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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31, 2004                                                 
|          
|or        
|          
|o          |  | 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)
|                                                                                   
|560 South Winchester Blvd.
    San Jose, CA(Address of principal executive offices) |  | 95128(Zip Code)                            

Registrants telephone number including area code:


(408) 236-7518


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)


þ o


o


o þ






DOCUMENTS INCORPORATED BY REFERENCE












---










COSINE COMMUNICATIONS, INC.


FORM 10-K


Year Ended December 31, 2004


TABLE OF CONTENTS


|              |  |                                                                                           |    |                                      |    |  |    | 
|------------- |  | ----------------------------------------------------------------------------------------- | -- | ------------------------------------ | -- |  | -- | 
|              |  |                                                                                           |    | Page                                 |   
|              |  |                                                                                           |    |                                      |   
|Part I       
|Item 1.       |  | Business                                                                                  |    |                                      | 4  | 
|              |  |                                                                                           |    | Executive Officers of the Registrant |    |  | 11 | 
|Item 2.       |  | Properties                                                                                |    |                                      | 11 | 
|Item 3.       |  | Legal Proceedings                                                                         |    |                                      | 11 | 
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders                                   |    |                                      | 12 | 
|Part II      
|Item 5.       |  | Market for Registrants Common Stock
    and Related Stockholder Matters                  |    |                                      | 12 | 
|Item 6.       |  | Selected Financial Data                                                                   |    |                                      | 13 | 
|Item 7.       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations |    |                                      | 15 | 
|Item 7A.      |  | Quantitative and Qualitative Disclosures
    about Market Risk                            |    |                                      | 36 | 
|Item 8.       |  | Financial Statements and Supplementary
    Data                                           |    |                                      | 37 | 
|Item 9.       |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure  |    |                                      | 65 | 
|Item 9A.      |  | Controls and Procedures                                                                   |    |                                      | 65 | 
|Item 9B.      |  | Other Information                                                                         |    |                                      | 65 | 
|Part III     
|Item 10.      |  | Directors and Executive Officers of the
    Registrant                                    |    |                                      | 66 | 
|Item 11.      |  | Executive Compensation                                                                    |    |                                      | 68 | 
|Item 12.      |  | Security Ownership of Certain Beneficial
    Owners and Management                        |    |                                      | 70 | 
|Item 13.      |  | Certain Relationships and Related
    Transactions                                        |    |                                      | 73 | 
|Item 14.      |  | Principal Accountant Fees and Services                                                    |    |                                      | 74 | 
|Part IV      
|Item 15.      |  | Exhibits and Financial Statement
    Schedules                                            |    |                                      | 74 | 
|Signatures    |  |                                                                                           | 76 |                                     
|Exhibit Index |  |                                                                                           | 77 |                                     
|EXHIBIT 2.2  
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 23.2 
|EXHIBIT 31.1 
|EXHIBIT 32.1 



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SAFE HARBOR STATEMENT UNDER


PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995




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PART I







|        |         
|------- | --------
|Item 1. | Business

OVERVIEW




















4



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INDUSTRY BACKGROUND












| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | attracting subscribers through differentiated services that can
    be layered on top of basic high-speed connectivity services;                                                                             
|
| |  | increasing revenue from business subscribers who are demanding
    additional services; and                                                                                                                  
|
| |  | reducing subscriber turnover, because customers must consider
    the total cost of replacing multiple services and evaluate the
    risk of moving critical business services to a new service
    provider.

THE PROBLEMS OF A CPE-BASED APPROACH






High Cost to Install and Manage.


5



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Difficult to Expand.


Limited Network Services.


Difficult to Integrate.


Inconsistent Quality of Service.


THE NEED FOR A NEW NETWORK-BASED SERVICE DELIVERY MODEL




Limitations of Existing Network-Based Approaches




Relocation of Customer Premises Equipment.


Carrier Switches and Routers.


Large General-Purpose Computers.


THE COSINE COMMUNICATIONS SOLUTION




6



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STRATEGY




PRODUCTS AND TECHNOLOGY




CUSTOMERS




SALES AND MARKETING




7



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| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Customer visits to our sales laboratory in Redwood City,
    California;                                                                                               
|
| |  | Laboratory visits and trials with our systems that are shipped
    to customers laboratory sites and/or customer network
    points of presence for field testing; and
|
| |  | Field trials with multiple CoSine systems provided for large
    carriers to validate our platform in the prospective
    customers global network.                   



Direct Sales




CUSTOMER SERVICE AND SUPPORT






RESEARCH AND DEVELOPMENT






8



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MANUFACTURING








BACKLOG






COMPETITION








9



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| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | provided extremely high network reliability;                                                                    
|
| |  | provided high performance;                                                                                      
|
| |  | scaled easily and efficiently through service virtualization and
    unparalleled service processing capability;
|
| |  | operated with existing network designs and equipment vendors;                                                   
|
| |  | reduced the complexity of the network by decreasing the need for
    multiple layers of equipment;              
|
| |  | provided a cost-effective solution for service
    providers; and                                               
|
| |  | were supported by responsive customer service and support.                                                      



INTELLECTUAL PROPERTY








EMPLOYEES






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EXECUTIVE OFFICER OF THE REGISTRANT




|             |  |     |    |  |          |                                                               
|------------ |  | --- | -- |  | -------- | --------------------------------------------------------------
|Name         |  | Age |    |  | Position
|             |  |     |    |  |         
|Terry Gibson |  |     | 51 |  |          | Chief Executive Officer, Chief Financial Officer and Secretary



AVAILABLE INFORMATION









|        |           
|------- | ----------
|Item 2. | Properties








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

In
re CoSine Communications, Inc. Initial Public Offering
Securities Litigation




11



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





| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | Election of Stephen Goggiano and R. David Spreng as Class I
    directors for a term expiring in 2007:

|                 |  |           |           |  |          |  |         | 
|---------------- |  | --------- | --------- |  | -------- |  | ------- | 
|Nominee          |  | Votes For |           |  | Withheld | 
|                 |  |           |           |  |          | 
|Stephen Goggiano |  |           | 9,638,914 |  |          |  | 132,898 | 
|R. David Spreng  |  |           | 9,533,088 |  |          |  | 238,724 | 



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | Ratification of Burr, Pilger & Mayer LLP as our
    independent registered public accounting firm for the 2004
    fiscal year:

|          |           |  |         |  |       |          |  |  |       | 
|--------- | --------- |  | ------- |  | ----- | -------- |  |  | ----- | 
|Votes For |           |  | Against |  |       | Withheld | 
|          |           |  |         |  |       |          | 
|          | 9,755,954 |  |         |  | 6,659 |          |  |  | 9,199 | 




PART II







|        |                                                                         
|------- | ------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Stock and Related
    Stockholder Matters



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|               |  |      |       |  |     |   |      | 
|-------------- |  | ---- | ----- |  | --- | - | ---- | 
|               |  | High |       |  | Low |  
|               |  |      |       |  |     |  
|2004           |  |      |       |  |     |   |      | 
|First quarter  |  | $    | 10.33 |  |     | $ | 6.05 | 
|Second quarter |  | $    | 6.48  |  |     | $ | 3.98 | 
|Third quarter  |  | $    | 4.51  |  |     | $ | 2.83 | 
|Fourth quarter |  | $    | 3.30  |  |     | $ | 2.60 | 
|2003           |  |      |       |  |     |   |      | 
|First quarter  |  | $    | 5.98  |  |     | $ | 4.23 | 
|Second quarter |  | $    | 6.50  |  |     | $ | 4.21 | 
|Third quarter  |  | $    | 7.07  |  |     | $ | 5.50 | 
|Fourth quarter |  | $    | 8.11  |  |     | $ | 6.14 | 

Dividend Policy




Use Of Proceeds of Registered Securities













|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



13



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|                                                                         |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |          |        |         |   |          |        |         | 
|------------------------------------------------------------------------ | ------------------------------------ | ------------------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------- | ---- | -------- | ------ | ------- | - | -------- | ------ | ------- | 
|                                                                         |                                      | Year Ended December 31                |        
|                                                                         |                                      |                                       |        
|                                                                         |                                      | 2004                                  |         |        | 2003   |   |         | 2002   |        |   | 2001    |        |         | 2000 |         
|                                                                         |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |         
|                                                                         |                                      | (In thousands, except per share data) |        
|Consolidated Statements of Operations Data:                              |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |          |        |         |   |          |       
|Revenue                                                                  |                                      | $                                     | 9,675   |        |        | $ | 14,621  |        |        | $ | 23,632  |        |         | $    | 34,293   |        |         | $ | 31,107   |       
|Cost of revenue                                                          |                                      |                                       | 7,086   |        |        |   | 6,765   |        |        |   | 13,807  |        |         |      | 30,214   |        |         |   | 23,926   |       
|                                                                         |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |         
|Gross profit                                                             |                                      |                                       | 2,589   |        |        |   | 7,856   |        |        |   | 9,825   |        |         |      | 4,079    |        |         |   | 7,181    |       
|                                                                         |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |         
|Operating expenses:                                                      |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |          |        |         |   |          |       
|                                                                         | Research and development             |                                       |         | 15,078 |        |   |         | 21,756 |        |   |         | 32,396 |         |      |          | 66,091 |         |   |          | 91,180 |        
|                                                                         | Sales and marketing                  |                                       |         | 10,052 |        |   |         | 13,808 |        |   |         | 28,271 |         |      |          | 60,000 |         |   |          | 53,625 |        
|                                                                         | General and administrative           |                                       |         | 6,064  |        |   |         | 7,226  |        |   |         | 10,959 |         |      |          | 23,525 |         |   |          | 24,441 |        
|                                                                         | Restructuring and impairment charges |                                       |         | 8,909  |        |   |         | 336    |        |   |         | 34,538 |         |      |          | 8,991  |         |   |          |       |        
|                                                                         |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |         
|                                                                         |                                      | Total operating expenses              |         |        | 40,103 |   |         |        | 43,126 |   |         |        | 106,164 |      |          |        | 158,607 |   |          |        | 169,246 | 
|                                                                         |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |         
|Loss from operations                                                     |                                      |                                       | (37,514 | )      |        |   | (35,270 | )      |        |   | (96,339 | )      |         |      | (154,528 | )      |         |   | (162,065 | )     
|                                                                         |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |         
|Other income (expense):                                                  |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |          |        |         |   |          |       
|                                                                         | Interest income                      |                                       |         | 489    |        |   |         | 1,296  |        |   |         | 3,535  |         |      |          | 11,086 |         |   |          | 8,060  |        
|                                                                         | Interest expense                     |                                       |         | (3     | )      |   |         | (224   | )      |   |         | (966   | )       |      |          | (1,675 | )       |   |          | (1,866 | )      
|                                                                         | Other                                |                                       |         | (276   | )      |   |         | (447   | )      |   |         | 313    |         |      |          | (299   | )       |   |          | 9      |        
|                                                                         |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |         
|                                                                         |                                      | Total other income                    |         |        | 210    |   |         |        | 625    |   |         |        | 2,882   |      |          |        | 9,112   |   |          |        | 6,203   | 
|                                                                         |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |         
|Loss before income tax provision                                         |                                      |                                       | (37,304 | )      |        |   | (34,645 | )      |        |   | (93,457 | )      |         |      | (145,416 | )      |         |   | (155,862 | )     
|                                                                         | Income tax provision                 |                                       |         | 33     |        |   |         | 287    |        |   |         | 509    |         |      |          | 837    |         |   |          | 264    |        
|                                                                         |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |         
|Net loss                                                                 |                                      |                                       | (37,337 | )      |        |   | (34,932 | )      |        |   | (93,966 | )      |         |      | (146,253 | )      |         |   | (156,126 | )     
|Deemed dividend to series D preferred stockholders                       |                                      |                                       |         |        |        |   |        |        |        |   |        |        |         |      |         |        |         |   | (2,500   | )     
|                                                                         |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |         
|Net loss allocable to common stockholders                                |                                      | $                                     | (37,337 | )      |        | $ | (34,932 | )      |        | $ | (93,966 | )      |         | $    | (146,253 | )      |         | $ | (158,626 | )     
|                                                                         |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |         
|Basic and diluted net loss per common share                              |                                      | $                                     | (3.70   | )      |        | $ | (3.57   | )      |        | $ | (9.72   | )      |         | $    | (15.09   | )      |         | $ | (52.27   | )     
|                                                                         |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |         
|Shares used in computing basic and diluted net loss per common
    share |                                      |                                       | 10,082  |        |        |   | 9,791   |        |        |   | 9,670   |        |         |      | 9,695    |        |         |   | 3,035    |       
|                                                                         |                                      |                                       |         |        |        |   |         |        |        |   |         |        |         |      |         

|                                                  |  |                |        |  |      |   |        |      |  |   |         |  |  |      |         |  |  |   |         | 
|------------------------------------------------- |  | -------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------- |  |  | ---- | ------- |  |  | - | ------- | 
|                                                  |  | December 31    |       
|                                                  |  |                |       
|                                                  |  | 2004           |        |  | 2003 |   |        | 2002 |  |   | 2001    |  |  | 2000 |        
|                                                  |  |                |        |  |      |   |        |      |  |   |         |  |  |      |        
|                                                  |  | (In thousands) |       
|Consolidated Balance Sheets Data:                 |  |                |        |  |      |   |        |      |  |   |         |  |  |      |         |  |  |   |         | 
|Cash, cash equivalents and short-term investments |  | $              | 24,913 |  |      | $ | 57,752 |      |  | $ | 101,467 |  |  | $    | 164,878 |  |  | $ | 288,282 | 
|Working capital                                   |  |                | 23,214 |  |      |   | 59,705 |      |  |   | 91,868  |  |  |      | 163,424 |  |  |   | 283,027 | 
|Total assets                                      |  |                | 27,823 |  |      |   | 73,426 |      |  |   | 119,561 |  |  |      | 221,203 |  |  |   | 353,928 | 
|Working capital loans                             |  |                |       |  |      |   |       |      |  |   | 131     |  |  |      | 1,992   |  |  |   | 4,541   | 
|Accrued rent                                      |  |                |       |  |      |   | 2,078  |      |  |   | 2,069   |  |  |      | 2,556   |  |  |   | 2,154   | 
|Long-term capital lease obligations               |  |                |       |  |      |   |       |      |  |   |        |  |  |      | 1,905   |  |  |   | 5,391   | 
|Other long-term liabilities                       |  |                |       |  |      |   |       |      |  |   |        |  |  |      | 11      |  |  |   | 132     | 
|Total stockholders equity                        |  |                | 23,364 |  |      |   | 61,174 |      |  |   | 93,481  |  |  |      | 187,065 |  |  |   | 304,763 | 

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Quarterly financial information (unaudited):


|                                     |  |                                       |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |        |            |  |   |            |   |  |   |         |   |  |   |        |  
|------------------------------------ |  | ------------------------------------- | ------ | - | ------- | - | ------ | ------- |  | - | ------- | - |  | ------- | ------- | - | ------- | - | ------ | ---------- |  | - | ---------- | - |  | - | ------- | - |  | - | ------ | -
|                                     |  | 2003                                  |        |   | 2004    |  
|                                     |  |                                       |        |   |         |  
|                                     |  | 1st                                   |        |   | 2nd     |   |        | 3rd     |  |   | 4th     |   |  | 1st     |         |   | 2nd     |   |        | 3rd        |  |   | 4th        |  
|                                     |  | Quarter                               |        |   | Quarter |   |        | Quarter |  |   | Quarter |   |  | Quarter |         |   | Quarter |   |        | Quarter(1) |  |   | Quarter(1) |  
|                                     |  |                                       |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |        |            |  |   |            |  
|                                     |  | (In thousands, except per share data) |       
|Revenue                              |  | $                                     | 2,206  |   |         | $ | 6,014  |         |  | $ | 4,024   |   |  | $       | 2,377   |   |         | $ | 4,455  |            |  | $ | 2,568      |   |  | $ | 1,088   |   |  | $ | 1,564  |  
|Gross profit (loss)                  |  |                                       | 715    |   |         |   | 2,822  |         |  |   | 1,798   |   |  |         | 1,430   |   |         |   | 2,958  |            |  |   | 1,133      |   |  |   | (3,353  | ) |  |   | 1,851  |  
|Net loss                             |  |                                       | (8,864 | ) |         |   | (7,716 | )       |  |   | (8,184  | ) |  |         | (10,168 | ) |         |   | (7,385 | )          |  |   | (9,706     | ) |  |   | (14,619 | ) |  |   | (5,627 | )
|Basic and diluted net loss per share |  | $                                     | (0.91  | ) |         | $ | (0.79  | )       |  | $ | (0.84   | ) |  | $       | (1.03   | ) |         | $ | (0.74  | )          |  | $ | (0.96      | ) |  | $ | (1.47   | ) |  | $ | (0.53  | )






|    |                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes restructuring and impairment charges of
    $6.8 million in the third quarter of 2004 and
    $3.7 million in the fourth quarter of 2004.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

OVERVIEW














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CRITICAL ACCOUNTING POLICIES AND ESTIMATES


General
















16



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Revenue Recognition








Allowance for Doubtful Accounts




Inventory Valuation




Long-lived assets




17



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Warranties




Impact of Equity Issuances on Operating Results










| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Non-recourse promissory notes receivable: During the
    fourth quarter of 2000, we converted full-recourse promissory
    notes received from employees upon the early exercise of
    unvested employee stock options to non-recourse obligations.
    Accordingly, we are required to re-measure the compensation
    associated with these shares until the earlier of repayment of
    the note or default. Deferred compensation expense, which is
    recorded at each re-measurement, is amortized over the remaining
    vesting period of the underlying options.                                                                                                                                                                                                                                                                                                                    
|
| |  | Re-priced stock options: In November 2002, we re-priced
    1,091,453 outstanding employee stock options to purchase shares
    of our common stock with original exercise prices ranging from
    $5.45 per share to $159.38 per share. These options
    were re-priced to $5.00 per share, which was higher than
    the fair market value of the underlying shares on the re-pricing
    date. In July 2001, we re-priced 722,071 unexercised employee
    stock options to $15.50 per share, the fair market value of
    the underlying shares on the re-pricing date. These options had
    previously been granted at prices ranging from $40.00 to
    $400.00 per share. Compensation will be re-measured for
    these options until they are exercised, canceled, or expire. At
    December 31, 2004, 313,605 stock options re-priced in
    November 2002 were still outstanding.





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RESULTS OF OPERATIONS












Revenue




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|              |               |      |       |       |   |  |    |      |   |   |       |        |  |      |    |     |   |   |       |        |  |  |    |     |  
|------------- | ------------- | ---- | ----- | ----- | - |  | -- | ---- | - | - | ----- | ------ |  | ---- | -- | --- | - | - | ----- | ------ |  |  | -- | --- | -
|              |               | 2004 |       |       | % |  |    | 2003 |   |   | %     |        |  | 2002 |    |     | % |  
|              |               |      |       |       |   |  |    |      |   |   |       |        |  |      |    |     |   |  
|United States |               | $    | 3,364 |       |   |  | 35 | %    |   | $ | 6,808 |        |  |      | 47 | %   |   | $ | 8,423 |        |  |  | 36 | %  
|Asia/ Pacific |               |      | 3,258 |       |   |  | 34 |      |   |   | 5,137 |        |  |      | 35 |     |   |   | 9,483 |        |  |  | 40 |    
|Europe        |               |      | 3,053 |       |   |  | 31 |      |   |   | 2,676 |        |  |      | 18 |     |   |   | 5,726 |        |  |  | 24 |    
|              |               |      |       |       |   |  |    |      |   |   |       |        |  |      |    |     |   |  
|              | Total revenue |      | $     | 9,675 |   |  |    | 100  | % |   | $     | 14,621 |  |      |    | 100 | % |   | $     | 23,632 |  |  |    | 100 | %
|              |               |      |       |       |   |  |    |      |   |   |       |        |  |      |    |     |   |  



|         |               |      |       |       |   |  |    |      |   |   |        |        |  |      |    |     |   |   |        |        |  |  |    |     |  
|-------- | ------------- | ---- | ----- | ----- | - |  | -- | ---- | - | - | ------ | ------ |  | ---- | -- | --- | - | - | ------ | ------ |  |  | -- | --- | -
|         |               | 2004 |       |       | % |  |    | 2003 |   |   | %      |        |  | 2002 |    |     | % |  
|         |               |      |       |       |   |  |    |      |   |   |        |        |  |      |    |     |   |  
|Hardware |               | $    | 6,316 |       |   |  | 65 | %    |   | $ | 11,352 |        |  |      | 78 | %   |   | $ | 18,753 |        |  |  | 79 | %  
|Software |               |      | 608   |       |   |  | 6  |      |   |   | 451    |        |  |      | 3  |     |   |   | 1,870  |        |  |  | 8  |    
|Services |               |      | 2,751 |       |   |  | 29 |      |   |   | 2,818  |        |  |      | 19 |     |   |   | 3,009  |        |  |  | 13 |    
|         |               |      |       |       |   |  |    |      |   |   |        |        |  |      |    |     |   |  
|         | Total revenue |      | $     | 9,675 |   |  |    | 100  | % |   | $      | 14,621 |  |      |    | 100 | % |   | $      | 23,632 |  |  |    | 100 | %
|         |               |      |       |       |   |  |    |      |   |   |        |        |  |      |    |     |   |  







20



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Non-Cash Charges and Credits Related to Equity Issuances






|                                                                                                                                                                                  |  |                         |        |   |      |   |       |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                                                                                                                                                  |  | Year Ended December 31, |       
|                                                                                                                                                                                  |  |                         |       
|                                                                                                                                                                                  |  | 2004                    |        |   | 2003 |   |       | 2002 | 
|                                                                                                                                                                                  |  |                         |        |   |      |   |       |      | 
|Amortization of deferred compensation related to stock options
    granted to employees prior to our initial public offering having
    an exercise price below fair market value |  | $                       | 92     |   |      | $ | 1,377 |      |  | $ | 7,273  |  
|Credits related to the reversal of deferred stock compensation
    amortization in excess of vesting for terminated employees                                                     |  |                         | (1,203 | ) |      |   | (956  | )    |  |   | (8,466 | )
|Amortization of deferred compensation associated with
    non-recourse promissory notes                                                                                           |  |                         |       |   |      |   |      |      |  |   | 173    |  
|Amortization of deferred compensation associated with re-pricing                                                                                                                  |  |                         | 55     |   |      |   | 797   |      |  |   | 514    |  
|Charges related to options with accelerated vesting                                                                                                                               |  |                         |       |   |      |   | 1     |      |  |   | 27     |  
|Issuance of common stock for employee stock bonus                                                                                                                                 |  |                         | 228    |   |      |   |      |      |  |   |       |  
|Amortization of charges related to warrants or stock options
    issued to non-employees in conjunction with lease, debt and
    reseller agreements                              |  |                         | 48     |   |      |   | 92    |      |  |   | 195    |  
|                                                                                                                                                                                  |  |                         |        |   |      |   |       |      | 
|Net non-cash charges related to equity issuances                                                                                                                                  |  | $                       | (780   | ) |      | $ | 1,311 |      |  | $ | (284   | )
|                                                                                                                                                                                  |  |                         |        |   |      |   |       |      | 



Cost of Revenue






21



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Gross Profit








Research and Development Expenses








22



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##### Table of Contents





Sales and Marketing Expenses










General and Administrative Expenses






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Restructuring and Impairment Charges




| |                            
| | ---------------------------
| | December 2004 Restructuring





|                                       |  |           |     |   |              |   |          |              |  |   |       |  |  |   |        |  
|-------------------------------------- |  | --------- | --- | - | ------------ | - | -------- | ------------ |  | - | ----- |  |  | - | ------ | -
|                                       |  | Worldwide |     |   |              |   | Software |              |  |  
|                                       |  | Workforce |     |   | Lease        |   |          | License      |  |   |      
|                                       |  | Reduction |     |   | Terminations |   |          | Terminations |  |   | Total | 
|                                       |  |           |     |   |              |   |          |              |  |   |       | 
|December 2004 restructuring charges    |  | $         | 619 |   |              | $ | 2,918    |              |  | $ | 1,037 |  |  | $ | 4,574  |  
|Cash payments                          |  |           | (66 | ) |              |   | (3,900   | )            |  |   |      |  |  |   | (3,966 | )
|Write offs                             |  |           |    |   |              |   | 982      |              |  |   |      |  |  |   | 982    |  
|                                       |  |           |     |   |              |   |          |              |  |   |       | 
|Provision balance at December 31, 2004 |  | $         | 553 |   |              | $ |         |              |  | $ | 1,037 |  |  | $ | 1,590  |  
|                                       |  |           |     |   |              |   |          |              |  |   |       | 



| |                             
| | ----------------------------
| | September 2004 Restructuring





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|                                       |  |           |        |   |                 |   |        |               |  |   |       |   |  |   |        |  
|-------------------------------------- |  | --------- | ------ | - | --------------- | - | ------ | ------------- |  | - | ----- | - |  | - | ------ | -
|                                       |  | Worldwide |        |   | Write-Down of   |   |        | Manufacturing |  |   |      
|                                       |  | Workforce |        |   | Inventory and   |   |        | Agreement     |  |   |      
|                                       |  | Reduction |        |   | Prepaid Royalty |   |        | Termination   |  |   | Total |  
|                                       |  |           |        |   |                 |   |        |               |  |   |       |  
|September 2004 restructuring charges   |  | $         | 2,872  |   |                 | $ | 3,541  |               |  | $ | 375   |   |  | $ | 6,788  |  
|Cash payments                          |  |           | (2,448 | ) |                 |   |       |               |  |   | (278  | ) |  |   | (2,726 | )
|Write offs                             |  |           |       |   |                 |   | (3,541 | )             |  |   | (97   | ) |  |   | (3,638 | )
|                                       |  |           |        |   |                 |   |        |               |  |   |       |  
|Provision balance at December 31, 2004 |  | $         | 424    |   |                 | $ |       |               |  | $ |      |   |  | $ | 424    |  
|                                       |  |           |        |   |                 |   |        |               |  |   |       |  



| |                                 
| | --------------------------------
| | May and March 2003 Restructuring





|                                       |  |           |      |   |             |   |     |       |  |   |      |  
|-------------------------------------- |  | --------- | ---- | - | ----------- | - | --- | ----- |  | - | ---- | -
|                                       |  | Worldwide |      |   | Lease       |   |     |      
|                                       |  | Workforce |      |   | Termination |   |     |      
|                                       |  | Reduction |      |   | and Other   |   |     | Total | 
|                                       |  |           |      |   |             |   |     |       | 
|Charges                                |  | $         | 277  |   |             | $ | 17  |       |  | $ | 294  |  
|Cash payments                          |  |           | (284 | ) |             |   | (12 | )     |  |   | (296 | )
|Non-cash items                         |  |           | (20  | ) |             |   | (4  | )     |  |   | (24  | )
|Accrual adjustment                     |  |           | 75   |   |             |   | (1  | )     |  |   | 74   |  
|                                       |  |           |      |   |             |   |     |       | 
|Provision balance at December 31, 2003 |  |           | 48   |   |             |   |    |       |  |   | 48   |  
|Cash payments                          |  |           | (38  | ) |             |   |     |       |  |   | (38  | )
|Accrual adjustment                     |  |           | (10  | ) |             |   |     |       |  |   | (10  | )
|                                       |  |           |      |   |             |   |     |       | 
|Provision balance at December 31, 2004 |  | $         |     |   |             | $ |    |       |  | $ |     |  
|                                       |  |           |      |   |             |   |     |       | 



| |                           
| | --------------------------
| | October 2002 Restructuring



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|                                       |  |           |        |   |             |   |        |       |  |   |        |  
|-------------------------------------- |  | --------- | ------ | - | ----------- | - | ------ | ----- |  | - | ------ | -
|                                       |  | Worldwide |        |   | Lease       |   |        |      
|                                       |  | Workforce |        |   | Termination |   |        |      
|                                       |  | Reduction |        |   | and Other   |   |        | Total | 
|                                       |  |           |        |   |             |   |        |       | 
|Charges                                |  | $         | 1,945  |   |             | $ | 7,854  |       |  | $ | 9,799  |  
|Cash payments                          |  |           | (1,628 | ) |             |   |       |       |  |   | (1,628 | )
|Deposit forfeiture and deferred rent   |  |           |       |   |             |   | 305    |       |  |   | 305    |  
|                                       |  |           |        |   |             |   |        |       | 
|Provision balance at December 31, 2002 |  |           | 317    |   |             |   | 8,159  |       |  |   | 8,476  |  
|Cash payments                          |  |           | (310   | ) |             |   | (8,112 | )     |  |   | (8,422 | )
|Accrual adjustment                     |  |           | (7     | ) |             |   | (47    | )     |  |   | (54    | )
|                                       |  |           |        |   |             |   |        |       | 
|Provision balance at December 31, 2003 |  | $         |       |   |             | $ |       |       |  | $ |       |  
|                                       |  |           |        |   |             |   |        |       | 



| |                       
| | ----------------------
| | May 2002 Restructuring





|                                       |  |           |        |   |               |   |        |             |  |   |        |   |  |   |        |  
|-------------------------------------- |  | --------- | ------ | - | ------------- | - | ------ | ----------- |  | - | ------ | - |  | - | ------ | -
|                                       |  | Worldwide |        |   | Write-Down    |   |        | Lease       |  |   |       
|                                       |  | Workforce |        |   | of Property   |   |        | Commitments |  |   |       
|                                       |  | Reduction |        |   | and Equipment |   |        | and Other   |  |   | Total  |  
|                                       |  |           |        |   |               |   |        |             |  |   |        |  
|Charges                                |  | $         | 3,660  |   |               | $ | 3,248  |             |  | $ | 2,318  |   |  | $ | 9,226  |  
|Cash payments                          |  |           | (3,660 | ) |               |   |       |             |  |   | (1,503 | ) |  |   | (5,163 | )
|Non-cash charges                       |  |           |       |   |               |   | (3,248 | )           |  |   |       |   |  |   | (3,248 | )
|                                       |  |           |        |   |               |   |        |             |  |   |        |  
|Provision balance at December 31, 2002 |  |           |       |   |               |   |       |             |  |   | 815    |   |  |   | 815    |  
|Cash payments                          |  |           |        |   |               |   |        |             |  |   | (677   | ) |  |   | (677   | )
|Non-cash charges                       |  |           |       |   |               |   |       |             |  |   | (42    | ) |  |   | (42    | )
|Accrual adjustment                     |  |           |       |   |               |   |       |             |  |   | 22     |   |  |   | 22     |  
|                                       |  |           |        |   |               |   |        |             |  |   |        |  
|Provision balance at December 31, 2003 |  |           |       |   |               |   |       |             |  |   | 118    |   |  |   | 118    |  
|Cash payments                          |  |           |        |   |               |   |        |             |  |   | (153   | ) |  |   | (153   | )
|Accrual adjustment                     |  |           |       |   |               |   |       |             |  |   | 35     |   |  |   | 35     |  
|                                       |  |           |        |   |               |   |        |             |  |   |        |  
|Provision balance at December 31, 2004 |  | $         |       |   |               | $ |       |             |  | $ |       |   |  | $ |       |  
|                                       |  |           |        |   |               |   |        |             |  |   |        |  

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Impairment of Long-lived Assets




| |                
| | ---------------
| | 2004 Impairment





| |                 
| | ----------------
| | 2002 Impairments



Interest Income and Other Income (Expense)




Interest Expense




Income Tax Provision




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LIQUIDITY AND CAPITAL RESOURCES


Currently, we are not generating sufficient revenue to fund
our operations. We expect our operating losses and net operating
cash outflows to continue and do not expect to sustain or
significantly increase our revenue.










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Cash, Cash Equivalents and Short-Term Investments




Operating Activities








| |   |                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Accrued other liabilities declined $10.8 million, primarily
    as a result of paying down $9.4 million of restructuring
    expenses accrued in the 2002.                                                                                                        
|
| |  | The net loss for the year ended December 31, 2002 included
    a non-cash write-down of $18.8 million for the impairment
    of fixed assets.                                                                                                                     
|
| |  | Depreciation expense declined $7.7 million due to the
    reduced carrying value of property and equipment resulting from
    impairment charges recorded in the second and third quarters of
    2002 and some property and equipment becoming fully depreciated.



Investing Activities




29



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Financing Activities








Contractual Obligations




|                                                |       |       |       |        |      |   |             |          |  |             |          |     |            |   |   |  |  |   |   |  | 
|----------------------------------------------- | ----- | ----- | ----- | ------ | ---- | - | ----------- | -------- |  | ----------- | -------- | --- | ---------- | - | - |  |  | - | - |  | 
|                                                |       |       |       | Due in |      |   | Due in 2006 |          |  | Due in 2008 |          | Due
|                                                |       | Total |       |        | 2005 |   |             | and 2007 |  |             | and 2009 |     | Thereafter
|                                                |       |       |       |        |      |   |             |          |  |             |          |     |           
|Operating lease obligations                     |       | $     | 33    |        |      | $ | 27          |          |  | $           | 6        |     |            | $ |  |  |  | $ |  | 
|Third party contracts                           |       |       | 1,738 |        |      |   | 1,738       |          |  |             |         |     |            |   |  |  |  |   |  | 
|Accrued severance-related restructuring charges |       |       | 976   |        |      |   | 976         |          |  |             |         |     |            |   |  |  |  |   |  | 
|Software license obligations                    |       |       | 1,037 |        |      |   | 587         |          |  |             | 450      |     |            |   |  |  |  |   |  | 
|                                                |       |       |       |        |      |   |             |          |  |             |          |     |            |   |  
|                                                | Total |       | $     | 3,784  |      |   | $           | 3,328    |  |             | $        | 456 |            |   | $ |  |  |   | $ |  | 
|                                                |       |       |       |        |      |   |             |          |  |             |          |     |            |   |  

OUTLOOK






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Recent Accounting Pronouncements






RISK FACTORS




31



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | CoSine has signed a definitive agreement to be acquired by
    Tut Systems, Inc (Tut), in a stock-for-stock transaction in
    which CoSine would be merged into a wholly owned subsidiary of
    Tut. If the merger is not completed, a continued investment in
    CoSine by its stockholders is subject to substantial risks.
    CoSine has ceased substantially all revenue generating
    operations and sold its operating assets.





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





| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | CoSine may not be able to dispose of its assets or business for
    values equaling or exceeding the value represented by the
    merger; in particular, its assets will likely be substantially
    diminished in value;
|
| |  | CoSine may file for or be forced into bankruptcy;                                                                                                                                                                        
|
| |  | CoSines costs related to the merger, such as legal,
    accounting and financial advisor fees, must be paid even if the
    merger is not completed; and                                                                
|
| |  | CoSine may have difficulty retaining its key remaining
    consultant.                                                                                                                                                   



| |                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | CoSine believes that the price of its common stock is
    based in large part on the price of Tut common stock and the
    price of Tut common stock may be affected by factors different
    from those affecting the price of CoSines common
    stock.



32



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| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | If the merger with Tut is not completed, CoSines
    stock may be delisted from the Nasdaq National Market.





| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Our directors and officers have interests in the merger
    besides those of a stockholder.





| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | There can be no assurance that CoSine will be able to
    consummate a strategic alternative.





| |                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the event the merger with Tut is not consummated,
    CoSine may elect to dissolve and distribute assets to
    stockholders if CoSines board of directors determines that
    such action is in the best interest of the stockholders.





| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | CoSines customers may sue it because CoSine has
    announced the discontinuance of its products and may not meet
    all their contractual commitments.





| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | The outlook for capital spending in the telecommunications
    industry directly impacts the strategic alternatives that may be
    available to CoSine.



33



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| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | CoSines IP Service Delivery Platform was its only
    product line, and the availability of strategic alternatives may
    depend on its perceived value in the telecommunications
    industry.





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





| |                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because the markets in which CoSine competes are prone to
    rapid technological change and the adoption of standards
    different from those that CoSine use, its products could become
    obsolete adversely impacting strategic alternatives available to
    it.





| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If necessary licenses of third-party technology are
    terminated or become unavailable or too expensive, CoSine may be
    unable to consummate an acceptable strategic alternative.



34



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| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | If CoSine is unable to protect its intellectual property
    rights, acceptable strategic alternatives may not be
    available.





| |                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If CoSine becomes involved in an intellectual property
    dispute, it could be subject to significant liability, the time
    and attention of CoSines management could be diverted from
    pursuing strategic alternatives.





| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | obtain from the owner of the infringed intellectual property
    right a license to sell the relevant technology, which license
    may not be available on reasonable terms, or at all; or
|
| |  | redesign those products or services that use the infringed
    technology.                                                                                                                 



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | CoSine has a history of losses that it expects will
    continue, and if it does not achieve profitability it may cease
    operations.





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



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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about Market
    Risk

Interest Rate Sensitivity








Exchange Rate Sensitivity




36



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|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















| |                             
| | ----------------------------
| | /s/ Burr, Pilger & Mayer LLP





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REPORT OF ERNST & YOUNG LLP, INDEPENDENT
REGISTERED


PUBLIC ACCOUNTING FIRM
















| |                      
| | ---------------------
| | /s/ Ernst & Young LLP









38



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COSINE COMMUNICATIONS, INC.





CONSOLIDATED BALANCE SHEETS


|                                       |                                                                                                                                                                             |                                                                                                                             |                            |          |              |        |        |          |       |        | 
|-------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------- | ------------ | ------ | ------ | -------- | ----- | ------ | 
|                                       |                                                                                                                                                                             | December 31,                                                                                                                |                            |          | December 31, |       
|                                       |                                                                                                                                                                             | 2004                                                                                                                        |                            |          | 2003         |       
|                                       |                                                                                                                                                                             |                                                                                                                             |                            |          |              |       
|                                       |                                                                                                                                                                             | (In thousands, except for share                                                                                             |                           
|                                       |                                                                                                                                                                             | and per share data)                                                                                                         |                           
|ASSETS                                
|Current assets:                        |                                                                                                                                                                             |                                                                                                                             |                            |          |              |        |        |         
|                                       | Cash and cash equivalents                                                                                                                                                   |                                                                                                                             | $                          | 9,203    |              |        | $      | 19,719   |      
|                                       | Short-term investments                                                                                                                                                      |                                                                                                                             |                            | 15,710   |              |        |        | 38,033   |      
|                                       | Accounts receivable:                                                                                                                                                        |                                                                                                                             |                            |          |              |        |        |          |      
|                                       |                                                                                                                                                                             | Trade (net of allowance for doubtful accounts of $90 and $150 at
    December 31, 2004 and December 31, 2003, respectively) |                            |          | 1,328        |        |        |          | 4,962 |       
|                                       |                                                                                                                                                                             | Other                                                                                                                       |                            |          | 483          |        |        |          | 494   |       
|                                       | Inventory                                                                                                                                                                   |                                                                                                                             |                            |         |              |        |        | 4,003    |      
|                                       | Prepaid expenses and other current assets                                                                                                                                   |                                                                                                                             |                            | 949      |              |        |        | 2,668    |      
|                                       |                                                                                                                                                                             |                                                                                                                             |                            |          |              |       
|                                       |                                                                                                                                                                             |                                                                                                                             | Total current assets       |          |              | 27,673 |        |          |       | 69,879 | 
|                                       | Property and equipment, net                                                                                                                                                 |                                                                                                                             |                            |         |              |        |        | 2,900    |      
|                                       | Long-term deposits                                                                                                                                                          |                                                                                                                             |                            | 150      |              |        |        | 647      |      
|                                       |                                                                                                                                                                             |                                                                                                                             |                            |          |              |       
|                                       |                                                                                                                                                                             | $                                                                                                                           | 27,823                     |          |              | $      | 73,426 |         
|                                       |                                                                                                                                                                             |                                                                                                                             |                            |          |              |       
|LIABILITIES AND STOCKHOLDERS EQUITY  
|Current liabilities:                   |                                                                                                                                                                             |                                                                                                                             |                            |          |              |        |        |         
|                                       | Accounts payable                                                                                                                                                            |                                                                                                                             | $                          | 252      |              |        | $      | 1,657    |      
|                                       | Accrued warranty liability                                                                                                                                                  |                                                                                                                             |                            | 157      |              |        |        | 464      |      
|                                       | Other accrued liabilities                                                                                                                                                   |                                                                                                                             |                            | 3,129    |              |        |        | 2,560    |      
|                                       | Accrued compensation                                                                                                                                                        |                                                                                                                             |                            | 412      |              |        |        | 1,821    |      
|                                       | Deferred revenue                                                                                                                                                            |                                                                                                                             |                            | 509      |              |        |        | 3,543    |      
|                                       | Current portion of equipment and working capital loans                                                                                                                      |                                                                                                                             |                            |         |              |        |        | 129      |      
|                                       |                                                                                                                                                                             |                                                                                                                             |                            |          |              |       
|                                       |                                                                                                                                                                             |                                                                                                                             | Total current liabilities  |          |              | 4,459  |        |          |       | 10,174 | 
|Accrued rent                           |                                                                                                                                                                             |                                                                                                                             |                           |          |              |        | 2,078  |         
|                                       |                                                                                                                                                                             |                                                                                                                             |                            |          |              |       
|                                       |                                                                                                                                                                             |                                                                                                                             | Total liabilities          |          |              | 4,459  |        |          |       | 12,252 | 
|                                       |                                                                                                                                                                             |                                                                                                                             |                            |          |              |       
|Commitments and contingencies (Note 4) |                                                                                                                                                                             |                                                                                                                             |                            |          |              |        |        |         
|Stockholders equity:                  |                                                                                                                                                                             |                                                                                                                             |                            |          |              |        |        |         
|                                       | Preferred stock, no par value, 3,000,000 shares authorized,
    no shares issued and outstanding                                                                            |                                                                                                                             |                            |         |              |        |        |         |      
|                                       | Common stock, $0.0001 par value, 300,000,000 shares
    authorized; 10,159,790 and 10,176,845 shares issued and
    outstanding at December 31, 2004 and 2003, respectively |                                                                                                                             |                            | 1        |              |        |        | 1        |      
|                                       | Additional paid-in capital                                                                                                                                                  |                                                                                                                             |                            | 540,028  |              |        |        | 546,176  |      
|                                       | Notes receivable from stockholders                                                                                                                                          |                                                                                                                             |                            | (1,520   | )            |        |        | (6,659   | )    
|                                       | Accumulated other comprehensive income                                                                                                                                      |                                                                                                                             |                            | 614      |              |        |        | 533      |      
|                                       | Deferred compensation                                                                                                                                                       |                                                                                                                             |                            |         |              |        |        | (455     | )    
|                                       | Accumulated deficit                                                                                                                                                         |                                                                                                                             |                            | (515,759 | )            |        |        | (478,422 | )    
|                                       |                                                                                                                                                                             |                                                                                                                             |                            |          |              |       
|                                       |                                                                                                                                                                             |                                                                                                                             | Total stockholders equity |          |              | 23,364 |        |          |       | 61,174 | 
|                                       |                                                                                                                                                                             |                                                                                                                             |                            |          |              |       
|                                       |                                                                                                                                                                             | $                                                                                                                           | 27,823                     |          |              | $      | 73,426 |         
|                                       |                                                                                                                                                                             |                                                                                                                             |                            |          |              |       



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COSINE COMMUNICATIONS, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                              |                                      |                           |                              |        |       |        |         |        |        |        |         |        |        |         | 
|------------------------------------------------------------- | ------------------------------------ | ------------------------- | ---------------------------- | ------ | ----- | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------- | 
|                                                              |                                      | Year Ended December 31,   |                             
|                                                              |                                      |                           |                             
|                                                              |                                      | 2004                      |                              |        | 2003  |        |         | 2002   |       
|                                                              |                                      |                           |                              |        |       |        |         |        |       
|                                                              |                                      | (In thousands, except for |                             
|                                                              |                                      | per share data)           |                             
|Revenue:                                                      |                                      |                           |                              |        |       |        |         |        |        |        |         |       
|                                                              | Product                              |                           | $                            | 6,924  |       |        | $       | 11,803 |        |        | $       | 20,623 |       
|                                                              | Service                              |                           |                              | 2,751  |       |        |         | 2,818  |        |        |         | 3,009  |       
|                                                              |                                      |                           |                              |        |       |        |         |        |       
|                                                              |                                      | Total revenue             |                              |        | 9,675 |        |         |        | 14,621 |        |         |        | 23,632 |        
|                                                              | Cost of revenue                      |                           |                              | 7,086  |       |        |         | 6,765  |        |        |         | 13,807 |       
|                                                              |                                      |                           |                              |        |       |        |         |        |       
|Gross profit                                                  |                                      |                           | 2,589                        |        |       |        | 7,856   |        |        |        | 9,825   |       
|                                                              |                                      |                           |                              |        |       |        |         |        |       
|Operating expenses:                                           |                                      |                           |                              |        |       |        |         |        |        |        |         |       
|                                                              | Research and development(2)          |                           |                              | 15,078 |       |        |         | 21,756 |        |        |         | 32,396 |       
|                                                              | Sales and marketing(3)               |                           |                              | 10,052 |       |        |         | 13,808 |        |        |         | 28,271 |       
|                                                              | General and administrative(4)        |                           |                              | 6,064  |       |        |         | 7,226  |        |        |         | 10,959 |       
|                                                              | Restructuring and impairment charges |                           |                              | 8,909  |       |        |         | 336    |        |        |         | 34,538 |       
|                                                              |                                      |                           |                              |        |       |        |         |        |       
|                                                              |                                      |                           | Total operating expenses     |        |       | 40,103 |         |        |        | 43,126 |         |        |        | 106,164 | 
|                                                              |                                      |                           |                              |        |       |        |         |        |       
|Loss from operations                                          |                                      |                           | (37,514                      | )      |       |        | (35,270 | )      |        |        | (96,339 | )     
|                                                              |                                      |                           |                              |        |       |        |         |        |       
|Other income (expense):                                       |                                      |                           |                              |        |       |        |         |        |        |        |         |       
|                                                              | Interest income                      |                           |                              | 489    |       |        |         | 1,296  |        |        |         | 3,535  |       
|                                                              | Interest expense(5)                  |                           |                              | (3     | )     |        |         | (224   | )      |        |         | (966   | )     
|                                                              | Other(6)                             |                           |                              | (276   | )     |        |         | (447   | )      |        |         | 313    |       
|                                                              |                                      |                           |                              |        |       |        |         |        |       
|                                                              |                                      |                           | Total other income (expense) |        |       | 210    |         |        |        | 625    |         |        |        | 2,882   | 
|                                                              |                                      |                           |                              |        |       |        |         |        |       
|Loss before income tax provision                              |                                      |                           | (37,304                      | )      |       |        | (34,645 | )      |        |        | (93,457 | )     
|                                                              | Income tax provision                 |                           |                              | 33     |       |        |         | 287    |        |        |         | 509    |       
|                                                              |                                      |                           |                              |        |       |        |         |        |       
|Net loss                                                      |                                      | $                         | (37,337                      | )      |       | $      | (34,932 | )      |        | $      | (93,966 | )     
|                                                              |                                      |                           |                              |        |       |        |         |        |       
|Basic and diluted net loss per share                          |                                      | $                         | (3.70                        | )      |       | $      | (3.57   | )      |        | $      | (9.72   | )     
|                                                              |                                      |                           |                              |        |       |        |         |        |       
|Shares used in computing basic and diluted net loss per share |                                      |                           | 10,082                       |        |       |        | 9,791   |        |        |        | 9,670   |       
|                                                              |                                      |                           |                              |        |       |        |         |        |       






|    |                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Cost of revenue includes $65 of non-cash credits related to
    equity issuances in 2004, $130 of non-cash charges related to
    equity issuances in 2003, and $101 of non-cash credits related
    to equity issuances in 2002.                 
|   
|(2) | Research and development expenses include $213 of non-cash
    credits related to equity issuances in 2004, $568 of non-cash
    charges related to equity issuances in 2003 and $385 of non-cash
    credits related to equity issuances in 2002.
|   
|(3) | Sales and marketing expenses include $195 of non-cash credits
    related to equity issuances in 2004, $124 of non-cash charges
    related to equity issuances in 2003 and $854 of non-cash credits
    related to equity issuances in 2002.     
|   
|(4) | General and administrative expenses include $305 of non-cash
    credits related to equity issuances in 2004 and $459 and $925 of
    non-cash charges related to equity issuances in 2003 and 2002,
    respectively.                            
|   
|(5) | Interest expense includes nil, $30 and $131 of non-cash charges
    related to equity issuances in 2004, 2003 and 2002, respectively.                                                                                                             
|   
|(6) | Other includes foreign exchange losses of $236, $432 and $281 in
    2004, 2003 and 2002, respectively.                                                                                                                                           



40



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COSINE COMMUNICATIONS, INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                                                                                 |                                            |                                   |            |   |            |       |   |            |             |   |               |   |  |          |         |   |              |       |     |               |   |   |         |   |  |   |          |         |   |   |         |         |  
|-------------------------------------------------------------------------------- | ------------------------------------------ | --------------------------------- | ---------- | - | ---------- | ----- | - | ---------- | ----------- | - | ------------- | - |  | -------- | ------- | - | ------------ | ----- | --- | ------------- | - | - | ------- | - |  | - | -------- | ------- | - | - | ------- | ------- | -
|                                                                                 |                                            |                                   |            |   |            | Notes |   |            | Accumulated |   |               |   |  |          |         |  
|                                                                                 |                                            | Common Stock                      |            |   | Additional |       |   | Receivable |             |   | Other         |   |  |          |         |   |              | Total |    
|                                                                                 |                                            |                                   |            |   | Paid-In    |       |   | from       |             |   | Comprehensive |   |  | Deferred |         |   | Accumulated  |       |     | Stockholders |  
|                                                                                 |                                            | Shares                            |            |   | Amount     |       |   | Capital    |             |   | Stockholders  |   |  | Income   |         |   | Compensation |       |     | Deficit       |   |   | Equity  |  
|                                                                                 |                                            |                                   |            |   |            |       |   |            |             |   |               |   |  |          |         |   |              |       |     |               |   |   |         |  
|                                                                                 |                                            | (In thousands, except share data) |           
|Balance at December 31, 2001                                                     |                                            |                                   | 10,199,686 |   |            | $     | 1 |            |             | $ | 575,894       |   |  | $        | (25,466 | ) |              | $     | 481 |               |   | $ | (14,321 | ) |  | $ | (349,524 | )       |   | $ | 187,065 |        
|Issuance of common stock in connection with stock options                        |                                            |                                   | 29,239     |   |            |       |  |            |             |   | 262           |   |  |          |        |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | 262     |        
|Issuance of common stock in connection with the Employee Stock
    Purchase Plan |                                            |                                   | 62,230     |   |            |       |  |            |             |   | 454           |   |  |          |        |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | 454     |        
|Repayment of notes receivable from stockholders                                  |                                            |                                   |           |   |            |       |  |            |             |   |              |   |  |          | 234     |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | 234     |        
|Repurchase of unvested shares                                                    |                                            |                                   | (332,063   | ) |            |       |  |            |             |   | (14,841       | ) |  |          | 14,701  |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | (140    | )      
|Remeasurement of deferred stock-based compensation                               |                                            |                                   |           |   |            |       |  |            |             |   | 829           |   |  |          |        |   |              |       |    |               |   |   | (829    | ) |  |   |         |         |   |   |        |        
|Cancellation of options with deferred stock compensation charges                 |                                            |                                   |           |   |            |       |  |            |             |   | (4,916        | ) |  |          |        |   |              |       |    |               |   |   | 4,916   |   |  |   |         |         |   |   |        |        
|Amortization of deferred stock-based compensation                                |                                            |                                   |           |   |            |       |  |            |             |   |              |   |  |          |        |   |              |       |    |               |   |   | 7,960   |   |  |   |         |         |   |   | 7,960   |        
|Reversal of amortization in excess of vesting                                    |                                            |                                   |           |   |            |       |  |            |             |   | (8,466        | ) |  |          |        |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | (8,466  | )      
|Options with vesting accelerated or exercise deadline extended                   |                                            |                                   |           |   |            |       |  |            |             |   | 27            |   |  |          |        |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | 27      |        
|Components of comprehensive loss:                                                |                                            |                                   |            |   |            |       |   |            |             |   |               |   |  |          |         |   |              |       |     |               |   |   |         |   |  |   |          |         |   |   |         |        
|                                                                                 | Net loss                                   |                                   |            |  |            |       |   |           |             |   |               |  |  |          |         |  |              |       |     |              |   |   |         |  |  |   |          | (93,966 | ) |   |         | (93,966 | )
|                                                                                 | Unrealized loss on investments, net of tax |                                   |            |  |            |       |   |           |             |   |               |  |  |          |         |  |              |       |     | (209          | ) |   |         |  |  |   |          |        |   |   |         | (209    | )
|                                                                                 | Translation adjustment, net of tax         |                                   |            |  |            |       |   |           |             |   |               |  |  |          |         |  |              |       |     | 260           |   |   |         |  |  |   |          |        |   |   |         | 260     |  
|                                                                                 |                                            |                                   |            |   |            |       |   |            |             |   |               |   |  |          |         |   |              |       |     |               |   |   |         |  
|Total comprehensive loss                                                         |                                            |                                   |           |   |            |       |  |            |             |   |              |   |  |          |        |   |              |       | 51  |               |   |   |        |   |  |   | (93,966  | )       |   |   | (93,915 | )      
|                                                                                 |                                            |                                   |            |   |            |       |   |            |             |   |               |   |  |          |         |   |              |       |     |               |   |   |         |  
|Balance at December 31, 2002                                                     |                                            |                                   | 9,959,092  |   |            |       | 1 |            |             |   | 549,243       |   |  |          | (10,531 | ) |              |       | 532 |               |   |   | (2,274  | ) |  |   | (443,490 | )       |   |   | 93,481  |        
|Issuance of common stock in connection with stock options                        |                                            |                                   | 245,629    |   |            |       |  |            |             |   | 1,207         |   |  |          |        |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | 1,207   |        
|Issuance of common stock in connection with the Employee Stock
    Purchase Plan |                                            |                                   | 57,480     |   |            |       |  |            |             |   | 231           |   |  |          |        |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | 231     |        
|Repayment of notes receivable from stockholders                                  |                                            |                                   |           |   |            |       |  |            |             |   |              |   |  |          | 32      |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | 32      |        
|Repurchase of unvested shares                                                    |                                            |                                   | (85,356    | ) |            |       |  |            |             |   | (3,905        | ) |  |          | 3,840   |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | (65     | )      
|Remeasurement of deferred stock-based compensation                               |                                            |                                   |           |   |            |       |  |            |             |   | 619           |   |  |          |        |   |              |       |    |               |   |   | (619    | ) |  |   |         |         |   |   |        |        
|Cancellation of options with deferred stock compensation charges                 |                                            |                                   |           |   |            |       |  |            |             |   | (264          | ) |  |          |        |   |              |       |    |               |   |   | 264     |   |  |   |         |         |   |   |        |        
|Amortization of deferred stock-based compensation                                |                                            |                                   |           |   |            |       |  |            |             |   |              |   |  |          |        |   |              |       |    |               |   |   | 2,174   |   |  |   |         |         |   |   | 2,174   |        
|Reversal of amortization in excess of vesting                                    |                                            |                                   |           |   |            |       |  |            |             |   | (956          | ) |  |          |        |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | (956    | )      
|Options with vesting accelerated or exercise deadline extended                   |                                            |                                   |           |   |            |       |  |            |             |   | 1             |   |  |          |        |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | 1       |        
|Components of comprehensive loss:                                                |                                            |                                   |            |   |            |       |   |            |             |   |               |   |  |          |         |   |              |       |     |               |   |   |         |   |  |   |          |         |   |   |         |        
|                                                                                 | Net loss                                   |                                   |            |  |            |       |   |           |             |   |               |  |  |          |         |  |              |       |     |              |   |   |         |  |  |   |          | (34,932 | ) |   |         | (34,932 | )
|                                                                                 | Unrealized loss on investments, net of tax |                                   |            |  |            |       |   |           |             |   |               |  |  |          |         |  |              |       |     | (315          | ) |   |         |  |  |   |          |        |   |   |         | (315    | )
|                                                                                 | Translation adjustment, net of tax         |                                   |            |  |            |       |   |           |             |   |               |  |  |          |         |  |              |       |     | 316           |   |   |         |  |  |   |          |        |   |   |         | 316     |  
|                                                                                 |                                            |                                   |            |   |            |       |   |            |             |   |               |   |  |          |         |   |              |       |     |               |   |   |         |  
|Total comprehensive loss                                                         |                                            |                                   |           |   |            |       |  |            |             |   |              |   |  |          |        |   |              |       | 1   |               |   |   |        |   |  |   | (34,932  | )       |   |   | (34,931 | )      
|                                                                                 |                                            |                                   |            |   |            |       |   |            |             |   |               |   |  |          |         |   |              |       |     |               |   |   |         |  
|Balance at December 31, 2003                                                     |                                            |                                   | 10,176,845 |   |            |       | 1 |            |             |   | 546,176       |   |  |          | (6,659  | ) |              |       | 533 |               |   |   | (455    | ) |  |   | (478,422 | )       |   |   | 61,174  |        
|Issuance of common stock in connection with stock options                        |                                            |                                   | 28,804     |   |            |       |  |            |             |   | 144           |   |  |          |        |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | 144     |        
|Issuance of common stock in connection with Employee Stock
    Purchase Plan     |                                            |                                   | 23,491     |   |            |       |  |            |             |   | 82            |   |  |          |        |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | 82      |        
|Issuance of common stock for employee stock bonus                                |                                            |                                   | 43,300     |   |            |       |  |            |             |   | 228           |   |  |          |        |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | 228     |        
|Issuance of warrant for services                                                 |                                            |                                   |           |   |            |       |  |            |             |   | 48            |   |  |          |        |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | 48      |        
|Repurchase of unvested shares                                                    |                                            |                                   | (112,650   | ) |            |       |  |            |             |   | (5,139        | ) |  |          | 5,139   |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   |        |        
|Remeasurement of deferred stock-based compensation                               |                                            |                                   |           |   |            |       |  |            |             |   | (250          | ) |  |          |        |   |              |       |    |               |   |   | 250     |   |  |   |         |         |   |   |        |        
|Cancellation of options with deferred stock compensation charges                 |                                            |                                   |           |   |            |       |  |            |             |   | (58           | ) |  |          |        |   |              |       |    |               |   |   | 58      |   |  |   |         |         |   |   |        |        
|Amortization of deferred stock-based compensation                                |                                            |                                   |           |   |            |       |  |            |             |   |              |   |  |          |        |   |              |       |    |               |   |   | 147     |   |  |   |         |         |   |   | 147     |        
|Reversal of amortization in excess of vesting                                    |                                            |                                   |           |   |            |       |  |            |             |   | (1,203        | ) |  |          |        |   |              |       |    |               |   |   |        |   |  |   |         |         |   |   | (1,203  | )      
|Components of comprehensive loss:                                                |                                            |                                   |            |   |            |       |   |            |             |   |               |   |  |          |         |   |              |       |     |               |   |   |         |   |  |   |          |         |   |   |         |        
|                                                                                 | Net loss                                   |                                   |            |  |            |       |   |           |             |   |               |  |  |          |         |  |              |       |     |              |   |   |         |  |  |   |          | (37,337 | ) |   |         | (37,337 | )
|                                                                                 | Unrealized loss on investments, net of tax |                                   |            |  |            |       |   |           |             |   |               |  |  |          |         |  |              |       |     | (42           | ) |   |         |  |  |   |          |        |   |   |         | (42     | )
|                                                                                 | Translation adjustment, net of tax         |                                   |            |  |            |       |   |           |             |   |               |  |  |          |         |  |              |       |     | 123           |   |   |         |  |  |   |          |        |   |   |         | 123     |  
|                                                                                 |                                            |                                   |            |   |            |       |   |            |             |   |               |   |  |          |         |   |              |       |     |               |   |   |         |  
|Total comprehensive loss                                                         |                                            |                                   |           |   |            |       |  |            |             |   |              |   |  |          |        |   |              |       | 81  |               |   |   |        |   |  |   | (37,337  | )       |   |   | (37,256 | )      
|                                                                                 |                                            |                                   |            |   |            |       |   |            |             |   |               |   |  |          |         |   |              |       |     |               |   |   |         |  
|Balance at December 31, 2004                                                     |                                            |                                   | 10,159,790 |   |            | $     | 1 |            |             | $ | 540,028       |   |  | $        | (1,520  | ) |              | $     | 614 |               |   | $ |        |   |  | $ | (515,759 | )       |   | $ | 23,364  |        
|                                                                                 |                                            |                                   |            |   |            |       |   |            |             |   |               |   |  |          |         |   |              |       |     |               |   |   |         |  



41



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##### Table of Contents



COSINE COMMUNICATIONS, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                 |                                                                                             |                                           |         |        |        |   |         |       |         |   |         |        |        |  
|-------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ----------------------------------------- | ------- | ------ | ------ | - | ------- | ----- | ------- | - | ------- | ------ | ------ | -
|                                                                                 |                                                                                             | Year Ended December 31,                   |        
|                                                                                 |                                                                                             |                                           |        
|                                                                                 |                                                                                             | 2004                                      |         |        | 2003   |   |         | 2002  |        
|                                                                                 |                                                                                             |                                           |         |        |        |   |         |       |        
|                                                                                 |                                                                                             | (In thousands)                            |        
|Operating activities:                                                            |                                                                                             |                                           |         |        |        |   |         |       |         |   |         |       
|Net loss                                                                         |                                                                                             | $                                         | (37,337 | )      |        | $ | (34,932 | )     |         | $ | (93,966 | )     
|Adjustments to reconcile net loss to net cash used in operating
    activities:  |                                                                                             |                                           |         |        |        |   |         |       |         |   |         |       
|                                                                                 | Depreciation                                                                                |                                           |         | 1,398  |        |   |         | 2,715 |         |   |         | 10,448 |       
|                                                                                 | Allowance for doubtful accounts                                                             |                                           |         | (60    | )      |   |         | (113  | )       |   |         | 296    |       
|                                                                                 | Non-cash charges related to inventory write-down                                            |                                           |         | 2,684  |        |   |         | 193   |         |   |         | 1,465  |       
|                                                                                 | Write-down of property and equipment                                                        |                                           |         | 1,427  |        |   |         |      |         |   |         | 18,761 |       
|                                                                                 | Non-cash restructuring charges                                                              |                                           |         | 2,014  |        |   |         | 66    |         |   |         | (305   | )     
|                                                                                 | Amortization of deferred stock compensation and charges related
    to vesting acceleration |                                           |         | 147    |        |   |         | 2,175 |         |   |         | 7,987  |       
|                                                                                 | Reversal of amortization in excess of vesting                                               |                                           |         | (1,203 | )      |   |         | (956  | )       |   |         | (8,466 | )     
|                                                                                 | Amortization of warrants issued for services                                                |                                           |         | 48     |        |   |         | 92    |         |   |         | 195    |       
|                                                                                 | Issuance of common stock for employee stock bonus                                           |                                           |         | 228    |        |   |         |      |         |   |         |       |       
|                                                                                 | Other                                                                                       |                                           |         | 124    |        |   |         | (11   | )       |   |         | 263    |       
|                                                                                 | Change in operating assets and liabilities:                                                 |                                           |         |        |        |   |         |       |         |   |         |        |       
|                                                                                 |                                                                                             | Accounts receivable (trade)               |         |        | 3,694  |   |         |       | 1,524   |   |         |        | 7,309  |  
|                                                                                 |                                                                                             | Other receivables                         |         |        | 11     |   |         |       | 185     |   |         |        | 598    |  
|                                                                                 |                                                                                             | Inventory                                 |         |        | 1,319  |   |         |       | (841    | ) |         |        | 589    |  
|                                                                                 |                                                                                             | Prepaid expenses and other current assets |         |        | 1,644  |   |         |       | 1,294   |   |         |        | 1,487  |  
|                                                                                 |                                                                                             | Long-term deposits                        |         |        | 497    |   |         |       | 333     |   |         |        | (306   | )
|                                                                                 |                                                                                             | Other assets                              |         |        |       |   |         |       |        |   |         |        | 245    |  
|                                                                                 |                                                                                             | Accounts payable                          |         |        | (1,405 | ) |         |       | (836    | ) |         |        | (717   | )
|                                                                                 |                                                                                             | Provision for warranty liability          |         |        | (307   | ) |         |       | (639    | ) |         |        | (1,402 | )
|                                                                                 |                                                                                             | Accrued compensation                      |         |        | (1,409 | ) |         |       | 113     |   |         |        | (2,513 | )
|                                                                                 |                                                                                             | Accrued other liabilities                 |         |        | (1,455 | ) |         |       | (10,847 | ) |         |        | 4,373  |  
|                                                                                 |                                                                                             | Deferred revenue                          |         |        | (3,034 | ) |         |       | 2,099   |   |         |        | (1,269 | )
|                                                                                 |                                                                                             | Accrued rent                              |         |        | (2,078 | ) |         |       | 9       |   |         |        | 263    |  
|                                                                                 |                                                                                             | Other liabilities                         |         |        |       |   |         |       |        |   |         |        | (11    | )
|                                                                                 |                                                                                             |                                           |         |        |        |   |         |       |        
|Net cash used in operating activities                                            |                                                                                             |                                           | (32,968 | )      |        |   | (38,377 | )     |         |   | (54,676 | )     
|                                                                                 |                                                                                             |                                           |         |        |        |   |         |       |        
|Investing activities:                                                            |                                                                                             |                                           |         |        |        |   |         |       |         |   |         |       
|Capital expenditures                                                             |                                                                                             |                                           | (1,096  | )      |        |   | (2,983  | )     |         |   | (3,304  | )     
|Proceeds from sale of property and equipment                                     |                                                                                             |                                           | 1,171   |        |        |   |        |       |         |   |        |       
|Purchase of short-term investments                                               |                                                                                             |                                           | (34,466 | )      |        |   | (76,849 | )     |         |   | (89,253 | )     
|Proceeds from sales and maturities of short-term investments                     |                                                                                             |                                           | 56,746  |        |        |   | 131,065 |       |         |   | 87,817  |       
|                                                                                 |                                                                                             |                                           |         |        |        |   |         |       |        
|Net cash provided by (used in) investing activities                              |                                                                                             |                                           | 22,355  |        |        |   | 51,233  |       |         |   | (4,740  | )     
|                                                                                 |                                                                                             |                                           |         |        |        |   |         |       |        
|Financing activities:                                                            |                                                                                             |                                           |         |        |        |   |         |       |         |   |         |       
|Principal payments of equipment and working capital loans and
    capital leases |                                                                                             |                                           | (129    | )      |        |   | (3,772  | )     |         |   | (6,032  | )     
|Proceeds from issuance of common stock, net                                      |                                                                                             |                                           | 226     |        |        |   | 1,438   |       |         |   | 716     |       
|Proceeds from notes receivable from stockholders                                 |                                                                                             |                                           |        |        |        |   | 32      |       |         |   | 234     |       
|Repurchase of common stock                                                       |                                                                                             |                                           |        |        |        |   | (65     | )     |         |   | (140    | )     
|                                                                                 |                                                                                             |                                           |         |        |        |   |         |       |        
|Net cash provided by (used in) financing activities                              |                                                                                             |                                           | 97      |        |        |   | (2,367  | )     |         |   | (5,222  | )     
|                                                                                 |                                                                                             |                                           |         |        |        |   |         |       |        
|Net (decrease) increase in cash and cash equivalents                             |                                                                                             |                                           | (10,516 | )      |        |   | 10,489  |       |         |   | (64,638 | )     
|Cash and cash equivalents at the beginning of the period                         |                                                                                             |                                           | 19,719  |        |        |   | 9,230   |       |         |   | 73,868  |       
|                                                                                 |                                                                                             |                                           |         |        |        |   |         |       |        
|Cash and cash equivalents at the end of the period                               |                                                                                             | $                                         | 9,203   |        |        | $ | 19,719  |       |         | $ | 9,230   |       
|                                                                                 |                                                                                             |                                           |         |        |        |   |         |       |        
|Supplemental information:                                                        |                                                                                             |                                           |         |        |        |   |         |       |         |   |         |       
|Cash paid for interest                                                           |                                                                                             | $                                         | 3       |        |        | $ | 195     |       |         | $ | 835     |       
|                                                                                 |                                                                                             |                                           |         |        |        |   |         |       |        
|Income taxes paid                                                                |                                                                                             | $                                         | 41      |        |        | $ | 110     |       |         | $ | 509     |       
|                                                                                 |                                                                                             |                                           |         |        |        |   |         |       |        
|Cancellation of notes receivable due to repurchase of unvested
    stock         |                                                                                             | $                                         | 5,139   |        |        | $ | 3,840   |       |         | $ | 14,701  |       
|                                                                                 |                                                                                             |                                           |         |        |        |   |         |       |        
|Net transfer from inventory to property and equipment                            |                                                                                             | $                                         |        |        |        | $ | 180     |       |         | $ | 191     |       
|                                                                                 |                                                                                             |                                           |         |        |        |   |         |       |        
|Net transfer to property and equipment from inventory                            |                                                                                             | $                                         | 31      |        |        | $ |        |       |         | $ |        |       
|                                                                                 |                                                                                             |                                           |         |        |        |   |         |       |        



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COSINE COMMUNICATIONS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                                           
|-- | ------------------------------------------
|1. | Summary of Significant Accounting Policies



| |                        
| | -----------------------
| | Description of Business





| |                                
| | -------------------------------
| | Financial Results and Liquidity











| |              
| | -------------
| | Consolidation



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COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                 
| | ----------------
| | Use of Estimates





| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets









| |                           
| | --------------------------
| | Significant Concentrations



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##### Table of Contents



COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |           
| | ----------
| | Guarantees







| |                                                  
| | -------------------------------------------------
| | Cash, Cash Equivalents and Short-Term Investments



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COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                       |  |              |        |   |      |   |         |  
|-------------------------------------- |  | ------------ | ------ | - | ---- | - | ------- | -
|                                       |  | December 31, |       
|                                       |  |              |       
|                                       |  | 2004         |        |   | 2003 |  
|                                       |  |              |        |   |      |  
|Money market funds                     |  | $            | 13,593 |   |      | $ | 44,700  |  
|Commercial paper                       |  |              | 5,127  |   |      |   | 11,065  |  
|Government securities                  |  |              | 4,514  |   |      |   |        |  
|                                       |  |              |        |   |      |  
|                                       |  |              | 23,234 |   |      |   | 55,765  |  
|Amounts classified as cash equivalents |  |              | (7,524 | ) |      |   | (17,732 | )
|                                       |  |              |        |   |      |  
|                                       |  | $            | 15,710 |   |      | $ | 38,033  |  
|                                       |  |              |        |   |      |  







| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts





| |            
| | -----------
| | Inventories



|                    |  |             |   |      |  |   |       | 
|------------------- |  | ----------- | - | ---- |  | - | ----- | 
|                    |  | December 31 |  
|                    |  |             |  
|                    |  | 2004        |   | 2003 | 
|                    |  |             |   |      | 
|Raw materials       |  | $           |  |      |  | $ | 160   | 
|Semi-finished goods |  |             |  |      |  |   | 3,466 | 
|Finished goods      |  |             |  |      |  |   | 377   | 
|                    |  |             |   |      |  |  
|                    |  | $           |  |      |  | $ | 4,003 | 
|                    |  |             |   |      |  |  





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COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                       
| | ----------------------
| | Property and Equipment



|                                       |  |              |   |      |  |   |        |  
|-------------------------------------- |  | ------------ | - | ---- |  | - | ------ | -
|                                       |  | December 31, |  
|                                       |  |              |  
|                                       |  | 2004         |   | 2003 | 
|                                       |  |              |   |      | 
|Computer equipment                     |  | $            |  |      |  | $ | 1,412  |  
|Furniture and fixtures                 |  |              |  |      |  |   | 211    |  
|Leasehold improvements                 |  |              |  |      |  |   | 30     |  
|Computer software                      |  |              |  |      |  |   | 312    |  
|Manufacturing and laboratory equipment |  |              |  |      |  |   | 5,423  |  
|                                       |  |              |   |      |  |  
|                                       |  |              |  |      |  |   | 7,388  |  
|Accumulated depreciation               |  |              |  |      |  |   | (4,488 | )
|                                       |  |              |   |      |  |  
|                                       |  | $            |  |      |  | $ | 2,900  |  
|                                       |  |              |   |      |  |  



| |           
| | ----------
| | Warranties



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COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                   |  |      |      |   |      |   |       |      |  |   |        |  
|-------------------------------------------------- |  | ---- | ---- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                   |  | 2004 |      |   | 2003 |   |       | 2002 | 
|                                                   |  |      |      |   |      |   |       |      | 
|Beginning balance                                  |  | $    | 464  |   |      | $ | 1,103 |      |  | $ | 2,505  |  
|Warranty charged to cost of revenue                |  |      | 6    |   |      |   | 352   |      |  |   | 351    |  
|Utilization of warranties                          |  |      | (313 | ) |      |   | (894  | )    |  |   | (1,568 | )
|Changes in estimated liability based on experience |  |      |     |   |      |   | (97   | )    |  |   | (185   | )
|                                                   |  |      |      |   |      |   |       |      | 
|Ending balance                                     |  | $    | 157  |   |      | $ | 464   |      |  | $ | 1,103  |  
|                                                   |  |      |      |   |      |   |       |      | 



| |                         
| | ------------------------
| | Stock-Based Compensation









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##### Table of Contents



COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                      
| | ---------------------
| | Pro Forma Information





|                                                                                                                                            |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                            |  | 2004 |         |   | 2003 |   |         | 2002 | 
|                                                                                                                                            |  |      |         |   |      |   |         |      | 
|Net loss, as reported                                                                                                                       |  | $    | (37,337 | ) |      | $ | (34,932 | )    |  | $ | (93,966 | )
|Add: Stock-based employee compensation expense included in
    reported net loss                                                            |  |      | 147     |   |      |   | 2,175   |      |  |   | 7,987   |  
|Deduct: Reversal of amortization in excess of vesting                                                                                       |  |      | (1,203  | ) |      |   | (956    | )    |  |   | (8,466  | )
|Deduct: Stock-based employee compensation expense determined
    under fair value method for all stock option grants
    (SFAS 123 expense) |  |      | (173    | ) |      |   | (2,556  | )    |  |   | 5,202   |  
|                                                                                                                                            |  |      |         |   |      |   |         |      | 
|Pro forma net loss                                                                                                                          |  | $    | (38,566 | ) |      | $ | (36,269 | )    |  | $ | (89,243 | )
|                                                                                                                                            |  |      |         |   |      |   |         |      | 
|Basic and diluted net loss per share, as reported                                                                                           |  | $    | (3.70   | ) |      | $ | (3.57   | )    |  | $ | (9.72   | )
|                                                                                                                                            |  |      |         |   |      |   |         |      | 
|Pro forma basic and diluted net loss per share                                                                                              |  | $    | (3.83   | ) |      | $ | (3.70   | )    |  | $ | (9.23   | )
|                                                                                                                                            |  |      |         |   |      |   |         |      | 



|                                              |  |              |         |   |              |   |         |              |  |   |         |  
|--------------------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | ------------ |  | - | ------- | -
|                                              |  | Fiscal Year  |         |   | Fiscal Year  |   |         | Fiscal Year  | 
|                                              |  | Ended        |         |   | Ended        |   |         | Ended        | 
|                                              |  | December 31, |         |   | December 31, |   |         | December 31, | 
|                                              |  | 2004         |         |   | 2003         |   |         | 2002         | 
|                                              |  |              |         |   |              |   |         |              | 
|Weighted average fair value of shares granted |  | $            | 4.41    |   |              | $ | 3.23    |              |  | $ | 2.73    |  
|Dividend yield                                |  |              | 0.0     | % |              |   | 0.0     | %            |  |   | 0.0     | %
|Volatility                                    |  |              | 0.95    |   |              |   | 0.82    |              |  |   | 0.67    |  
|Risk free interest rate                       |  |              | 2.6     | % |              |   | 2.2     | %            |  |   | 3.0     | %
|Expected life                                 |  |              | 4 years |   |              |   | 4 years |              |  |   | 4 years |  





| |                    
| | -------------------
| | Revenue Recognition



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COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                
| | ---------------
| | Cost of Revenue





| |                         
| | ------------------------
| | Research and Development







| |                    
| | -------------------
| | Advertising Expense





| |                   
| | ------------------
| | Net Loss Per Share



50



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##### Table of Contents



COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                     |                                                                          |                        |         |        |      |   |         |       |  |   |         |        | 
|------------------------------------ | ------------------------------------------------------------------------ | ---------------------- | ------- | ------ | ---- | - | ------- | ----- |  | - | ------- | ------ | 
|                                     |                                                                          | Year Ended December 31 |        
|                                     |                                                                          |                        |        
|                                     |                                                                          | 2004                   |         |        | 2003 |   |         | 2002  | 
|                                     |                                                                          |                        |         |        |      |   |         |       | 
|Net loss                             |                                                                          | $                      | (37,337 | )      |      | $ | (34,932 | )     |  | $ | (93,966 | )     
|                                     |                                                                          |                        |         |        |      |   |         |       | 
|Basic and diluted:                   |                                                                          |                        |         |        |      |   |         |       |  |   |         |       
|                                     | Weighted average shares of common stock outstanding                      |                        |         | 10,199 |      |   |         | 9,999 |  |   |         | 10,095 | 
|                                     | Less: weighted average shares subject to repurchase                      |                        |         | 117    |      |   |         | 208   |  |   |         | 425    | 
|                                     |                                                                          |                        |         |        |      |   |         |       | 
|                                     | Weighted-average shares used in basic and diluted net loss per
    share |                        |         | 10,082 |      |   |         | 9,791 |  |   |         | 9,670  | 
|                                     |                                                                          |                        |         |        |      |   |         |       | 
|Basic and diluted net loss per share |                                                                          | $                      | (3.70   | )      |      | $ | (3.57   | )     |  | $ | (9.72   | )     
|                                     |                                                                          |                        |         |        |      |   |         |       | 





| |                  
| | -----------------
| | Segment Reporting

CoSine operates in only one segment:




|                      |  |         |        | 
|--------------------- |  | ------- | ------ | 
|Region                |  | Revenue |       
|                      |  |         |       
|2004                  |  |         |        | 
|Europe                |  | $       | 3,053  | 
|Japan                 |  |         | 1,620  | 
|Korea                 |  |         | 1,602  | 
|Rest of Asia/ Pacific |  |         | 36     | 
|United States         |  |         | 3,364  | 
|                      |  |         |       
|                      |  | $       | 9,675  | 
|                      |  |         |       
|2003                  |  |         |        | 
|Europe                |  | $       | 2,676  | 
|Japan                 |  |         | 2,957  | 
|Korea                 |  |         | 1,717  | 
|Rest of Asia/ Pacific |  |         | 463    | 
|United States         |  |         | 6,808  | 
|                      |  |         |       
|                      |  | $       | 14,621 | 
|                      |  |         |       

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##### Table of Contents



COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                      |  |         |        | 
|--------------------- |  | ------- | ------ | 
|Region                |  | Revenue |       
|                      |  |         |       
|2002                  |  |         |        | 
|Europe                |  | $       | 5,726  | 
|Japan                 |  |         | 4,726  | 
|Korea                 |  |         | 2,911  | 
|Rest of Asia/ Pacific |  |         | 1,846  | 
|United States         |  |         | 8,423  | 
|                      |  |         |       
|                      |  | $       | 23,632 | 
|                      |  |         |       



| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements





Reclassifications






|   |                                    
|-- | -----------------------------------
|2. | Equipment and working capital loans



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##### Table of Contents



COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |       
|-- | ------
|3. | Leases



|                             |  |           |    | 
|---------------------------- |  | --------- | -- | 
|                             |  | Operating |   
|                             |  | Leases    |   
|                             |  |           |   
|2005                         |  | $         | 27 | 
|2006                         |  |           | 6  | 
|                             |  |           |   
|Total minimum lease payments |  | $         | 33 | 
|                             |  |           |   





|   |                              
|-- | -----------------------------
|4. | Commitments and Contingencies

In re
CoSine Communications, Inc. Initial Public Offering Securities
Litigation








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COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|   |            
|-- | -----------
|5. | 401(k) Plan





|   |                     
|-- | --------------------
|6. | Stockholders Equity



| |             
| | ------------
| | Common Stock



|                     |                             |      |       |       |      |  |       |       | 
|-------------------- | --------------------------- | ---- | ----- | ----- | ---- |  | ----- | ----- | 
|                     |                             | 2004 |       |       | 2003 | 
|                     |                             |      |       |       |      | 
|Stock options:       |                             |      |       |       |      |  |       |      
|                     | Options outstanding         |      |       | 590   |      |  |       | 1,246 | 
|                     | Available for future grants |      |       | 2,487 |      |  |       | 1,747 | 
|Warrants outstanding |                             |      | 289   |       |      |  | 34    |      
|                     |                             |      |       |       |      | 
|                     |                             |      | 3,366 |       |      |  | 3,027 |      
|                     |                             |      |       |       |      | 



| |                       
| | ----------------------
| | 1997 Stock Option Plan





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##### Table of Contents



COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                       
| | ----------------------
| | 2000 Stock Option Plan







| |                       
| | ----------------------
| | 2002 Stock Option Plan









| |                          
| | -------------------------
| | 2000 Director Option Plan





55



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##### Table of Contents



COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                   
| | ----------------------------------
| | Summary Stock Option Plan Activity



|                                |  |               |        |                     |        |           |           |       |  |   |       | 
|------------------------------- |  | ------------- | ------ | ------------------- | ------ | --------- | --------- | ----- |  | - | ----- | 
|                                |  |               |        | Options Outstanding |       
|                                |  |               |        |                     |       
|                                |  |               |        |                     |        | Weighted- |          
|                                |  | Shares        |        |                     |        |           | Average   |      
|                                |  | Available for |        |                     |        |           | Price per |      
|                                |  | Grant         |        |                     | Shares |           |           | Share | 
|                                |  |               |        |                     |        |           |           |       | 
|Balance as of December 31, 2001 |  |               | 859    |                     |        |           | 1680      |       |  | $ | 23.57 | 
|Repurchased                     |  |               | 645    |                     |        |           |          |       |  |   |      | 
|Granted                         |  |               | (1,884 | )                   |        |           | 1,884     |       |  |   | 9.26  | 
|Exercised                       |  |               |       |                     |        |           | (30       | )     |  |   | 9.73  | 
|Canceled                        |  |               | 2,236  |                     |        |           | (2,236    | )     |  |   | 20.05 | 
|                                |  |               |        |                     |        |           |           |       | 
|Balance as of December 31, 2002 |  |               | 1,856  |                     |        |           | 1,298     |       |  |   | 9.18  | 
|Repurchased                     |  |               | 85     |                     |        |           |          |       |  |   |      | 
|Granted                         |  |               | (695   | )                   |        |           | 695       |       |  |   | 5.42  | 
|Exercised                       |  |               |       |                     |        |           | (246      | )     |  |   | 4.93  | 
|Canceled                        |  |               | 501    |                     |        |           | (501      | )     |  |   | 11.45 | 
|                                |  |               |        |                     |        |           |           |       | 
|Balance as of December 31, 2003 |  |               | 1,747  |                     |        |           | 1,246     |       |  |   | 7.01  | 
|Repurchased                     |  |               | 113    |                     |        |           |          |       |  |   |      | 
|Granted                         |  |               | (86    | )                   |        |           | 86        |       |  |   | 6.67  | 
|Exercised                       |  |               |       |                     |        |           | (29       | )     |  |   | 5.00  | 
|Canceled                        |  |               | 713    |                     |        |           | (713      | )     |  |   | 5.50  | 
|                                |  |               |        |                     |        |           |           |       | 
|Balance as of December 31, 2004 |  |               | 2,487  |                     |        |           | 590       |       |  | $ | 8.88  | 
|                                |  |               |        |                     |        |           |           |       | 



|                         |  |                     |     |           |                     |  |           |          |  |   |           |           |  |          |     |  |  |   |       | 
|------------------------ |  | ------------------- | --- | --------- | ------------------- |  | --------- | -------- |  | - | --------- | --------- |  | -------- | --- |  |  | - | ----- | 
|                         |  | Options Outstanding |     |           | Options Exercisable | 
|                         |  |                     |     |           |                     | 
|                         |  |                     |     | Weighted- |                     |  |           |          | 
|                         |  |                     |     | Average   |                     |  | Weighted- |          |  |   |           | Weighted- | 
|                         |  |                     |     | Remaining |                     |  | Average   |          |  |   |           | Average   | 
|                         |  | Number              |     |           | Contractual         |  |           | Exercise |  |   | Number of |           |  | Exercise |    
|Range of Exercise Prices |  | of Shares           |     |           | Life (Years)        |  |           | Price    |  |   | Shares    |           |  | Price    |    
|                         |  |                     |     |           |                     |  |           |          |  |   |           |           |  |          |    
|$ 4.00 - 4.94            |  |                     | 2   |           |                     |  | 8.1       |          |  | $ | 4.66      |           |  |          | 2   |  |  | $ | 4.66  | 
|5.00                     |  |                     | 314 |           |                     |  | 6.4       |          |  |   | 5.00      |           |  |          | 276 |  |  |   | 5.00  | 
|5.20                     |  |                     | 182 |           |                     |  | 8.4       |          |  |   | 5.20      |           |  |          | 88  |  |  |   | 5.20  | 
|6.12 - 9.80              |  |                     | 38  |           |                     |  | 8.5       |          |  |   | 7.33      |           |  |          | 8   |  |  |   | 7.05  | 
|11.40 - 17.70            |  |                     | 23  |           |                     |  | 6.8       |          |  |   | 15.22     |           |  |          | 22  |  |  |   | 15.27 | 
|22.30 - 120.00           |  |                     | 32  |           |                     |  | 5.7       |          |  |   | 65.08     |           |  |          | 24  |  |  |   | 79.61 | 
|                         |  |                     |     |           |                     |  |           |          |  |   |           |           |  |          |    
|$ 4.00 - 120.00          |  |                     | 590 |           |                     |  | 7.1       |          |  | $ | 8.88      |           |  |          | 421 |  |  | $ | 9.87  | 
|                         |  |                     |     |           |                     |  |           |          |  |   |           |           |  |          |    

56



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COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                  
| | ---------------------------------
| | 2000 Employee Stock Purchase Plan





| |                         
| | ------------------------
| | Stock-Based Compensation









57



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##### Table of Contents



COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |         
| | --------
| | Warrants







58



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##### Table of Contents



COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|   |                
|-- | ---------------
|7. | Related Parties







|   |             
|-- | ------------
|8. | Income Taxes



|                                                        |                 |      |         |    |      |   |         |      |  |   |         |     | 
|------------------------------------------------------- | --------------- | ---- | ------- | -- | ---- | - | ------- | ---- |  | - | ------- | --- | 
|                                                        |                 | 2004 |         |    | 2003 |   |         | 2002 | 
|                                                        |                 |      |         |    |      |   |         |      | 
|U.S. federal tax benefit at federal statutory rate      |                 | $    | (12,683 | )  |      | $ | (11,780 | )    |  | $ | (32,888 | )  
|Loss for which no tax benefit is currently recognizable |                 |      | 12,825  |    |      |   | 11,910  |      |  |   | 30,828  |    
|Non-cash charges related to equity issuances            |                 |      | (109    | )  |      |   | 157     |      |  |   | 2,569   |    
|                                                        |                 |      |         |    |      |   |         |      | 
|                                                        | Total provision |      | $       | 33 |      |   | $       | 287  |  |   | $       | 509 | 
|                                                        |                 |      |         |    |      |   |         |      | 

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COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                          |                                                |              |          |         |      |  |          |         | 
|------------------------- | ---------------------------------------------- | ------------ | -------- | ------- | ---- |  | -------- | ------- | 
|                          |                                                | December 31, |         
|                          |                                                |              |         
|                          |                                                | 2004         |          |         | 2003 | 
|                          |                                                |              |          |         |      | 
|Deferred tax assets:      |                                                |              |          |         |      |  |          |        
|                          | Net operating loss carryforwards               |              | $        | 125,976 |      |  | $        | 101,653 | 
|                          | Equity related charges                         |              |          | (193    | )    |  |          | 150     | 
|                          | Tax credit carryforwards                       |              |          | 8,435   |      |  |          | 8,359   | 
|                          | Deferred revenue                               |              |          | 3       |      |  |          | 579     | 
|                          | Inventory reserve                              |              |          | 157     |      |  |          | 5,471   | 
|                          | Capitalized research and development           |              |          | 8,170   |      |  |          | 9,332   | 
|                          | Capital loss carryforward                      |              |          | 27,789  |      |  |          | 27,789  | 
|                          | Accruals and reserves not currently deductible |              |          | 1,358   |      |  |          | 7,879   | 
|                          |                                                |              |          |         |      | 
|Total deferred tax assets |                                                |              | 171,695  |         |      |  | 161,212  |        
|Valuation allowance       |                                                |              | (171,695 | )       |      |  | (161,212 | )      
|                          |                                                |              |          |         |      | 
|                          | Net deferred tax assets                        |              | $        |        |      |  | $        |        | 
|                          |                                                |              |          |         |      | 













|   |                                     
|-- | ------------------------------------
|9. | Restructuring and Impairment Charges



| |                            
| | ---------------------------
| | December 2004 Restructuring



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COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                       |  |           |     |   |              |   |          |              |  |   |       |  |  |   |        |  
|-------------------------------------- |  | --------- | --- | - | ------------ | - | -------- | ------------ |  | - | ----- |  |  | - | ------ | -
|                                       |  | Worldwide |     |   |              |   | Software |              |  |  
|                                       |  | Workforce |     |   | Lease        |   |          | License      |  |   |      
|                                       |  | Reduction |     |   | Terminations |   |          | Terminations |  |   | Total | 
|                                       |  |           |     |   |              |   |          |              |  |   |       | 
|December 2004 restructuring charges    |  | $         | 619 |   |              | $ | 2,918    |              |  | $ | 1,037 |  |  | $ | 4,574  |  
|Cash payments                          |  |           | (66 | ) |              |   | (3,900   | )            |  |   |      |  |  |   | (3,966 | )
|Write offs                             |  |           |    |   |              |   | 982      |              |  |   |      |  |  |   | 982    |  
|                                       |  |           |     |   |              |   |          |              |  |   |       | 
|Provision balance at December 31, 2004 |  | $         | 553 |   |              | $ |         |              |  | $ | 1,037 |  |  | $ | 1,590  |  
|                                       |  |           |     |   |              |   |          |              |  |   |       | 



| |                             
| | ----------------------------
| | September 2004 Restructuring







|                                       |  |           |        |            |              |   |        |               |  |   |       |   |  |   |        |  
|-------------------------------------- |  | --------- | ------ | ---------- | ------------ | - | ------ | ------------- |  | - | ----- | - |  | - | ------ | -
|                                       |  |           |        | Write-Down |              |   |        |               | 
|                                       |  | Worldwide |        |            | of Inventory |   |        | Manufacturing |  |   |      
|                                       |  | Workforce |        |            | and Prepaid  |   |        | Agreement     |  |   |      
|                                       |  | Reduction |        |            | Royalty      |   |        | Termination   |  |   | Total |  
|                                       |  |           |        |            |              |   |        |               |  |   |       |  
|September 2004 restructuring charges   |  | $         | 2,872  |            |              | $ | 3,541  |               |  | $ | 375   |   |  | $ | 6,788  |  
|Cash payments                          |  |           | (2,448 | )          |              |   |       |               |  |   | (278  | ) |  |   | (2,726 | )
|Write offs                             |  |           |       |            |              |   | (3,541 | )             |  |   | (97   | ) |  |   | (3,638 | )
|                                       |  |           |        |            |              |   |        |               |  |   |       |  
|Provision balance at December 31, 2004 |  | $         | 424    |            |              | $ |       |               |  | $ |      |   |  | $ | 424    |  
|                                       |  |           |        |            |              |   |        |               |  |   |       |  

61



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COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                 
| | --------------------------------
| | May and March 2003 Restructuring





|                                       |  |           |      |   |             |   |     |       |  |   |      |  
|-------------------------------------- |  | --------- | ---- | - | ----------- | - | --- | ----- |  | - | ---- | -
|                                       |  | Worldwide |      |   | Lease       |   |     |      
|                                       |  | Workforce |      |   | Termination |   |     |      
|                                       |  | Reduction |      |   | and Other   |   |     | Total | 
|                                       |  |           |      |   |             |   |     |       | 
|Charges                                |  | $         | 277  |   |             | $ | 17  |       |  | $ | 294  |  
|Cash payments                          |  |           | (284 | ) |             |   | (12 | )     |  |   | (296 | )
|Non-cash items                         |  |           | (20  | ) |             |   | (4  | )     |  |   | (24  | )
|Accrual adjustment                     |  |           | 75   |   |             |   | (1  | )     |  |   | 74   |  
|                                       |  |           |      |   |             |   |     |       | 
|Provision balance at December 31, 2003 |  |           | 48   |   |             |   |    |       |  |   | 48   |  
|Cash payments                          |  |           | (38  | ) |             |   |     |       |  |   | (38  | )
|Accrual adjustment                     |  |           | (10  | ) |             |   |     |       |  |   | (10  | )
|                                       |  |           |      |   |             |   |     |       | 
|Provision balance at December 31, 2004 |  | $         |     |   |             | $ |    |       |  | $ |     |  
|                                       |  |           |      |   |             |   |     |       | 



| |                           
| | --------------------------
| | October 2002 Restructuring





|                                       |  |           |        |   |             |   |        |       |  |   |        |  
|-------------------------------------- |  | --------- | ------ | - | ----------- | - | ------ | ----- |  | - | ------ | -
|                                       |  | Worldwide |        |   | Lease       |   |        |      
|                                       |  | Workforce |        |   | Termination |   |        |      
|                                       |  | Reduction |        |   | and Other   |   |        | Total | 
|                                       |  |           |        |   |             |   |        |       | 
|Charges                                |  | $         | 1,945  |   |             | $ | 7,854  |       |  | $ | 9,799  |  
|Cash payments                          |  |           | (1,628 | ) |             |   |       |       |  |   | (1,628 | )
|Deposit forfeiture and deferred rent   |  |           |       |   |             |   | 305    |       |  |   | 305    |  
|                                       |  |           |        |   |             |   |        |       | 
|Provision balance at December 31, 2002 |  |           | 317    |   |             |   | 8,159  |       |  |   | 8,476  |  
|Cash payments                          |  |           | (310   | ) |             |   | (8,112 | )     |  |   | (8,422 | )
|Accrual adjustment                     |  |           | (7     | ) |             |   | (47    | )     |  |   | (54    | )
|                                       |  |           |        |   |             |   |        |       | 
|Provision balance at December 31, 2003 |  | $         |       |   |             | $ |       |       |  | $ |       |  
|                                       |  |           |        |   |             |   |        |       | 

62



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COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                       
| | ----------------------
| | May 2002 Restructuring





|                                       |  |           |        |   |               |   |        |             |  |   |        |   |  |   |        |  
|-------------------------------------- |  | --------- | ------ | - | ------------- | - | ------ | ----------- |  | - | ------ | - |  | - | ------ | -
|                                       |  | Worldwide |        |   | Write-Down    |   |        | Lease       |  |   |       
|                                       |  | Workforce |        |   | of Property   |   |        | Commitments |  |   |       
|                                       |  | Reduction |        |   | and Equipment |   |        | and Other   |  |   | Total  |  
|                                       |  |           |        |   |               |   |        |             |  |   |        |  
|Charges                                |  | $         | 3,660  |   |               | $ | 3,248  |             |  | $ | 2,318  |   |  | $ | 9,226  |  
|Cash payments                          |  |           | (3,660 | ) |               |   |       |             |  |   | (1,503 | ) |  |   | (5,163 | )
|Non-cash charges                       |  |           |       |   |               |   | (3,248 | )           |  |   |       |   |  |   | (3,248 | )
|                                       |  |           |        |   |               |   |        |             |  |   |        |  
|Provision balance at December 31, 2002 |  |           |       |   |               |   |       |             |  |   | 815    |   |  |   | 815    |  
|Cash payments                          |  |           |        |   |               |   |        |             |  |   | (677   | ) |  |   | (677   | )
|Non-cash charges                       |  |           |       |   |               |   |       |             |  |   | (42    | ) |  |   | (42    | )
|Accrual adjustment                     |  |           |       |   |               |   |        |             |  |   | 22     |   |  |   | 22     |  
|                                       |  |           |        |   |               |   |        |             |  |   |        |  
|Provision balance at December 31, 2003 |  |           |       |   |               |   |       |             |  |   | 118    |   |  |   | 118    |  
|Cash payments                          |  |           |        |   |               |   |        |             |  |   | (153   | ) |  |   | (153   | )
|Non-cash charges                       |  |           |       |   |               |   |       |             |  |   |       |   |  |   |       |  
|Accrual adjustment                     |  |           |       |   |               |   |       |             |  |   | 35     |   |  |   | 35     |  
|                                       |  |           |        |   |               |   |        |             |  |   |        |  
|Provision balance at December 31, 2004 |  | $         |       |   |               | $ |       |             |  | $ |       |   |  | $ |       |  
|                                       |  |           |        |   |               |   |        |             |  |   |        |  



| |                                       
| | --------------------------------------
| | April and September 2001 Restructuring





| |                                
| | -------------------------------
| | Impairment of Long-lived Assets



| |                        
| | -----------------------
| | 2004 Impairment Charges



63



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##### Table of Contents



COSINE COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                        
| | -----------------------
| | 2002 Impairment Charges





|    |                  
|--- | -----------------
|10. | Subsequent Events





64



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##### Table of Contents








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










|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of Disclosure Controls and Procedures.


Changes in Internal Controls.




Limitations on Effectiveness of Controls and Procedures.







|         |                  
|-------- | -----------------
|Item 9B. | Other Information

None


65



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##### Table of Contents






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant

DIRECTORS




|                |  |     |    |  |          |                                                              
|--------------- |  | --- | -- |  | -------- | -------------------------------------------------------------
|Name            |  | Age |    |  | Position
|                |  |     |    |  |         
|Donald Green    |  |     | 73 |  |          | Chairman of the Board of Directors                           
|R. David Spreng |  |     | 43 |  |          | Director                                                     
|Terry Gibson    |  |     | 51 |  |          | Director, Chief Executive Officer and Chief Financial Officer
|Charles J. Abbe |  |     | 63 |  |          | Director                                                     

Donald Green,


R. David Spreng,


Terry Gibson


Charles J. Abbe




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##### Table of Contents







| |                                     
| | ------------------------------------
| | Stockholder Nominations of Directors



EXECUTIVE OFFICERS




SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE




CODE OF ETHICS




67



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##### Table of Contents








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

EXECUTIVE COMPENSATION




Summary Compensation Table


|                            |                              |        |      |                     |            |   |            |              |  |   |             |        |  |                  |   |         |     |   |   |   | 
|--------------------------- | ---------------------------- | ------ | ---- | ------------------- | ---------- | - | ---------- | ------------ |  | - | ----------- | ------ |  | ---------------- | - | ------- | --- | - | - | - | 
|                            |                              |        |      |                     |            |   |            | Long Term    |  |   |            
|                            |                              |        |      |                     |            |   |            | Compensation |  |   |            
|                            |                              |        |      |                     |            |   |            | Awards       |  |   |            
|                            |                              |        |      |                     |            |   |            |              | 
|                            |                              |        |      | Annual Compensation |            |   | Securities |              |  |  
|                            |                              | Fiscal |      |                     |            |   |            | Underlying   |  |   | All Other  
|Name and Principal Position |                              | Year   |      |                     | Salary ($) |   |            | Bonus ($)    |  |   | Options (#) |        |  | Compensation ($)
|                            |                              |        |      |                     |            |   |            |              |  |   |             |        |  |                 
|Stephen Goggiano(1)         |                              |        | 2004 |                     |            | $ | 300,908    |              |  | $ |            |        |  |                  |  |         |     | $ |  |  
|                            | Director, President and      |        |      | 2003                |            |   |            | 300,908      |  |   |             |       |  |                  |   | 90,000  |     |   |   |  | 
|                            | Chief Executive Officer      |        |      | 2002                |            |   |            | 300,908      |  |   |             |       |  |                  |   | 220,000 | (3) |   |   |  | 
|Terry Gibson                |                              |        | 2004 |                     |            |   | 265,358    |              |  |   |            |        |  |                  |  |         |     |   |  |  
|                            | Executive Vice President and |        |      | 2003                |            |   |            | 265,358      |  |   |             |       |  |                  |   | 46,000  |     |   |   |  | 
|                            | Chief Financial Officer      |        |      | 2002                |            |   |            | 260,128      |  |   |             |       |  |                  |   | 60,000  | (4) |   |   |  | 
|Jerry Jalaba(2)             |                              |        | 2004 |                     |            |   | 186,813    |              |  |   |            |        |  |                  |  |         |     |   |  |  
|                            | Senior Vice President,       |        |      | 2003                |            |   |            | 92,975       |  |   |             | 10,000 |  |                  |   | 50,000  |     |   |   |  | 
|                            | Worldwide Sales              |        |      |                     |            |   |            |              |  |   |             |        |  |                  |   |         |     |   |   |   | 






|    |                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Goggiano served as President and Chief Operating
    Officer in fiscal year 2001 and was appointed to the board of
    directors and named Chief Executive Officer on March 3,
    2002. Mr. Goggiano passed away on January 14, 2005.                 
|   
|(2) | Mr. Jalaba began employment on August 4, 2003 and
    resigned on July 8, 2004.                                                                                                                                                                            
|   
|(3) | Includes the grant of options in 2002 for the purchase of
    90,000 shares, the subsequent re-pricing of those options
    in November of 2002, and the re-pricing of options granted prior
    to 2002 for the purchase of an aggregate of 40,000 shares.
|   
|(4) | Includes the grant of options in 2002 for the purchase of
    30,000 shares and the subsequent re-pricing of those
    options in November of 2002.                                                                                                        

Stock Option Grants




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##### Table of Contents



Stock Option Exercises in 2004 and 2004 Year End
Values




Aggregate Stock Option Exercises in Last Fiscal Year


and Fiscal Year End Option Values


|                 |  |             |   |  |             |                        |                   |  |                          |                      |         |  |             |  |        |               |  |  |   |  |  |  |   | 
|---------------- |  | ----------- | - |  | ----------- | ---------------------- | ----------------- |  | ------------------------ | -------------------- | ------- |  | ----------- |  | ------ | ------------- |  |  | - |  |  |  | - | 
|                 |  |             |   |  |             | Number of Securities   |                   |  |                         
|                 |  |             |   |  |             | Underlying Unexercised |                   |  | Value of Unexercised In- |                     
|                 |  |             |   |  |             | Options at             |                   |  | the-Money Options at     |                     
|                 |  | Shares      |   |  |             |                        | December 31, 2004 |  |                          | December 31, 2004(2) |        
|                 |  | Acquired or |   |  | Value       |                        |                   |  |                          |                      |        
|                 |  | Exercised   |   |  | Realized(1) |                        | Exercisable       |  |                          | Unexercisable        |         |  | Exercisable |  |        | Unexercisable | 
|                 |  | (#)         |   |  | ($)         |                        | (#)               |  |                          | (#)                  |         |  | ($)         |  |        | ($)           | 
|                 |  |             |   |  |             |                        |                   |  |                          |                      |         |  |             |  |        |               | 
|Stephen Goggiano |  |             |  |  |             | $                      |                  |  |                          |                      | 139,166 |  |             |  | 80,834 |               |  |  |  |  |  |  |  | 
|Terry Gibson     |  |             |  |  |             |                        |                  |  |                          |                      | 40,083  |  |             |  | 35,917 |               |  |  |  |  |  |  |  | 






|    |                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on the fair value of the underlying securities on the date
    of exercise minus the exercise price. Values are stated on a
    pre-tax basis.                                                                
|   
|(2) | Based on the closing sales price of $2.80 of the underlying
    securities as of December 31, 2004 as reported on the
    Nasdaq National Market minus the exercise price. Values are
    stated on a pre-tax basis.

DIRECTOR COMPENSATION






|                  |  |               |                  |          |       |   |           |        |  |  |       | 
|----------------- |  | ------------- | ---------------- | -------- | ----- | - | --------- | ------ |  |  | ----- | 
|                  |  |               |                  | Exercise |       |   | Number of |       
|Director Name     |  | Date of Grant |                  |          | Price |   |           | Shares | 
|                  |  |               |                  |          |       |   |           |        | 
|Charles J. Abbe   |  |               | May 6, 2003      |          |       | $ | 5.20      |        |  |  | 2,000 | 
|                  |  |               | October 20, 2003 |          |       |   | 6.96      |        |  |  | 6,000 | 
|Vinton G. Cerf(1) |  |               | May 6, 2003      |          |       |   | 5.20      |        |  |  | 2,000 | 
|                  |  |               | October 20, 2003 |          |       |   | 6.96      |        |  |  | 6,000 | 
|Donald Green      |  |               | May 6, 2003      |          |       |   | 5.20      |        |  |  | 2,000 | 
|                  |  |               | October 20, 2003 |          |       |   | 6.96      |        |  |  | 6,000 | 
|R. David Spreng   |  |               | May 6, 2003      |          |       |   | 5.20      |        |  |  | 2,000 | 
|                  |  |               | October 20, 2003 |          |       |   | 6.96      |        |  |  | 6,000 | 

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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION






CHANGE OF CONTROL ARRANGEMENTS









|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
OWNERS




|                                          |                                |                        |           |            |          |  |       |   | 
|----------------------------------------- | ------------------------------ | ---------------------- | --------- | ---------- | -------- |  | ----- | - | 
|                                          |                                | Shares of Common Stock |          
|                                          |                                | Beneficially Owned(2)  |          
|                                          |                                |                        |          
|                                          |                                |                        |           | Percent of |         
|Name and Address of Beneficial Owner(1)   |                                | Number                 |           |            | Class(3) | 
|                                          |                                |                        |           |            |          | 
|5% Stockholders                           |                                |                        |           |            |          |  |       |  
|George W. Haywood(4)                      |                                |                        | 1,889,597 |            |          |  | 18.60 | %
|                                          | c/o Cronin and VRIS, LLP       |                        |           |            |          |  |       |   | 
|                                          | 380 Madison Avenue             |                        |           |            |          |  |       |   | 
|                                          | New York, NY 10017             |                        |           |            |          |  |       |   | 
|Tut Systems, Inc.(5)                      |                                |                        | 1,177,063 |            |          |  | 11.59 | %
|                                          | 600 SW Meadows Rd., Suite 200  |                        |           |            |          |  |       |   | 
|                                          | Lake Oswego, OR 97035          |                        |           |            |          |  |       |   | 
|Crescendo Ventures(6)                     |                                |                        | 892,943   |            |          |  | 8.79  | %
|                                          | 800 LaSalle Avenue, Suite 2250 |                        |           |            |          |  |       |   | 
|                                          | Minneapolis, MN 55402          |                        |           |            |          |  |       |   | 
|Dimensional Fund Advisors Inc.(7)         |                                |                        | 688,053   |            |          |  | 6.77  | %
|                                          | 1299 Ocean Avenue              |                        |           |            |          |  |       |   | 
|                                          | 11thFloor                      |                        |           |            |          |  |       |   | 
|                                          | Santa Monica, CA. 90401        |                        |           |            |          |  |       |   | 
|Fuller & Thaler Asset Management, Inc.(9) |                                |                        | 533,800   |            |          |  | 5.25  | %
|                                          | 411 Borel Avenue, Suite 402    |                        |           |            |          |  |       |   | 
|                                          | San Mateo, CA 94402            |                        |           |            |          |  |       |   | 

70



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|                                                                                               |                                |                        |         |            |          |  |      |   | 
|---------------------------------------------------------------------------------------------- | ------------------------------ | ---------------------- | ------- | ---------- | -------- |  | ---- | - | 
|                                                                                               |                                | Shares of Common Stock |        
|                                                                                               |                                | Beneficially Owned(2)  |        
|                                                                                               |                                |                        |        
|                                                                                               |                                |                        |         | Percent of |         
|Name and Address of Beneficial Owner(1)                                                        |                                | Number                 |         |            | Class(3) | 
|                                                                                               |                                |                        |         |            |          | 
|Freestone Advisors LLC(8)                                                                      |                                |                        | 511,637 |            |          |  | 5.05 | %
|                                                                                               | 1191 Second Avenue, Suite 2100 |                        |         |            |          |  |      |   | 
|                                                                                               | Seattle, WA. 98101             |                        |         |            |          |  |      |   | 
|Directors and Named Executive Officers                                                         |                                |                        |         |            |          |  |      |  
|Terry Gibson, Director, Chief Executive Officer, Chief Financial
    Officer and Secretary(10) |                                |                        | 42,000  |            |          |  | *    |  
|Charles J. Abbe, Director(11)                                                                  |                                |                        | 10,250  |            |          |  | *    |  
|Donald Green, Chairman(12)                                                                     |                                |                        | 32,794  |            |          |  | *    |  
|R. David Spreng, Director(6)                                                                   |                                |                        | 892,943 |            |          |  | 8.79 | %
|All directors and current executive officers as a group (4
    persons)(13)                    |                                |                        | 977,897 |            |          |  | 9.63 | %






| |   |              
| | - | -------------
| | * | Less than 1%.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Unless otherwise indicated, the address for each listed
    stockholder is c/o CoSine Communications, Inc., 560 South
    Winchester Blvd. Suite 500, San Jose, CA 94124. Except
    as otherwise indicated, and subject to community property laws
    where applicable, the persons named in the table have sole
    voting and investment power with respect to all shares of common
    stock shown as beneficially owned by them.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | (2) | Beneficial ownership is determined in accordance with the rules
    promulgated by the Securities and Exchange Commission. Under
    such rules, beneficial ownership includes any shares as to which
    the individual or entity has sole or shared voting power or
    investment power and any shares as to which the individual or
    entity has the right to acquire beneficial ownership within
    60 days after February 25, 2005 (or as of
    April 25, 2005) through the exercise of any stock option or
    other right. Shares of common stock subject to options that are
    presently exercisable or exercisable within 60 days after
    February 25, 2005 are deemed to be beneficially owned by
    the person holding such options for the purpose of computing the
    percentage of ownership of such person, but are not treated as
    outstanding for the purpose of computing the percentage of any
    other person.                                                                                                                 
|
| | (3) | Percentage of beneficial ownership is based on
    10,159,790 shares of common stock outstanding as of
    February 25, 2005, adjusted as required by rules
    promulgated by the Securities and Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | (4) | Of the 1,889,597 shares, 1,802,197 shares are directly
    owned by Mr. Haywood and 87,400 shares are indirectly
    owned by him. Of these 87,400 shares, 60,000 are indirectly
    owned through Mr. Haywoods spouse and 27,400 are
    indirectly owned through his children. The information in this
    footnote is based upon the Schedule 13G/ A filed
    February 14, 2005 on behalf of Mr. Haywood.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (5) | As an inducement for Tut Systems to enter into the merger, our
    directors have entered into a Voting Agreement with Tut Systems
    and irrevocably appointed Tut Systems as his lawful attorney and
    proxy. Such proxy gives Tut Systems the limited right to vote
    each of the 1,177,063 shares of common stock beneficially
    owned by such director and the Estate or Stephen Goggiano in all
    matters related to the merger. Tut Systems is not a record
    holder of any shares of CoSines capital stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (6) | Of the 892,943, shares, 2,250 are subject to exercisable
    options, 225 are directly owned by R. David Spreng, a director
    of CoSine; 173,856 are directly owned by Crescendo World Fund,
    LLC; 13,921 are directly owned by Crescendo III, GbR;
    20,059 are directly owned by Crescendo III Executive Fund,
    LP; 675,325 are directly owned by Crescendo III, LP; 7,307
    are directly owned by Eagle Ventures WF, LLC. The sole general
    partner of Crescendo World Fund, LLC is Crescendo Ventures World
    Fund, LLC. The sole general partner of Crescendo III, LP
    and Crescendo III Executive Fund, LP is Crescendo
    Ventures III, LLC. The general partners of
    Crescendo III, GbR are Crescendo Ventures III, LLC and
    Verbier Ventures, LLC. R. David Spreng is a managing member of
    Crescendo Ventures World Fund, LLC, Crescendo Ventures III,
    LLC, Eagle Ventures WF, LLC, and Verbier Ventures, LLC.
    Crescendo Capital Management, LLC, is an investment advisor of,
    and holds a profit interest in,

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##### Table of Contents



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | PRISMA German American Venture Partners, GbR. Mr. Spreng is
    a managing member of Crescendo Capital Management, LLC.
    Mr. Spreng disclaims beneficial ownership of the shares
    held by Crescendo World Fund, LLC, Crescendo III, GbR,
    Crescendo III Executive Fund, LP, Crescendo III, LP,
    Eagle Ventures WF, LLC, and PRISMA German American Venture
    Partners, GbR, except to the extent of his pecuniary interest in
    the shares. The information in this footnote is based upon the
    Schedule 13G filed February 15, 2002 on behalf of
    Mr. Spreng and each of the entities named above in this
    footnote.
|
| | (7) | Dimension Fund Advisors Inc. holds voting power over all of
    the 688,053 shares pursuant to separate arrangements
    whereby it acts as investment adviser to certain entities. The
    information in this footnote is based upon the Schedule 13G
    filed January 19, 2005 on behalf of Dimension Fund Advisors
    Inc.                                                                                                                                                                                                                                                                                                              
|
| | (8) | Freestone Advisors LLC holds shared voting power over all of the
    511,637 shares with and is the general partner of Freestone
    Opportunity Partners LP of which Gary I. Furukawa and Randall C.
    Buck are managing members. The information in this footnote is
    based upon the Schedule 13G filed February 9, 2005 on
    behalf of Dimension Fund Advisors Inc.                                                                                                                                                                                                                                                                 
|
| | (9) | All of the 533,800 shares are directly owned by
    Fuller & Thaler Asset Management, Inc. pursuant to
    separate arrangements whereby it acts as investment adviser to
    certain persons. The information in this footnote is based upon
    the Schedule 13G filed August 4, 2004 on behalf of
    Fuller & Thaler Asset Management, Inc.                                                                                                                                                                                                                                                                                               



|     |                                                                                                                                                                                                                                                                                                                                                                                                                              
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | All of these shares are subject to exercisable options.                                                                                                                                                                                                                                                                                                                                                                      
|    
|(11) | Of the 10,250 shares, 7,250 are subject to exercisable
    options.                                                                                                                                                                                                                                                                                                                                                          
|    
|(12) | Of the 32,794 shares, 2,250 shares are subject to
    exercisable options, 14,438 shares are owned directly by
    Green Venture Capital II, L.P. and indirectly by
    Mr. Green as the general partner of Green Venture Capital
    II, L.P. Mr. Green disclaims beneficial ownership of the
    shares owned directly by Green Venture Capital II, L.P.,
    except to the extent of his pecuniary interest in the shares.
|    
|(13) | Of the 977,897 shares, 890,468 shares are owned by
    Crescendo Ventures as explained in footnote 6 above,
    14,438 shares are owned by Green Venture Capital as
    explained in footnote 12 above, an additional
    53,750 shares are subject to options that are exercisable
    within 60 days of February 25, 2005 all of which will
    be vested as of April 25, 2005.                                            

EQUITY COMPENSATION PLAN INFORMATION




|                                                          |       |                      |         |         |                      |                      |                         |                         |  |  |           |           | 
|--------------------------------------------------------- | ----- | -------------------- | ------- | ------- | -------------------- | -------------------- | ----------------------- | ----------------------- |  |  | --------- | --------- | 
|                                                          |       |                      |         |         |                      | (c)                  |                        
|                                                          |       |                      |         |         |                      | Number of Securities |                        
|                                                          |       | (a)                  |         |         |                      |                      | Remaining Available for |                        
|                                                          |       | Number of Securities |         |         | (b)                  |                      |                         | Future Issuance under   | 
|                                                          |       | to Be Issued         |         |         | Weighted-Average     |                      |                         | Equity Compensation     | 
|                                                          |       | upon Exercise of     |         |         | Exercise Price of    |                      |                         | Plans (Excluding        | 
|                                                          |       | Outstanding Options, |         |         | Outstanding Options, |                      |                         | Securities Reflected in | 
|Plan Category                                             |       | Warrants and Rights  |         |         | Warrants and Rights  |                      |                         | Column (a))             | 
|                                                          |       |                      |         |         |                      |                      |                         |                         | 
|Equity compensation plans approved by stockholders        |       |                      | 578,141 | (1)     |                      | $                    | 8.97                    | (1)                     |  |  | 2,045,003 | (2)      
|Equity compensation plans not approved by stockholders(3) |       |                      | 46,593  |         |                      |                      | 12.59                   |                         |  |  | 852,780   |          
|                                                          | Total |                      |         | 624,734 |                      |                      |                         | 9.24                    |  |  |           | 2,897,783 | 






|    |                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 109,552 shares subject to outstanding options
    under the 1997 Stock Plan, 444,589 shares subject to
    outstanding options under the 2000 Stock Plan, and
    24,000 shares subject to outstanding options under the
    Director Plan.            
|   
|(2) | Includes 1,588,741 shares available for future issuance
    under the 2000 Stock Plan, 24,000 shares available for
    future issuance under the Director Plan, and 432,262 shares
    available for future issuance under the Employee Stock Purchase
    Plan.

72



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | 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. 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 CoSine 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 CoSine
    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.






|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions

INDEBTEDNESS OF MANAGEMENT




|                  |  |           |         |  |               |  |                  |             |  |  |      |  
|----------------- |  | --------- | ------- |  | ------------- |  | ---------------- | ----------- |  |  | ---- | -
|                  |  | Principal |         |  |               |  |                 
|                  |  | Amount of |         |  |               |  | Annual Rate      |            
|Executive Officer |  | Note(s)   |         |  | Maturity Date |  |                  | of Interest | 
|                  |  |           |         |  |               |  |                  |             | 
|Stephen Goggiano  |  | $         | 600,000 |  |               |  | February 1, 2010 |             |  |  | 6.77 | %



CERTAIN TRANSACTIONS






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##### Table of Contents








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



|                                      |                  |       |         |         |         |   |         |         |         | 
|------------------------------------- | ---------------- | ----- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                      |                  | 2004  |         |         | 2003    |  
|                                      |                  |       |         |         |         |  
|Audit Fees  Ernst & Young(1)         |                  | $     | 179,300 |         |         | $ | 264,208 |        
|Audit Fees  Burr, Pilger & Mayer(1)  |                  |       | 235,000 |         |         |   |        |        
|                                      |                  |       |         |         |         |  
|                                      | Total audit fees |       |         | 414,300 |         |   |         | 264,208 |        
|Audit related fees  Ernst & Young(2) |                  |       |        |         |         |   | 6,400   |        
|Tax fees(3)                           |                  |       |        |         |         |   | 35,647  |        
|All other fees(4)                     |                  |       | 5,600   |         |         |   | 14,314  |        
|                                      |                  |       |         |         |         |  
|                                      |                  | Total |         | $       | 419,900 |   |         | $       | 320,569 | 
|                                      |                  |       |         |         |         |  






|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Audit fees include fees associated with the annual audit and
    10-K, and the reviews of the Companys quarterly reports on
    Form 10-Q.
|   
|(2) | Audit-related fees principally included accounting consultations.                                                                          
|   
|(3) | Tax fees included tax compliance and tax advice.                                                                                           
|   
|(4) | All other fees principally included stock options advise,
    internal control consultation and subsidiary liquidation
    services.       








|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules



Financial Statements:


|                                                                                                                              |  |      |    | 
|----------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                              |  | Page |   
|                                                                                                                              |  |      |   
|Report of Independent Registered Public
    Accounting Firm  Burr, Pilger & Mayer LLP                                        |  |      | 37 | 
|Report of Independent Registered Public
    Accounting Firm  Ernst & Young LLP                                               |  |      | 38 | 
|Consolidated Balance Sheets 
    December 31, 2004 and 2003                                                                  |  |      | 39 | 
|Consolidated Statements of
    Operations  Years ended December 31, 2004, 2003
    and 2002                                  |  |      | 40 | 
|Consolidated Statements of
    Stockholders Equity and Comprehensive Loss 
    Years ended December 31, 2004, 2003 and 2002 |  |      | 41 | 
|Consolidated Statements of Cash
    Flows  Years ended December 31, 2004, 2003 and
    2002                                  |  |      | 42 | 
|Notes to Consolidated Financial
    Statements                                                                                |  |      | 43 | 

Financial Statement Schedules:


|                                                |  |  |    | 
|----------------------------------------------- |  |  | -- | 
|Schedule II  Valuation and Qualifying Accounts |  |  | 75 | 



Exhibits:




74



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##### Table of Contents



COSINE COMMUNICATIONS, INC.


SCHEDULE II  VALUATION AND QUALIFYING
ACCOUNTS


|                                                                   |  |                   |     |            |           |   |      |                 |  |   |                |   |  |   |     | 
|------------------------------------------------------------------ |  | ----------------- | --- | ---------- | --------- | - | ---- | --------------- |  | - | -------------- | - |  | - | --- | 
|                                                                   |  |                   |     | Charged to |           |   |      |                 | 
|                                                                   |  | Balance at        |     |            | Expenses  |   |      | Additions       |  |   | Balance at End |  
|Classification                                                     |  | Beginning of Year |     |            | (Credits) |   |      | (Deductions)(1) |  |   | of Year        |  
|                                                                   |  |                   |     |            |           |   |      |                 |  |   |                |  
|                                                                   |  | (In thousands)    |    
|Year ended December 31, 2004
    Reserves for accounts receivable  |  | $                 | 150 |            |           | $ | 38   |                 |  | $ | (98            | ) |  | $ | 90  | 
|                                                                   |  |                   |     |            |           |   |      |                 |  |   |                |  
|Year ended December 31, 2003:
    Reserves for accounts receivable |  | $                 | 233 |            |           | $ | (113 | )               |  | $ | 30             |   |  | $ | 150 | 
|                                                                   |  |                   |     |            |           |   |      |                 |  |   |                |  
|Year ended December 31, 2002:
    Reserves for accounts receivable |  | $                 | 700 |            |           | $ | 296  |                 |  | $ | (763           | ) |  | $ | 233 | 
|                                                                   |  |                   |     |            |           |   |      |                 |  |   |                |  






|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(1) | Represents write offs of accounts receivable. In 2003, CoSine
    collected a receivable previously written off.

75



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##### Table of Contents






SIGNATURES






| |                            
| | ---------------------------
| | COSINE COMMUNICATIONS, INC.



| |     |                 
| | --- | ----------------
| | By: | /s/ Terry Gibson

| |                        
| | -----------------------
| |                        
| | Terry Gibson           
| | Chief Executive Officer

POWER OF ATTORNEY






|                                       |  |                                                                                                                                      |  | 
|-------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------ |  | 
|Signature                              |  | Title                                                                                                                               
|                                       |  |                                                                                                                                     
|                                      
|/s/ Terry GibsonTerry
    Gibson       |  | Chief Executive Officer, Chief Financial Officer
    and Director (Principal Executive Officer and
    Principal Accounting Officer)
|                                      
|/s/ Donald GreenDonald
    Green       |  | Chairman of the Board and Director                                                                                                  
|                                      
|/s/ Charles J. AbbeCharles
    J. Abbe |  | Director                                                                                                                            
|                                      
|/s/ R. David SprengR.
    David Spreng |  | Director                                                                                                                            

76



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##### Table of Contents






EXHIBIT INDEX


Description


| |    |      |  |                                                                                                                                                                                                                                                                                                                            
| | -- | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2  | .1*  |  | Agreement and Plan of Merger by and among Registrant, Tut
    Systems, Inc. and Cadillac Merger Sub, Inc., dated
    January 7, 2005 (incorporated by reference to
    Exhibit 2.1 to Form 8-K filed January 10, 2005) (the
    schedules and exhibits have been omitted pursuant to
    Item 602(b)(2) of Regulation S-K).
| | 2  | .2   |  | Amendment No. 1 to Agreement and Plan of Merger by and
    among Registrant, Tut Systems, Inc. and Cadillac Merger Sub,
    Inc., dated as of February 14, 2005.                                                                                                                                                           
|
| | 3  | .1*  |  | Second Amended and Restated Certificate of Incorporation, as
    amended (incorporated by reference to Exhibit 3.1 to
    Form 10-Q filed November 14, 2000).                                                                                                                                                              
|
| | 3  | .2*  |  | Bylaws (incorporated by reference to Exhibit 3.3 to Form 8A
    (file no. 000-30715) filed May 26, 2000).                                                                                                                                                                                                                  
|
| | 3  | .3*  |  | First Amendment to Bylaws dated April 30, 2001
    (incorporated by reference to Exhibit 3.3 to Form 10-Q
    filed August 13, 2001).                                                                                                                                                                                      
|
| | 3  | .4*  |  | Second Amendment to Bylaws dated January 28, 2003
    (incorporated by reference to Exhibit 3.4 to Form 10-K
    filed March 27, 2003).                                                                                                                                                                                    
|
| | 3  | .5*  |  | Third Amendment to Bylaws dated February 2, 2004
    (incorporated by reference to Exhibit 3.5 to Form 10-K
    filed March 25, 2004).                                                                                                                                                                                     
|
| | 4  | .1*  |  | Form of warrant to purchase common stock issued by the
    Registrant to Fujitsu Network Communications, Inc. dated as of
    May 28, 2004 (incorporated by reference to Exhibit 4.1
    to Form10-Q filed August 9, 2004).                                                                                                
|
| | 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 Employee Stock Purchase Plan and forms of agreements
    thereunder (incorporated by reference to Exhibit 10.3 of
    Amendment No. 1 to Registration Statement on Form S-1
    filed June 6, 2000).                                                                                                                  
|
| | 10 | .4*  |  | 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 | .5*  |  | 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 | .6*  |  | Third Amended and Restated Investors Rights Agreement
    (incorporated by reference to Exhibit 10.6 of Amendment
    No. 1 to Registration Statement on Form S-1 filed
    June 6, 2000).                                                                                                                                
|
| | 10 | .7*  |  | Master Loan and Security Agreement between Registrant and Finova
    Capital Corporation date as of May 19, 1999 (incorporated
    by reference to Exhibit 10.10 of Amendment No. 1 to
    Registration Statement on Form S-1 filed June 6, 2000).                                                                         
|
| | 10 | .8*  |  | Building Lease Agreement between Registrant and Westport Joint
    Venture dated as of May 26, 1998 (incorporated by reference
    to Exhibit 10.14 of Amendment No. 1 to Registration
    Statement on Form S-1 filed June 6, 2000).                                                                                      
|
| | 10 | .9*  |  | Amendment No. 1 to Lease between Registrant and Westport
    Joint Venture dated as of September 9, 1999 (incorporated
    by reference to Exhibit 10.15 of Registration Statement on
    Form S-1 filed April 28, 2000).                                                                                                  
|
| | 10 | .10* |  | Building Lease Agreement between Registrant and Westport Joint
    Venture dated as of September 20, 1999 (incorporated by
    reference to Exhibit 10.16 of Amendment No. 1 to
    Registration Statement on Form S-1 filed June 6, 2000).                                                                                
|
| | 10 | .11* |  | Amendment to Lease Agreement between Registrant and Westport
    Joint Venture executed as of February 18, 2003
    (incorporated by reference to Exhibit 10.11 to Form 10-K
    filed March 25, 2004).                                                                                                                    
|
| | 10 | .12* |  | 2002 Stock Plan and forms of agreements thereunder (incorporated
    by reference to Exhibit 10.17 to Form 10-K filed
    March 25, 2002).                                                                                                                                                                                 
|
| | 10 | .13* |  | Form of Severance Agreement extended to Stephen Goggiano,
    President and Chief Executive Officer of Registrant, and Terry
    Gibson, Chief Financial Officer of Registrant, as of
    September 23, 2004 (incorporated by reference to
    Exhibit 10.1 to Form 10-Q filed November 15, 2004).                         

77



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##### Table of Contents



| |    |      |  |                                                                                                                                                                                                                                                                                                                            
| | -- | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 10 | .14* |  | Statement of Work between Registrant and Wipro Limited, dated
    October 14, 2004 (incorporated by reference to
    Exhibit 10.2 to Form 10-Q filed November 15, 2004).                                                                                                                                                   
|
| | 10 | .15* |  | Amendment No. 4 to Lease between Registrant and Westport
    Joint Venture dated as of October 14, 2004                                                                                                                                                                                                                    
|
| | 10 | .16* |  | Bill of Sale between Registrant and Westport Joint Venture,
    executed on October 22, 2004 (incorporated by reference to
    Exhibit 10.2 to Form 8-K filed October 27, 2004).                                                                                                                                           
|
| | 10 | .17* |  | Agreement and Plan of Merger by and among Registrant, Tut
    Systems, Inc. and Cadillac Merger Sub, Inc., dated
    January 7, 2005 (incorporated by reference to
    Exhibit 2.1 to Form 8-K filed January 10, 2005) (the
    schedules and exhibits have been omitted pursuant to
    Item 602(b)(2) of Regulation S-K).
|
| | 21 | .1   |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                            
|
| | 23 | .1   |  | Consent of Independent Registered Public Accounting
    Firm  Burr, Pilger & Mayer LLP.                                                                                                                                                                                                                                   
|
| | 23 | .2   |  | Consent of Independent Registered Public Accounting
    Firm  Ernst & Young LLP.                                                                                                                                                                                                                                          
|
| | 31 | .1   |  | Certification of Terry 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 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.

78