**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**











**FORM
      10-Q**







**(MARK
      ONE)**


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





**FOR
      THE QUARTERLY PERIOD ENDED** **March 31, 2007**





**OR**





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





**For
      the transition period from ____________ to
      ____________.**





**Commission
      File Number 000-30715**





**COSINE
      COMMUNICATIONS, INC.**


*(Exact
      name of Registrant as specified in its charter)*





**Delaware**
            **94-3280301***(State
                or other jurisdiction of*
            *(I.R.S.
                Employer**incorporation
                or organization)*
            *Identification
                Number)***61
                East Main Street, Suite B Los Gatos, CA**
            **95031***(Address
                of principal executive offices)*
            *(Zip
                Code)*





**Registrant's
      telephone number including area code: (408) 236-7518**





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 is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check
      one):





Large
      accelerated filer  o
      Accelerated filer  o Non-accelerated
      filer  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
o





**There
      were 10,090,635 shares of the Registrant’s Common Stock, par value $.0001,
      outstanding on April 30, 2007.**










**COSINE
      COMMUNICATIONS, INC.**





**FORM
      10-Q**





**Quarter
      ended March 31, 2007**





**TABLE
      OF CONTENTS**





Page**PART
                I**FINANCIAL
                INFORMATIONItem 1.
            Condensed
                Consolidated Financial Statements:Condensed
                Consolidated Balance Sheets as of March 31, 2007 and December 31,
                2006
            
            
            3Condensed
                Consolidated Statements of Operations for the Three Months Ended
                March 31,
                2007 and 2006
            
            
            4Condensed
                Consolidated Statements of Cash Flows for Three Months Ended March
                31,
                2007 and 2006
            
            
            5Notes
                to Condensed Consolidated Financial Statements
            
            
            6Item 2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            
            12Item 3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            
            17Item 4.
            Controls
                and Procedures
            
            
            17**PART
                II**OTHER
                INFORMATIONItem 1.
            Legal
                Proceedings
            
            
            18Item 1A.
            Risk
                Factors
            
            
            19Item 2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            
            23Item 6.
            Exhibits
            
            
            23Signature
            
            
            24Exhibit
              Index
            
            
            25Certifications




PAGE
          2 OF
          25


**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





**COSINE
      COMMUNICATIONS, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


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




**March
                31,**
              **2007**
            
            **December
                31,**
              **2006****(Unaudited)**
            
            **(1)**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            7,980
            
            $
            5,207Short-term
                investments
            
            
            14,915
            
            
            17,650Accounts
                receivable:Trade
                (net of allowance for doubtful accounts of nil at March 31, 2007
                and
                December 31, 2006)
            
            
            6
            
            
            55Other
            
            
            41
            
            
            68Prepaid
                expenses and other current assets
            
            
            47
            
            
            56$
            22,989
            
            $
            23,036LIABILITIES
                AND STOCKHOLDERS' EQUITYCurrent
                liabilities:Accounts
                payable
            
            $
            286
            
            $
            320Accrued
                other liabilities
            
            
            122
            
            
            239Total
                current liabilities
            
            
            408
            
            
            559Stockholders'
                equity:Preferred
                stock, 3,000,000 authorized, none issued and outstanding
            
            
            —
            
            
            —Common
                stock, $.0001 par value, 22,000,000 shares authorized; 10,090,635
                shares
                issued and outstanding at March 31, 2007 and December 31, 2006
            
            
            1
            
            
            1Additional
                paid-in capital
            
            
            538,997
            
            
            538,987Accumulated
                other comprehensive income
            
            
            17
            
            
            17Accumulated
                deficit
            
            
            (516,434
            )
            
            (516,528
            )Total
                stockholders' equity
            
            
            22,581
            
            
            22,477$
            22,989
            
            $
            23,036




See
      accompanying notes to condensed consolidated financial statements.





(1)
      The
      information in this column was derived from the Company's audited consolidated
      financial statements for the year ended December 31, 2006.


PAGE
          3 OF
          25


**COSINE
      COMMUNICATIONS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


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


**(Unaudited)**





**Three
                Months Ended**
              **March
                31,********2007**
            
            ******2006**Revenue:Product
            
            $
            —
            
            $
            —Service
            
            
            —
            
            
            579Total
                revenue
            
            
            —
            
            
            579Cost
                of revenue1
            
            
            —
            
            
            570Gross
                profit
            
            
            —
            
            
            9Operating
                expenses:Research
                and development
            
            
            —
            
            
            —Sales
                and marketing
            
            
            —
            
            
            —General
                and administrative2
            
            
            197
            
            
            377Restructuring
                and impairment charges
            
            
            —
            
            
            —Total
                operating expenses
            
            
            197
            
            
            377Loss
                from operations
            
            
            (197
            )
            
            (368
            )Other
                income (expenses):Interest
                income and other
            
            
            291
            
            
            242Total
                other income (expenses)
            
            
            291
            
            
            242Income
                (Loss) before income tax provision
            
            
            94
            
            
            (126
            )Income
                tax provision
            
            
            —
            
            
            —Net
                income (loss)
            
            $
            94
            
            $
            (126
            )Basic
                net income (loss) per share
            
            $
            0.01
            
            $
            (0.01
            )Diluted
                net income (loss) per share
            
            $
            0.01
            
            $
            (0.01
            )Shares
                used in computing per share amounts:Basic
            
            
            10,091
            
            
            10,090Diluted
            
            
            10,120
            
            
            10,090





See
      accompanying notes to condensed consolidated financial statements.




1  Cost
            of
            revenue includes nil and $60 for the three months ended March 31, 2007
            and 2006,
            respectively, of non-cash charges related to equity issuances.
 2 General
            and administrative expenses include $10 and $5, for the three months
            ended March
            31, 2007 and 2006, respectively, of non-cash charges related to equity
            issuances.
 PAGE
              4 OF
              25


**COSINE
      COMMUNICATIONS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(In
      thousands)**


**(Unaudited)**





**Three
                Months Ended**
              **March
                31,****2007**
            
            ******2006****Operating
                activities:**Net
                income (loss)
            
            $
            94
            
            $
            (126
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Amortization
                of warrants issued for services
            
            
            —
            
            
            60Expense
                for option vesting
            
            
            10
            
            
            5Change
                in operating assets and liabilities:Accounts
                receivable, trade
            
            
            49
            
            
            (362
            )Other
                receivables
            
            
            27
            
            
            209Prepaid
                expenses and other current assets
            
            
            9
            
            
            (10
            )Accounts
                payable
            
            
            (34
            )
            
            17Accrued
                other liabilities
            
            
            (117
            )
            
            (147
            )Accrued
                compensation
            
            
            —
            
            
            —Deferred
                revenue
            
            
            —
            
            
            (64
            )Net
                cash provided by (used in) operating activities
            
            
            38
            
            
            (418
            )**Investing
                activities:**Purchase
                of short-term investments
            
            
            (7,213
            )
            
            (1,607
            )Proceeds
                from sales and maturities of short-term investments
            
            
            9,948
            
            
            7,702Net
                cash provided by investing activities
            
            
            2,735
            
            
            6,095Net
                increase in cash and cash equivalents
            
            
            2,773
            
            
            5,677Cash
                and cash equivalents at the beginning of the period
            
            
            5,207
            
            
            12,417Cash
                and cash equivalents at the end of the period
            
            $
            7,980
            
            $
            18,094**Supplemental
                information:**Income
                taxes paid
            
            $
            —
            
            $
            —





See
      accompanying notes to condensed consolidated financial
      statements.


PAGE
          5 OF
          25


**COSINE
      COMMUNICATIONS, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





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. 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.
      As a result of these activities, our business consisted primarily of a customer
      support capability for our discontinued products provided by a third party.
      We
      continued such support activities through December 31, 2006, at which time
      we
      ceased all customer support services. In 2006 we sold our patent portfolio
      and
      the intellectual property related to our carrier products and service business.
      We continue to seek 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 net operating loss carry-forwards
      ("NOLs").





***Liquidity
      and Redeployment Strategy***





The
      accompanying financial statements have been prepared in conformity with U.S.
      generally accepted accounting principles, which contemplate continuation of
      the
      Company as a going concern. However, at March 31, 2007, we have an accumulated
      deficit of $516 million. As of December 31, 2006, we have ceased our customer
      service capability. Our actions in the fourth quarter of fiscal year 2004 to
      terminate most of our employees and discontinue production activities in an
      effort to conserve cash raise substantial doubt about our ability to continue
      as
      a going concern. 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.





In
      July
      2005, we completed a comprehensive review of strategic alternatives, including
      a
      sale of CoSine, a sale or licensing of intellectual property, a redeployment
      of
      our assets into new business ventures, or a winding-up and liquidation of the
      business and a return of capital. The board of directors approved a plan to
      redeploy our existing resources to identify and acquire one or more new business
      operations, while continuing to support our existing customers and continuing
      to
      offer our intellectual property for license or sale. We continued to provide
      customer support services through December 31, 2006, at which time we terminated
      customer support operations. During 2006, we sold the rights to our patent
      portfolio and the intellectual property related to our carrier products and
      service business. We continue to pursue our redeployment strategy, which
      involves the acquisition of one or more operating businesses with existing
      or
      prospective taxable earnings that can be offset by use of our NOLs.




***Basis
      of Consolidation***





The
      consolidated financial statements include all of the accounts of CoSine and
      its
      wholly owned subsidiaries. All significant intercompany balances and
      transactions have been eliminated.





***Use
      of Estimates***





The
      preparation of consolidated 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 consolidated financial
      statements and the accompanying notes. Actual results could differ from these
      estimates. Estimates are used in accounting for, but not limited to, revenue
      recognition, allowance for doubtful accounts, inventory valuations, long-lived
      asset valuations, accrued liabilities including warranties, and equity
      issuances. Estimates and assumptions are reviewed periodically and the effects
      of revisions are reflected in the consolidated financial statements in the
      period of determination.


PAGE
          6 OF
          25





The
      unaudited condensed consolidated 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. and its wholly owned
      subsidiaries ("CoSine" or collectively, the "Company"). Certain information
      and
      footnote disclosures normally included in financial statements prepared in
      accordance with U. S. generally accepted accounting principles have been
      condensed or omitted pursuant to the Securities Exchange Commission’s rules and
      regulations. In the opinion of management, all adjustments (consisting of normal
      recurring items) necessary for a fair presentation have been included. The
      results of operations for the three months ended March 31, 2007 are not
      necessarily indicative of the results to be expected for any subsequent quarter
      or for the entire year. The condensed consolidated balance sheet at December
      31,
      2006 has been derived from the audited financial statements as of that date.
      These unaudited condensed consolidated financial statements should be read
      in
      conjunction with the audited consolidated financial statements and the notes
      included in our Annual Report filed on Form 10-K for the year ended December
      31,
      2006.





***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.





**Impact
      of the Adoption of SFAS No. 123 (R)**





The
      effect of recording stock-based compensation for the three months ended March
      31, 2007 and 2006 was $10,000 and $5,000, respectively, which consisted of
      stock
      based compensation related to employee stock options. As of March 31, 2007
      we
      had an unrecorded deferred stock compensation balance related to stock options
      of approximately $84,000 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 2.5% for our options. Accordingly,
      as
      of March 31, 2007, we estimated that the stock-based compensation for the awards
      not expected to vest was approximately $4,000, and therefore, the unrecorded
      deferred stock-based compensation balance related to stock options was adjusted
      to approximately $80,000 after estimated forfeitures. This amount will be
      recognized over an estimated weighted average amortization period of 3 years. .




During
      the three months ended March 31, 2007 and 2006, respectively, there were no
      stock options granted, exercised, cancelled or expired.





**Valuation
      Assumptions**





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





**Three
                Months Ended March 31,****2007**
            
            **2006**Dividend
                yield
            
            
            0.0
            %
            
            0.0
            %Volatility
            
            
            0.40
            
            
            0.47Risk
                free interest rate
            
            
            5.0
            %
            
            4.2
            %Expected
                life
            
            
            6.25
                years
            
            
            4
                years





The
      dividend yield of zero is based on the fact that we have never paid cash
      dividends and have no present intention to pay cash dividends. Expected
      volatility is based on the historical volatility of our common stock. The
      risk-free interest rates are taken from the Daily Federal Yield Curve Rates
      as
      of the grant dates as published by the Federal Reserve and represent the yields
      on actively traded treasury securities for terms equal to the expected term
      of
      the options. The expected term calculation is based on the observed historical
      option exercise behavior and post-vesting forfeitures of our employees and
      an
      analysis of the existing option holders.




PAGE
          7 OF
          25





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**
              **Share****Balance
                as of December 31, 2006**
            
            
            2,940
            
            
            147
            
            $
            7.69Granted
            
            
            —
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —Canceled
            
            
            —
            
            
            —
            
            
            —**Balance
                as of March 31, 2007**
            
            
            2,940
            
            
            147
            
            $
            7.69




The
      following table summarizes information concerning options outstanding and
      exercisable at March 31, 2007 (in thousands, except per share
      data):





**Options
                Outstanding****Weighted-**
            
            
            
            **Options
                Exercisable****Average**
            
            **Weighted-**
            
            
            
            **Weighted-****Number**
            
            **Remaining**
            
            **Average**
            
            **Number**
            
            **Average****Range
                of**
            
            **Of**
            
            **Contractual**
            
            **Exercise**
            
            **Of**
            
            **Exercise****Exercise
                Prices**
            
            **Shares**
            
            **Life
                (Years)**
            
            **Price**
            
            **Shares**
            
            **Price**$2.15-2.60
            
            
            118
            
            
            8.3
            
            $
            2.56
            
            
            52
            
            $
            2.585.20
            
            
            4
            
            
            6.1
            
            
            5.20
            
            
            -
            
            
            -6.96
            
            
            12
            
            
            6.6
            
            
            6.96
            
            
            9
            
            
            6.968.80
            
            
            4
            
            
            5.1
            
            
            8.80
            
            
            4
            
            
            8.8022.30
            
            
            4
            
            
            4.2
            
            
            22.30
            
            
            4
            
            
            22.30120.00
            
            
            5
            
            
            3.4
            
            
            120.00
            
            
            5
            
            
            120.00$2.15-120.00
            
            
            147
            
            
            7.7
            
            $
            7.69
            
            
            74
            
            $
            12.47




***Guarantees***





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





Generally,
      a maximum obligation is not explicitly stated. Because the obligated amounts
      associated with this type of agreement are not explicitly stated, the overall
      maximum amount of the obligation cannot be reasonably estimated. Historically,
      we have not been obligated to make payments for these obligations, and no
      liabilities have therefore been recorded for these obligations on its
      consolidated balance sheet as of March 31, 2007.




PAGE
          8 OF
          25





***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 consolidated 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. The terms
      of
      the settlement, if approved, would dismiss and release all claims against the
      participating defendants (including us). In exchange for this dismissal, D&O
      insurance carriers would agree to guarantee a recovery by the plaintiffs from
      the underwriter defendants of at least $1 billion, and the issuer defendants
      would agree to an assignment or surrender to the plaintiffs of certain claims
      the issuer defendants may have against the underwriters. On August 31, 2005,
      the
      court issued an order granting preliminary approval of the settlement. On April
      24, 2006, the court held a fairness hearing in connection with the motion for
      final approval of the settlement but has yet to rule on this
      motion.





On
      December 5, 2006, the Court of Appeals for the Second Circuit reversed the
      court's October 2004 order certifying a class in six test cases that were
      selected by the underwriter defendants and plaintiffs in the coordinated
      proceedings. It is unclear what impact this will have on the case. The
      settlement is subject to a number of conditions, including final court approval,
      which cannot be assured. If the settlement is not consummated, we intend to
      defend the lawsuit vigorously. However, we cannot predict its outcome with
      certainty. If we are not successful in our defense of this lawsuit, we could
      be
      forced to make significant payments to the plaintiffs and their lawyers, and
      such payments could have a material adverse effect on our business, financial
      condition and results of operations if not covered by our insurance
      carrier.





Even
      if
      these 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.


PAGE
          9 OF
          25





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




3.
      BALANCE SHEET DETAILS





***Cash***





At
      March
      31, 2007, we had deposits with a financial institution that may exceed the
      amount of insurance provided on such deposits.





***Accounts
      Receivable***





****** One
      European customer accounted for 100% of total accounts receivable as of March
      31, 2007, as compared to two customers comprising 94% of total accounts
      receivable at December 31, 2006.





***Warranty***





Prior
      to
      discontinuing our products in September 2004, we provided a basic limited
      warranty, including repair or replacement of parts, and technical support for
      products sold on or before September 30, 2004. We ceased offering warranties
      in
      2004 in connection with the discontinuance of our products and all warranty
      obligations have expired on or before March 31, 2007. There were no warranty
      activities in the three months ended March 31, 2007 and 2006,
      respectively.








4.
      NET
      INCOME (LOSS) PER COMMON SHARE




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





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





**2007**
            
            **2006**Numerator:Net
                income (loss)
            
            $
            94
            
            $
            (126
            )Denominator:Weighted
                average shares outstanding for basic income (loss)per
                share
            
            
            10,091
            
            
            10,090Add:
                effect of dilutive securities - stock options
            
            
            29
            
            
            —Weighted
                average shares used in basic and diluted netincome
                (loss) per share
            
            
            10,120
            
            
            10,090Basic
                net income (loss) per share
            
            $
            0.01
            
            $
            (0.01
            )Diluted
                net income (loss) per share
            
            $
            0.01
            
            $
            (0.01
            )




Basic
      net
      income (loss) per common share is calculated based on the weighted-average
      number of common shares outstanding during the periods presented. Common stock
      equivalents consisting of stock options and warrants (calculated using the
      treasury stock method), have been excluded from the diluted net loss per common
      share computations in the three months ended March 31, 2006, as their inclusion
      would be antidilutive. These securities amounted to 147,000 shares for the
      three
      months ended March 31, 2006.




PAGE
          10
          OF 25


5.
      COMPREHENSIVE INCOME (LOSS)





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





**Three
                Months Ended**
              **March
                31,****2007**
            
            **2006**Net
                income (loss)
            
            $
            94
            
            $
            (126
            )Other
                comprehensive gain:Unrealized
                gains on investments
            
            
            —
            
            
            6Translation
                adjustment
            
            
            —
            
            
            12Total
                other comprehensive gain
            
            
            —
            
            
            18Comprehensive
                income (loss)
            
            $
            94
            
            
            ($
                108
            )




6.
      SEGMENT REPORTING




We
      operate in only one operating segment, and substantially all of our assets
      are
      located in the United States.




Revenues
      from customers by geographic region for the three months ended March 31, 2007
      and 2006 were as follows, in thousands:





**Three
                Months Ended**
              **March
                31,****2007**
            
            **2006****Region**North
                America
            
            $
            —
            
            $
            545Italy
            
            
            —
            
            
            —France
            
            
            —
            
            
            —South
                Korea
            
            
            —
            
            
            —Europe
            
            
            —
            
            
            34Japan
            
            
            —
            
            
            —Total
            
            $
            —
            
            $
            579





We
      had no
      revenues in the three months ended March 31, 2007. Two North American customers
      accounted for 74% and 11% of total revenues, respectively, in the three months
      ended March 31, 2006.





7.
      RECENT
      ACCOUNTING PRONOUNCEMENTS





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes —
an interpretation of FASB Statement No. 109” (FIN 48). FIN 48
      prescribes a recognition threshold and measurement attribute for financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return, and also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure, and transition. FIN 48 is effective for fiscal years beginning
      after December 15, 2006. We adopted the provisions of FIN 48 on January 1,
      2007. As a result of the implementation of FIN 48, we recognized no material
      adjustments in the liability for unrecognized income tax benefits. We operated
      in multiple tax jurisdictions both inside and outside the United States. With
      few exceptions, we are no longer subject to audits by tax authorities for tax
      years prior to 2001. At the adoption date we did not have any unrecognized
      tax
      benefits and did not have any interest or penalties accrued.


PAGE
          11
          OF 25





In
      September 2006, the FASB issued FASB Statement No. 157, Fair Value
      Measurements, or SFAS 157. The standard provides guidance for using fair
      value to measure assets and liabilities. The standard also responds to
      investors’ requests for expanded information about the extent to which companies
      measure assets and liabilities at fair value, the information used to measure
      fair value, and the effect of fair value measurements on earnings. The standard
      applies whenever other standards require or permit assets or liabilities to
      be
      measured at fair value. The standard does not expand the use of fair value
      in
      any new circumstances. SFAS 157 must be adopted prospectively as of the
      beginning of the year it is initially applied. SFAS 157 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007, and interim periods within those fiscal years. We are still evaluating
      the
      impact of this standard will have on our financial position or results of
      operations.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No,
      158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
      Plans-an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS
      158). This statement requires balance sheet recognition of the overfunded or
      underfunded status of pension and postretirement benefit plans. Under SFAS
      158,
      actuarial gains and losses, prior service costs or credits, and any remaining
      transition assets or obligations that have not been recognized under previous
      accounting standards must be recognized in Accumulated Other Non-Shareowners’
Changes in Equity, net of tax effects, until they are amortized as a component
      of net periodic benefit cost. The adoption of SFAS 158 is not expected to have
      a
      material impact on the consolidated financial position or results of operations
      of the Company.





In
      February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities—Including an amendment of FASB
      Statement No. 115” (“SFAS 159”). SFAS 159 creates a “fair value option” under
      which an entity may elect to record certain financial assets or liabilities
      at
      fair value upon their initial recognition. Subsequent changes in fair value
      would be recognized in earnings as those changes occur. The election of the
      fair
      value option would be made on a contract-by contract basis and would need to
      be
      supported by concurrent documentation or a preexisting documented policy. SFAS
      159 requires an entity to separately disclose the fair value of these items
      on
      the balance sheet or in the footnotes to the financial statements and to provide
      information that would allow the financial statement user to understand the
      impact on earnings from changes in the fair value. SFAS 159 is effective for
      us
      beginning with fiscal year 2008. We are currently evaluating the impact that
      the
      adoption of SFAS 159 will have on our consolidated financial
      statements.




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





**OVERVIEW**





Our
      business consisted primarily of a customer support capability for our
      discontinued products provided by a third party. We continued such support
      activities through December 31, 2006, at which time we ceased all customer
      support services. In 2006 we sold our patent portfolio and the intellectual
      property related to our carrier products and service business. We continue
      to
      seek 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 net operating loss carry-forwards ("NOLs").




DUE
      TO
      THE ADOPTION OF OUR REDEPLOYMENT STRATEGY, THE INFORMATION APPEARING BELOW,
      WHICH RELATES TO PRIOR PERIODS, MAY NOT BE INDICATIVE OF THE RESULTS THAT MAY
      BE
      EXPECTED FOR ANY SUBSEQUENT PERIODS. THE THREE MONTHS ENDED MARCH 31, 2007
      PRIMARILY REFLECTS, AND FUTURE PERIODS PRIOR TO A REDEPLOYMENT OF OUR ASSETS
      ARE
      EXPECTED TO PRIMARILY REFLECT, GENERAL AND ADMINISTRATIVE EXPENSES AND
      TRANSACTION EXPENSES ASSOCIATED WITH THE CONTINUING ADMINISTRATION OF THE
      COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS.




PAGE
          12
          OF 25




**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





**General**





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




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





**Revenue
      Recognition**





Historically,
      prior to discontinuing our products, most of our sales were generated from
      complex arrangements. Recognizing revenue in these arrangements required our
      making significant judgments, particularly in the areas of customer acceptance
      and collectibility.





Certain
      of our historic product sales arrangements required formal acceptance by our
      customers. In such cases, we did not recognize revenue until we received formal
      notification of acceptance. Although we worked closely with our customers to
      help them achieve satisfaction with our products prior to and after acceptance,
      the timing of customer acceptance could greatly affect the timing of the
      recognition of our revenue.





While
      the
      end user of our product was normally a large network service provider, we also
      sold product and services through small resellers and to small network service
      providers in Asia, Europe and North America. To recognize revenue before we
      receive payment, we were required to assess that collection from the customer
      was probable. If we could not satisfy ourselves that collection is probable,
      we
      deferred revenue recognition until we collected payment.





Our
      current business consists primarily of customer service revenue. We record
      revenue as earned for customer service revenue, once we satisfy ourselves that
      collection is probable. If we cannot satisfy ourselves that collection is
      probable, we defer revenue recognition until we collected payment.





**Allowance
      for Doubtful Accounts**





We
      maintain allowances for doubtful accounts in connection with estimated losses
      resulting from the inability of our customers to pay our invoices. In order
      to
      estimate the appropriate level of this allowance, we analyze historical bad
      debts, customer concentrations, current customer credit-worthiness, current
      economic trends and changes in our customer payment patterns. In future periods,
      if the financial condition of our customers were to deteriorate and affect
      their
      ability to make payments, additional allowances may be required.




**Warranties**





Prior
      to
      discontinuing our products, we provided a basic limited warranty, including
      repair or replacement of parts, and technical support for our products. The
      specific terms and conditions of those warranties varied depending on the
      customer or region in which we did business. We estimated the costs that could
      be incurred under our basic limited warranty and recorded a liability in the
      amount of such costs at the time product revenue was recognized. Our warranty
      obligation is affected by the number of installed units, product failure rates,
      materials usage and service delivery costs incurred in correcting product
      failures. Each quarter, we assess the adequacy of our recorded warranty
      liabilities and adjust the amounts as necessary. In future periods, if actual
      product failure rates, materials usage or service delivery costs differ from
      our
      estimates, adjustments to cost of revenue may result.


PAGE
          13
          OF 25





We
      ceased
      offering warranty on product or service sales in 2004.





**Impact
      of Equity Issuances on Operating Results**





Equity
      issuances have historically had a material impact on our operating results.
      The
      equity issuances that have affected operating results to date include warrants
      granted to customers and suppliers, stock options granted to employees and
      consultants, 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
      consolidated 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 consolidated 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.





In
      the
      second quarter of 2004, we issued to a reseller a warrant to acquire 254,489
      shares of our common stock at an exercise price of $4.65 per share. The warrant
      has a two-year term beginning May 28, 2004 and vests ratably over the term.
      If
      during the two-year term (1) any person or entity acquires a greater than 50%
      interest in us or the ownership or control of more than 50% of our voting stock
      or (2) we sell substantially all of our intellectual property assets, the
      warrant becomes exercisable. Even if the reseller does not immediately exercise
      the warrant upon the occurrence of such an event that makes the warrant
      exercisable (a “trigger event”), the reseller shall be entitled to securities,
      cash and property to which it would have been entitled to upon the consummation
      of the trigger event, less the aggregate price applicable to the warrant. We
      calculated the fair value of the warrant to be approximately $487,000 using
      the
      Black-Scholes option pricing model, using a volatility factor of .97, a
      risk-free interest rate of 2.5%, and an expected life of two years. The fair
      value of the warrant is being amortized over the two-year expected life of
      the
      warrant. The warrant was fully amortized at December 31, 2006. During the three
      months ended March 31, 2006 we amortized $60,000 to cost of revenue.





**RESULTS
      OF OPERATIONS**




**Revenue**





Effective
      December 31, 2006, we have ceased all customer service operations, accordingly,
      there were no revenues recognized for the three months ended March 31, 2007.
      Revenues for the three months ended March 31, 2006 were $579,000, all of which
      was from service.





Revenues
      by geographic region for the three months ended March 31, 2006 were as follows,
      in thousands:





**2006****Region**North
                America
            
            $
            545Italy
            
            
            —France
            
            
            —South
                Korea
            
            
            —Europe-other
            
            
            34Japan
            
            
            —Total
            
            $
            579




PAGE
          14
          OF 25




**Non-Cash
      Charges Related to Equity Issuances**





During
      the three months ended March 31, 2007 and 2006, we recorded $10,000 and $65,000,
      respectively, of non-cash charges related to equity issuances. The charges
      in
      2007 include $10,000 related to the adoption of SFAS No. 123(R). The charges
      in
      2006 relate to stock option expense as well as the amortization of a stock
      purchase warrant granted to a reseller.





**Cost
      of Revenue**





**** For
      the
      three months ended March 31, 2006, cost of revenue was $570,000, which
      represented costs of our third party support contract as well as amortization
      of
      a warrant granted to a sales representative. **** There
      was
      no cost of revenue for the three months ended March 31, 2007 as we closed our
      customer service business effective December 31, 2006.





**Gross
      Profit**





For
      the
      three months ended March 31, 2006, gross profit was $9,000. Our gross profit
      was
      adversely affected by the declining volume of our service contract sales and
      the
      costs we incurred with our third party contractor.





**Research
      and Development Expenses**





Research
      and development expenses were nil for the three months ended March 31, 2007
      and
      2006, respectively. We discontinued all research and development in connection
      with our announcement in September 2004 that we were laying off all employees
      and discontinuing our products. We do not expect to incur research and
      development costs unless and until we acquire new operating businesses.





**Sales
      and Marketing Expenses**





Sales
      and
      marketing expenses were nil for the three months ended March 31, 2007 and 2006,
      respectively. With our announcement in September 2004 that we were laying off
      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 $197,000 and $377,000 for the three months
      ended March 31, 2007 and 2006, respectively. With our announcement in September
      2004 that we were laying off all employees and discontinuing our products,
      our
      general and administrative efforts have been focused on restructuring
      activities, the evaluation of strategic alternatives, as well as the activities
      related to identifying and acquiring profitable business operations. General
      and
      administrative costs for the three months ended March 31, 2007 and 2006
      consisted of costs of our employee, contractors, legal and accounting services,
      insurance and office expenses. General and administrative expenses should remain
      at approximately the levels reported in the three months ended March 31, 2007
      for the quarter ending June 30, 2007 **.**





**Interest
      Income and Other Income (Expense)**





For
      the
      three months ended March 31, 2007 and 2006, interest income and other income
      was
      $291,000 and $242,000, respectively. The increase from March 31, 2006 to March
      31, 2007 is due to higher interest rates, partially offset by lower short term
      investments.




PAGE
          15
          OF 25





**Income
      Tax Provision**





Provisions
      for income taxes were nil for the three months ended March 31, 2007 and 2006,
      respectively. Our tax expense for fiscal 2007 will continue to depend on the
      amount and mix of income derived from sources subject to corporate income taxes
      of foreign taxing jurisdictions.





**LIQUIDITY
      AND CAPITAL RESOURCES**





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





Through
      December 31, 2006, our current business consisted primarily of a customer
      support capability for our discontinued products provided by a third party.
      In
      June 2006, we sold the rights to our patent portfolio for cash consideration
      of
      $180,000 and in November 2006 we sold the rights to our intellectual property
      for $80,000. We ceased customer support activities effective December 31, 2006.
      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. 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
      restructuring activities and our new redeployment of assets strategy raise
      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 $22.9 million at March 31,
      2007
      and December 31, 2006.





**Operating
      Activities**




We
      generated $38,000 in cash for operations for the three months ended March 31,
      2007 as compared to a usage of $418,000 in cash for operations for the three
      months ended March 31, 2006. The improvement in 2007 is due to the net income
      in
      the three months ended March 31, 2007 as compared to a loss in the prior year
      period, as well as reductions in receivables, partially offset by reductions
      in
      accounts payable and accrued other liabilities.




**Investing
      Activities**





**** Investing
      activities generated $2.7 million in cash in the three months ended March 31,
      2007 as compared to $6.1 million in the three months ended March 31, 2006.
      There
      were no capital expenditures in the three months ended March 31, 2007 or 2006,
      respectively.





**Financing
      Activities**





There
      were no significant financing activities in the three months ended March 31,
      2007 or 2006, respectively.


PAGE
          16
          OF 25




**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, while continuing to support our existing
      customers and continuing to offer our intellectual property for license or
      sale.
      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 net operating loss carry-forwards (“NOLs”). As of this date, no
      candidate has been identified, and no assurance can be given that we will find
      suitable candidates, and if we do, that we will be able to utilize our existing
      NOLs.





At
      March
      31, 2007, we had $22.9 million in cash and short-term investments. We believe
      we
      possess sufficient liquidity and capital resources to fund our operations and
      working capital requirements for at least the next 12 months.





**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





**Interest
      Rate Sensitivity**





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





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





A
      sensitivity analysis was performed on our investment portfolio as of March
      31,
      2007 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 $37,000 decrease in the fair value of our
      investments in debt securities as of March 31, 2007.





**Exchange
      Rate Sensitivity**





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





**ITEM
      4. CONTROLS AND PROCEDURES**





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





**Changes
      in Internal Controls** .
      In
      connection with its audit of our consolidated financial statements for the
      year
      ended December 31, 2006, Burr, Pilger & Mayer LLP identified significant
      deficiencies, which represent material weaknesses. The material weaknesses
      were
      related to a lack of adequate segregation of duties. In addition, significant
      audit adjustments and financial statement disclosure changes were needed that
      were the result of an insufficient quantity of experienced resources involved
      with the financial reporting and year end closing process resulting from staff
      reductions associated with our downsizing.


PAGE
          17
          OF 25





Prior
      to
      the issuance of our consolidated financial statements, we completed the needed
      analyses and our management review such that we can certify that the information
      contained in our consolidated financial statements for the year ended December
      31, 2006 and the three months ended March 31, 2007 fairly presents, in all
      material respects, our financial condition and results of
      operations.





**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. The terms
      of
      the settlement, if approved, would dismiss and release all claims against the
      participating defendants (including us). In exchange for this dismissal, D&O
      insurance carriers would agree to guarantee a recovery by the plaintiffs from
      the underwriter defendants of at least $1 billion, and the issuer defendants
      would agree to an assignment or surrender to the plaintiffs of certain claims
      the issuer defendants may have against the underwriters. On August 31, 2005,
      the
      court issued an order granting preliminary approval of the settlement. On April
      24, 2006, the court held a fairness hearing in connection with the motion for
      final approval of the settlement but has yet to rule on this
      motion.


PAGE
          18
          OF 25





On
      December 5, 2006, the Court of Appeals for the Second Circuit reversed the
      court's October 2004 order certifying a class in six test cases that were
      selected by the underwriter defendants and plaintiffs in the coordinated
      proceedings. It is unclear what impact this will have on the case. The
      settlement is subject to a number of conditions, including final court approval,
      which cannot be assured. If the settlement is not consummated, we intend to
      defend the lawsuit vigorously. However, we cannot predict its outcome with
      certainty. If we are not successful in our defense of this lawsuit, we could
      be
      forced to make significant payments to the plaintiffs and their lawyers, and
      such payments could have a material adverse effect on our business, financial
      condition and results of operations if not covered by our insurance
      carrier.





Even
      if
      these 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 legal proceedings involving
      contractual obligations, employment relationships and other matters. Except
      as
      described above, we do not believe there are any pending or threatened legal
      proceedings that will have a material impact on our financial position or
      results of operations.




**ITEM
      1A. RISK FACTORS**





Our
      future results and the market price for our stock are subject to numerous risks,
      many of which are driven by factors that we cannot control or predict. The
      following discussion, as well as other sections of this Report on Form 10-Q
      including Item 2 - Management's Discussion and Analysis of Financial Condition
      and Results of Operations, describes certain risk factors related to our
      business. You should carefully consider the risk factors described below in
      conjunction of the other information is this document.





***We
      have sold our operating assets and are executing a redeployment strategy. There
      can be no assurance that the redeployment strategy will increase shareholder
      value, and we may decide to liquidate.***




We
      have
      incurred losses since inception and expect that net losses and negative cash
      flow will continue for the foreseeable future. In September 2004, we announced
      the termination of most of our employees to facilitate the strategic
      alternatives then in consideration and ceased all operations other than a
      customer service and support capability. In July 2005, we completed a
      comprehensive review of strategic alternatives and approved a plan to redeploy
      our existing resources to identify and acquire one or more new business
      operations, while continuing to support our existing customers and continuing
      to
      offer our intellectual property for license or sale. If we are not successful
      in
      executing this strategy we will continue to incur operating losses and negative
      cash flow and may at some point decide to liquidate and return the net proceeds
      to our stockholders. In the case of a liquidation or bankruptcy, we would need
      to hold back or distribute assets to cover liabilities before paying
      stockholders, which may therefore reduce or delay the proceeds that stockholders
      may receive for their ownership in us. However, we believe we have adequate
      cash
      resources to continue to realize our assets and discharge our liabilities as
      a
      company through 2007.




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




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





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





·
            We
                may not be able to utilize our existing NOLs to offset future
                earnings;





·
            We
                may have difficulty retaining our key remaining
                employee;





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


PAGE
          19
          OF 25





***There
      can be no assurance that we will be able to identify suitable acquisition
      candidates in connection with our redeployment
      strategy.***





We
      have
      incurred recurring operating losses, and operations have not generated positive
      cash flows since inception. If we are unable to acquire suitable acquisition
      candidate(s), we will continue to incur operating losses and negative cash
      flows
      and may decide to liquidate. In the case of a liquidation, we would need to
      hold
      back assets to cover liabilities, which may therefore reduce or delay the
      proceeds that stockholders may receive.




***We
      may elect to dissolve and distribute assets to stockholders if our board of
      directors determines that such action is in the best interest of the
      stockholders.*** ****





If
      our
      redeployment strategy is deemed unsuccessful, our board of directors may deem
      it
      advisable to dissolve the company and distribute assets to stockholders.
      Liquidation and dissolution may not create value to our stockholders or result
      in any remaining capital for distribution to our stockholders. The precise
      nature, amount and timing of any distribution to our stockholders would depend
      on and could be delayed by, among other things, sales of our non-cash assets
      and
      claim settlements with creditors.





***We
      will incur significant costs in connection with our evaluation of suitable
      acquisition candidates.***





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





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





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





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





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





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





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




PAGE
          20
          OF 25





***Certain
      transfer restrictions implemented by us to preserve our NOLs may not be
      effective or may have some unintended negative
      effects.***





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





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





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





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





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





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


PAGE
          21
          OF 25





***Our
      customers may sue us because we have announced the discontinuance of our
      products and may not meet all our contractual
      commitments.*** ****





Certain
      of our customer contracts contained provisions relating to the availability
      of
      products, spare parts and services for periods up to ten years. We have worked
      with our customers to aid in a smooth transition, but our customers may choose
      to sue us for breach of contract.





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




Our
      products are technically complex and can be adequately tested only when put
      to
      full use in large and diverse networks with high amounts of traffic. They have
      in the past contained, and may in the future contain, undetected or unresolved
      errors or defects. Despite extensive testing, errors, defects or failures may
      be
      found in our products. If this happens, we may experience product returns,
      increased service and warranty costs, any of which could have a material adverse
      effect on our business, financial condition and results of operations. Moreover,
      because our products are designed to provide critical communications services,
      we may receive significant liability claims. We attempted to include in our
      agreements with customers and distribution partners provisions intended to
      limit
      our exposure to liability claims. However, our customers and distribution
      partners may not be willing to agree to such provisions, and in any event such
      provisions may not be effective in any or all cases or under any or all
      scenarios, and they may not preclude all potential claims resulting from a
      defect in one of our products or from a defect related to the installation
      or
      operation of one of its products. Although we maintains product liability and
      errors and omissions insurance covering certain damages arising from
      implementation and use of their products, our insurance may not cover all claims
      sought against it. Liability claims could require it to spend significant time
      and money in litigation or to pay significant damages. As a result, any such
      claims, whether or not successful, could seriously damage our reputation and
      our
      business.




***If
      we became involved in an intellectual property dispute, we could be subject
      to
      significant liability, the time and attention of our management could be
      diverted from pursuing strategic alternatives.***




We
      may
      become a party to litigation in the future to protect its intellectual property
      or because others may allege infringement of their intellectual property. These
      claims and any resulting lawsuits could subject it to significant liability
      for
      damages or invalidate our proprietary rights. These lawsuits, regardless of
      their merits, likely would be time-consuming and expensive to resolve and would
      divert management time and attention. Any potential intellectual property
      litigation alleging our infringement of a third-party’s intellectual property
      also could force us to:




·
            obtain
                from the owner of the infringed intellectual property right a license
                to
                sell the relevant technology, which license may not be available
                on
                reasonable terms, or at all; or





·
            redesign
                those products or services that use the infringed
                technology.





***We
      have a history of losses that we expect will continue, and if we do not achieve
      profitability we may cease operations.***





At
      March
      31, 2007, we had an accumulated deficit of $516 million. We have incurred net
      losses since our incorporation. If we do not achieve profitability and are
      unable to obtain additional financing, we will run out of cash and cease
      operations.





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





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


PAGE
          22
          OF 25




**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 28.




PAGE
          23
          OF 25




**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.By:
            /s/
              Terry R. GibsonTerry
              R. GibsonChief
              Executive Officer and Chief Financial
              Officer


Dated:
      May 1, 2007


PAGE
          24
          OF 25


**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




PAGE
          25
          OF 25