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 June 30, 2010





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 July 15, 2010.










COSINE
COMMUNICATIONS, INC.





FORM
10-Q





Quarter
ended June 30, 2010





TABLE
OF CONTENTS





PagePART
      IFINANCIAL
      INFORMATIONItem
      1. Condensed  Financial Statements (Unaudited):Condensed  Balance
      Sheets as of June 30, 2010 (unaudited) and December 31,
    2009
                3Condensed  Statements
      of Operations for the Three and Six Month Periods Ended June 30, 2010
      (unaudited) and 2009 (unaudited)
                4Condensed  Statements
      of Cash Flows for Six Months Ended June 30, 2010 (unaudited) and 2009
      (unaudited)
                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
                15Item
      4. Controls and Procedures
                16PART
      IIOTHER
      INFORMATIONItem
      1. Legal Proceedings
                16Item
      1A. Risk Factors
                17Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                17Item
      6. Exhibits
                17Signature
                18Exhibit
      Index
                19Certifications


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)





June 30,
                  2010
                
                
                December 31,
                  20091(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                22,089
                
                
                $
                22,564Accounts
      receivable – other
                
                
                3
                
                
                
                2Prepaid
      expenses and other current assets
                
                
                30
                
                
                
                28Total
      current assets
                
                
                22,122
                
                
                
                22,594Long-term
      deposit
                
                
                3
                
                
                
                3Total
      assets
                
                $
                22,125
                
                
                $
                22,597LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                255
                
                
                $
                172Accrued
      liabilities
                
                
                14
                
                
                
                60Total
      current liabilities
                
                
                269
                
                
                
                232Commitments
      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 June 30, 2010 and
      December 31, 2009
                
                
                1
                
                
                
                1Additional
      paid-in capital
                
                
                539,094
                
                
                
                539,088Accumulated
      deficit
                
                
                (517,239
                )
                
                
                (516,724
                )Total
      stockholders' equity
                
                
                21,856
                
                
                
                22,365Total
      liabilities and stockholders' equity
                
                $
                22,125
                
                
                $
                22,597





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, 2009.


3


COSINE
COMMUNICATIONS, INC.


CONDENSED
STATEMENTS OF OPERATIONS


(In
thousands, except for per share data)


(Unaudited)





Three Months Ended
                                    June 30,
                                  
                                  
                                  Six Months Ended
                                    June 30,2010
                                  
                                  
                                  2009
                                  
                                  
                                  2010
                                  
                                  
                                  2009Revenue
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —Operating
      expenses:General
      and administrative1
                                  
                                  
                                  323
                                  
                                  
                                  
                                  188
                                  
                                  
                                  
                                  526
                                  
                                  
                                  
                                  413Total
      operating expenses
                                  
                                  
                                  323
                                  
                                  
                                  
                                  188
                                  
                                  
                                  
                                  526
                                  
                                  
                                  
                                  413Loss
      from operations
                                  
                                  
                                  (323
                                  )
                                  
                                  
                                  (188
                                  )
                                  
                                  
                                  (526
                                  )
                                  
                                  
                                  (413
                                  )Other
      Income:Interest
      income and other
                                  
                                  
                                  8
                                  
                                  
                                  
                                  37
                                  
                                  
                                  
                                  12
                                  
                                  
                                  
                                  108Total
      other income
                                  
                                  
                                  8
                                  
                                  
                                  
                                  37
                                  
                                  
                                  
                                  12
                                  
                                  
                                  
                                  108Loss
      before income tax provision
                                  
                                  
                                  (315
                                  )
                                  
                                  
                                  (151
                                  )
                                  
                                  
                                  (514
                                  )
                                  
                                  
                                  (305
                                  )Income
      tax provision
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1
                                  
                                  
                                  
                                  1Net
      loss
                                  
                                  $
                                  (315
                                  )
                                  
                                  $
                                  (151
                                  )
                                  
                                  $
                                  (515
                                  )
                                  
                                  $
                                  (306
                                  )Basic
      net loss per share
                                  
                                  $
                                  (0.03
                                  )
                                  
                                  $
                                  (0.01
                                  )
                                  
                                  $
                                  (0.05
                                  )
                                  
                                  $
                                  (0.03
                                  )Diluted
      net loss per share
                                  
                                  $
                                  (0.03
                                  )
                                  
                                  $
                                  (0.01
                                  )
                                  
                                  $
                                  (0.05
                                  )
                                  
                                  $
                                  (0.03
                                  )Shares
      used in computing per share amounts:Basic
                                  
                                  
                                  10,091
                                  
                                  
                                  
                                  10,091
                                  
                                  
                                  
                                  10,091
                                  
                                  
                                  
                                  10,091Diluted
                                  
                                  
                                  10,091
                                  
                                  
                                  
                                  10,191
                                  
                                  
                                  
                                  10,091
                                  
                                  
                                  
                                  10,091





See
accompanying notes to condensed financial statements.





(1) General
and administrative expenses include $4 and $6 for the three and six months
ended  June 30, 2010, respectively for non-cash charges related to
equity issuances. General
and administrative expenses include $9 and $17 for the three and six months
ended June 30, 2009, respectively for
non-cash charges related to equity issuances.




4




COSINE
COMMUNICATIONS, INC.


CONDENSED
STATEMENTS OF CASH FLOWS


(In
thousands)


(Unaudited)





Six Months Ended
                  June 30,2010
                
                
                2009Operating
      activities:Net
      loss
                
                $
                (515
                )
                
                $
                (306
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Stock-based
      compensation
                
                
                6
                
                
                
                17Change
      in operating assets and liabilities:Other
      receivables
                
                
                (1
                )
                
                
                72Prepaid
      expenses and other current assets
                
                
                (2
                )
                
                
                14Accounts
      payable
                
                
                83
                
                
                
                (19
                )Accrued
      liabilities
                
                
                (46
                )
                
                
                (25
                )Net
      cash used in operating activities
                
                
                (475
                )
                
                
                (247
                )Investing
      activities:Proceeds
      from sales and maturities of short-term investments
                
                
                —
                
                
                
                10,231Net
      cash provided by investing activities
                
                
                —
                
                
                
                10,231Net
      increase (decrease) in cash and cash equivalents
                
                
                (475
                )
                
                
                9,984Cash
      and cash equivalents at the beginning of the period
                
                
                22,564
                
                
                
                9,155Cash
      and cash equivalents at the end of the period
                
                $
                22,089
                
                
                $
                19,139





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





Liquidity
and Redeployment Strategy





The
accompanying financial statements have been prepared in conformity with U.S.
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, at June 30, 2010, we have an accumulated
deficit of $517 million.  As of December 31, 2006, we ceased our
customer service capability.  Based on these items and our actions in
the fourth quarter of fiscal year 2004 to terminate most of our employees and
discontinue production activities in an effort to conserve cash raise
substantial doubt about our ability to continue as a going concern. We continue
to pursue our redeployment strategy, which involves the acquisition of, or
investment in, one or more operating businesses with existing or prospective
taxable income, or from which we can realize capital gains, that can be offset
by use of our NOLs.  The financial statements do not include any
adjustments to reflect the possible future effects relating to the
recoverability and classification of the recorded asset amounts or amounts and
classification of liabilities that might result from the outcome of this
uncertainty.





Use
of Estimates





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





Significant
Concentrations





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





Guarantees





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


6


Generally,
a maximum obligation is not explicitly stated.  Because the obligated
amounts associated with this type of agreement are not explicitly stated, the
overall maximum amount of the obligation cannot be reasonably
estimated.  Historically, we have not been obligated to make payments
for these obligations, and no liabilities have therefore been recorded for these
obligations on our balance sheet as of June 30, 2010.





Stock
Compensation





The effect of recording stock-based compensation
for the three and six months ended June 30, 2010 was $4,000 and $6,000,
respectively, which consisted of stock based compensation related to employee
stock options. For the three and six months ended June 30, 2009 stock based
compensation related to employee stock options was $9,000 and $17,000,
respectively. As of June 30, 2010 we had an unrecorded deferred stock
compensation balance related to stock options of approximately $41,000 before
estimated forfeitures.  ASC 718 requires forfeitures to be estimated
at the time of grant and revised if necessary in subsequent periods if actual
forfeitures differ from those estimates.  Based on our analysis of
historical experience and review of current option holders, we have assumed an
annual forfeiture rate of 6.8% for our options.  Accordingly, as of
June 30, 2010, we estimated that the stock-based compensation for the awards not
expected to vest was approximately $2,000, and therefore, the unrecorded
deferred stock-based compensation balance related to stock options was adjusted
to approximately $39,000 after estimated forfeitures.  This amount
will be recognized over an estimated weighted average amortization period of 2.9
years.





During the six months ended June 30, 2010
there were stock option grants for 32,000 shares with an exercise price of $1.81
per share, the price on the date of the grant.  There were no stock
options exercised, cancelled or expired.





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





Shares
                  Available for
                  Grant
                
                
                Options
                  Outstanding
                
                
                Weighted-
                  Average
                  Price Per
                  ShareBalance
      as of December 31, 2009
                
                
                2,797
                
                
                
                181
                
                
                $
                6.66Granted
                
                
                32
                
                
                
                32
                
                
                
                1.81Exercised
                
                
                —
                
                
                
                —
                
                
                
                —Canceled
                
                
                —
                
                
                
                —
                
                
                
                —Balance
      as of June 30, 2010
                
                
                2,765
                
                
                
                213
                
                
                $
                5.93





The
following table summarizes information concerning options outstanding and
exercisable at June 30, 2010 (in thousands, except per share data):





Options Outstanding
                                  
                                  
                                  Options ExercisableWeighted-Average
                                  
                                  
                                  Weighted-
                                  
                                  
                                  
                                  
                                  
                                  Weighted-Number
                                  
                                  
                                  Remaining
                                  
                                  
                                  Average
                                  
                                  
                                  Number
                                  
                                  
                                  AverageRange of
                                  
                                  Of
                                  
                                  
                                  Contractual
                                  
                                  
                                  Exercise
                                  
                                  
                                  Of
                                  
                                  
                                  ExerciseExercise Prices
                                  
                                  Shares
                                  
                                  
                                  Life (Years)
                                  
                                  
                                  Price
                                  
                                  
                                  Shares
                                  
                                  
                                  Price$1.64 - $1.81
                                  
                                  
                                  52
                                  
                                  
                                  
                                  9.5
                                  
                                  
                                  $
                                  1.74
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -$2.15
      - $2.60
                                  
                                  
                                  118
                                  
                                  
                                  
                                  5.2
                                  
                                  
                                  
                                  2.56
                                  
                                  
                                  
                                  118
                                  
                                  
                                  
                                  2.57$2.61
      - $3.50
                                  
                                  
                                  14
                                  
                                  
                                  
                                  7.3
                                  
                                  
                                  
                                  3.01
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -$3.51
      - $5.20
                                  
                                  
                                  4
                                  
                                  
                                  
                                  2.7
                                  
                                  
                                  
                                  5.20
                                  
                                  
                                  
                                  4
                                  
                                  
                                  
                                  5.20$5.21
      - $6.96
                                  
                                  
                                  12
                                  
                                  
                                  
                                  3.2
                                  
                                  
                                  
                                  6.96
                                  
                                  
                                  
                                  12
                                  
                                  
                                  
                                  6.96$6.97
      - $8.80
                                  
                                  
                                  4
                                  
                                  
                                  
                                  1.8
                                  
                                  
                                  
                                  8.80
                                  
                                  
                                  
                                  4
                                  
                                  
                                  
                                  8.80$8.81
      - $22.30
                                  
                                  
                                  4
                                  
                                  
                                  
                                  0.9
                                  
                                  
                                  
                                  22.30
                                  
                                  
                                  
                                  4
                                  
                                  
                                  
                                  22.30$22.31
      - $120.00
                                  
                                  
                                  5
                                  
                                  
                                  
                                  0.1
                                  
                                  
                                  
                                  120.00
                                  
                                  
                                  
                                  5
                                  
                                  
                                  
                                  120.00$2.15
      - $120.00
                                  
                                  
                                  213
                                  
                                  
                                  
                                  5.9
                                  
                                  
                                  $
                                  5.93
                                  
                                  
                                  
                                  147
                                  
                                  
                                  $
                                  7.69


7


Income
Taxes





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





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.





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





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





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





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





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


8


3.
BALANCE SHEET DETAILS





Cash


At June 30, 2010, we had deposits with a financial
institution that may exceed the amount of insurance provided on such
deposits.





Fair
Value Measurements





In
January 2010, the FASB issued guidance amending the previous disclosure
requirements related to recurring and nonrecurring fair value measurements. The
guidance requires new disclosures on the transfers of assets and liabilities
between Level 1 and Level 2 of the fair value measurement hierarchy, including
the reasons and the timing of the transfers. Additionally, the guidance requires
a roll forward of activities on purchases, sales, issuance, and settlements of
the assets and liabilities measured using significant unobservable inputs (Level
3 fair value measurements). The guidance will be applied prospectively to new
transfers of financial assets occurring in fiscal years beginning after November
15, 2009. The adoption of this amendment required additional disclosure only and
therefore did not have an impact on our financial position, results of
operations, or cash flows.





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





Level 1:  Quoted prices (unadjusted) in active markets
for identical assets or liabilities.  We used Level 1 assumptions for our
cash and cash equivalents.  The valuations are based on quoted prices that
are readily and regularly available in an active market, and accordingly, a
significant degree of judgment is not required.  As of June 30, 2010
we did not have any short term investments.


Level
2:   Directly or indirectly observable market based inputs used
in models or other valuation methodologies.  As of   June
30, 2010, we did not have any Level 2 financial assets or
liabilities.


Level 3:  Unobservable inputs that are
supported by little or no market data and require the use of significant
management judgment.  As of June 30, 2010, we did not have any Level 3
financial assets or liabilities.




The
following table summarizes our financial assets measured at fair value on a
recurring basis in accordance with ASC 820 as of June 30, 2010 (in thousands)
with comparative balances as of December 31, 2009:




As of June 30,
2010




Cost or
                    Amortized
                    Cost
                  
                  
                  Unrealized
                    Gain
                  
                  
                  Unrealized
                    (Loss)
                  
                  
                  Fair Value
                  
                  
                  Quoted Prices in
                    Active Markets
                    for Identical
                    Assets (Level 1)Assets:Cash
      equivalents:Money
      market funds
                  
                  $
                  22,028
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  22,028
                  
                  
                  $
                  22,028Short-term
      investments:Commercial  paper
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Corporate
      obligations
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  22,028
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  22,028
                  
                  
                  $
                  22,028Liabilities
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —


9




As of December 31,
2009




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





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 June 30, 2010, we did not have any assets with
instrument valuations which are not obtained from readily-available pricing
sources for comparable instruments (level 2) or assets without observable market
values that would require a high level of judgment to determine fair value
(level 3).





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





We manage our investments as a single portfolio of highly
marketable securities that is intended to be available to meet our current cash
requirements.  We have no securities investments as of June 30, 2010
and December 31, 2009.





4. NET
LOSS PER COMMON SHARE





Basic net
loss 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 per share
for each year (in thousands, except per share data):





Three Months Ended
                      June 30,
                    
                    
                    Six Months Ended
                      June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Numerator:Net
      loss
                    
                    $
                    (315
                    )
                    
                    $
                    (151
                    )
                    
                    $
                    (515
                    )
                    
                    $
                    (306
                    )Denominator:Weighted
      average shares used in basic and diluted net loss per
share
                    
                    
                    10,091
                    
                    
                    
                    10,091
                    
                    
                    
                    10,091
                    
                    
                    
                    10,091Add:
      effect of dilutive securities – stock options
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0Weighted-average
      shares used in diluted net loss per share
                    
                    
                    10,091
                    
                    
                    
                    10,091
                    
                    
                    
                    10,091
                    
                    
                    
                    10,091Basic
      net loss per share
                    
                    $
                    (0.03
                    )
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.05
                    )
                    
                    $
                    (0.03
                    )Diluted
      net loss per share
                    
                    $
                    (0.03
                    )
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.05
                    )
                    
                    $
                    (0.03
                    )





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


10


Options to purchase 213,000 and 161,000 shares of
common stock were outstanding as of June 30, 2010 and 2009 respectively, 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
                      June 30,
                    
                    
                    Six Months Ended
                      June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Net
      (loss)  income
                    
                    $
                    (315
                    )
                    
                    $
                    (151
                    )
                    
                    $
                    (515
                    )
                    
                    $
                    (306
                    )Other
      comprehensive (loss) income:Unrealized
      gains (loss) on investments
                    
                    
                    —
                    
                    
                    
                    (20
                    )
                    
                    
                    —
                    
                    
                    
                    (58
                    )Comprehensive
      (loss) income
                    
                    $
                    (315
                    )
                    
                    $
                    (171
                    )
                    
                    $
                    (515
                    )
                    
                    $
                    (364
                    )





6.  RECENT
ACCOUNTING PRONOUNCEMENTS





In
January 2010, the FASB issued guidance amending the previous disclosure
requirements related to recurring and nonrecurring fair value measurements. The
guidance requires new disclosures on the transfers of assets and liabilities
between Level 1 and Level 2 of the fair value measurement hierarchy, including
the reasons and the timing of the transfers. Additionally, the guidance requires
a roll forward of activities on purchases, sales, issuance, and settlements of
the assets and liabilities measured using significant unobservable inputs (Level
3 fair value measurements). The guidance will be applied prospectively to new
transfers of financial assets occurring in fiscal years beginning after November
15, 2009. The adoption of this amendment required additional disclosure only and
therefore did not have an impact on our financial position, results of
operations, or cash flows.





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





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





7.  TRANSACTIONS
WITH RELATED PERSONS





In July
2007, we contracted with SP Corporate Services, LLC (“SP”), an entity owned by
an affiliate Steel Partners Holdings L.P., the largest stockholder of CoSine, to
provide management and other administrative services, including the services of
our Chief Executive and Chief Financial Officer.  On approval of the
contract by the independent members of our board of directors, our Chief
Executive Officer, Chief Financial Officer, and Secretary terminated his
employment with us and became a Managing Director of SP Corporate Services LLC,
effective July 1, 2007.  During the six months ended June 30, 2010, we
incurred $102,000 for services performed by SP under the services
agreement.


11





ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      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, 2009 and our other Quarterly Reports on Form 10-Q filed
by us in our fiscal year 2010.





OVERVIEW





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





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





DUE TO
THE ADOPTION OF OUR REDEPLOYMENT STRATEGY, THE INFORMATION APPEARING BELOW,
WHICH RELATES TO PRIOR PERIODS, MAY NOT BE INDICATIVE OF THE RESULTS THAT MAY BE
EXPECTED FOR ANY SUBSEQUENT PERIODS.  THE SIX MONTHS ENDED JUNE 30,
PRIMARILY REFLECTS, AND FUTURE PERIODS PRIOR TO A REDEPLOYMENT OF OUR ASSETS ARE
EXPECTED TO PRIMARILY REFLECT, GENERAL AND ADMINISTRATIVE EXPENSES AND
TRANSACTION EXPENSES ASSOCIATED WITH THE CONTINUING ADMINISTRATION OF THE
COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





General





Our
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles.  The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, 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.





Fair
Value Measurements





In
January 2010, the FASB issued guidance amending the previous disclosure
requirements related to recurring and nonrecurring fair value measurements. The
guidance requires new disclosures on the transfers of assets and liabilities
between Level 1 and Level 2 of the fair value measurement hierarchy, including
the reasons and the timing of the transfers. Additionally, the guidance requires
a roll forward of activities on purchases, sales, issuance, and settlements of
the assets and liabilities measured using significant unobservable inputs (Level
3 fair value measurements). The guidance will be applied prospectively to new
transfers of financial assets occurring in fiscal years beginning after November
15, 2009. The adoption of this amendment required additional disclosure only and
therefore did not have an impact on our financial position, results of
operations, or cash flows.


12





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





Level
1:  Quoted prices (unadjusted) in active markets for identical assets or
liabilities.  We used Level 1 assumptions for our cash and cash equivalents
and short term investments, which are traded in an active market.  The
valuations are based on quoted prices that are readily and regularly available
in an active market, and accordingly, a significant degree of judgment is not
required.  As of  June 30, 2010 we did not have any short
term investments.




Level
2:   Directly or indirectly observable market based inputs used
in models or other valuation methodologies.  As of   June
30, 2010, we did not have any Level 2 financial assets or
liabilities.




Level
3:   Unobservable inputs that are supported  by little
or no market data and require the use of significant management judgment. 
As of June 30, 2010, we did not have any Level 3 financial assets or
liabilities.





Impact
of Equity Issuances on Operating Results





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





Income
Taxes





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





Sources
of Income





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


13





RESULTS
OF OPERATIONS





Revenue





Effective
December 31, 2006, we ceased all customer service operations. Accordingly, there
were no revenues recognized for the three months and six months ended June 30,
2010 and 2009, respectively.





Non-Cash
Charges Related to Equity Issuances





During
the six months ended June 30, 2010 and 2009, we recorded $6,000 and $17,000,
respectively, of non-cash charges related to equity issuances.  Such
costs were $4,000 and $9,000 for the three month period ended June 30, 2010 and
2009, respectively.  The charges relate to the adoption of Accounting
Standard Codification No. 740 (ASC 740).





General
and Administrative Expenses





General
and administrative expenses were $526,000 and $413,000 for the six months ended
June 30, 2010 and 2009, respectively.  Such costs were $323,000 and
$188,000 for the three months ended June 30, 2010 and 2009
respectively.  The increase is due primarily to increased legal and
consulting costs related to investigating a potential acquisition candidate.
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 six months ended June 30,
2010 and 2009 consisted of costs of 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
June 30, 2010 for the quarter ending September 30, 2010.





Interest and Other Income
(Expense)





For the
six months ended June 30, 2010 and 2009, interest and other income was $12,000
and $108,000, respectively.  For the three months ended June 30, 2010
and 2009, interest and other income was $8,000 and $37,000 respectively. The
decrease from June 30, 2009 to June 30, 2010 is primarily related to the
movement of investment cash from short-term investments to money market funds as
well as the decline in interest rates during the first six months of 2010 as
compared to the first six months of 2009.





Income
Tax Provision





Provisions
for income taxes were nil for the three months ended June 30, 2010 and 2009,
respectively.  For the six months ended June 30, 2010 and 2009,
provisions for income taxes were $1 and $1 respectively.





LIQUIDITY
AND CAPITAL RESOURCES





We have
adopted a strategy of seeking to enhance stockholder value by pursuing
opportunities to redeploy our assets through an acquisition of, or investment
in, one or more operating businesses with existing or prospective taxable
income, or from which we can realize capital gains, that can be offset by use of
our net operating loss carry-forwards.  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.


14





Cash,
Cash Equivalents and Short-Term Investments





Cash and
cash equivalents were $22.1 million and $22.6 million at June 30, 2010 and
December 31, 2009, respectively.  We do not have any short-term
investments as of June 30, 2010 and December 31, 2009.





Operating
Activities





We used
$475,000 in cash from operations for the six months ended June 30, 2010 as
compared to using $247,000 in cash for operations for the six months ended June
30, 2009.  The increase in cash usage in 2010 is due primarily to the
increased net loss for the six months ended June 30, 2010 as compared to the net
loss for the six months ended June 30, 2009 as a result of increased general and
administrative costs related to legal and consulting costs and decreased
interest income during 2010 as compared to 2009.





Investing
Activities





We
generated $0 in cash in the six months ended June 30, 2010 as compared to
generating cash of $10.2 million during the six months ended June 30, 2009 due
to no purchases of short term investments for the six month period ended June
30, 2010.  There were no capital expenditures in the six months ended
June 30, 2010 or 2009, respectively.





Financing
Activities





There
were no significant financing activities in the six months ended June 30, 2010
or 2009.





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





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





At June
30, 2010, we had $22.1 million in cash and cash equivalents. We believe we
possess sufficient liquidity and capital resources to fund our operations and
working capital requirements for at least the next 12 months.





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, if any, are classified as available-for-sale and
considered to be short-term investments.





A
sensitivity analysis was performed on our investment portfolio as of June 30,
2010 based on a modeling technique that measures hypothetical fair market value
changes that would result from a parallel shift in the yield curve of plus 100
basis points.  Based on this analysis, a hypothetical 100 basis point
increase in interest rates would result in a $2,000 decrease in the fair value
of our investments in debt securities as of June 30, 2010.


15





Exchange
Rate Sensitivity





Currently,
all of our income 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.





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.





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


16





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





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





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





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 for our fiscal year ended December 31,
2009. The risks discussed in our Annual Report on Form 10-K could
materially affect our business, financial condition and future results. The
risks described in our Annual Report on Form 10-K 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 19.


17


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:
      August 5, 2010
                By:
                /s/ Terry R. GibsonTerry
      R. GibsonChief
      Executive Officer and Chief Financial Officer(Principal
      Accounting Officer)




18


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




19