##### Table of Contents



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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



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FORM 10-Q



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(MARK ONE)



|    |                                                                                        
|--- | ---------------------------------------------------------------------------------------
|[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

OR



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

For the transition period from ____________ to ____________.

Commission File Number 000-30715

COSINE COMMUNICATIONS, INC.

(Exact name of Registrant as specified in its charter)


|                                                                               |  |                                                   
|------------------------------------------------------------------------------ |  | --------------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization)        |  | 94-3280301
(I.R.S. Employer
Identification Number)
|                                                                              
|3200 Bridge Parkway, Redwood City, CA
(Address of principal executive offices) |  | 94065
(Zip Code)                                  

Registrants telephone number including area code: (650) 637-4777

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 [   ]

Although the Registrant has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the period
that the Registrant was required to file such reports, the Registrant did not
become subject to such filing requirements until the registration of certain
shares of its Common Stock pursuant to a Registration Statement on Form S-1
which was declared effective by the Securities and Exchange Commission on
September 25, 2000.

There were 102,426,195 shares of the Companys Common Stock, par value
$.0001, outstanding on July 31, 2001.

Exhibit index on page 21.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION   
|                              | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                              | ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS                                    
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURE                    
|EXHIBIT INDEX                
|EXHIBIT 3.3                  

COSINE COMMUNICATIONS, INC.

FORM 10-Q

Quarter ended June 30, 2001

TABLE OF CONTENTS

|                              |  |                                                                                                                    |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | ----
|                              |  |                                                                                                                    |  | Page
|                              |  |                                                                                                                    |  |     
|PART I. FINANCIAL INFORMATION
|                             
|                             
|                             
|                             
|Item 1.                       |  | Condensed Consolidated Financial Statements:                                                                       |  |     
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000                                    |  | 3   
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2001 and June 30, 2000 |  | 4   
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June
30, 2001 and June 30, 2000           |  | 5   
|                             
|                             
|                             
|                             
|                              |  | Notes to Condensed Consolidated Financial Statements                                                               |  | 6   
|                             
|                             
|                             
|                             
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                              |  | 9   
|                             
|                             
|                             
|                             
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                         |  | 18  
|                             
|                             
|                             
|                             
|PART II. OTHER INFORMATION   
|                             
|                             
|                             
|                             
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                          |  | 19  
|                             
|                             
|                             
|                             
|Item 4.                       |  | Submission of Matters to Vote of Security Holders                                                                  |  | 19  
|                             
|                             
|                             
|                             
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                   |  | 19  
|                             
|                             
|                             
|                             
|Signature                     |  |                                                                                                                    |  | 20  
|                             
|                             
|                             
|                             
|Exhibit Index                 |  |                                                                                                                    |  | 21  

PAGE 2 OF 23



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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




COSINE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

|                                                         |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        |             |         |              |       |         |  | 
|-------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------- | ------ | ----------- | ------- | ------------ | ----- | ------- |  | 
|                                                         |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        | June 30,    |         | December 31,
|                                                         |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        | 2001        |         | 2000        
|                                                         |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        |             |         |             
|                                                         |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        | (Unaudited) |         |              |       |        
|ASSETS                                                  
|                                                        
|                                                        
|                                                        
|                                                        
|Current assets:                                          |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        |             |         |             
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Cash and cash equivalents                                                                                                                                                                                            |                                                                                                                     | $                          | 83,122   |        |             | $       | 126,139      |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Short-term investments                                                                                                                                                                                               |                                                                                                                     |                            | 133,097  |        |             |         | 162,143      |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Accounts receivable:                                                                                                                                                                                                 |                                                                                                                     |                            |          |        |             |         |              |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                                                                                                                                      | Trade (net of allowance for doubtful accounts of $48
and $631 at June 30, 2001 and December 31, 2000,
respectively) |                            |          | 10,966 |             |         |              | 6,093 |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                                                                                                                                                      | Other                                                                                                               |                            |          | 1,011  |             |         |              | 791   |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Inventory                                                                                                                                                                                                            |                                                                                                                     |                            | 11,156   |        |             |         | 10,634       |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Prepaid expenses and other current assets                                                                                                                                                                            |                                                                                                                     |                            | 8,820    |        |             |         | 14,174       |      
|                                                         |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        |             |         |             
|                                                         |                                                                                                                                                                                                                      |                                                                                                                     | Total current assets       |          |        | 248,172     |         |              |       | 319,974 | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Property and equipment, net                                                                                                                                                                                          |                                                                                                                     |                            | 35,795   |        |             |         | 32,739       |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Other assets                                                                                                                                                                                                         |                                                                                                                     |                            | 1,231    |        |             |         | 1,215        |      
|                                                         |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        |             |         |             
|                                                         |                                                                                                                                                                                                                      | $                                                                                                                   | 285,198                    |          |        | $           | 353,928 |             
|                                                         |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        |             |         |             
|LIABILITIES AND STOCKHOLDERS EQUITY                    
|                                                        
|                                                        
|                                                        
|                                                        
|Current liabilities:                                     |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        |             |         |             
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Accounts payable                                                                                                                                                                                                     |                                                                                                                     | $                          | 3,480    |        |             | $       | 7,134        |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Provision for warranty claims                                                                                                                                                                                        |                                                                                                                     |                            | 2,094    |        |             |         | 3,741        |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Accrued other liabilities                                                                                                                                                                                            |                                                                                                                     |                            | 10,673   |        |             |         | 7,478        |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Accrued compensation                                                                                                                                                                                                 |                                                                                                                     |                            | 5,226    |        |             |         | 4,810        |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Note payable                                                                                                                                                                                                         |                                                                                                                     |                            |         |        |             |         | 223          |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Deferred revenue                                                                                                                                                                                                     |                                                                                                                     |                            | 7,098    |        |             |         | 7,643        |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Current portion of equipment and working capital loans                                                                                                                                                               |                                                                                                                     |                            | 2,671    |        |             |         | 2,674        |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Current portion of obligations under capital lease                                                                                                                                                                   |                                                                                                                     |                            | 3,319    |        |             |         | 3,160        |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Other current liabilities                                                                                                                                                                                            |                                                                                                                     |                            | 306      |        |             |         | 84           |      
|                                                         |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        |             |         |             
|                                                         |                                                                                                                                                                                                                      |                                                                                                                     | Total current liabilities  |          |        | 34,867      |         |              |       | 36,947  | 
|                                                        
|                                                        
|                                                        
|                                                        
|Long-term portion of equipment and working capital loans |                                                                                                                                                                                                                      |                                                                                                                     | 3,140                      |          |        |             | 4,541   |             
|                                                        
|                                                        
|                                                        
|                                                        
|Long-term portion of obligations under capital lease     |                                                                                                                                                                                                                      |                                                                                                                     | 3,691                      |          |        |             | 5,391   |             
|                                                        
|                                                        
|                                                        
|                                                        
|Accrued rent                                             |                                                                                                                                                                                                                      |                                                                                                                     | 2,370                      |          |        |             | 2,154   |             
|                                                        
|                                                        
|                                                        
|                                                        
|Other long-term liabilities                              |                                                                                                                                                                                                                      |                                                                                                                     |                           |          |        |             | 132     |             
|                                                        
|                                                        
|                                                        
|                                                        
|Commitments and contingencies                            |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        |             |         |             
|                                                        
|                                                        
|                                                        
|                                                        
|Stockholders equity:                                    |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        |             |         |             
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Preferred stock, 3,000,000 authorized, none issued and
outstanding at June 30, 2001 and December 31, 2000                                                                                                            |                                                                                                                     |                            |          |        |             |         |              |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Common stock, $.0001 par value, 300,000,000 shares
authorized at June 30, 2001 and December 31, 2000,
102,458,374 and 103,697,827 shares issued and
outstanding at June 30, 2001 and December 31, 2000,
respectively |                                                                                                                     |                            | 10       |        |             |         | 10           |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Additional paid-in capital                                                                                                                                                                                           |                                                                                                                     |                            | 587,510  |        |             |         | 634,261      |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Notes receivable from stockholders                                                                                                                                                                                   |                                                                                                                     |                            | (31,722  | )      |             |         | (36,521      | )    
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Accumulated other comprehensive income                                                                                                                                                                               |                                                                                                                     |                            | 608      |        |             |         | 2,286        |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Deferred compensation                                                                                                                                                                                                |                                                                                                                     |                            | (31,065  | )      |             |         | (92,002      | )    
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Accumulated deficit                                                                                                                                                                                                  |                                                                                                                     |                            | (284,211 | )      |             |         | (203,271     | )    
|                                                         |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        |             |         |             
|                                                         |                                                                                                                                                                                                                      |                                                                                                                     | Total stockholders equity |          |        | 241,130     |         |              |       | 304,763 | 
|                                                         |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        |             |         |             
|                                                         |                                                                                                                                                                                                                      | $                                                                                                                   | 285,198                    |          |        | $           | 353,928 |             
|                                                         |                                                                                                                                                                                                                      |                                                                                                                     |                            |          |        |             |         |             

See accompanying notes.

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##### Table of Contents






COSINE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

|                                                   |                               |                               |         |                    |        |                  |         |        |        |      |         |        |        |   |         |        |        | 
|-------------------------------------------------- | ----------------------------- | ----------------------------- | ------- | ------------------ | ------ | ---------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                   |                               |                               |         | Three Months Ended |        | Six Months Ended
|                                                   |                               |                               |         | June 30,           |        | June 30,        
|                                                   |                               |                               |         |                    |        |                 
|                                                   |                               |                               |         | 2001               |        | 2000             |         | 2001   |        | 2000
|                                                   |                               |                               |         |                    |        |                  |         |        |        |     
|Revenue                                            |                               | $                             | 7,127   |                    |        | $                | 5,253   |        |        | $    | 13,182  |        |        | $ | 7,622   |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Cost of goods sold(1)         |                               |         | 4,442              |        |                  |         | 4,381  |        |      |         | 13,287 |        |   |         | 7,275  |       
|                                                   |                               |                               |         |                    |        |                  |         |        |        |      |         |        |        |   |         |       
|Gross profit (loss)                                |                               |                               | 2,685   |                    |        |                  | 872     |        |        |      | (105    | )      |        |   | 347     |       
|                                                   |                               |                               |         |                    |        |                  |         |        |        |      |         |        |        |   |         |       
|Operating expenses:                                |                               |                               |         |                    |        |                  |         |        |        |      |         |        |        |   |         |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Research and development(2)   |                               |         | 18,004             |        |                  |         | 18,697 |        |      |         | 36,701 |        |   |         | 34,103 |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Sales and marketing(3)        |                               |         | 18,642             |        |                  |         | 10,815 |        |      |         | 35,012 |        |   |         | 16,242 |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | General and administrative(4) |                               |         | 7,691              |        |                  |         | 5,143  |        |      |         | 14,674 |        |   |         | 8,313  |       
|                                                   |                               |                               |         |                    |        |                  |         |        |        |      |         |        |        |   |         |       
|                                                   |                               | Total operating expenses      |         |                    | 44,337 |                  |         |        | 34,655 |      |         |        | 86,387 |   |         |        | 58,658 | 
|                                                   |                               |                               |         |                    |        |                  |         |        |        |      |         |        |        |   |         |       
|Loss from operations                               |                               |                               | (41,652 | )                  |        |                  | (33,783 | )      |        |      | (86,492 | )      |        |   | (58,311 | )     
|                                                   |                               |                               |         |                    |        |                  |         |        |        |      |         |        |        |   |         |       
|Other income (expenses):                           |                               |                               |         |                    |        |                  |         |        |        |      |         |        |        |   |         |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Interest income and other     |                               |         | 3,206              |        |                  |         | 1,367  |        |      |         | 7,001  |        |   |         | 2,061  |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Interest expense(5)           |                               |         | (450               | )      |                  |         | (470   | )      |      |         | (938   | )      |   |         | (786   | )     
|                                                   |                               |                               |         |                    |        |                  |         |        |        |      |         |        |        |   |         |       
|                                                   |                               | Total other income (expenses) |         |                    | 2,756  |                  |         |        | 897    |      |         |        | 6,063  |   |         |        | 1,275  | 
|                                                   |                               |                               |         |                    |        |                  |         |        |        |      |         |        |        |   |         |       
|Loss before income tax provision                   |                               |                               | (38,896 | )                  |        |                  | (32,886 | )      |        |      | (80,429 | )      |        |   | (57,036 | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Income tax provision          |                               |         | 198                |        |                  |         |       |        |      |         | 511    |        |   |         |       |       
|                                                   |                               |                               |         |                    |        |                  |         |        |        |      |         |        |        |   |         |       
|Net loss                                           |                               |                               | (39,094 | )                  |        |                  | (32,886 | )      |        |      | (80,940 | )      |        |   | (57,036 | )     
|                                                  
|                                                  
|                                                  
|                                                  
|Deemed dividend to series D preferred stockholders |                               |                               |        |                    |        |                  |        |        |        |      |        |        |        |   | (2,500  | )     
|                                                   |                               |                               |         |                    |        |                  |         |        |        |      |         |        |        |   |         |       
|Net loss allocable to common stockholders          |                               | $                             | (39,094 | )                  |        | $                | (32,886 | )      |        | $    | (80,940 | )      |        | $ | (59,536 | )     
|                                                   |                               |                               |         |                    |        |                  |         |        |        |      |         |        |        |   |         |       
|Basic and diluted net loss per common share        |                               | $                             | (0.41   | )                  |        | $                | (3.98   | )      |        | $    | (0.85   | )      |        | $ | (7.19   | )     
|                                                   |                               |                               |         |                    |        |                  |         |        |        |      |         |        |        |   |         |       
|Shares used in computing per share amounts         |                               |                               | 96,355  |                    |        |                  | 8,273   |        |        |      | 95,667  |        |        |   | 8,286   |       
|                                                   |                               |                               |         |                    |        |                  |         |        |        |      |         |        |        |   |         |       



---

|(1) |  | Cost of goods sold includes $384 and $649 for the three months ended 2001 and 2000, respectively and
$1,265 and $943 for the six months ended 2001 and 2000, respectively of non-cash charges related to equity
issuances.                      
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Research and development expenses include $1,775 and $5,905 for the three months ended 2001 and 2000,
respectively and $7,020 and $10,000 for the six months ended 2001 and 2000, respectively of non-cash charges
related to equity issuances. 
|   
|   
|   
|   
|(3) |  | Sales and marketing expenses include $5,738 and $3,291 for the three months ended 2001 and 2000,
respectively and $9,468 and $5,089 for the six months ended 2001 and 2000, respectively of non-cash charges
related to equity issuances.       
|   
|   
|   
|   
|(4) |  | General and administrative expenses include $1,298 and $2,797 for the three months ended 2001 and 2000,
respectively and $3,597 and $4,608 for the six months ended 2001 and 2000, respectively of non-cash charges
related to equity issuances.
|   
|   
|   
|   
|(5) |  | Interest expense includes $41 and $42 for the three months ended 2001 and 2000, respectively and $83 and
$54 for the six months ended 2001 and 2000, respectively of non-cash charges related to equity issuances.                              

See accompanying notes.

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##### Table of Contents






COSINE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                                                       |                                                  |                                           |         |                  |        |      |         |         |         |  
|-------------------------------------------------------------------------------------- | ------------------------------------------------ | ----------------------------------------- | ------- | ---------------- | ------ | ---- | ------- | ------- | ------- | -
|                                                                                       |                                                  |                                           |         | Six Months Ended
|                                                                                       |                                                  |                                           |         | June 30,        
|                                                                                       |                                                  |                                           |         |                 
|                                                                                       |                                                  |                                           |         | 2001             |        | 2000
|                                                                                       |                                                  |                                           |         |                  |        |     
|Operating activities:                                                                  |                                                  |                                           |         |                  |        |      |         |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Net loss                                                                               |                                                  | $                                         | (80,940 | )                |        | $    | (57,036 | )      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Adjustments to reconcile net loss to net cash used in operating activities:            |                                                  |                                           |         |                  |        |      |         |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Depreciation                                     |                                           |         | 6,412            |        |      |         | 2,650   |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Amortization of warrants issued for services     |                                           |         | 5,146            |        |      |         | 3,830   |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Amortization of deferred stock compensation      |                                           |         | 18,577           |        |      |         | 19,766  |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Other, net                                       |                                           |         | 675              |        |      |         | 806     |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Change in operating assets and liabilities:      |                                           |         |                  |        |      |         |         |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                  | Accounts receivable                       |         |                  | (5,093 | )    |         |         | (18,044 | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                  | Inventory                                 |         |                  | (522   | )    |         |         | (7,033  | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                  | Prepaid expenses and other current assets |         |                  | 1,410  |      |         |         | (3,761  | )
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                  | Other assets                              |         |                  | (16    | )    |         |         | 1,117   |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                  | Accounts payable                          |         |                  | (3,654 | )    |         |         | 7,762   |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                  | Provision for warranty claims             |         |                  | (1,647 | )    |         |         | 1,195   |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                  | Accrued other liabilities                 |         |                  | 3,195  |      |         |         | 2,748   |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                  | Accrued compensation                      |         |                  | 416    |      |         |         | 951     |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                  | Note payable                              |         |                  | (223   | )    |         |         |        |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                  | Deferred revenue                          |         |                  | (1,747 | )    |         |         | 10,173  |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                  | Other current liabilities                 |         |                  | 90     |      |         |         | 141     |  
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       |                                                  | Accrued rent                              |         |                  | 216    |      |         |         | 228     |  
|                                                                                       |                                                  |                                           |         |                  |        |      |         |        
|Net cash used in operating activities                                                  |                                                  |                                           | (57,705 | )                |        |      | (34,507 | )      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Investing activities:                                                                  |                                                  |                                           |         |                  |        |      |         |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Capital expenditures                                                                   |                                                  |                                           | (10,332 | )                |        |      | (13,368 | )      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Purchase of short-term investments                                                     |                                                  |                                           | (74,093 | )                |        |      | (39,831 | )      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Proceeds from sales and maturities of short-term investments                           |                                                  |                                           | 101,655 |                  |        |      | 30,204  |        
|                                                                                       |                                                  |                                           |         |                  |        |      |         |        
|                                                                                       | Net cash provided (used) by investing activities |                                           |         | 17,230           |        |      |         | (22,995 | )      
|                                                                                       |                                                  |                                           |         |                  |        |      |         |        
|Financing activities:                                                                  |                                                  |                                           |         |                  |        |      |         |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Proceeds from equipment and working capital loans and capital leases                   |                                                  |                                           |        |                  |        |      | 7,111   |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Principal payments of equipment and working capital loans and capital
leases           |                                                  |                                           | (2,945  | )                |        |      | (1,410  | )      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Proceeds from issuance of preferred stock, net                                         |                                                  |                                           |        |                  |        |      | 75,004  |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Proceeds from issuance of common stock, net                                            |                                                  |                                           | 107     |                  |        |      | 1,364   |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Proceeds from notes receivable from stockholders                                       |                                                  |                                           | 296     |                  |        |      | 43      |        
|                                                                                       |                                                  |                                           |         |                  |        |      |         |        
|                                                                                       | Net cash (used) provided by financing activities |                                           |         | (2,542           | )      |      |         | 82,112  |        
|                                                                                       |                                                  |                                           |         |                  |        |      |         |        
|Net (decrease) increase in cash and cash equivalents                                   |                                                  |                                           | (43,017 | )                |        |      | 24,610  |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Cash and cash equivalents at the beginning of the period                               |                                                  |                                           | 126,139 |                  |        |      | 20,089  |        
|                                                                                       |                                                  |                                           |         |                  |        |      |         |        
|Cash and cash equivalents at the end of the period                                     |                                                  | $                                         | 83,122  |                  |        | $    | 44,699  |        
|                                                                                       |                                                  |                                           |         |                  |        |      |         |        
|Supplemental information:                                                              |                                                  |                                           |         |                  |        |      |         |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Cash paid for interest                                                                 |                                                  | $                                         | 855     |                  |        | $    | 720     |        
|                                                                                       |                                                  |                                           |         |                  |        |      |         |        
|Capital lease obligations incurred                                                     |                                                  |                                           |        |                  |        |      |        |        
|                                                                                       |                                                  |                                           |         |                  |        |      |         |        
|Supplemental schedule of non-cash investing and financing activities:                  |                                                  |                                           |         |                  |        |      |         |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Issuance and remeasurement of warrants                                                 |                                                  |                                           |        |                  |        | $    | 16,828  |        
|                                                                                       |                                                  |                                           |         |                  |        |      |         |        
|Notes receivable received from stockholders (in exchange for issuance of
common stock) |                                                  |                                           |        |                  |        | $    | 17,814  |        
|                                                                                       |                                                  |                                           |         |                  |        |      |         |        

See accompanying notes.

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COSINE COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements have been
prepared by CoSine Communications, Inc. pursuant to the rules and regulations
of the Securities and Exchange Commission 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 generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, all adjustments
(consisting of normal recurring items) necessary for a fair presentation have
been included. The results of operations for the three and six months ended
June 30, 2001 are not necessarily indicative of the results to be expected for
the entire year. These unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and the notes included in CoSines Annual Report filed on Form 10-K
for the year ended December 31, 2000.

During 2000, CoSine issued warrants to its initial customers, which
significantly affects revenues. These warrants were issued upon receipt of
substantial purchase orders, which were preceded by a period of cooperation
with marketing, development and refinement of the Companys products. Customer
revenue consists of receipts from sales, including equity issued in connection
with sales, less receipts for equity issued in connection with sales.

Below is a reconciliation of revenue for the three and six months ended
June 30, 2001 and 2000 as presented in our statement of operations to show the
separate components as indicated (in thousands):

|                                                                      |  |                    |       |                  |  |      |       |      |  |   |        |  |  |   |        | 
|--------------------------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|                                                                      |  | Three Months Ended |       | Six Months Ended
|                                                                      |  | June 30,           |       | June 30,        
|                                                                      |  |                    |       |                 
|                                                                      |  | 2001               |       | 2000             |  | 2001 |       | 2000
|                                                                      |  |                    |       |                  |  |      |       |     
|                                                                      |  | (unaudited)        |       | (unaudited)     
|Receipts from sales,
including equity
issued in connection
with sales |  | $                  | 8,465 |                  |  | $    | 7,781 |      |  | $ | 15,476 |  |  | $ | 11,321 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Less: Receipts for
equity issued in
connection with sales             |  |                    | 1,338 |                  |  |      | 2,528 |      |  |   | 2,294  |  |  |   | 3,699  | 
|                                                                      |  |                    |       |                  |  |      |       |      |  |   |        |  |  |   |        | 
|Revenue                                                               |  | $                  | 7,127 |                  |  | $    | 5,253 |      |  | $ | 13,182 |  |  | $ | 7,622  | 
|                                                                      |  |                    |       |                  |  |      |       |      |  |   |        |  |  |   |        | 

In the second quarter of 2001, one of the Companys customers filed for
bankruptcy. As a result, the remaining portion of the unamortized value of the
warrants issued to that customer of approximately $3.8 million was written off.
Approximately $1.1 million was taken against revenue representing the amount
of revenue previously recognized for this customer and approximately $2.7
million of the unamortized value of the warrants was charged to sales and
marketing expense.

2. CUSTOMER CONCENTRATION

Currently a small number of customers account for a substantial portion of
CoSines revenues, and the loss of any one customer could have a material
impact on operations.

3. INVENTORIES

Net inventories, stated at the lower of cost (first-in, first-out) or
market, consisted of the following, in thousands:

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|                    |  |             |        |              |  |   |        | 
|------------------- |  | ----------- | ------ | ------------ |  | - | ------ | 
|                    |  | June 30,    |        | December 31,
|                    |  | 2001        |        | 2000        
|                    |  |             |        |             
|                    |  | (unaudited) |        |              |  |  
|                   
|                   
|                   
|                   
|Raw materials       |  | $           | 1,543  |              |  | $ | 832    | 
|                   
|                   
|                   
|                   
|Semi-finished goods |  |             | 9,041  |              |  |   | 7,554  | 
|                   
|                   
|                   
|                   
|Finished goods      |  |             | 572    |              |  |   | 2,248  | 
|                    |  |             |        |              |  |   |        | 
|                    |  | $           | 11,156 |              |  | $ | 10,634 | 
|                    |  |             |        |              |  |   |        | 

Included in net finished goods inventory at June 30, 2001 and December 31,
2000 were $572,000 and $415,000, respectively, of goods awaiting customer
acceptance. Included in net semi-finished goods at June 30, 2001 and December
31, 2000 were $1,204,000 and $1,158,000, respectively, of goods used for
customer evaluation purposes.

4. NET LOSS PER COMMON SHARE

Basic net loss per common share is calculated based on the
weighted-average number of common shares outstanding during the periods
presented, less the weighted-average shares outstanding that are subject to
CoSines right of repurchase. Common stock equivalents consisting of
convertible preferred stock, stock options and warrants (calculated using the
treasury stock method), have been excluded from the diluted net loss per common
share computations, as their inclusion would be antidilutive. These securities
amounted to 15,648,000 shares and 80,632,000 shares for the six months ended
June 30, 2001 and 2000, respectively.

The calculations of basic and diluted net loss per share are shown below,
in thousands, except per share data:

|                                              |                                                                             |   |                    |         |                  |   |         |        |      |   |         |         |  |   |         |        | 
|--------------------------------------------- | --------------------------------------------------------------------------- | - | ------------------ | ------- | ---------------- | - | ------- | ------ | ---- | - | ------- | ------- |  | - | ------- | ------ | 
|                                              |                                                                             |   | Three Months Ended |         | Six Months Ended
|                                              |                                                                             |   | June 30,           |         | June 30,        
|                                              |                                                                             |   |                    |         |                 
|                                              |                                                                             |   | 2001               |         | 2000             |   | 2001    |        | 2000
|                                              |                                                                             |   |                    |         |                  |   |         |        |     
|                                              |                                                                             |   | (unaudited)        |         | (unaudited)     
|                                             
|                                             
|                                             
|                                             
|Net loss allocable to common stockholders     |                                                                             | $ | (39,094            | )       |                  | $ | (32,886 | )      |      | $ | (80,940 | )       |  | $ | (59,536 | )     
|                                             
|                                             
|                                             
|                                             
|Basic and diluted:                            |                                                                             |   |                    |         |                  |   |         |        |      |   |         |         |  |   |         |       
|                                             
|                                             
|                                             
|                                             
|                                              | Weighted-average shares of common stock
outstanding                         |   |                    | 102,849 |                  |   |         | 19,178 |      |   |         | 103,208 |  |   |         | 17,226 | 
|                                             
|                                             
|                                             
|                                             
|Weighted-average shares subject to repurchase |                                                                             |   | (6,494             | )       |                  |   | (10,905 | )      |      |   | (7,541  | )       |  |   | (8,940  | )     
|                                              |                                                                             |   |                    |         |                  |   |         |        |      |   |         |         |  |   |         |       
|                                              | Weighted-average shares used in basic and
diluted net loss per common share |   |                    | 96,355  |                  |   |         | 8,273  |      |   |         | 95,667  |  |   |         | 8,286  | 
|                                              |                                                                             |   |                    |         |                  |   |         |        |      |   |         |         |  |   |         |       
|Basic and diluted net loss per common share   |                                                                             | $ | (0.41              | )       |                  | $ | (3.98   | )      |      | $ | (0.85   | )       |  | $ | (7.19   | )     
|                                              |                                                                             |   |                    |         |                  |   |         |        |      |   |         |         |  |   |         |       

5. COMPREHENSIVE LOSS

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

|                                   |                                         |                                          |         |                    |      |                  |         |      |    |      |         |        |        |   |         |   |   | 
|---------------------------------- | --------------------------------------- | ---------------------------------------- | ------- | ------------------ | ---- | ---------------- | ------- | ---- | -- | ---- | ------- | ------ | ------ | - | ------- | - | - | 
|                                   |                                         |                                          |         | Three Months Ended |      | Six Months Ended
|                                   |                                         |                                          |         | June 30,           |      | June 30,        
|                                   |                                         |                                          |         |                    |      |                 
|                                   |                                         |                                          |         | 2001               |      | 2000             |         | 2001 |    | 2000
|                                   |                                         |                                          |         |                    |      |                  |         |      |    |     
|                                   |                                         |                                          |         | (unaudited)        |      | (unaudited)     
|                                  
|                                  
|                                  
|                                  
|Net loss                           |                                         | $                                        | (39,094 | )                  |      | $                | (32,886 | )    |    | $    | (80,940 | )      |        | $ | (57,036 | )
|                                  
|                                  
|                                  
|                                  
|Other comprehensive income (loss): |                                         |                                          |         |                    |      |                  |         |      |    |      |         |        |        |   |         |  
|                                  
|                                  
|                                  
|                                  
|                                   |                                         | Unrealized gains (losses) on investments |         |                    | (69  | )                |         |      | 41 |      |         |        | (1,485 | ) |         |   | 2 | 
|                                  
|                                  
|                                  
|                                  
|                                   |                                         | Translation adjustment                   |         |                    | (105 | )                |         |      |   |      |         |        | (193   | ) |         |   |  | 
|                                   |                                         |                                          |         |                    |      |                  |         |      |    |      |         |        |        |   |         |  
|                                   | Total other comprehensive income (loss) |                                          |         | (174               | )    |                  |         | 41   |    |      |         | (1,678 | )      |   |         | 2 |  
|                                   |                                         |                                          |         |                    |      |                  |         |      |    |      |         |        |        |   |         |  
|Comprehensive loss                 |                                         | $                                        | (39,268 | )                  |      | $                | (32,845 | )    |    | $    | (82,618 | )      |        | $ | (57.034 | )
|                                   |                                         |                                          |         |                    |      |                  |         |      |    |      |         |        |        |   |         |  

6. SEGMENT REPORTING

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CoSine operates in only one operating segment. Enterprise-wide
information is provided in accordance with Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information. Substantially all of CoSines assets are located in the United
States.

Revenues from customers by geographic region for the three and six months
ended June 30, 2001 and 2000, respectively, were as follows, in thousands:

|                                 |       |                       |                            |            |                      |         |       |       |  |   |       |        | 
|-------------------------------- | ----- | --------------------- | -------------------------- | ---------- | -------------------- | ------- | ----- | ----- |  | - | ----- | ------ | 
|                                 |       |                       | Receipts from sales,       |            | Receipts for equity  |         |       |       | 
|                                 |       |                       | including equity issued in |            | issued in connection |         |       |       | 
|Region                           |       | connection with sales |                            | with sales |                      | Revenue
|                                 |       |                       |                            |            |                      |        
|Three Months Ended June 30, 2001 |       |                       |                            |            |                      |         |       |       |  |   |       |       
|(unaudited)                      |       |                       |                            |            |                      |         |       |       |  |   |       |       
|                                
|                                
|                                
|                                
|Europe                           |       | $                     | 5,716                      |            |                      | $       | 24    |       |  | $ | 5,692 |       
|                                
|                                
|                                
|                                
|Asia/Pacific                     |       |                       | 1,723                      |            |                      |         |      |       |  |   | 1,723 |       
|                                
|                                
|                                
|                                
|United States                    |       |                       | 1,026                      |            |                      |         | 1,314 |       |  |   | (288  | )     
|                                 |       |                       |                            |            |                      |         |       |       |  |   |       |       
|                                 | Total |                       | $                          | 8,465      |                      |         | $     | 1,338 |  |   | $     | 7,127  | 
|                                 |       |                       |                            |            |                      |         |       |       |  |   |       |       
|Three Months Ended June 30, 2000 |       |                       |                            |            |                      |         |       |       |  |   |       |       
|(unaudited)                      |       |                       |                            |            |                      |         |       |       |  |   |       |       
|                                
|                                
|                                
|                                
|Europe                           |       | $                     | 3,909                      |            |                      | $       | 346   |       |  | $ | 3,563 |       
|                                
|                                
|                                
|                                
|United States                    |       |                       | 3,872                      |            |                      |         | 2,182 |       |  |   | 1,690 |       
|                                 |       |                       |                            |            |                      |         |       |       |  |   |       |       
|                                 | Total |                       | $                          | 7,781      |                      |         | $     | 2,528 |  |   | $     | 5,253  | 
|                                 |       |                       |                            |            |                      |         |       |       |  |   |       |       
|Six Months Ended June 30, 2001   |       |                       |                            |            |                      |         |       |       |  |   |       |       
|(unaudited)                      |       |                       |                            |            |                      |         |       |       |  |   |       |       
|                                
|                                
|                                
|                                
|Europe                           |       | $                     | 6,763                      |            |                      | $       | 182   |       |  | $ | 6,581 |       
|                                
|                                
|                                
|                                
|Asia/Pacific                     |       |                       | 4,871                      |            |                      |         |      |       |  |   | 4,871 |       
|                                
|                                
|                                
|                                
|United States                    |       |                       | 3,842                      |            |                      |         | 2,112 |       |  |   | 1,730 |       
|                                 |       |                       |                            |            |                      |         |       |       |  |   |       |       
|                                 | Total |                       | $                          | 15,476     |                      |         | $     | 2,294 |  |   | $     | 13,182 | 
|                                 |       |                       |                            |            |                      |         |       |       |  |   |       |       
|Six Months Ended June 30, 2000   |       |                       |                            |            |                      |         |       |       |  |   |       |       
|(unaudited)                      |       |                       |                            |            |                      |         |       |       |  |   |       |       
|                                
|                                
|                                
|                                
|Europe                           |       | $                     | 5,635                      |            |                      | $       | 499   |       |  | $ | 5,136 |       
|                                
|                                
|                                
|                                
|United States                    |       |                       | 5,686                      |            |                      |         | 3,200 |       |  |   | 2,486 |       
|                                 |       |                       |                            |            |                      |         |       |       |  |   |       |       
|                                 | Total |                       | $                          | 11,321     |                      |         | $     | 3,699 |  |   | $     | 7,622  | 
|                                 |       |                       |                            |            |                      |         |       |       |  |   |       |       

7. SUBSEQUENT EVENT

Subsequent to June 30, the Company
repriced 7,220,710 outstanding employee stock options to purchase
shares of the Company's common stock with original exercise prices ranging from $4.00
per share to $40.00 per share.

These options were repriced on July 10, 2001
at $1.55 per share, the fair market value of the underlying shares on that date.

As a result, these options will be subject to variable
accounting treatment. Variable accounting will continue until the
options subject to variable accounting treatment are exercised,
canceled or expired. Variable accounting treatment will result in
unpredictable charges or credits, recorded in Non-Cash Charges
Related to Equity Issuances, dependent on fluctuations in quoted
prices for the Company's common stock.

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

This Managements Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements. These
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in these
forward-looking statements. We use words such as anticipate, believe,
plan, expect, future, intend and similar expressions to identify
forward-looking statements. Factors that might cause such a difference
include, but are not limited to, product development, commercialization and
technology difficulties, manufacturing costs, the impact of competitive
products, pricing pressures, changing customer requirements, timely
availability and acceptance of new products, changes in economic conditions in
the various markets we serve and those factors discussed in the section
entitled Managements Discussion and Analysis of Financial Position and
Results of Operations  Risk Factors. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect managements
opinions only as of the date hereof. We undertake no obligation to revise or
publicly release the results of any revision to these forward-looking
statements.

OVERVIEW

From our incorporation on April 14, 1997 through December 31, 1999, we
were a development stage enterprise, and our operating activities were
primarily devoted to increasing our research and development capabilities,
designing our hardware, developing our software and testing our products. In
March 2000, after extensive field-testing of our Internet Protocol (IP) service
delivery platform, we recognized revenue from product shipments to our first
customers and therefore ceased to be classified as a development stage
enterprise. We market our products through our direct sales force and through
resellers to service providers in Asia, Europe and the Americas. We provide
customer service and support for our products.

The market for our IP service delivery platform is new and evolving, and
the volume and timing of orders are difficult to predict. A customers decision
to purchase our platform typically involves a significant commitment of its
resources and a lengthy evaluation, testing and product qualification process.
Long sales and implementation cycles for our platform may cause our revenue and
operating results to vary significantly and unexpectedly from quarter to
quarter.

RESULTS OF OPERATIONS

For the three months ended June 30, 2001 and 2000, we reported a basic and
diluted net loss per common share of $0.41 and $3.98, respectively. The effect
of non-cash charges related to equity issuances was a loss of $0.11 and $1.84
per share for the three months ended June 30, 2001 and 2000, respectively.

For the six months ended June 30, 2001 and 2000, we reported a basic and
diluted net loss per common share of $0.85 and $7.19, respectively. The effect
of non-cash charges related to equity issuances was a loss of $0.25 and $2.95
per share for the six months ended June 30, 2001 and 2000, respectively.

In the second quarter of 2001, one of the Companys customers filed for
bankruptcy. As a result, the remaining portion of the unamortized value of the
warrants issued to that customer of approximately $3.8 million was written off.
Approximately $1.1 million was taken against revenue representing the amount
of revenue previously recognized for this customer and approximately $2.7
million of the unamortized value of the warrants was charged to sales and
marketing expense.

REVENUE

During 2000, CoSine issued warrants to its initial customers, which
significantly affects revenues. These warrants were issued upon receipt of
substantial purchase orders, which were preceded by a period of cooperation
with marketing, development and refinement of the Companys products. Customer
revenue consists of receipts from sales, including equity issued in connection
with sales, less receipts for equity issued in connection with sales.

For the three months ended June 30, 2001, revenue was $7.1 million of
which 64% was from hardware sales, 10% was from software sales and 26% was from
sales of services. Receipts from sales, including equity issued in connection
with sales, were $8.5 million. For the three months ended June 30, 2000,
revenue was $5.3 million of which 95% was from hardware sales and 5% was from
software sales. Receipts from sales, including equity issued in connection
with sales, were $7.8 million.

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For the six months ended June 30, 2001, revenue was $13.2 million of which
54% was from hardware sales, 11% was from software sales and 35% was from sales
of services. Receipts from sales, including equity issued in connection with
sales, were $15.5 million. For the six months ended June 30, 2000, revenue was
$7.6 million of which 87% was from hardware sales, 12% was from software sales
and 1% was from sales of services. Receipts from sales, including equity
issued in connection with sales, were $11.3 million.

Below is a reconciliation of revenue for the three and six months ended
June 30, 2001 and 2000 as presented in our statement of operations to show the
separate components as indicated (in thousands):

|                                                                      |  |                    |       |                  |  |      |       |      |  |   |        |  |  |   |        | 
|--------------------------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|                                                                      |  | Three Months Ended |       | Six Months Ended
|                                                                      |  | June 30,           |       | June 30,        
|                                                                      |  |                    |       |                 
|                                                                      |  | 2001               |       | 2000             |  | 2001 |       | 2000
|                                                                      |  |                    |       |                  |  |      |       |     
|                                                                      |  | (unaudited)        |       | (unaudited)     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Receipts from sales,
including equity
issued in connection
with sales |  | $                  | 8,465 |                  |  | $    | 7,781 |      |  | $ | 15,476 |  |  | $ | 11,321 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Less: Receipts for
equity issued in
connection with sales             |  |                    | 1,338 |                  |  |      | 2,528 |      |  |   | 2,294  |  |  |   | 3,699  | 
|                                                                      |  |                    |       |                  |  |      |       |      |  |   |        |  |  |   |        | 
|Revenue                                                               |  | $                  | 7,127 |                  |  | $    | 5,253 |      |  | $ | 13,182 |  |  | $ | 7,622  | 
|                                                                      |  |                    |       |                  |  |      |       |      |  |   |        |  |  |   |        | 

During the year ended December 31, 2000 we issued the following warrants
to customers:

A warrant exercisable for 1,233,499 shares of our series C preferred stock
at an exercise price of $0.81 per share issued to Qwest Communications upon
receipt of a purchase order from Qwest for $18.3 million of our products and
services;

A warrant exercisable for 200,000 shares of our common stock at an
exercise price of $4.00 per share issued to AduroNet Ltd. upon receipt of a
purchase order from AduroNet for $20.7 million of our products and services;
and

A warrant exercisable for 468,849 shares of our common stock at an
exercise price of $3.73 per share issued to BroadBand Office upon receipt of a
purchase order from BroadBand Office for $20.0 million of our products and
services. BroadBand filed for bankruptcy in May 2001 and subsequently the
Company wrote off the remaining unamortized portion of this warrant.

We calculated the fair value of these customer-related warrants to be
$16.2 million ($10.3 million in the case of Qwest, $1.8 million in the case of
AduroNet and $4.1 million in the case of BroadBand Office). These values were
calculated using the Black-Scholes option pricing model, using volatility of
0.6, a risk-free interest rate of 5% and an expected life of four years. Of
this amount, $1.3 million and $2.5 million were excluded from revenue for the
three months ended June 30, 2001 and 2000, respectively, and $2.3 million and
$3.7 million were excluded from revenue for the six months ended June 30, 2001
and 2000, respectively.

NON-CASH CHARGES RELATED TO EQUITY ISSUANCES

During the three months ended June 30, 2001 and 2000, we amortized $9.2
million and $12.7 million, respectively of non-cash charges related to equity
issuances. During the six months ended June 30, 2001 and 2000, we amortized
$21.4 million and $20.7 million, respectively of non-cash charges related to
equity issuances. These amounts do not include the amortization of customer
warrants described above. The equity issuances which impacted cost of goods
sold and operating expenses included warrants issued to suppliers for services,
stock options granted to employees and consultants, stock issued in lieu of
cash compensation to suppliers and unvested shares issued upon exercise of
unvested employee stock options for full recourse promissory notes that were
converted to non-recourse obligations. Additionally, during the second quarter
of 2001, $2.7 million was included for the write off of the unamortized portion
of customer warrants due to the customers filing for bankruptcy.

COST OF GOODS SOLD

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For the three months ended June 30, 2001, cost of goods sold was $4.4
million, of which $2.3 million or 51% represented materials, labor, production
overhead and the costs of providing services, $1.8 million or 40% represented
inventory reserve provisions and $0.4 million or 9% represented amortization of
deferred compensation related to stock options granted to employees in
manufacturing operations. For the three months ended June 30, 2000, cost of
goods sold was $4.4 million, of which $2.5 million or 56% represented material,
labor and production overhead, $0.7 million or 16% represented warranty costs,
$0.6 million or 13% represented the write down of excess inventory and $0.6
million or 15% represented amortization of deferred compensation.

For the six months ended June 30, 2001, cost of goods sold was $13.3
million, of which $5.0 million or 38% represented materials, labor, production
overhead and the costs of providing services, $7.0 million or 53% represented
inventory reserve provisions and $1.3 million or 9% represented amortization of
deferred compensation related to stock options granted to employees in
manufacturing operations. For the six months ended June 30, 2000, cost of
goods sold was $7.3 million, of which $3.7 million or 51% represented material,
labor and production overhead, $1.5 million or 20% represented warranty costs,
$1.1 million or 16% represented the write down of excess inventory and $0.9
million or 13% represented amortization of deferred compensation.

GROSS PROFIT (LOSS)

For the three months ended June 30, 2001 and 2000, gross profit was $2.7
million and $0.9 million, respectively. For the six months ended June 30, 2001
gross loss was $0.1 million and for the six months ended June 30, 2000 gross
profit was $0.3 million.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses were $18.0 million and $18.7 million for
the three months ended June 30, 2001 and 2000, respectively. This represents a
decrease of $0.7 million or 4%. This primarily resulted from decreased
non-cash charges related to the issuance of stock options to employees and
consultants offset by increased salary and bonus expenses and restructuring
charges. Non-cash charges related to stock options granted to employees and
consultants were $1.8 million and $5.9 million for the three months ended June
30, 2001 and 2000, respectively.

For the six months ended June 30, 2001 and 2000, research and development
expenses were $36.7 million and $34.1 million, respectively. This represents
an increase of $2.6 million or 8%. This primarily resulted from increased
salary and bonus expenses, facilities costs, information technology charges and
restructuring charges offset by decreased non-cash charges related to the
issuance of stock options to employees and consultants. Non-cash charges
related to stock options granted to employees and consultants were $7.0 million
and $10.0 million for the six months ended June 30, 2001 and 2000,
respectively.

SALES AND MARKETING EXPENSES

Sales and marketing expenses were $18.6 million and $10.8 million for the
three months ended June 30, 2001 and 2000, respectively. This represents an
increase of $7.8 million or 72%. This increase primarily resulted from
increased salary expenses and related employee expenses, non-cash charges
related to the issuance of stock options to employees and consultants,
marketing programs and facilities costs. Non-cash charges related to stock
options granted to employees and consultants were $5.7 million and $3.3 million
for the three months ended June 30, 2001 and 2000, respectively.

For the six months ended June 30, 2001 and 2000, sales and marketing
expenses were $35.0 million and $16.2 million, respectively. This represents
an increase of $18.8 million or 116%. This primarily resulted from increased
salary and related employee expenses, non-cash charges related to the issuance
of stock options to employees and consultants, facilities costs and marketing
programs. Non-cash charges related to stock options granted to employees and
consultants and the amortization of warrants granted to a customer that went
bankrupt in May 2001 were $9.5 million and $5.1 million for the six months
ended June 30, 2001 and 2000, respectively.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were $7.7 million and $5.1 million for
the three months ended June 30, 2001 and 2000, respectively. General and
administrative expenses increased $2.5 million or 50% in 2001 when compared
with the same period of 2000. This was primarily a result of restructuring
charges, outside professional and other services and bad debt

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provisions offset by decreased non-cash charges related to the issuance of
stock options to employees and consultants. General and administrative
non-cash charges related to stock options granted to employees and consultants
were $1.3 million and $2.8 million for the three months ended June 30, 2001 and
2000, respectively.

For the six months ended June 30, 2001 and 2000, general and
administrative expenses were $14.7 million and $8.3 million, respectively, this
was an increase of $6.4 million or 77%. This primarily resulted from increased
salary expenses and related employee expenses, professional and other outside
services and restructuring charges offset by decreased non-cash charges related
to the issuance of stock options to employees and consultants. Non-cash
charges related to stock options granted to employees and consultants were $3.6
million and $4.6 million for the six months ended June 30, 2001 and 2000,
respectively.

INTEREST AND OTHER INCOME

For the three months ended June 30, 2001, interest and other income was
$3.2 million, an increase of $1.8 million from the comparable period in 2000.
For the six months ended June 30, 2001, interest and other income was $7.0
million, an increase of $4.9 million from the comparable period in 2000. This
reflects increased interest income due to higher levels of cash and short-term
investments as a result of cash received from our September 2000 initial public
offering and the private placement of series E convertible preferred stock in
May of 2000.

INTEREST EXPENSE

For the three months ended June 30, 2001, interest expense was $0.5
million compared with $0.5 million of interest expense in the comparable period
of 2000. For the six months ended June 30, 2001, interest expense was $0.9
million compared with $0.8 million of interest expense in 2000.

INCOME TAX PROVISION

The provision for income taxes of $0.2 million and $0.5 million for the
three and six months ended June 30, 2001, respectively was composed entirely of
foreign corporate income taxes. These taxes are a function of operating our
subsidiaries in various countries. The provision for income taxes is based on
income taxes on minimum profits the foreign operations generated for services
provided to the U.S. parent company.

DEEMED DIVIDEND

In March 2000, we sold 625,000 shares of series D redeemable convertible
preferred stock at $8.00 per share for which we received proceeds of $5.0
million. At the date of issuance, we believed that the per share price of $8.00
represented the fair value of the preferred stock. After our initial public
offering process began, we reevaluated and increased the fair value of our
common stock at March 2000. The increase in fair value resulted in a beneficial
conversion feature of $2.5 million, which we recorded as a deemed dividend to
preferred stockholders in 2000. We recorded the deemed dividend at the date of
issuance by offsetting charges and credits to stockholders equity. The
preferred stock dividend increased the net loss allocable to common
stockholders in the calculation of basic and diluted net loss per common share
for the six months ended June 30, 2000.

LIQUIDITY AND CAPITAL RESOURCES

Prior to our initial public offering in September 2000, we financed our
operations primarily through sales of convertible preferred stock for net
proceeds of $166.6 million, plus equipment and working capital loans and
capital leases. Upon the closing of our initial public offering on September
29, 2000, we received cash proceeds, net of underwriters discounts and
offering expenses, totaling $242.5 million, and all of our convertible
preferred stock was converted into 69.6 million shares of common stock.

We believe that we possess sufficient liquidity and capital resources to
fund our operating and working capital requirements for at least the next 12
months. We may require additional funds to support other purposes and may seek
to raise these additional funds through debt or equity financing or from other
sources. There can be no assurances that additional funding will be available
at all, or that if available, such financing will be obtainable on terms
favorable to us.

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CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

At June 30, 2001, cash, cash equivalents and short-term investments were
$216.2 million. This compares with $288.3 million at December 31, 2000.

OPERATING ACTIVITIES

We used $57.7 million and $34.5 million in cash for operations for the six
months ended June 30, 2001 and 2000, respectively. This was primarily the
result of higher operating expenses due to additional headcount and related
employee expenses, and increased costs of information technology, facilities,
product development, marketing and professional services related to the
expansion of our business.

INVESTING ACTIVITIES

For the six months ended June 30, 2001 and 2000, we provided $17.2 million
and used $23.0 million, respectively, in cash from investing activities. This
reflects an increase of $37.2 million for net proceeds from the sale of
short-term investments offset by a decrease in capital expenditures of $3.0
million.

FINANCING ACTIVITIES

For the six months ended June 30, 2001, we used $2.5 million in cash from
financing activities and for the comparable period of 2000 $82.1 million was
provided in cash from financing activities. This primarily reflects the
issuance of preferred stock and common stock in 2000 of $75.0 million and $1.4
million, respectively.

OUTLOOK

The long-term growth outlook (2 to 5 years) for capital spending in the
telecommunications industry appears healthy. However, due to reductions in
capital spending commitments by our customers and uncertainty within the
telecommunications industry, the current and short-term outlook (up to 2 years)
for growth is not optimistic. There is a decided lack of capital availability
for many emerging service providers and with the caution being exercised by
larger service providers, capital spending in the industry as a whole has
slowed. While we believe this is a short-term (up to 2 years) phenomenon, it
has had and will continue to have a direct impact on our operations for at
least the current fiscal year. We anticipate that these capital spending
trends will continue to adversely affect our revenue growth dramatically for at
least the current fiscal year. This is evidenced by a slowdown in bookings
coupled with our decision not to ship product to customers that represent
unsuitable credit risks. As capital continues to be scarce, we believe that
pricing will continue to be under pressure as each potential customer attempts
to improve returns on capital.

RISK FACTORS

RISKS RELATED TO OUR BUSINESS

We have a history of losses that we expect will continue, and if we never
achieve profitability we may cease operations.

At June 30, 2001, we had an accumulated deficit of $284.2 million. We have
incurred net losses since our incorporation. We have only recently begun to
recognize revenue, and we cannot be certain that our revenue will grow or that
we will generate sufficient revenue to become profitable. If we do not achieve
profitability, we may cease operations.

We have incurred significant expenses in the past. For example, for the
fiscal year ended December 31, 2000, we incurred research and development,
sales and marketing and general and administrative expenses of $169.2 million.
Although we cannot quantify the amount, we expect expenses to continue to
increase through 2001 and to continue to incur losses.

The limited sales history of our IP service delivery platform makes forecasting
our revenue difficult, which may impair our ability to manage our business.

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We were founded in April 1997, shipped our first test IP service delivery
platform product in March 1999, and sold our first IP service delivery platform
product in March 2000. We have limited meaningful historical financial data
upon which to forecast our revenue.

If our customers are unable to generate sales of services delivered using our
products and to manage delivery of these services to their customers, we may be
unable to sell our products.

Our future success depends on network service providers, who are our
customers, generating revenue from the sale of services delivered using our
products. Sales of our products may decline or be delayed if our customers do
not successfully introduce commercial services derived from our IP service
delivery platform or if our customers do not generate revenue from these
services sufficient to realize an attractive return on their investment in our
IP service delivery platform.

Our ability to generate future revenue also depends on whether network
service providers successfully forecast market trends and identify the services
and features that our products should offer their customers.

If our IP service delivery platform does not rapidly achieve market acceptance,
we may be unable to achieve profitability.

Our products offer a new approach for delivering services by network
service providers, which may perceive our products as being more expensive than
the other technologies and products they purchase. If network service providers
do not accept our IP service delivery platform as a method for delivering
services to their customers, our ability to increase our revenue, achieve
profitability and continue operations would be harmed. Our success also depends
on third-party software providers recognizing the advantages of our service
delivery method and on our ability to effectively support their software
development efforts.

Our IP service delivery platform is our only product line, and our future
revenue depends on its commercial success.

Our IPSX 9000, IPSX 9500, IPSX 3500, InVision and InGage products are the
only products that we currently offer to our customers. Our future revenue
depends on the commercial success of our IP service delivery platform product
line. If customers do not adopt, purchase and successfully implement our IP
service delivery platform in large numbers, our revenue will not grow.

Our products are technically complex and may contain errors or defects that are
not found until our customers put our products to full use. Errors or defects
in our products could seriously harm our reputation and our ability to sell our
products.

Our products are more complicated than most networking products. They can
be adequately tested only when put to full use in very large and diverse
networks with high amounts of traffic. Because none of our customers has put
our products to full use, we are unable to assess the likelihood or magnitude
of this risk. Errors or defects in our products could result in:



| |  |  | loss of current customers and failure to attract new customers or
achieve market acceptance; and
| | - |  | ------------------------------------------------------------------------------------------------
|
| |  |  | increased service and warranty costs.                                                           

The long sales cycle for our platform, as well as the expectation that
customers will sporadically place large orders, may cause our revenue and
operating results to vary significantly from quarter to quarter, and the price
of our stock to decline.

A customers decision to purchase our IP service delivery platform
involves a significant commitment of its resources and a lengthy evaluation,
testing and product qualification process. Network service providers and other
customers with complex networks usually expand their networks in large
increments on a periodic basis. We may receive purchase orders for significant
dollar amounts on an irregular and unpredictable basis. These events may cause
our revenue and operating results to vary significantly and unexpectedly from
quarter to quarter, which could cause our stock price to decline.

If we fail to develop new products or features, we will have difficulty
attracting customers.

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Based on our prior experience, we expect that our customers will require
product features that our current IP service delivery platform does not have.
Our products are technically complex, and the development of new products or
features is an uncertain, time-consuming and labor-intensive process. We may
experience design, manufacturing or marketing problems with new products. If we
fail to develop new or enhanced products that meet customer requirements, our
ability to attract and retain customers will be hindered.

We rely upon a limited number of customers, and any decrease in revenue from
these customers or failure to increase our customer base could harm our
operating results.

The loss of one or more of our customers, a reduction in purchases of our
products by our customers or the decline of our customers business may limit
our revenue growth and harm our operating results. Our customers may generally
reduce or discontinue purchases of our products at any time.

Our future success will depend on attracting additional customers. Failure
to increase our customer base would hinder our growth and harm our operating
results.

If we do not effectively manage our growth, integrate newly-hired key personnel
and hire additional personnel, our operations will suffer.

The growth of our operations places a significant strain on our management
systems and resources. If we do not effectively manage our growth and improve
our financial and managerial controls and systems, we may be unable to provide
adequate service and support to our customers and our operations will suffer.
We plan to continue to hire a moderate number of employees this year, but we
may be unable to hire and retain the kind and number that we need.

A failure of our contract manufacturers or our sole source and limited source
suppliers to meet our needs would seriously harm our ability to timely fill
customer orders.

If any of our manufacturers terminates its relationship with us or is
unable to produce sufficient quantities of our products in a timely manner and
at satisfactory quality levels, our ability to fill customer orders on time,
our reputation and our operating results will suffer. Our contract
manufacturers do not have a long-term obligation to supply products to us.
Qualifying new contract manufacturers and starting volume production is
expensive and time consuming and would disrupt our business.

We purchase several key components, including field programmable gate
arrays, some integrated circuits and memory devices, and power supplies from a
single source or limited sources. We do not have long-term supply contracts for
these components. If our supply of these components is interrupted, we may be
unable to locate an alternate source in a timely manner or at favorable prices.
Interruption or delay in the supply of these components could cause us to lose
sales to existing and potential customers.

If any of our significant suppliers were to terminate their relationships with
us or compete against us, our revenue and market share will likely be reduced.

Many of our suppliers also have significant development and marketing
relationships with our competitors and have significantly greater financial and
marketing resources than we do. If they develop and market products in the
future in competition with us, or form or strengthen arrangements with our
competitors, our revenue and market share will likely be reduced.

If we fail to predict our manufacturing requirements accurately, we could incur
additional costs or manufacturing delays.

We provide forecasts of our demand to our contract manufacturers up to
twelve months before scheduled delivery of products to our customers. If we
overestimate our manufacturing requirements, our contract manufacturers may
have excess or obsolete inventory, which would harm our operating results if we
were required to purchase the excess or obsolete inventory. If we underestimate
our requirements, our contract manufacturers may have an inadequate inventory,
which could interrupt manufacturing of our products and result in delays in
shipments and revenue. If we do not accurately anticipate lead times for
components, we may experience component shortages.

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If necessary licenses of third-party technology are terminated or become
unavailable or too expensive, our competitive position and our product offering
will suffer.

We license from third-party suppliers several key software applications
incorporated in our IP service delivery platform. We will be required to
license technology from other third-party suppliers to enable us to develop new
products or features. Our inability to renew or obtain any third-party license
that we need could require us to obtain substitute technology of lower quality
or at greater cost. Either of these outcomes could seriously impair our ability
to sell our products and harm our operating results.

Insiders continue to have substantial control over us and they could delay or
prevent a change in our corporate control even if our other stockholders wanted
it to occur.

Our executive officers, directors and principal stockholders who hold 5%
or more of the outstanding common stock and their affiliates beneficially own a
significant portion of our outstanding common stock. These stockholders will be
able to exercise significant control over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. This could delay or prevent an outside party from
acquiring or merging with us even if our other stockholders wanted it to occur.

RISKS RELATED TO OUR INDUSTRY

The growth outlook for capital spending in the telecommunications industry
directly impacts our business.

Due to reductions in capital spending commitments by our customers and
uncertainty within the telecommunications industry, the current and short-term
outlook for growth is not favorable. Capital spending in the industry as a
whole has slowed as a result of a lack of available capital for many emerging
service providers and a generally cautious approach to capital spending within
the industry.

While we believe this is a short-term phenomenon, it has had and will
continue to have a direct impact on our operations for at least the current
fiscal year. We anticipate that these capital spending trends will continue to
adversely affect our revenue growth dramatically for at least the current
fiscal year.

Ongoing power supply problems in California could harm our business.

Our corporate headquarters, our research and development activities, other
critical business operations and the majority of our suppliers are located in
California. California has recently experienced ongoing power shortages, which
have resulted in rolling blackouts. These blackouts could cause disruptions
to our operations and the operations of our suppliers and customers. Losses
incurred for these types of outages are not covered under CoSines insurance
policies. In addition, California has recently experienced rising energy costs
which could negatively impact our results.

We participate in several highly competitive markets, and our failure to
compete successfully would limit our ability to increase our market share and
harm our business.

Competition in the network infrastructure market is intense, and we expect
that competition in the market for IP networking services will also be intense.
If we are unable to compete effectively, our revenue and market share will be
reduced.

We face competition from:



| |  |  | companies in the network infrastructure market, including Cisco
Systems, Lucent Technologies, Nortel Networks, Alcatel, Ericsson
and Siemens; and                                                                                       
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | companies, including Cisco, that market products for
installation on the premises of network service providers customers
and which offer some services that compete with the services
delivered using our IP service delivery platform.

We believe that there is likely to be consolidation in this industry. We
expect to face increased competition from larger companies with significantly
greater resources than we have.

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Some of these larger competitors have pre-existing relationships involving
a range of product lines with the network service providers who are the
principal potential customers for our IP service delivery platform. These
competitors may offer vendor financing, which we generally do not offer,
undercut our prices or use their pre-existing relationships with our customers
to induce them not to use our IP service delivery platform.

If we become subject to unfair hiring claims, we could be prevented from hiring
needed personnel, or from pursuing or implementing our research, and could
incur substantial liabilities or costs.

Companies in our industry whose employees accept positions with
competitors frequently claim that these competitors have engaged in unfair
hiring practices or that the employment of these persons would involve the
disclosure or use of trade secrets. We have been threatened with claims like
these in the past and may receive claims of this kind in the future. These
claims could prevent us from hiring personnel or from using the intellectual
property alleged to be trade secrets brought to us by the personnel that we
hired. We could also incur substantial costs and damages in defending ourselves
or our employees against these claims, regardless of their merits. Defending
ourselves from these claims could divert the attention of our management away
from our operations.

If our products do not work the way our customers expect, orders for our
products may be cancelled and the market perception of our products could be
harmed.

If our products do not work with our customers or their end users
networks, the market perception of our products could be harmed and orders for
our products could be cancelled. In particular, if an actual or perceived
breach of network security occurs in a customers or its end-users network
that uses our products, we may be subject to lawsuits for losses suffered by
customers or their end-users.

If we have to redesign or modify our products to make them compatible with
a customers or end users network, our sales cycle could be extended, our
research and development expenses may increase, and profit margins on our
products may be reduced.

Because the markets in which we compete are prone to rapid technological change
and the adoption of standards different from those that we use, our products
could become obsolete, and we could be required to incur substantial expenses
to modify our products to remain competitive.

The market for our IP service delivery platform is prone to rapid
technological change, the adoption of new standards, frequent new product
introductions and changes in customer and end user requirements. We may be
unable to respond quickly or effectively to these developments. We may
experience difficulties that could prevent our development of new products and
features. The introduction of new products or technologies by competitors, or
the emergence of new industry standards could render our products obsolete or
could require us to incur expenses to redesign our products.

We rely on our intellectual property rights to be competitive, and if we are
unable to protect these rights, we may never become profitable.

We rely on a combination of copyright, trademark, patent and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. Monitoring unauthorized use of our products is difficult, and we cannot
be certain that the steps we have taken will prevent unauthorized use of our
technology. If we are unable to protect our intellectual property rights, our
ability to supply our products as they have been designed could suffer, and our
ability to become profitable could be harmed.

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If we become involved in an intellectual property dispute, we could be subject
to significant liability, the time and attention of our management could be
diverted and we could be prevented from selling our products.

We may become a party to litigation in the future to protect our
intellectual property or because others may allege infringement of their
intellectual property. These claims and any resulting lawsuit could subject us
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:



| |  |  | stop selling our products or services that use the challenged
intellectual property;                                                                                                
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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; and
|
| |  |  | redesign those products or services that use the infringed
technology.                                                                                                              

We have limited experience marketing and selling our products internationally.
We intend to expand our operations internationally, and our operating results
will suffer if we do not generate revenue from international operations that
exceeds the cost of establishing and maintaining the operations.

We intend to enter new markets in Europe, Asia and Latin America. We have
limited experience in marketing and distributing our products internationally
and may be unable to develop international market demand for our products. If
we are unable to generate revenue from international operations that exceed the
cost of establishing and maintaining these operations, our operating results
will suffer.

The success of our international operations may be affected by:



| |  |  | our ability to establish relationships with international
distributors who can effectively market and support our products; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | difficulties inherent in developing versions of our products
that comply with local standards or regulatory requirements.      




ITEM 3. QUALITATIVE AND QUANTITATIVE 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.

EXCHANGE RATE SENSITIVITY

Currently, all of our sales and most of our expenses are denominated in
United States dollars. Therefore, we have not engaged in any foreign exchange
hedging activities to date. However, we expect to conduct transactions in
foreign currencies in increasing volumes in the future, and as a result we may
engage in foreign exchange hedging activities.

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PART II. OTHER INFORMATION




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



| | (a) |  | 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 11,500,000 shares of our common stock were offered
and sold for our account at a price of $23 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 in underwriting discounts and
approximately $3.5 million in 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 not yet used all the funds from the initial public offering. We
expect to use the net proceeds from the initial public offering for
general corporate purposes, including working capital, expansion of our
sales and marketing organization and capital expenditures. We may also
use a portion of the net proceeds from this offering to acquire or
invest in businesses, technologies or products that are complementary
to our business. We currently have no commitments or agreements with
respect to any acquisitions or investments. We have not determined the
amounts we plan to spend on any of the uses described above or the
timing of these expenditures. Pending our use of the net proceeds, we
intend to invest them in short-term, interest-bearing, investment-grade
securities.




ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS



| | (a) |  | The annual meeting of CoSines shareholders was held on June 18,
2001.                                                                                                                                                                                                                                                                                                                            
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | R. David Spreng was elected as a Class I director for a term of
three years. The Companys Class II and Class III directors did not
stand for reelection at the annual meeting. The terms of the
Companys Class II directors, Dean E. G. Hamilton and Charles J.
Abbe, will expire in 2002. The terms of the Companys Class III
directors, Vinton G. Cerf and Donald Green, will expire in 2003.
|
| | (c) |  | The only other matter voted upon at the annual meeting was the
ratification of Ernst & Young LLP as the independent auditors of the
Company for the 2001 fiscal year.                                                                                                                                                                                                                             
|
| |     |  | The following sets forth the number of votes cast or withheld, as well
as the number of abstentions and broker non-votes, with respect to the
nominee for election as a director and the ratification of Ernst &
Young LLP:                                                                                                                                                                       

|                                                |  |     |            |          |  |  |         | 
|----------------------------------------------- |  | --- | ---------- | -------- |  |  | ------- | 
|                                                |  | For |            | Withheld
|                                                |  |     |            |         
|Election of R. David Spreng as Class I director |  |     | 67,163,446 |          |  |  | 224,161 | 

|                                                                    |  |     |            |         |  |         |        |  |  |  |         | 
|------------------------------------------------------------------- |  | --- | ---------- | ------- |  | ------- | ------ |  |  |  | ------- | 
|                                                                    |  | For |            | Against |  | Abstain
|                                                                    |  |     |            |         |  |        
|Ratify the appointment of Ernst & Young LLP
as independent auditors |  |     | 67,170,065 |         |  |         | 51,549 |  |  |  | 165,993 | 




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits.
| | --- |  | ---------



| |                              
| | -----------------------------
| | See exhibit index on page 21.



| | (b) |  | Reports on Form 8-K.
| | --- |  | --------------------



| |      
| | -----
| | None.

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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/ Craig B. Collins
| |                                                                                                                     
| | Craig B. Collins  
Chief Financial Officer and Executive Vice President
(Principal Financial and Accounting Officer)

Dated: August 13, 2001

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EXHIBIT INDEX

|               |  |                                                                                                                                                                                                                                                  
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                      
|               |  |                                                                                                                                                                                                                                                  
|3.1*           |  | Second Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.2 to Form 8A (file
no. 000-30715) filed May 26, 2000).                                                                                          
|              
|              
|              
|              
|3.2*           |  | Bylaws (incorporated by reference to Exhibit 3.3 to Form 8A
(file no. 000-30715) filed May 26, 2000).                                                                                                                                            
|              
|              
|              
|              
|3.3            |  | First Amendment to Bylaws dated April 30, 2001.                                                                                                                                                                                                  
|              
|              
|              
|              
|10.1*          |  | Form of Indemnification Agreement entered into by the
Registrant with each of its directors and officers
(incorporated by reference to Exhibit 10.1 of Amendment No.
1 to Registration Statement on Form S-1 filed June 6,
2000).                
|              
|              
|              
|              
|10.2*          |  | 2000 Stock Plan and forms of agreements thereunder
(incorporated by reference to Exhibit 10.2 of Amendment No.
1 to Registration Statement on Form S-1 filed June 6,
2000).                                                                      
|              
|              
|              
|              
|10.3*          |  | 2000 Employee Stock Purchase Plan and forms of agreements
thereunder (incorporated by reference to Exhibit 10.3 of
Amendment No. 1 to Registration Statement on Form S-1 filed
June 6, 2000).                                                    
|              
|              
|              
|              
|10.4*          |  | 2000 Director Option Plan and forms of agreements
thereunder (incorporated by reference to Exhibit 10.4 of
Amendment No. 1 to Registration Statement on Form S-1 filed
June 6, 2000).                                                            
|              
|              
|              
|              
|10.5*          |  | 1997 Stock Plan (as amended and restated) and forms of
agreements thereunder (incorporated by reference to Exhibit
10.5 of Registration Statement on Form S-1 filed April 28,
2000).                                                             
|              
|              
|              
|              
|10.6*          |  | Third Amended and Restated Investors Rights Agreement
(incorporated by reference to Exhibit 10.6 of Amendment No.
1 to Registration Statement on Form S-1 filed June 6,
2000).                                                                  
|              
|              
|              
|              
|10.7*          |  | Master Equipment Lease Agreement between the Registrant and
Relational Funding Corporation dated as of February 1, 2000
(incorporated by reference to Exhibit 10.7 of Amendment No.
1 to Registration Statement on Form S-1 filed June 6,
2000). 
|              
|              
|              
|              
|10.8*          |  | Loan and Security Agreement between Registrant and Venture
Lending and Leasing II, Inc. dated as of September 21, 1998
(incorporated by reference to Exhibit 10.8 of Amendment No.
1 to Registration Statement on Form S-1 filed June 6,
2000).  
|              
|              
|              
|              
|10.9*          |  | Amended and Restated Supplement between Registrant and
Venture Lending and Leasing II, Inc. dated as of October
21, 1998 (incorporated by reference to Exhibit 10.9 of
Amendment No. 1 to Registration Statement on Form S-1 filed
June 6, 2000).
|              
|              
|              
|              
|10.10*         |  | Master Loan and Security Agreement between Registrant and
Finova Capital Corporation date as of May 19, 1999
(incorporated by reference to Exhibit 10.10 of Amendment
No. 1 to Registration Statement on Form S-1 filed June 6,
2000).           
|              
|              
|              
|              
|10.11*         |  | Loan and Security Agreement between Registrant and Silicon
Valley Bank dated as                                                                                                                                                                  

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|               |  |                                                                                                                                                                                                                                
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                    
|               |  |                                                                                                                                                                                                                                
|              
|              
|              
|              
|               |  | of May 29, 1998 (incorporated by
reference to Exhibit 10.11 of Amendment No. 1 to
Registration Statement on Form S-1 filed June 6, 2000).                                                                                      
|              
|              
|              
|              
|10.12*         |  | Loan Modification Agreement between Registrant and Silicon
Valley Bank dated as of June 22, 1998 (incorporated by
reference to Exhibit 10.12 of Registration Statement on
Form S-1 filed April 28, 2000).                      
|              
|              
|              
|              
|10.13*         |  | Loan and Security Agreement between Registrant and Silicon
Valley Bank dated as of September 30, 1999 (incorporated by
reference to Exhibit 10.13 of Amendment No. 1 to
Registration Statement on Form S-1 filed June 6, 2000).
|              
|              
|              
|              
|10.14*         |  | Building Lease Agreement between Registrant and Westport
Joint Venture dated as of May 26, 1998 (incorporated by
reference to Exhibit 10.14 of Amendment No. 1 to
Registration Statement on Form S-1 filed June 6, 2000).      
|              
|              
|              
|              
|10.15*         |  | Amendment No. 1 to Lease between Registrant and Westport
Joint Venture dated as of September 9, 1999 (incorporated
by reference to Exhibit 10.15 of Registration Statement on
Form S-1 filed April 28, 2000).                  
|              
|              
|              
|              
|10.16*         |  | Building Lease Agreement between Registrant and Westport
Joint Venture dated as of September 20, 1999 (incorporated
by reference to Exhibit 10.16 of Amendment No. 1 to
Registration Statement on Form S-1 filed June 6, 2000).
|              
|              
|              
|              
|10.17*         |  | Sublease between Registrant and Liberate Technologies dated
as of June 28, 2000 (incorporated by reference to Exhibit
10.17 of Amendment No. 4 to Registration Statement on Form
S-1 filed September 5, 2000).                 



---

|* |  | Previously filed.
|- |  | -----------------

PAGE 22 OF 23