and directors.  Incentive stock options
granted under the plan were at prices not less than the fair value of stock at
the date of grant, except in the case of a sale to a person who owned stock
representing more than 10% of all the voting power of all classes of our stock,
in which case the purchase price was 110% of the fair market value of the common
stock on the date of grant.  Nonstatutory stock options granted under
the 1997 Plan were at prices not less than 85% of the fair value of stock at the
date of grant, except in the case of a sale to a person who owned stock
representing more than 10% of all the voting power of all classes of stock of
CoSine, in which case the purchase price was 110% of the fair market value of
the common stock on the date of grant.  Options granted under the 1997
Plan generally vested over four years at a rate of 25% one year from the grant
date and ratably monthly thereafter and were to expire 10 years after the grant,
or earlier upon termination.  Options could be granted with different
vesting terms.





Effective
upon the initial public offering, the 1997 Plan was terminated and the shares
reserved and unissued under the 1997 Plan were reserved for issuance under the
2000 Plan.





2000
Stock Option Plan





In May
2000, the board of directors adopted the 2000 Stock Plan (“2000
Plan”).  The 2000 Plan was approved by our shareholders before the
completion of the initial public offering. The 2000 Plan provides for the grant
of incentive stock options to employees, and for the grant of nonstatutory stock
options and stock purchase rights to employees, directors, and
consultants.  Incentive stock options granted under the 2000 Plan will
be at prices not less than the fair value of the common stock at the date of
grant.  The term of each option will be determined by the
administrator of the plan, generally 10 years or less.





We have
authorized 2,215,779 shares of common stock for issuance under the 2000 Plan. At
December 31, 2009 and 2008, respectively, a total of1,898,735 and 1,918,735shares were available for future options grants under the 2000
Plan.





2002
Stock Option Plan





In
January 2002, the board of directors adopted the 2002 Stock Plan (“2002
Plan”).  The purpose of the 2002 Plan is to make available for
issuance certain shares of common stock that have been (i) previously issued
pursuant to the exercise of stock options granted under the 1997 Plan and (ii)
subsequently reacquired by us pursuant to repurchase rights contained in
restricted stock purchase agreements or pursuant to optionee defaults on
promissory notes issued in connection with the exercise of such options
(“Reacquired Shares”).  Under the terms of the 1997 Plan and the 2000
Plan, these Reacquired Shares would not otherwise have been available for
reissuance.  Only shares that were previously issued under the 1997
Plan and subsequently reacquired by us have been or will be reserved for
issuance under the 2002 Plan.





We have
authorized up to a maximum of 1,000,000 shares of common stock for issuance of
Reacquired Shares under the 2002 Plan.  At December 31, 2009 and 2008,
a total of
893,990shares were available for future options grants under the 2002
Plan.




31





The
provisions of the 2002 Plan are substantially similar to those of the 2000 Plan,
except that the 2002 Plan does not permit the grant of awards to officers or
directors and does not permit the grant of Incentive Stock
Options.  The 2002 Plan provides for the grant of nonstatutory stock
options to employees (excluding officers) and consultants.  Stock
options granted under the 2002 Plan will be at prices not less than the fair
value of the common stock at the date of grant.  The term of each
option, generally 10 years or less, will be determined by the administrator of
the Plan.





2000
Director Option Plan





In May
2000, the board of directors adopted the 2000 Director Option Plan (“Director’s
Plan”), which was effective upon the closing of the initial public
offering.  At December 31, 2009 and 2008, a total of 48,000 shares of
common stock have been authorized for issuance under the Director’s
Plan.  At December 31, 2009 and 2008, a total of 4,000shares,
respectively, were available for future options grants under the Director’s
Plan.





Historically,
the Director’s Plan automatically granted an option to purchase 8,000 shares of
common stock to each non-employee director when he or she is first elected to
our board of directors following the initial public offering.  The
Director’s Plan also historically provided that each non-employee director who
had been a member of the board of directors for at least six months before the
date of each annual stockholders’ meeting would receive an automatic annual
grant of options to acquire 2,000 shares of common stock.  Grants
under the Director's Plan were suspended in 2009 due to insufficient shares
being available for future annual automatic annual grants.





The
options have an exercise price per share equal to the fair market value of
common stock at the date of grant and have a term of 10
years.  Initial options vest and become exercisable in four equal
annual increments immediately following the date of grant.  Any
additional options granted will vest and become exercisable on the fourth
anniversary of the date of grant.





Stock-Based
Compensation





The
effect of recording stock-based compensation for the years ended 2009, 2008 and
2007 was as follows (in thousands except per share data):





Year Ended
                  December 31,
                  2009
                
                
                Year Ended
                  December 31,
                  2008
                
                
                Year Ended
                  December 31,
                  2007Stock-based
      compensation expense
                
                $
                28
                
                
                $
                34
                
                
                $
                39Tax
      effect on stock-based compensation
                
                
                -
                
                
                
                -
                
                
                
                -Net
      effect on net income
                
                $
                28
                
                
                $
                34
                
                
                $
                39Effect
      on basic and diluted net income per share
                
                $
                0.00
                
                
                $
                0.00
                
                
                $
                0.00





Under
the 1997, 2000, and 2002 stock option plans, our board of directors has the
authority to determine the type of option and the number of shares subject to
each option. The exercise price is generally equal to fair value of the
underlying stock at the date of grant. Options generally become exercisable over
a four-year period and, if not exercised, expire ten years from the date of
grant. The 1997 Plan was terminated in connection with our initial public
offering in 2000, and the shares reserved and unissued under the 1997 Plan were
reserved for issuance under the 2000 Plan.





Under the
2000 Director’s Option Plan, option grants are made to new non-employee
directors and to continuing non-employee directors pursuant to the terms
contained in the Director Stock Option Plan Agreement. The exercise price is
equal to fair value of the underlying stock at the date of grant. Initial
options vest in four equal annual increments immediately following the date of
grant and the subsequent options vest on the fourth anniversary of the date of
grant. The options, if not exercised, expire ten years from date of
grant.




32





At
December 31, 2009, the Company had the following stock plans:




Shares
                      Available for
                      Grant
                    
                    
                    Options
                      Outstanding1997
      Stock Option Plan
                    
                    
                    —
                    
                    
                    
                    5,0002000
      Stock Option Plan
                    
                    
                    1,898,735
                    
                    
                    
                    132,0002002
      Stock Option Plan
                    
                    
                    893,990
                    
                    
                    
                    —2000
      Directors’ Option Plan
                    
                    
                    4,000
                    
                    
                    
                    44 ,000Totals
                    
                    
                    2,796,725
                    
                    
                    
                    181,000





As of
December 31, 2009, we had an unrecorded deferred stock compensation balance
related to stock options of approximately  $18,000 before estimated
forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant
and revised if necessary in subsequent periods if actual forfeitures differ from
those estimates. Based on our analysis of historical experience and review of
current option holders, we have assumed an annual forfeiture rate of 1.24% for
our options. Accordingly, as of December 31, 2009, we estimated that the
stock-based compensation for the awards not expected to vest was nil, and
therefore, the unrecorded deferred stock-based compensation balance related to
stock options was adjusted to approximately $18,000 after estimated forfeitures
and will be recognized over an estimated weighted average amortization period of
2.5 years.





During
the fiscal year ended December, 31 2009, there were stock option grants for a
total of 20,000 shares, with an exercise price of $ 1.64 per share, the market
price on the date of grant.





Valuation
Assumptions





The fair
value of our options was estimated at the grant date using the Black-Scholes
option pricing model with the following weighted average
assumptions:





Fiscal Year
                      Ended
                      December 31,
                      2009
                    
                    
                    Fiscal Year
                      Ended
                      December 31,
                      2008
                    
                    
                    Fiscal Year
                      Ended
                      December 31,
                      2007Dividend
      yield
                    
                    
                    0.00%
                    
                    
                    
                    0.00%
                    
                    
                    
                    0.00%Volatility
                    
                    
                    0.45%
                    
                    
                    
                    0.41%
                    
                    
                    
                    0.39%Risk
      free interest rate
                    
                    
                    3.11%
                    
                    
                    
                    3.20%
                    
                    
                    
                    4.89%Expected
      life
                    
                    
                    6.25
      years
                    
                    
                    
                    6.25
      years
                    
                    
                    
                    6.25
      years





Summary
Stock Option Plan Activity





Stock
activity under the Stock Option Plans was as follows (in thousands, except per
share data):





Options OutstandingShares
                    Available
      for
                    Grant
                  
                  
                  Shares
                  
                  
                  Weighted-
                    Average
                    Price
      Per
                    ShareBalance
      as of December 31, 2005
                  
                  
                  2,831
                  
                  
                  
                  147
                  
                  
                  $
                  8.37Granted
                  
                  
                  (6
                  )
                  
                  
                  6
                  
                  
                  
                  2.45Canceled
                  
                  
                  6
                  
                  
                  
                  (6
                  )
                  
                  
                  18.88Balance
      as of December 31, 2006
                  
                  
                  2,831
                  
                  
                  
                  147
                  
                  
                  
                  7.69Granted
                  
                  
                  (6
                  )
                  
                  
                  6
                  
                  
                  
                  3.50Balance
      as of December 31, 2007
                  
                  
                  2,825
                  
                  
                  
                  153
                  
                  
                  
                  7.52Granted
                  
                  
                  (8
                  )
                  
                  
                  8
                  
                  
                  
                  2.65Balance
      as of December 31, 2008
                  
                  
                  2,817
                  
                  
                  
                  161
                  
                  
                  
                  7.28Granted
                  
                  
                  (20
                  )
                  
                  
                  20
                  
                  
                  
                  1.64Balance
      as of December 31, 2009
                  
                  
                  2,797
                  
                  
                  
                  181
                  
                  
                  $
                  6.66




33





The
aggregate intrinsic value of stock options outstanding at December 31, 2009 is
$6,000.  The aggregate intrinsic value of options vested and expected
to vest is nil at December 31, 2009 and the weighted average contractual life is
6 years. The aggregate intrinsic value of options exercisable at December 31,
2009 is nil and the weighted average contractual life is 6 years.





The
following table summarizes information concerning options outstanding and
exercisable at December 31, 2009 (in thousands, except per share
data):





Options Outstanding
                              
                              
                              Options ExercisableWeighted-Average
                              
                              
                              Weighted-
                              
                              
                              
                              
                              
                              Weighted-Number
                              
                              
                              Remaining
                              
                              
                              Average
                              
                              
                              Number
                              
                              
                              AverageRange
      of
                              
                              Of
                              
                              
                              Contractual
                              
                              
                              Exercise
                              
                              
                              Of
                              
                              
                              ExerciseExercise Prices
                              
                              Shares
                              
                              
                              Life (Years)
                              
                              
                              Price
                              
                              
                              Shares
                              
                              
                              Price$1.64
      - $1.64
                              
                              
                              20
                              
                              
                              
                              9.6
                              
                              
                              $
                              1.64
                              
                              
                              
                              -
                              
                              
                              $
                              -$2.15
      - $2.60
                              
                              
                              118
                              
                              
                              
                              5.8
                              
                              
                              
                              2.55
                              
                              
                              
                              112
                              
                              
                              
                              2.56$2.61
      - $3.50
                              
                              
                              14
                              
                              
                              
                              7.9
                              
                              
                              
                              3.01
                              
                              
                              
                              -
                              
                              
                              
                              -$3.51
      - $5.20
                              
                              
                              4
                              
                              
                              
                              3.4
                              
                              
                              
                              5.20
                              
                              
                              
                              4
                              
                              
                              
                              5.20$5.21
      - $6.96
                              
                              
                              12
                              
                              
                              
                              3.8
                              
                              
                              
                              6.96
                              
                              
                              
                              12
                              
                              
                              
                              6.96$6.97
      - $8.80
                              
                              
                              4
                              
                              
                              
                              2.4
                              
                              
                              
                              8.80
                              
                              
                              
                              4
                              
                              
                              
                              8.80$8.81
      - $22.30
                              
                              
                              4
                              
                              
                              
                              1.5
                              
                              
                              
                              22.30
                              
                              
                              
                              4
                              
                              
                              
                              22.30$22.31
      - $120.00
                              
                              
                              5
                              
                              
                              
                              0.7
                              
                              
                              
                              120.00
                              
                              
                              
                              5
                              
                              
                              
                              120.00$2.15
      - $120.00
                              
                              
                              181
                              
                              
                              
                              5.87
                              
                              
                              $
                              6.66
                              
                              
                              
                              141
                              
                              
                              $
                              7.91





Exercisable
options at December 31, 2009 and 2008 were 141,000 and 135,000 shares,
respectively, at weighted average exercise prices of $7.91 and $8.16 per share,
respectively.





Warrants





At
December 31, 2009, warrants to purchase 3,750 shares of common stock at $80.00
per share were outstanding.





5.  Related
Parties





In July
2007, we contracted with SP Corporate Services, LLC, an entity owned by an
affiliate Steel Partners Holdings L.P., the largest stockholder of CoSine, to
provide management and other administrative services, including the services of
our Chief Executive and Chief Financial Officer.  On approval of the
contract by the independent members of our board of directors, our Chief
Executive, Chief Financial Officer, and Secretary terminated his employment with
us and became a Managing Director of SP Corporate Services LLC, effective July
1, 2007.  We paid a total of $204,000 for such services for the years
ended December 31, 2009 and 2008, respectively, and owed SP Corporate Services
LLC, nil at December 31, 2009 and 2008.





6.  Income
Taxes





The
provision (benefit) for income taxes was nil, nil, and $(17,000) for the years
ended December 31, 2009, 2008 and 2007, respectively, and are related to US
federal income taxes only.  The difference between the provisions for
income taxes and the amounts computed by applying the federal statutory income
tax rate to the income (losses) before income taxes are explained below (in
thousands):





Years Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007U.S.
      federal tax provision (benefit) at federal statutory rate
                  
                  $
                  (208
                  )
                  
                  $
                  (5
                  )
                  
                  $
                  142Loss
      for which no tax benefit is currently recognizable
                  
                  
                  (208
                  )
                  
                  
                  5
                  
                  
                  
                  -Loss
      for which a tax benefit is currently recognizable
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (142
                  )Non-cash
      charges related to equity issuances
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Reduction
      of foreign tax accrual
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (17
                  )Foreign
      corporate income tax (benefit)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      provision
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  (17
                  )




34





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.  Significant components of
the Company’s deferred tax assets are as follows (in thousands):





December 31,2009
                  
                  
                  2008Deferred
      tax assets:Net
      operating loss carryforwards
                  
                  $
                  131,902
                  
                  
                  $
                  132,830Equity
      related charges
                  
                  
                  (192
                  )
                  
                  
                  (193
                  )Tax
      credit carryforwards
                  
                  
                  8,435
                  
                  
                  
                  8,435Capitalized
      research and development
                  
                  
                  2,321
                  
                  
                  
                  3,490Capital
      loss carryforward
                  
                  
                  31,653
                  
                  
                  
                  31,784Accruals
      and reserves not currently deductible
                  
                  
                  -
                  
                  
                  
                  (3
                  )Total
      deferred tax assets
                  
                  
                  174,119
                  
                  
                  
                  176,343Valuation
      allowance
                  
                  
                  (174,119
                  )
                  
                  
                  (176,343
                  )Net
      deferred tax assets
                  
                  $
                  —
                  
                  
                  $
                  —





Professional
accounting standards establishes a framework for the recognition of deferred tax
assets if realization of the deferred tax assets is more likely than
not.  Based upon the weight of available evidence, which includes the
company’s historical operating performance and the reported cumulative net
losses in all prior years, The Company has provided a full valuation allowance
against its net deferred tax assets.  The valuation allowance
decreased by $2,224,000 in 2009 and $31,277,000 in 2008.





As of
December 31, 2009, the Company had federal net operating loss carryforwards of
approximately $353,745,000, which will begin to expire in 2018 if not utilized
and state net operating loss carryforwards of approximately $199,316,000, which
will begin to expire in 2012 if not utilized.  As of December 31,
2008, the Company had federal net operating loss carryforwards of approximately
$353,149,000, which will begin to expire in 2018 if not utilized and state net
operating loss carryforwards of approximately $212,640,000, which will begin to
expire in 2009 if not utilized.





As of
December 31, 2009 and 2008 the Company also had federal and state research and
development tax credit carryforwards of approximately $7,113,000 and $7,967,000,
respectively.  The Company  also had state manufacturer's
investment credit carryforward of  approximately
$895,000.  The federal tax credit carryforwards will expire at various
dates beginning in 2013, if not utilized.  The State credits do not
expire.





During
fiscal 2006, the Company liquidated various subsidiaries resulting in a capital
loss carryforward of approximately $79,461,000.  These losses may only
be offset against future capital gains and will expire in fiscal 2011 if not
utilized.





Use of
the net operating loss and tax credit carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, and similar state
provisions.  The annual limitation may result in the expiration of net
operating loss and tax credit carryforwards before utilization.





Item
9.  Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure





None.





Item
9A.  Controls and
Procedures





Evaluation of Disclosure Controls and
Procedures.    The
Securities and Exchange Commission defines the term "disclosure controls and
procedures" to mean a company's controls and other procedures that are designed
to ensure that information required to be disclosed in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported, within the time periods specified in the Commission's
rules and forms. Our Chief Executive Officer and Chief Financial Officer has
concluded, based on the evaluation of the effectiveness of the disclosure
controls and procedures by our management as of the end of the period covered by
this report, that our disclosure controls and procedures were effective for this
purpose, except as noted below under "Changes in Internal
Controls."




35


Managements’ annual report on
internal control over financial reporting. Our management is responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f). Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Projections of any evaluation of the
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate. Our management with the
participation of the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework of Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.  Based on our evaluation under the framework in Internal
Control-Integrated Framework, our management concluded that our internal control
over financial reporting was effective as of December 31, 2009





This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal controls over financial
reporting.  Management’s evaluation was not subject to attestation by
the Company’s registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the Company to provide only
management’s report in the Annual Report.





Changes in Internal Controls.
There have been no changes to our internal controls which have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.





Limitations on Effectiveness of
Controls and Procedures.  Our management, including our Chief
Executive Officer and Chief Financial Officer, does not expect that our
disclosure controls and procedures or our internal controls will prevent all
errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include,
but are not limited to, the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.  Over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.





Item
9B.  Other
Information





None.





PART
III





Item
10.  Directors ,
Executive Officers and Corporate Governance





Except as
set forth above in Part I under “Executive Officers of the Registrant” and in
the paragraph below, the information required by Item 10 has been omitted from
this Annual Report on Form 10-K, and is incorporated by reference to the
sections “Election of Directors” and “Section 16(a) Beneficial Ownership
Reporting Compliance” in our definitive Proxy Statement for the 2010 Annual
Meeting of Stockholders, which we will file with the Commission pursuant to
Regulation 14A within 120 days after the end of our 2009 fiscal
year.





On March
11, 2008, our Board of Directors adopted an amended and restated Code of
Business Conduct and Ethics that applies to our officers, including our
principal executive officer, principal financial officer, principal accounting
officer and all other officers, directors and employees in compliance with
applicable rules of the Securities and Exchange Commission.  The full
text of our Code of Business Conduct and Ethics is published on the Investor
Relations – Corporate Governance section of our web site at www.cosinecom.com.  We
intend to disclose future amendments to certain provisions of our Code of
Business Conduct and Ethics, or waivers of such provision granted to officers
and directors, on this web site within four business days following the date of
such amendments or waiver.




36





Item
11.  Executive
Compensation





Information
required by Item 11 has been omitted from this Annual Report on Form 10-K and is
incorporated by reference to the section “Executive Compensation” in our
definitive Proxy Statement for the 2010 Annual Meeting of
Stockholders.





Item
12.  Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters





Information
required by Item 12 has been omitted from this Annual Report on Form 10-K and is
incorporated by reference to the sections “Security Ownership of Management and
Certain Beneficial Owners” and “Equity Compensation Plan Information” in our
definitive Proxy Statement for the 2010 Annual Meeting of
Stockholders.





Item
13.  Certain
Relationships and Related Transactions and Director
Independence





Information
required by Item 13 has been omitted from this Annual Report on Form 10-K and is
incorporated by reference to the section “Election of Directors” in our
definitive Proxy Statement for the 2010 Annual Meeting of
Stockholders.





Item
14.  Principal
Accountant Fees and Services





Information
required by Item 14 has been omitted from this Annual Report on Form 10-K and is
incorporated by reference to the section “Audit Committee Disclosure” in our
definitive Proxy Statement for the 2010 Annual Meeting of
Stockholders.





Item
15.  Exhibits and
Financial Statement Schedules





(a) The
following documents are filed as part of this Annual Report on Form
10-K:





(1) Financial
Statements:





PageReport
      of Independent Registered Public Accounting Firm – Burr Pilger Mayer,
      Inc.
                20Balance
      Sheets — December 31, 2009 and 2008
                21Statements
      of Operations — Years ended December 31, 2009, 2008, and
    2007
                22Statements
      of Stockholders’ Equity— Years ended December 31, 2009, 2008, and
      2007
                23Statements
      of Cash Flows — Years ended December 31, 2009, 2008, and
    2007
                24Notes
      to  Financial Statements
                25





(2) Financial Statement
Schedules:





All
schedules are omitted as they are not applicable or the required information is
shown in the financial statements or the notes thereto.





(3) Exhibits:





See
Exhibit Index on page 40.  The Exhibits listed in the accompanying
Exhibit Index are filed as part of this Annual Report on Form 10-K.




37


COSINE
COMMUNICATIONS, INC.





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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, on March 1, 2010.





COSINE
      COMMUNICATIONS, INC.By:
            /s/
            Terry R. GibsonTerry
      R. GibsonChief
      Executive Officer





POWER
OF ATTORNEY





KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Terry Gibson his true and lawful attorneys-in-fact and
agents, each with full power of substitution, for him in any and all capacities,
to sign any and all amendments to this report, and to file the same, with all
exhibits thereto and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each of said
attorneys-in-fact, or his substitute or substitutes, and each of them, hereby
ratifying and confirming all that such attorneys-in-fact, or any substitutes,
may do or cause to be done by virtue hereof.





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed on March 1, 2010 by the following persons in the capacities
indicated.





Signature
            
            Title/s/
            TERRY R. GIBSON
            
            Chief
      Executive Officer, Chief Financial Officer andTerry
      R. Gibson
            
            Director
      (Principal Executive Officer and Principal Accounting
    Officer)/s/
            Donald Green
            
            Chairman
      of the Board and DirectorDonald
      Green/s/
            Charles J. Abbe
            
            DirectorCharles
      J. Abbe/s/
            Jack L. Howard
            
            DirectorJack
      L. Howard


38





EXHIBIT
INDEX





Description





3.2*
              Fourth
      Amended and Restated Certificate of Incorporation filed with the Delaware
      Secretary of State on May 30, 2006 (incorporated by reference to Exhibit
      3.1 to Form 10-Q filed August 2, 2006).3.3*
              Bylaws
      (incorporated by reference to Exhibit 3.3 to Form 8A (file no. 000-30715)
      filed May 26, 2000).3.4*
              First
      Amendment to Bylaws dated April 30, 2001 (incorporated by reference to
      Exhibit 3.3 to Form 10-Q filed August 13, 2001).3.5*
              Second
      Amendment to Bylaws dated January 28, 2003 (incorporated by reference to
      Exhibit 3.4 to Form 10-K filed March 27, 2003).3.6*
              Third
      Amendment to Bylaws dated February 2, 2004 (incorporated by reference to
      Exhibit 3.5 to Form 10-K filed March 25, 2004).3.7*
              Certificate
      of Designation of Series A Junior Participating Preferred Stock, as filed
      with the Secretary of State of Delaware on September 8, 2005 (incorporated
      by reference to Exhibit 3.1 to Form 8-K filed September 8,
      2005).4.1*
              Form
      of Rights Certificate (incorporated by reference to Exhibit 4.1 to Form
      8-K filed September 8, 2005).4.2*
              Rights
      Agreement, dated as of September 1, 2005, by and between CoSine
      Communications, Inc. and Mellon Investor Services LLC (incorporated by
      reference to Exhibit 4.2 to Form 8-K filed September 8,
    2005).4.3*
              First
      Amendment to Rights Agreement by and between CoSine Communications, Inc.
      and Mellon Investor Services LLC, effective as of August 31, 2007
      (incorporated by reference to Exhibit 10.1 to Form 8-K filed September 4,
      2007).4.4*
              Second
      Amendment to Rights Agreement by and between CoSine Communications, Inc.
      and Mellon Investor Services LLC, effective as of August 6, 2009
      (incorporated by reference to Exhibit 10.1 to Form 10-Q filed November 6,
      2009).10.1*
              1997
      Stock Plan (as amended and restated) and forms of agreements thereunder
      (incorporated by reference to Exhibit 10.5 of Registration Statement on
      Form S-1 filed April 28, 2000).10.2*
              2000
      Stock Plan and forms of agreements thereunder (incorporated by reference
      to Exhibit 10.2 of Amendment No. 1 to Registration Statement on Form S-1
      filed June 6, 2000).10.3*
              2000
      Director Option Plan and forms of agreements thereunder (incorporated by
      reference to Exhibit 10.4 of Amendment No. 1 to Registration Statement on
      Form S-1 filed June 6, 2000).10.4*
              2002
      Stock Plan and forms of agreements thereunder (incorporated by reference
      to Exhibit 10.17 to Form 10-K filed March 25, 2002).10.5*
              Services
      Agreement by and between Cosine Communications, Inc. and SP Corporate
      Services LLC, effective as of July 1, 2007 (incorporated by reference to
      Exhibit 10.1 to Form 8K filed June 19, 2007).14.1*
              Code
      of Business Conduct and Ethics, adopted March 11, 2008 (incorporated by
      reference to Exhibit 14.1 to Form 10-K filed March 14,
    2008).23.1
              Consent
      of Independent Registered Public Accounting Firm – Burr Pilger Mayer,
      Inc.31.1
              Certification
      of Terry R. Gibson, Chief Executive Officer and Chief Financial Officer of
      CoSine Communications, Inc., pursuant to 15 U.S.C. Section 7241, as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
              Certification
      of Terry R. Gibson, Chief Executive Officer and Chief Financial Officer of
      CoSine Communications, Inc., pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


*
Previously filed.


39