UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549











FORM
10-Q









(MARK
ONE)


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





FOR
THE QUARTERLY PERIOD ENDED March 31, 2009





OR





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





For
the transition period from ____________ to ____________.





Commission
File Number 000-30715





COSINE
COMMUNICATIONS, INC.


(Exact
name of Registrant as specified in its charter)





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





Registrant's
telephone number including area code: (408) 399-6494





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x  No  ̈





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





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


Large accelerated filer ̈
            Accelerated filer ̈Non-accelerated filer ̈(Do not check if a
      smaller reporting company)
            Small
      reporting company x




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


Yes x   No
 ̈





There
were 10,090,635 shares of the Registrant’s Common Stock, par value $.0001,
outstanding on April 30, 2009.








COSINE
COMMUNICATIONS, INC.





FORM
10-Q





Quarter
ended March 31, 2009





TABLE
OF CONTENTS





PagePART
      IFINANCIAL
      INFORMATIONItem 1.
                        Condensed  Financial
      Statements (Unaudited):Condensed  Balance
      Sheets as of March 31, 2009 (unaudited) and December 31,
    2008
                        3Condensed  Statements
      of Operations for the Three Months Ended March 31, 2009 (unaudited) and
      2008
                        4Condensed  Statements
      of Cash Flows for Three Months Ended March 31, 2009 (unaudited) and
      2008
                        5Notes
      to Condensed  Financial Statements
                        6Item 2.
                        Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                        12Item 3.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        16Item 4.
                        Controls
      and Procedures
                        16PART
      IIOTHER
      INFORMATIONItem
      1. Legal Proceedings
                        17Item
      1A. Risk Factors
                        18Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                        18Item
      6. Exhibits
                        18Signature
                        19Exhibit
      Index
                        20Certifications




2


PART
I. FINANCIAL INFORMATION





ITEM
1.  CONDENSED FINANCIAL STATEMENTS





COSINE
COMMUNICATIONS, INC.


CONDENSED
BALANCE SHEETS


(In
thousands, except for par value and share data)





March 31,
                      2009
                    
                    
                    December 31,
                      20081(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    15,311
                    
                    
                    $
                    9,155Short-term
      investments
                    
                    
                    7,715
                    
                    
                    
                    13,997Accounts
      Receivable - Other
                    
                    
                    32
                    
                    
                    
                    96Prepaid
      expenses and other current assets
                    
                    
                    20
                    
                    
                    
                    31Total
      current assets
                    
                    
                    23,078
                    
                    
                    
                    23,279Long
      term deposit and other
                    
                    
                    3
                    
                    
                    
                    3$
                    23,081
                    
                    
                    $
                    23,282LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                    
                    $
                    224
                    
                    
                    $
                    207Accrued
      other liabilities
                    
                    
                    20
                    
                    
                    
                    53Total
      current liabilities
                    
                    
                    244
                    
                    
                    
                    260Commitments
      and contingencies (note 2)Stockholders'
      equity:Preferred
      stock, 3,000,000 authorized, none issued and outstanding
                    
                    
                    —
                    
                    
                    
                    —Common
      stock, $.0001 par value, 22,000,000 shares authorized;
      10,090,635  shares issued and outstanding at March 31, 2009 and
      December 31, 2008
                    
                    
                    1
                    
                    
                    
                    1Additional
      paid-in capital
                    
                    
                    539,068
                    
                    
                    
                    539,060Accumulated
      other comprehensive income
                    
                    
                    50
                    
                    
                    
                    88Accumulated
      deficit
                    
                    
                    (516,282
                    )
                    
                    
                    (516,127
                    )Total
      stockholders' equity
                    
                    
                    22,837
                    
                    
                    
                    23,022$
                    23,081
                    
                    
                    $
                    23,282




See
accompanying notes to condensed financial statements.




(1)The
information in this column was derived from the Company's audited financial
statements for the year ended December 31, 2008.


3


COSINE
COMMUNICATIONS, INC.


CONDENSED
STATEMENTS OF OPERATIONS


(In
thousands, except for per share data)


(Unaudited)





Three Months Ended
                  March 31,2009
                
                
                2008Revenue:Product
                
                $
                —
                
                
                $
                —Service
                
                
                —
                
                
                
                —Total
      revenue
                
                
                —
                
                
                
                —Cost
      of revenue
                
                
                —
                
                
                
                —Gross
      profit
                
                
                —
                
                
                
                —Operating
      expenses:Research
      and development
                
                
                —
                
                
                
                —Sales
      and marketing
                
                
                —
                
                
                
                —General
      and administrative1
                
                
                225
                
                
                
                178Total
      operating expenses
                
                
                225
                
                
                
                178Loss
      from operations
                
                
                (225
                )
                
                
                (178
                )Other
      income:Interest
      and other income
                
                
                71
                
                
                
                230Total
      other income
                
                
                71
                
                
                
                230Income
      (loss) before income tax provision
                
                
                (154
                )
                
                
                52Income
      tax provision
                
                
                (1
                )
                
                
                —Net
      (loss) income
                
                $
                (155
                )
                
                $
                52Basic
      net (loss) income per share
                
                $
                (0.02
                )
                
                $
                0.01Diluted
      net (loss) income per share
                
                $
                (0.02
                )
                
                $
                0.01Shares
      used in computing per share amounts:Basic
                
                
                10,091
                
                
                
                10,091Diluted
                
                
                10,091
                
                
                
                10,091





See
accompanying notes to condensed financial statements.





(1)General and administrative expenses
include $8 for the three months ended March 31, 2009 and 2008, respectively for
non-cash charges related to equity issuances.


4


COSINE
COMMUNICATIONS, INC.


CONDENSED
STATEMENTS OF CASH FLOWS


(In
thousands)


(Unaudited)





Three Months Ended
                  March 31,2009
                
                
                2008Operating
      activities:Net
      (loss) income
                
                $
                (155
                )
                
                $
                52Adjustments
      to reconcile net (loss) income to net cash used in operating
      activities:Expense
      for option vesting
                
                
                8
                
                
                
                8Change
      in operating assets and liabilities:Accounts
      receivable, trade
                
                
                —
                
                
                
                —Other
      receivables
                
                
                64
                
                
                
                (43
                )Prepaid
      expenses and other current assets
                
                
                11
                
                
                
                13Accounts
      payable
                
                
                17
                
                
                
                22Accrued
      other liabilities
                
                
                (33
                )
                
                
                (87
                )Net
      cash used in operating activities
                
                
                (88
                )
                
                
                (35
                )Investing
      activities:Purchase
      of short-term investments
                
                
                —
                
                
                
                (11,769
                )Proceeds
      from sales and maturities of short-term investments
                
                
                6,244
                
                
                
                7,495Net
      cash provided by (used in)  investing activities
                
                
                6,244
                
                
                
                (4,274
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                6,156
                
                
                
                (4,309
                )Cash
      and cash equivalents at the beginning of the period
                
                
                9,155
                
                
                
                12,709Cash
      and cash equivalents at the end of the period
                
                $
                15,311
                
                
                $
                8,400




See
accompanying notes to condensed financial statements.


5


COSINE
COMMUNICATIONS, INC.


NOTES
TO CONDENSED FINANCIAL STATEMENTS


(Unaudited)





1. BASIS
OF PRESENTATION





Description
of Business





CoSine
Communications, Inc. ("CoSine" or the "Company," which may be referred to as
"we," "us" or "our") was incorporated in California on April 14, 1997 and in
August 2000 was reincorporated in the State of Delaware. Our current business
strategy is to enhance stockholder value by pursuing opportunities to redeploy
our assets through an acquisition of one or more operating businesses with
existing or prospective taxable earnings that can be offset by use of our net
operating loss carry-forwards (“NOLs”). No assurance can be given that we will
find suitable candidates, and if we do, that we will be able to utilize our
existing NOLs.





We were a
provider of carrier network equipment products and services until the fourth
quarter of fiscal year 2004 during which time we discontinued our product lines,
took actions to lay off most of our employees, terminated contract manufacturing
arrangements, contractor and consulting arrangements and various facility
leases, and sold, scrapped or wrote-off our inventory, property and equipment.
In July 2005, our board of directors approved our strategy of redeploying our
existing resources to identify and acquire new business
operations.  In 2006, we sold the remaining assets of our carrier
network products business with the sale of our patent portfolio and the rights
to the related intellectual property.  During 2006, we also completed
the wrap-up of our carrier services business, providing customer support
services for our discontinued products through December 31, 2006, at which time
we terminated all customer support offerings.  Effective July 1, 2007,
we engaged SP Corporate Services LLC to provide all of our executive, financial
and administrative support service, rent and personnel requirements and, as a
result, we no longer have any employees.





Redeployment
Strategy and Liquidity





In July
2005, after a comprehensive review of strategic alternatives, our board of
directors approved a strategy to redeploy our existing resources to identify and
acquire one or more new business operations with existing or prospective taxable
earnings that can be offset by use of our NOLs.





The
accompanying financial statements have been prepared in conformity with U.S.
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, at March 31, 2009, we have an accumulated
deficit of $516 million.  Our current redeployment of assets strategy
and the termination of our employees, discontinuance of production activities
and cessation of our customer support offerings and service capabilities raise
substantial doubt about our ability to continue as a going
concern.  The financial statements do not include any adjustments to
reflect the possible future effects relating to the recoverability and
classification of the recorded asset amounts or amounts and classification of
liabilities that might result from the outcome of this uncertainty.





Use
of Estimates





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





The
unaudited condensed financial statements have been prepared by us pursuant to
instructions to Form 10-Q and Article 10 of Regulation S-X and include the
accounts of CoSine Communications, Inc.  Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with U. S. generally accepted accounting principles have been
condensed or omitted pursuant to the Securities Exchange Commission’s rules and
regulations.  In the opinion of management, all adjustments
(consisting of normal recurring items) necessary for a fair presentation have
been included.  The results of operations for the three months ended
March 31, 2009 are not necessarily indicative of the results to be expected for
any subsequent quarter or for the entire year.  The condensed balance
sheet at December 31, 2008 has been derived from the audited financial
statements as of that date.  These unaudited condensed financial
statements should be read in conjunction with the audited financial statements
and the notes included in our Annual Report filed on Form 10-K for the year
ended December 31, 2008.


6





Stock
Compensation





Effective
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123 (R), “Share-Based
Payment”(“SFAS No. 123
(R).”  SFAS No. 123 (R) establishes accounting for stock-based awards
exchanged for employee services.  Accordingly, stock-based
compensation cost is measured at grant date, based on the fair value of the
award, and is recognized as expense over the employee requisite service
period.  All of our stock compensation is accounted for as an equity
instrument.





The
effect of recording stock-based compensation for the three months ended March
31, 2009 and 2008 was $8,000 and $8,000, respectively, which consisted of stock
based compensation related to employee stock options. As of March 31, 2009 we
had an unrecorded deferred stock compensation balance related to stock options
of approximately $27,000 before estimated forfeitures.  SFAS No. 123
(R) requires forfeitures to be estimated at the time of grant and revised if
necessary in subsequent periods if actual forfeitures differ from those
estimates.  Based on our analysis of historical experience and review
of current option holders, we have assumed an annual forfeiture rate of 1.2% for
our options.  Accordingly, as of March 31, 2009, we estimated that the
stock-based compensation for the awards not expected to vest was approximately
$300, and therefore, the unrecorded deferred stock-based compensation balance
related to stock options was adjusted to approximately $26,700 after estimated
forfeitures.  This amount will be recognized over an estimated
weighted average amortization period of 1.75 years.





During
the three months ended March 31, 2009 and 2008, respectively, there were no
stock options granted, exercised, cancelled or expired.





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





Shares
                  Available for
                  Grant
                
                
                Shares
                
                
                Weighted-
                  Average
                  Price Per
                  ShareBalance
      as of December 31, 2008
                
                
                2,817
                
                
                
                161
                
                
                $
                7.28Granted
                
                
                —
                
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —
                
                
                
                —Canceled
                
                
                —
                
                
                
                —
                
                
                
                —Balance
      as of March 31, 2009
                
                
                2,817
                
                
                
                161
                
                
                $
                7.28





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





Options Outstanding
                    
                    
                    Options ExercisableWeighted-Average
                    
                    
                    Weighted-
                    
                    
                    
                    
                    
                    Weighted-Number
                    
                    
                    Remaining
                    
                    
                    Average
                    
                    
                    Number
                    
                    
                    AverageRange of
                    
                    Of
                    
                    
                    Contractual
                    
                    
                    Exercise
                    
                    
                    Of
                    
                    
                    ExerciseExercise Prices
                    
                    Shares
                    
                    
                    Life (Years)
                    
                    
                    Price
                    
                    
                    Shares
                    
                    
                    Price$2.15
      - $2.60
                    
                    
                    118
                    
                    
                    
                    6.6
                    
                    
                    $
                    2.55
                    
                    
                    
                    106
                    
                    
                    $
                    2.57$2.61
      - $3.50
                    
                    
                    14
                    
                    
                    
                    8.6
                    
                    
                    
                    3.01
                    
                    
                    
                    -
                    
                    
                    
                    -$3.51
      - $5.20
                    
                    
                    4
                    
                    
                    
                    4.1
                    
                    
                    
                    5.20
                    
                    
                    
                    4
                    
                    
                    
                    5.20$5.21
      - $6.96
                    
                    
                    12
                    
                    
                    
                    4.6
                    
                    
                    
                    6.96
                    
                    
                    
                    12
                    
                    
                    
                    6.96$6.97
      - $8.80
                    
                    
                    4
                    
                    
                    
                    3.1
                    
                    
                    
                    8.80
                    
                    
                    
                    4
                    
                    
                    
                    8.80$8.81
      - $22.30
                    
                    
                    4
                    
                    
                    
                    2.2
                    
                    
                    
                    22.30
                    
                    
                    
                    4
                    
                    
                    
                    22.30$22.31
      - $120.00
                    
                    
                    5
                    
                    
                    
                    1.4
                    
                    
                    
                    120.00
                    
                    
                    
                    5
                    
                    
                    
                    120.00$2.15
      - $120.00
                    
                    
                    161
                    
                    
                    
                    6.2
                    
                    
                    $
                    7.28
                    
                    
                    
                    135
                    
                    
                    $
                    8.16


Guarantees





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


7





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





Income
Taxes





We
adopted the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1,
2007.  This Interpretation clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in our financial statements.  The Interpretation
also provides guidance for the measurement and classification of tax positions,
interest and penalties, and requires additional disclosure on an annual
basis.   The cumulative effect of the change was not
material.  Following implementation, the ongoing recognition of
changes in measurement of uncertain tax positions will be reflected as a
component of income tax expense.  Interest and penalties incurred
associated with unresolved income tax positions will continue to be included in
other income (expense).





2.
COMMITMENTS AND CONTINGENCIES





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





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





In June
2004, a stipulation of settlement and release of claims against the issuer
defendants, including us, was submitted to the Court for approval.  On
August 31, 2005, the Court preliminarily approved the settlement. In December
2006, the appellate court overturned the certification of classes in the six
test cases that were selected by the underwriter defendants and plaintiffs in
the coordinated proceedings.  Because class certification was a
condition of the settlement, it was unlikely that the settlement would receive
final Court approval.  On June 25, 2007, the Court entered an order
terminating the proposed settlement based upon a stipulation among the parties
to the settlement.  Plaintiffs have filed amended master allegations
and amended complaints and moved for class certification in the six focus
cases.  Defendants moved to dismiss the amended complaints and have
opposed class certification.  On March 26, 2008, the Court denied the
defendants’ motion to dismiss the amended complaints.




The
parties recently reached a global settlement of the litigation.  On April
2, 2009, plaintiffs filed a motion for preliminary approval of the settlement.
Under the settlement, which remains subject to Court approval, the insurers
would pay the full amount of settlement share allocated to the Company, and the
Company would bear no financial liability. The Company, as well as the officer
and director defendants who were previously dismissed from the action pursuant
to tolling agreements, would receive complete dismissals from the
case.  It is uncertain whether the settlement will receive final Court
approval.


8


On
October 9, 2007, a purported CoSine shareholder filed a complaint for violation
of Section 16(b) of the Securities Exchange Act of 1934, which prohibits
short-swing trading, against the Company's IPO underwriters. The complaint,
Vanessa Simmonds v. The Goldman Sachs Group, et al., Case No. C07-1629, filed in
the District Court for the Western District of Washington, seeks the recovery of
short-swing profits. The Company is named as a nominal defendant. No recovery is
sought from the Company. The plaintiff, Vanessa Simmonds, has filed similar
lawsuits in the District Court for the Western District of Washington alleging
short-swing trading in the stock of 54 other companies. On July 25, 2008, a
majority of the named issuer companies, including CoSine, jointly filed a motion
to dismiss plaintiff's claims.  On March 12, 2009, the Court issued an
order granting the motion to dismiss and a judgment in the favor of the moving
issuers.  On March 31, 2009, Ms. Simmonds appealed the order and
judgment dismissing her claims to the United States Court of Appeal for the
Ninth Circuit.  The appeal is pending.





Even if
the above claims are not successful, the litigation could result in substantial
costs and divert management's attention and resources, which could adversely
affect our business, results of operations and financial position.





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





Our
unconditional purchase obligations relate to executive, financial and
administrative support services, rent and personnel provided by SP Corporate
Services LLC under an agreement which became effective as of July 1, 2007 and
was renewed as of July 1, 2008 (the "Services Agreement").  Under the
Services Agreement, we pay SP Corporate Services LLP a monthly fee of $17,000 in
exchange for SP Corporate Services LLC’s services, rent and personnel. The
Services Agreement has a term of one year and automatically renews for
successive one year periods unless otherwise terminated by either
party.





3.
BALANCE SHEET DETAILS





Cash





At
March 31, 2009, we had deposits with a financial institution that may exceed the
amount of insurance provided on such deposits.




Fair
Value Measurement




On
January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157,
“Fair Value Measurements” (“SFAS 157”), which defines fair value,
establishes a framework for using fair value to measure assets and liabilities,
and expands disclosures about fair value measurements. The Statement applies
whenever other statements require or permit assets or liabilities to be measured
at fair value. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, except for nonfinancial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis, for which application has been deferred for one
year.




The following table summarizes our
financial assets measured at fair value on a recurring basis in accordance with
SFAS No. 157 as of March 31, 2009 (in thousands):




Significant OtherBalance as of
                  
                  Observable InputsMarch 31, 2009
                  
                  (Level 1)Assets:Cash
      equivalents:Commercial
      paper
                  
                  $
                  -
                  
                  
                  $
                  -Money
      market funds
                  
                  
                  15,252
                  
                  
                  
                  15,252Short-term
      investments:Corporate
      obligations
                  
                  
                  1,097
                  
                  
                  
                  1,097U.S.
      government agency notes
                  
                  
                  6,618
                  
                  
                  
                  6,618$
                  22,967
                  
                  
                  $
                  22,967Liabilities:
                  
                  
                  —
                  
                  
                  
                  —




9




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





4. NET
(LOSS) INCOME PER COMMON SHARE





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





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





Three Months Ended
                    March 31,2009
                  
                  
                  2008Numerator:Net
      (loss) income
                  
                  $
                  (155
                  )
                  
                  $
                  52Denominator:Weighted
      average shares outstanding for basic (loss) income per
    share
                  
                  
                  10,091
                  
                  
                  
                  10,091Add:
      effect of dilutive securities – stock options
                  
                  
                  -
                  
                  
                  
                  -Weighted
      average shares used in basic and diluted net (loss) income per
      share
                  
                  
                  10,091
                  
                  
                  
                  10,091Basic
      net (loss) income per share
                  
                  $
                  (0.02
                  )
                  
                  $
                  0.01Diluted
      net (loss) income per share
                  
                  $
                  (0.02
                  )
                  
                  $
                  0.01





Basic net
(loss) income per common share is calculated based on the weighted-average
number of common shares outstanding during the periods presented.





Options
to purchase 18,000 shares of common stock were outstanding as of March 31, 2009
and 2008, and were excluded from the computation of diluted net earnings per
share because such options were anti-dilutive.





5.
COMPREHENSIVE (LOSS)  INCOME





The
components of comprehensive (loss) income  are shown below, in
thousands:





Three Months Ended
                        March 31,2009
                      
                      
                      2008Net
      (loss) income
                      
                      $
                      (155
                      )
                      
                      $
                      52Other
      comprehensive gain:Unrealized
      gains on investments
                      
                      
                      (38
                      )
                      
                      
                      —Translation
      adjustment
                      
                      
                      —
                      
                      
                      
                      —Comprehensive
      income (loss)
                      
                      $
                      (193
                      )
                      
                      $
                      52


10


6.  RECENT
ACCOUNTING PRONOUNCEMENTS





In September 2006, the FASB issued
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS 157”). This statement defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. The
statement became effective for financial statements issued for years beginning
after November 15, 2007 and interim periods within that year. On
February 12, 2008 the FASB issued FASB Staff Position (FSP) FAS 157-2. This
FSP permits a delay in the effective date of SFAS 157 to years beginning after
November 15, 2008, for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The delay is intended to
allow the Board and constituents additional time to consider the effect of
various implementation issues that have arisen, or that may arise, from the
application of SFAS 157. On February 14, 2008, the FASB issued FSP FAS
157-1 to exclude SFAS 13, Accounting for Leases, and its related interpretive
accounting pronouncements from the scope of SFAS 157. The Company adopted this
statement for financial assets and financial liabilities and nonfinancial assets
and nonfinancial liabilities disclosed or recognized at fair value on a
recurring basis (at least annually) as of January 1, 2008. The Company
adopted the statement for nonfinancial assets and nonfinancial liabilities on
January 1, 2009. The adoption of this statement in each period did not have
a material impact on its consolidated financial statements.





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), Business Combinations(“SFAS 141(R)”).
SFAS 141(R) changes accounting for acquisitions that close beginning in
2009. More transactions and events will qualify as business combinations and
will be accounted for at fair value under the new standard. SFAS 141(R)
promotes greater use of fair values in financial reporting. Some of the changes
will introduce more volatility into earnings. SFAS 141(R) is effective for
fiscal years beginning on or after December 15, 2008. The adoption
of  SFAS 141(R) on January 1, 2009, did not  have an
impact on our financial position, results of operations, and cash
flows.





In
April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies.” This FSP requires that assets acquired and liabilities
assumed in a business combination that arise from contingencies be recognized at
fair value if fair value can be reasonably estimated. If fair value cannot be
reasonably estimated, the asset or liability would generally be recognized in
accordance with SFAS No. 5, “Accounting for Contingencies” and FASB
Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss”.
Further, the FASB removed the subsequent accounting guidance for assets and
liabilities arising from contingencies from SFAS No. 141(R). The
requirements of this FSP carry forward without significant revision the guidance
on contingencies of SFAS No. 141, “Business Combinations”, which was
superseded by SFAS No. 141(R). The FSP also eliminates the requirement to
disclose an estimate of the range of possible outcomes of recognized
contingencies at the acquisition date. For unrecognized contingencies, the FASB
requires that entities include only the disclosures required by SFAS No. 5.
SFAS 141(R), as modified by FSP 141(R)-1, is required to be applied
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  The adoption of SFAS 141(R), as modified by FSP
141(R)-1, as of January 1, 2009 had no impact on the Company’s financial
statements and its effects on future periods will depend on the nature and
extent of business combinations that we complete, if any, in or after fiscal
2009.





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160,  Noncontrolling Interests in  Financial
Statements (“SFAS 160”), an amendment of ARB No. 51. SFAS 160
will change the accounting and reporting for minority interests which will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008. SFAS 160 requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests. The
adoption of  SFAS 160 did not have an impact on our financial
position, results of operations, and cash flows.





In
December 2007, the FASB issued EITF Issue 07-1 Accounting for Collaborative
Arrangements (EITF 07-1). Collaborative arrangements are agreements between
parties to participate in some type of joint operating activity. The task force
provided indicators to help identify collaborative arrangements and provides for
reporting of such arrangements on a gross or net basis pursuant to guidance in
existing authoritative literature. The task force also expanded disclosure
requirements about collaborative arrangements. Conclusions within EITF 07-1 are
to be applied retrospectively. The adoption of EITF 07-1 did not have an impact
on our financial position, results of operations, and cash flows.





In
October 2008, the FASB issued FASB Staff Position No. 157-3, (“Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active”
(“FSP 157-3”)). FSP 157-3 clarifies the application of SFAS 157 in a market that
is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. FSP 157-3 became effective immediately, including
prior periods for which financial statements have not been issued. Therefore,
the Company adopted the provisions of FSP 157-3 in its financial statements in
the quarter ended December 31, 2008. The adoption did not have an impact on the
Company's results or operations or financial condition.





In April
2009, the FASB issued the three new accounting standards which are required to
be adopted no later than periods ending after June 15, 2009. The Company is
currently evaluating the impact of the following:


11




i.)   FASB
Staff Position FAS 157-4, “Determining Whether a Market Is Not Active and a
Transaction Is Not Distressed” (“FSP FAS 157-4”) provides guidelines for
making fair value measurements more consistent with the principles presented in
SFAS 157. FSP FAS 157-4 provides additional authoritative guidance in
determining whether a market is active or inactive, and whether a transaction is
distressed, is applicable to all assets and liabilities (i.e. financial and
nonfinancial) and will require enhanced disclosures.




ii.)   FASB
Staff Position FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” provides additional guidance to provide
greater clarity about the credit and noncredit component of an
other-than-temporary impairment event and to improve presentation and disclosure
of other than temporary impairments in the financial statements.




iii.)   FASB
Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of
Financial Instruments” amends FASB Statement No. 107, “Disclosures about Fair
Value of Financial Instruments”, to require disclosures about fair value of
financial instruments in interim as well as in annual financial statements. This
FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require
those disclosures in all interim financial statements.





7.  TRANSACTIONS
WITH RELATED PERSONS





In
efforts to reduce our operating expenses, on June 15, 2007, the board of
directors approved an agreement (the “Services Agreement”) with SP Corporate
Services, LLC (“SP”) pursuant to which SP provides us, on a non-exclusive basis,
a full range of executive, financial and administrative support services, rent
and personnel, including the services of a Chief Executive Officer, Chief
Financial Officer, Secretary, Principal Executive Officer and Principal
Accounting Officer, maintenance of our corporate office and records, periodic
reviews of transactions in our stock to assist in preservation of our NOLs, and
related executive, financial, accounting and administrative support services.
The Service Agreement became effective as of July 1, 2007 and was renewed as of
July 1, 2008.  Under the Services Agreement, we pay SP a monthly fee
of $17,000 in exchange for SP's services. SP is responsible for compensating and
providing all applicable employment benefits to any SP personnel in connection
with providing services under the Services Agreement. We reimburse SP for
reasonable and necessary business expenses of ours incurred by SP, and we are
responsible for payment of fees related to audit, tax, legal, stock transfer,
insurance broker, investment advisor and banking services provided to us by
third party advisors. The Services Agreement has a term of one year and
automatically renews for successive one year periods unless otherwise terminated
by either party. The Services Agreement is also terminable by us upon the death
of Terry R. Gibson or his resignation as our Chief Executive Officer, Chief
Financial Officer or Secretary of the Company. Under the Services Agreement, SP
and its personnel are entitled to the same limitations on liability and
indemnity rights available under our charter documents to any other person
performing such services for us. During the three months ended March 31, 2009,
we incurred $51,000 for services performed by SP under the Services
Agreement.





SP is
affiliated with Steel Partners II, L.P., our largest stockholder, by virtue of
SP’s President, Warren Lichtenstein, serving as the managing member of Steel
Partners II GP LLC, the general partner of Steel Partners II, L.P.  SP
is also a wholly owned subsidiary of Steel Partners, Ltd., also controlled by
Mr. Lichtenstein.  Mr. Gibson is the Managing Director of SP Corporate
Services, LLC.





Pursuant
to the Services Agreement, Terry R. Gibson terminated his employment with us,
effective as of June 30, 2007, but continues to serve as our Chief Executive
Officer, Chief Financial Officer, Secretary, Principal Executive Officer and
Principal Accounting Officer as an employee of SP.  SP is responsible
for compensating Mr. Gibson, including providing him with all applicable
employment benefits to which he may be entitled, for his serving as our Chief
Executive Officer, Chief Financial Officer, Secretary, Principal Executive
Officer and Principal Accounting Officer and for any other services he may
provide to us under the Services Agreement.





ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF
      OPERATIONS





In
addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements that involve risks and uncertainties that
could cause our actual results to differ materially. When used in this report,
the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”
“estimates” and similar expressions are generally intended to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which reflect our opinions only as of the date of
this Quarterly Report. We undertake no obligation to publicly release any
revisions to the forward-looking statements after the date of this document. You
should carefully review the risk factors described in other documents we file
from time to time with the U.S. Securities and Exchange Commission,
including our Annual Report on Form 10-K for our fiscal year ended
December 31, 2008 and our other Quarterly Reports on Form 10-Q filed
by us in our fiscal year 2009.


12





OVERVIEW





Our
strategy is to enhance stockholder value by pursuing opportunities to redeploy
our assets through an acquisition of one or more operating businesses with
existing or prospective taxable earnings that can be offset by use of our net
operating loss carry-forwards (“NOLs”). No assurance can be given that we will
find suitable candidates, and if we do, that we will be able to utilize our
existing NOLs.





We were a
provider of carrier network equipment products and services until the fourth
quarter of fiscal year 2004 during which time we discontinued our product lines,
took actions to lay off most of our employees, terminated contract manufacturing
arrangements, contractor and consulting arrangements and various facility
leases, and sold, scrapped or wrote-off our inventory, property and equipment.
In July 2005, our board of directors approved our strategy of redeploying our
existing resources to identify and acquire new business
operations.  In 2006, we sold the remaining assets of our carrier
network products business with the sale of our patent portfolio and the rights
to the related intellectual property.  During 2006, we also completed
the wrap-up of our carrier services business, providing customer support
services for our discontinued products through December 31, 2006, at which time
we terminated all customer support offerings.  Effective July 1, 2007,
we engaged SP Corporate Services LLC to provide all of our executive, financial
and administrative support service, rent and personnel requirements and, as a
result, no longer have any employees.





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





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





General





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





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





Impact
of Equity Issuances on Operating Results





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





Our
cost of revenue, operating expenses and interest expense were affected in prior
years by charges related to warrants and options issued for
services.  Furthermore, some of our employee stock option transactions
had resulted in deferred compensation, which was presented as a reduction of
stockholders’ equity on our balance sheet and was amortized over the vesting
period of the applicable options using the graded vesting
method.


13


Some
of the stock options granted to our employees had resulted in deferred
compensation as a result of stock options having an exercise price below their
estimated fair value.  Deferred compensation is presented as a
reduction to stockholders’ equity on the balance sheet and is then amortized
using an accelerated method over the vesting period of the applicable
options.  When an employee terminates, an expense credit is recorded
for any amortization that has been previously recorded as an expense in excess
of vesting.





RESULTS
OF OPERATIONS





Revenue





Effective
December 31, 2006, we ceased all customer service operations. Accordingly, there
were no revenues recognized for the three months ended March 31, 2009 and 2008,
respectively.





Non-Cash
Charges Related to Equity Issuances





During
the three months ended March 31, 2009 and 2008, we recorded $8,000 and $8,000,
respectively, of non-cash charges related to equity issuances.  The
charges relate to the adoption of SFAS No. 123(R).





Cost
of Revenue





There was
no cost of revenue for the three months ended March 31, 2009 and 2008 as we
closed our customer service business effective December 31, 2006.





Research
and Development Expenses





Research
and development expenses were nil for the three months ended March 31, 2009 and
2008, respectively.  We discontinued all research and development in
connection with our announcement in September 2004 that we were terminating all
employees and discontinuing our products.  We do not expect to incur
research and development costs unless and until we acquire new operating
businesses.





Sales
and Marketing Expenses





Sales and
marketing expenses were nil for the three months ended March 31, 2009 and 2008,
respectively.  With our announcement in September 2004 that we were
terminating all employees and were discontinuing our products, we have ceased
essentially all ongoing sales and marketing efforts. We do not expect to incur
sales and marketing costs unless and until we acquire new operating
businesses.





General
and Administrative Expenses





General
and administrative expenses were $225,000 and $178,000 for the three months
ended March 31, 2009 and 2008, respectively.  With our announcement in
September 2004 that we were terminating all employees and discontinuing our
products, our general and administrative efforts have been focused on activities
related to identifying and acquiring profitable business operations. General and
administrative costs for the three months ended March 31, 2009 and 2008
consisted of costs contractors, legal and accounting services, insurance and
office expenses.  General and administrative expenses should remain at
approximately the levels reported in the three months ended March 31, 2009 for
the quarter ending June 30, 2009.





Interest
and Other Income (Expense)





For the
three months ended March 31, 2009 and 2008, interest and other income was
$71,000 and $230,000, respectively.  The decrease from March 31, 2008
to March 31, 2009 is due to lower interest rates during the first quarter of
2009 as compared to the first quarter of  2008.





Income
Tax Provision





Provisions
for income taxes were $1,000 for the three months ended March 31, 2009 and nil
for the three months ended March 31, 2008.


14


LIQUIDITY
AND CAPITAL RESOURCES





We
have adopted a strategy of seeking to enhance stockholder value by pursuing
opportunities to redeploy our assets through an acquisition of one or more
operating business with existing or prospective taxable earnings that can be
offset by use of our net operating loss carry-forwards ("NOLs").  We
believe that we possess sufficient liquidity and capital resources to fund our
operations and working capital requirements for at least the next 12 months.
However, our redeployment of assets strategy raises substantial doubt as to our
ability to continue as a going concern.





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





Cash,
Cash Equivalents and Short-Term Investments





Cash,
cash equivalents and short-term investments were $23.0 million and $23.2 million
at March 31, 2009 and December 31, 2008, respectively.





Operating
Activities





We used
$88,000 in cash from operations for the three months ended March 31, 2009 as
compared to using $35,000 in cash for operations for the three months ended
March 31, 2008.  The increase in cash usage in 2009 is due primarily
to the net loss incurred for the three months ended March 31, 2009 as compared
to the net income for the three months ended March 31, 2008.





Investing
Activities





We
generated $6.2 million in cash in the three months ended March 31, 2009 as
compared to cash used of $4.3 million during the three months ended March 31,
2008 due to a decrease in purchases of short term investments for the three
months period ended March 31, 2009.  There were no capital
expenditures in the three months ended March 31, 2009 or 2008,
respectively.





Financing
Activities





There
were no significant financing activities in the three months ended March 31,
2009 or 2008.





Off-Balance
Sheet Arrangements





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





OUTLOOK





Our
board of directors, on completion of a comprehensive review of strategic
alternatives, approved a plan to redeploy our existing resources to identify and
acquire one or more new business operations.  Our redeployment
strategy will involve the acquisition of one or more operating businesses with
existing or prospective taxable earnings that can be offset by use of our
NOLs.  No assurance can be given that we will find suitable
candidates, and if we do, that we will be able to utilize our existing
NOLs.





At
March 31, 2009, we had $23.0 million in cash and short-term investments. We
believe we possess sufficient liquidity and capital resources to fund our
operations and working capital requirements for at least the next 12
months.


15




ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Interest
Rate Sensitivity





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





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





A
sensitivity analysis was performed on our investment portfolio as of March 31,
2009 based on a modeling technique that measures hypothetical fair market value
changes that would result from a parallel shift in the yield curve of plus 100
basis points.  Based on this analysis, a hypothetical 100 basis point
increase in interest rates would result in a $18,000 decrease in the fair value
of our investments in debt securities as of March 31, 2009.





Exchange
Rate Sensitivity





Currently,
all of our revenue and most of our expenses are denominated in U.S.
dollars.





ITEM
4. CONTROLS AND PROCEDURES





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




Changes in Internal Controls.
With respect to the most recently completed fiscal quarter, there have been no
changes to our internal controls which have materially affected, or are
reasonably likely to materially affect our internal controls over financial
reporting.




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


16




PART
II. OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS





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





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





In June
2004, a stipulation of settlement and release of claims against the issuer
defendants, including us, was submitted to the Court for approval.  On
August 31, 2005, the Court preliminarily approved the settlement. In December
2006, the appellate court overturned the certification of classes in the six
test cases that were selected by the underwriter defendants and plaintiffs in
the coordinated proceedings.  Because class certification was a
condition of the settlement, it was unlikely that the settlement would receive
final Court approval.  On June 25, 2007, the Court entered an order
terminating the proposed settlement based upon a stipulation among the parties
to the settlement.  Plaintiffs have filed amended master allegations
and amended complaints and moved for class certification in the six focus
cases.  Defendants moved to dismiss the amended complaints and have
opposed class certification.  On March 26, 2008, the Court denied the
defendants’ motion to dismiss the amended complaints.





The
parties recently reached a global settlement of the litigation.  On April
2, 2009, plaintiffs filed a motion for preliminary approval of the settlement.
Under the settlement, which remains subject to Court approval, the insurers
would pay the full amount of settlement share allocated to the Company, and the
Company would bear no financial liability. The Company, as well as the officer
and director defendants who were previously dismissed from the action pursuant
to tolling agreements, would receive complete dismissals from the case. It is
uncertain whether the settlement will receive final Court approval.





On
October 9, 2007, a purported CoSine shareholder filed a complaint for violation
of Section 16(b) of the Securities Exchange Act of 1934, which prohibits
short-swing trading, against the Company's IPO underwriters. The complaint,
Vanessa Simmonds v. The Goldman Sachs Group, et al., Case No. C07-1629, filed in
the District Court for the Western District of Washington, seeks the recovery of
short-swing profits. The Company is named as a nominal defendant. No recovery is
sought from the Company. The plaintiff, Vanessa Simmonds, has filed similar
lawsuits in the District Court for the Western District of Washington alleging
short-swing trading in the stock of 54 other companies. On July 25, 2008, a
majority of the named issuer companies, including CoSine, jointly filed a motion
to dismiss plaintiff's claims. .  On March 12, 2009, the Court issued
an order granting the motion to dismiss and a judgment in the favor of the
moving issuers.  On March 31, 2009, Ms. Simmonds appealed the order
and judgment dismissing her claims to the United States Court of Appeal for the
Ninth Circuit.  The appeal is pending.





Even if
the above claims are not successful, the litigation could result in substantial
costs and divert management's attention and resources, which could adversely
affect our business, results of operations and financial position.





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


17




ITEM
1A.  RISK FACTORS





In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. “Risk Factors” in
our Annual Report on Form 10-K/A for our fiscal year ended
December 31, 2008. The risks discussed in our Annual Report on
Form 10-K/A could materially affect our business, financial condition and
future results. The risks described in our Annual Report on Form 10-K/A are
not the only risks facing us. Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially and
adversely affect our business, financial condition or operating
results.





ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





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





We did
not pay directly or indirectly any of the underwriting discounts or other
related expenses of the initial public offering to any of our directors or
officers, any person owning 10% or more of any class of our equity securities,
or any of our affiliates.





We have
used approximately $220 million of the funds from the initial public offering to
fund our operations.  We expect to use the remaining net proceeds for
general corporate purposes, to fund our operations, working capital and capital
expenditures.  Pending further use of the net proceeds, we have
invested them in short-term, interest-bearing, investment-grade
securities.





ITEM
6. EXHIBITS





Exhibit
Index on page 20.


18


SIGNATURE





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





COSINE
      COMMUNICATIONS, INC.Dated:
      May 11, 2009
              By:
              /s/
      Terry R. GibsonTerry
      R. GibsonChief
      Executive Officer and Chief Financial Officer(Principal
      Accounting Officer)




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EXHIBIT
INDEX





Exhibit Number
                    
                    Description31.1
                    
                    Certification
      of Terry R. Gibson, Chief Executive Officer and Chief Financial Officer of
      CoSine Communications, Inc., pursuant to 15 U.S.C. Section 7241, as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
                    
                    Certification
      of Terry R. Gibson, Chief Executive Officer and Chief Financial Officer of
      CoSine Communications, Inc., pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002




20