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, 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 August 5, 2009.
  COSINE
COMMUNICATIONS, INC.
 
 FORM
10-Q
 
 Quarter
ended June 30, 2009
 
 TABLE
OF CONTENTS
 
 PagePART
      IFINANCIAL
      INFORMATIONItem 1.
      Condensed  Financial Statements (Unaudited):Condensed  Balance
      Sheets as of June 30, 2009 (unaudited) and December 31,
    2008
                    3Condensed  Statements
      of Operations (unaudited) for the Three and Six Month Periods Ended June
      30, 2009 and 2008
                    4Condensed  Statements
      of Cash Flows (unaudited) for Six Months Ended June 30,
      2009  and 2008
                    5Notes
      to Condensed  Financial Statements
                    6Item 2.
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations
                    13Item 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)
 
 June 30,
                        2009
                      
                      
                      December 31,
                        20081(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      19,139
                      
                      
                      $
                      9,155Short-term
      investments
                      
                      
                      3,708
                      
                      
                      
                      13,997Accounts
      receivable - other
                      
                      
                      24
                      
                      
                      
                      96Prepaid
      expenses and other current assets
                      
                      
                      17
                      
                      
                      
                      31Total
      current assets
                      
                      
                      22,888
                      
                      
                      
                      23,279Long
      term deposit
                      
                      
                      3
                      
                      
                      
                      3Total
      Assets
                      
                      $
                      22,891
                      
                      
                      $
                      23,282LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                      
                      $
                      188
                      
                      
                      $
                      207Accrued
      other liabilities
                      
                      
                      28
                      
                      
                      
                      53Total
      current liabilities
                      
                      
                      216
                      
                      
                      
                      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 June 30, 2009 and
      December 31, 2008
                      
                      
                      1
                      
                      
                      
                      1Additional
      paid-in capital
                      
                      
                      539,077
                      
                      
                      
                      539,060Accumulated
      other comprehensive income
                      
                      
                      30
                      
                      
                      
                      88Accumulated
      deficit
                      
                      
                      (516,433
                      )
                      
                      
                      (516,127
                      )Total
      stockholders' equity
                      
                      
                      22,675
                      
                      
                      
                      23,022Total
      liabilities and stockholders’ equity
                      
                      $
                      22,891
                      
                      
                      $
                      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
                                      June 30,
                                    
                                    
                                    Six Months Ended
                                      June 30,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008Revenue:Product
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —Service
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Total
      revenue
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Cost
      of revenue
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Gross
      profit (loss)
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Operating
      expenses:Research
      and development
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Sales
      and marketing
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —General
      and administrative1
                                    
                                    
                                    188
                                    
                                    
                                    
                                    145
                                    
                                    
                                    
                                    413
                                    
                                    
                                    
                                    322Total
      operating expenses
                                    
                                    
                                    188
                                    
                                    
                                    
                                    145
                                    
                                    
                                    
                                    413
                                    
                                    
                                    
                                    322Loss
      from operations
                                    
                                    
                                    (188
                                    )
                                    
                                    
                                    (145
                                    )
                                    
                                    
                                    (413
                                    )
                                    
                                    
                                    (322
                                    )Interest
      income and other
                                    
                                    
                                    37
                                    
                                    
                                    
                                    167
                                    
                                    
                                    
                                    108
                                    
                                    
                                    
                                    396(Loss)
      Income before income tax provision
                                    
                                    
                                    (151
                                    )
                                    
                                    
                                    22
                                    
                                    
                                    
                                    (305
                                    )
                                    
                                    
                                    74Income
      tax provision
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    —Net
      (loss) income
                                    
                                    $
                                    (151
                                    )
                                    
                                    $
                                    22
                                    
                                    
                                    $
                                    (306
                                    )
                                    
                                    $
                                    74Basic
      net (loss)  income per share
                                    
                                    $
                                    (0.01
                                    )
                                    
                                    $
                                    0.00
                                    
                                    
                                    $
                                    (0.03
                                    )
                                    
                                    $
                                    0.01Diluted
      net (loss) income per share
                                    
                                    $
                                    (0.01
                                    )
                                    
                                    $
                                    0.00
                                    
                                    
                                    $
                                    (0.03
                                    )
                                    
                                    $
                                    0.01Shares
      used in computing per share amounts:Basic
                                    
                                    
                                    10,091
                                    
                                    
                                    
                                    10,091
                                    
                                    
                                    
                                    10,091
                                    
                                    
                                    
                                    10,091Diluted
                                    
                                    
                                    10,091
                                    
                                    
                                    
                                    10,194
                                    
                                    
                                    
                                    10,091
                                    
                                    
                                    
                                    10,091
 
 See
accompanying notes to condensed financial statements.
 
 (1)General and administrative expenses
include non-cash charges related to equity issuances of $9 and $17, for the
three month and six month periods ended June 30, 2009,
respectively.  General and administrative expenses include non-cash
charges related to equity issuances of $9 and $16 for the three month and six
month periods ended June 30, 2008, respectively.
  4
  COSINE
COMMUNICATIONS, INC.
 CONDENSED
STATEMENTS OF CASH FLOWS
 (In
thousands)
 (Unaudited)
 
 Six Months Ended
                        June 30,2009
                      
                      
                      2008Operating
      activities:Net
      (loss) income
                      
                      $
                      (306
                      )
                      
                      $
                      74Adjustments
      to reconcile net (loss) income to net cash used in operating
      activities:Share-based
      compensation
                      
                      
                      17
                      
                      
                      
                      16Change
      in operating assets and liabilities:Other
      receivables
                      
                      
                      72
                      
                      
                      
                      1Prepaid
      expenses and other current assets
                      
                      
                      14
                      
                      
                      
                      14Accounts
      payable
                      
                      
                      (19
                      )
                      
                      
                      64Accrued
      other liabilities
                      
                      
                      (25
                      )
                      
                      
                      (79
                      )Net
      cash (used in) provided by  operating activities
                      
                      
                      (247
                      )
                      
                      
                      90Investing
      activities:Purchase
      of short-term investments
                      
                      
                      —
                      
                      
                      
                      (19,191
                      )Proceeds
      from sales and maturities of short-term investments
                      
                      
                      10,231
                      
                      
                      
                      16,283Net
      cash provided by (used in)  investing activities
                      
                      
                      10,231
                      
                      
                      
                      (2,908
                      )Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      9,984
                      
                      
                      
                      (2,818
                      )Cash
      and cash equivalents at the beginning of the period
                      
                      
                      9,155
                      
                      
                      
                      12,709Cash
      and cash equivalents at the end of the period
                      
                      $
                      19,139
                      
                      
                      $
                      9,891
 
 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 June 30, 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 and six months
ended June 30, 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
 
 In
preparing the accompanying unaudited condensed financial statements, the Company
has reviewed, as determined necessary by the Company’s management, events that
have occurred after June 30, 2009, up until the issuance of the financial
statements, which occurred on August 6, 2009.
 
 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 and six months ended
June 30, 2009 was $9,000 and $17,000, respectively, which consisted of stock
based compensation related to employee stock options. The effect of recording
stock-based compensation for the three and six months ended June 30, 2008 was
$9,000 and $16,000, respectively, which consisted of stock based compensation
related to employee stock options.  As of June 30, 2009 we had an
unrecorded deferred stock compensation balance related to stock options of
approximately $18,000 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 June 30, 2009, we estimated that the
stock-based compensation for the awards not expected to vest was approximately
$200, and therefore, the unrecorded deferred stock-based compensation balance
related to stock options was adjusted to approximately $18,500 after estimated
forfeitures.  This amount will be recognized over an estimated
weighted average amortization period of 1.25 years.
 
 During
the six months ended June 30, 2009 there were no stock options granted,
exercised, cancelled or expired.  During the six months ended June 30,
2008, there were stock option grants for 8,000 shares, with an exercise price of
$2.65 per share, the market price of the stock at the date of the grant, and
there were no 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
                            
                            
                            Shares
                            
                            
                            Weighted-
                              Average
                              Price Per
                              ShareBalance
      as of December 31, 2008
                            
                            
                            2,817
                            
                            
                            
                            161
                            
                            
                            $
                            7.28Granted
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Exercised
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Canceled
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Balance
      as of June 30, 2009
                            
                            
                            2,817
                            
                            
                            
                            161
                            
                            
                            $
                            7.28
 
 The
following table summarizes information concerning options outstanding and
exercisable at June 30, 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
                      
                      
                      
                      6.3
                      
                      
                      $
                      2.55
                      
                      
                      
                      106
                      
                      
                      $
                      2.57$2.61 - $3.50
                      
                      
                      14
                      
                      
                      
                      8.4
                      
                      
                      
                      3.01
                      
                      
                      
                      -
                      
                      
                      
                      -$3.51 - $5.20
                      
                      
                      4
                      
                      
                      
                      3.9
                      
                      
                      
                      5.20
                      
                      
                      
                      4
                      
                      
                      
                      5.20$5.21 - $6.96
                      
                      
                      12
                      
                      
                      
                      4.3
                      
                      
                      
                      6.96
                      
                      
                      
                      12
                      
                      
                      
                      6.96$6.97 - $8.80
                      
                      
                      4
                      
                      
                      
                      2.9
                      
                      
                      
                      8.80
                      
                      
                      
                      4
                      
                      
                      
                      8.80$8.81 - $22.30
                      
                      
                      4
                      
                      
                      
                      2.0
                      
                      
                      
                      22.30
                      
                      
                      
                      4
                      
                      
                      
                      22.30$22.31 - $120.00
                      
                      
                      5
                      
                      
                      
                      1.2
                      
                      
                      
                      120.00
                      
                      
                      
                      5
                      
                      
                      
                      120.00$2.15 - $120.00
                      
                      
                      161
                      
                      
                      
                      6.0
                      
                      
                      $
                      7.28
                      
                      
                      
                      135
                      
                      
                      $
                      8.16
  7
  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.
 
 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 June 30, 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 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 opposed
class certification.  On March 26, 2008, the Court denied the
defendants’ motion to dismiss the amended complaints.
  8
 
 The
parties have reached a global settlement of the litigation.  On April 2,
2009, plaintiffs filed a motion for preliminary approval of the settlement. On
June 9, 2009, the Court granted preliminary approval of the settlement and set a
final approval hearing for September 10, 2009.  Under the settlement,
which remains subject to final 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 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.
 
 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, 2009 (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
June 30, 2009, we had deposits with a financial institution that may exceed the
amount of insurance provided on such deposits.
  Investments
and 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.
  9
  The
following table summarizes our financial assets measured at fair value on a
recurring basis in accordance with SFAS No. 157 as of June 30, 2009 (in
thousands):
  Significant OtherUnrealized
                    
                    
                    
                    
                    
                    ObservableInputsCost
                    
                    
                    Gain/(loss)
                    
                    
                    Fair Value
                    
                    
                    (Level 1)Assets:Cash
      Equivalents:Commercial
      paper
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Money
      market funds
                    
                    
                    19,084
                    
                    
                    
                    -
                    
                    
                    
                    19,084
                    
                    
                    
                    19,084Available-for-sale
      investment - short termCorporate
      obligations
                    
                    
                    653
                    
                    
                    
                    
                    
                    
                    
                    653
                    
                    
                    
                    653U.S.
      government agency notes
                    
                    
                    3,085
                    
                    
                    
                    (30
                    )
                    
                    
                    3,055
                    
                    
                    
                    3,055$
                    22,822
                    
                    
                    $
                    (30
                    )
                    
                    $
                    22,792
                    
                    
                    $
                    22,792Liabilities:
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
  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, 2009 we did not have any assets with instrument
valuations which are not obtained from readily-available pricing sources for
comparable instruments (level 2) or assets without observable market values that
would require a high level of judgment to determine fair value (level
3).
  The
carrying amounts of certain of the Company’s financial assets
and liabilities including cash, accounts receivable-others, accounts payable and
accrued expenses approximate its fair value due to their short term
maturities.
 
 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
                              June 30,
                            
                            
                            Six Months Ended
                              June 30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Net
      (loss) income
                            
                            $
                            (151
                            )
                            
                            $
                            22
                            
                            
                            $
                            (306
                            )
                            
                            $
                            74Basic
      and diluted:Weighted-average
      shares of common stock outstanding
                            
                            
                            10,091
                            
                            
                            
                            10,091
                            
                            
                            
                            10,091
                            
                            
                            
                            10,091Add:
      effect of dilutive securities – stock options
                            
                            
                            0
                            
                            
                            
                            3
                            
                            
                            
                            0
                            
                            
                            
                            0Weighted-average
      shares used in diluted net income per share
                            
                            
                            10,091
                            
                            
                            
                            10,094
                            
                            
                            
                            10,091
                            
                            
                            
                            10,091Basic
      and diluted net (loss)  income per share
                            
                            $
                            (0.01
                            )
                            
                            $
                            0.00
                            
                            
                            $
                            (0.03
                            )
                            
                            $
                            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.  Dilutive net income includes the effects of outstanding
dilutive options.
  10
 
 5.
COMPREHENSIVE (LOSS) INCOME
 
 The
components of comprehensive income are shown below, in thousands:
 
 Three Months Ended
                          June 30,
                        
                        
                        Six Months Ended
                          June 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Net
      (loss)  income
                        
                        $
                        (151
                        )
                        
                        $
                        22
                        
                        
                        $
                        (306
                        )
                        
                        $
                        74Other
      comprehensive (loss) income:Unrealized
      gains (loss) on investments
                        
                        
                        (20
                        )
                        
                        
                        (12
                        )
                        
                        
                        (58
                        )
                        
                        
                        (12
                        )Currency
      translation adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      other comprehensive (loss)  income
                        
                        
                        (20
                        )
                        
                        
                        (12
                        )
                        
                        
                        (58
                        )
                        
                        
                        (12
                        )Comprehensive
      (loss) income
                        
                        $
                        (171
                        )
                        
                        $
                        10
                        
                        
                        $
                        (364
                        )
                        
                        $
                        62
 
 6.  RECENT
ACCOUNTING PRONOUNCEMENTS
 
 In March 2008, the FASB issued
Statement of Financial Accounting Standards (“SFAS”) SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities” (“SFAS No. 161”), which is
intended to enable investors to better understand how derivative instruments and
hedging activities affect an entity’s financial position, financial performance
and cash flows through enhanced disclosure requirements.  SFAS No. 161
will be effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008.  SFAS No. 161 is effective
for the Company on April 1, 2009.  The Company’s adoption of SFAS No.
161 did not have a material impact on its consolidated financial position or
results of operations.
 
 In April
2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (“FSP FAS
107-1”).  FSP FAS 107-1 amends SFAS No. 107, “Disclosures about Fair
Value of Financial Instruments” to require disclosures about fair value of
financial instruments in interim reporting periods.  Such disclosures
were previously required only in annual financial statements.  FSP FAS
107-1 is effective for the Company’s quarter ended June 30, 2009.  FSP
FAS 107-1 applies only to financial statement disclosures and the Company has
adopted them in the second quarter of June 30, 2009.  See Note
3.
 
 On April
9, 2009, the FASB issued Staff Position SFAS 115-2 and SFAS 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments” (FSP
115-2).  FSP 115-2 provides guidance in determining whether
impairments in debt securities are other than temporary, and modifies the
presentation and disclosures surrounding such instruments.  FSP 115-2
is effective for interim periods ending after June 15, 2009, and the Company has
adopted its provisions for second quarter 2009.  FSP 115-2 did not
have a significant impact on the Company’s financial position, results of
operations, cash flows, or disclosures for second quarter 2009.
 
 In May
2009, the FASB issued statement No. 165, “Subsequent Events” (SFAS 165). SFAS
165 modifies the definition of what qualifies as a subsequent event—those events
or transactions that occur following the balance sheet date, but before the
financial statements are issued, or are available to be issued—and requires
companies to disclose the date through which it has evaluated subsequent events
and the basis for determining that date.  The Company adopted the
provisions of SFAS 165 for second quarter 2009, in accordance with the effective
date.  See Note 1.
 
 In
October 2008, the Financial Accounting Standards Board (the “FASB”) issued FASB
Staff Position (“FSP”) FAS No. 157-3, “Determining the Fair Value of a Financial
Asset When the Market For That Asset Is Not Active” (“FSP FAS No.
157-3”).  FSP FAS No. 157-3 clarifies the application of Statement of
Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” 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 FAS No. 157-3
became effective upon issuance, including with respect to prior periods for
which financial statements have not been issued.  The Company’s
adoption of FSP FAS No. 157-3 did not have a material impact on its consolidated
financial position or results of operations.
  11
 
 In April
2009, the FASB issued Staff Position No. 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”),
which provides additional guidance for estimating fair value in accordance with
Statement of Financial Accounting Standard (SFAS) No. 157.  FSP FAS
157-4 is effective for the Company’s quarter ended June 30, 2009.  The
Company’s adoption of Staff Position No. 157-4 did not have a material impact on
its consolidated financial position or results of operations.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”).  SFAS No. 141(R) will change how
business acquisitions are accounted for and will impact financial statements
both on the acquisition date and in subsequent periods.  SFAS No.
141(R) is effective for the Company on April 1, 2009.  The Company
will assess the impact of SFAS No. 141(R) if and when future acquisitions
occur.
 
 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 June
2009, the FASB issued FASB No. 168, The FASB Accounting Codification and
Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB
No. 162.  The Codification does not change current U.S. GAAP,
but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in one
place.  All existing accounting standard documents will be superseded
and all other accounting literature not included in the Codification will be
considered non-authoritative. The Codification is effective for interim and
annual periods ending after September 15, 2009. The Codification is effective
for the Corporation in the interim period ending September 30, 2009 and the
Company does not expect the adoption to have a material impact on its
consolidated financial position, results of operations or cash
flows.
 
 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, 2009.  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 six months ended June 30, 2009, we
incurred $102,000 for services performed by SP under the Services
Agreement.
  12
 
 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.
 
 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 SIX MONTHS ENDED JUNE 30, 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.
 
 13
 
 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.
 
 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 and six months ended June 30, 2009 and
2008, respectively.
 
 Non-Cash
Charges Related to Equity Issuances
 
 During
the six months ended June 30, 2009 and 2008, we recorded $17,000 and $16,000,
respectively, of non-cash charges related to equity
issuances.   Such costs were $9,000 for the three month period
ended June 30, 2009 and 2008 respectively.   The charges relate
to the adoption of SFAS No. 123(R).
 
 Cost
of Revenue
 
 There was
no cost of revenue for the three and six months ended June 30, 2009 and 2008 as
we closed our customer service business effective December 31,
2006.
 
 Research
and Development Expenses
 
 There
were no research and development expenses for the three and six months ended
June 30, 2009 and 2008 as 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.
 
 14
 
 Sales
and Marketing Expenses
 
 There
were no sales and marketing expenses for the three and six months ended June 30,
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 $413,000 and $322,000 for the six months ended
June 30, 2009 and 2008, respectively.  Such costs were $188,000 and
$145,000 for the three months ended June 30, 2009 and 2008
respectively.  The increases from June 30, 2008 to 2009 are due to
primarily to increased legal costs. 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, 2009 and 2008 consisted
of costs of our 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, 2009 for
the quarter ending September 30, 2009.
 
 Interest
and Other Income (Expense)
 
 For the
six months ended June 30, 2009 and 2008, interest and other income was $108,000
and $396,000, respectively.  For the three months ended June 30, 2009
and 2008, interest and other income was $37,000 and $167,000
respectively.  The decreases during the three and six month periods
ended June 30, 2008 to June 30, 2009 are due to lower interest rates during the
first half of 2009 as compared to the first half
of  2008.
 
 Income
Tax Provision
 
 Provisions
for income taxes were nil for the three months ended June 30, 2009 and 2008,
respectively.  For the six months ended June 30, 2009 and 2008,
provisions for income taxes were $1 and $0 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 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 $22.8 million and $23.2 million
at June 30, 2009 and December 31, 2008, respectively.
 
 Operating
Activities
 
 We used
$247,000 in cash from operations for the six months ended June 30, 2009 as
compared to generating $90,000 in cash from operations for the six months ended
June 30, 2008.  The increase in cash usage in 2009 is due primarily to
the net loss incurred for the six months ended June 30, 2009 as compared to the
net income for the six months ended June 30, 2008.
 
 15
 
 Investing
Activities
 
 We
generated $10.2 million in cash in the six months ended June 30, 2009 as
compared to utilizing cash of $2.9 million during the six months ended June 30,
2008 due to a decrease in purchases of short term investments for the six months
period ended June 30, 2009.  There were no capital expenditures in the
six months ended June 30, 2009 or 2008, respectively.
 
 Financing
Activities
 
 There
were no significant financing activities in the six months ended June 30, 2009
or 2008 respectively.
 
 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 June
30, 2009, we had $22.8 million in cash, cash equivalents 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.
 
 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 June 30,
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 $7,000 decrease in the fair value
of our investments in debt securities as of June 30, 2009.
 
 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.
  16
  Changes in Internal Controls.
With respect to the most recently completed fiscal quarter, there have been no
changes to our internal controls over financial reporting 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.
 
 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 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 opposed
class certification.  On March 26, 2008, the Court denied the
defendants’ motion to dismiss the amended complaints.
 
 The
parties have reached a global settlement of the litigation.  On April 2,
2009, plaintiffs filed a motion for preliminary approval of the
settlement.  On June 9, 2009, the Court granted preliminary approval
of the settlement and set a final approval hearing for September 10,
2009.  Under the settlement, which remains subject to final 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.
  17
 
 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/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:
      August 6, 2009
                          By:
                          /s/ Terry R. GibsonTerry
      R. GibsonDirector,
      Chief Executive Officer and Chief Financial Officer(Principal
      Accounting
Officer)
 19
 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