**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





________________





**FORM
      10-Q**


________________





**(MARK
      ONE)**


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





**FOR
      THE QUARTERLY PERIOD ENDED** **September 30, 2008**





**OR**





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





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




**Commission
      File Number 000-30715**





**COSINE
      COMMUNICATIONS, INC.**


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





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





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





Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes xNo o





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





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





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


Yes
xNo
o





There
      were 10,090,635 shares of the Registrant’s Common Stock, par value $.0001,
      outstanding on November 6, 2008.










**COSINE
      COMMUNICATIONS, INC.**





**FORM
      10-Q**





**Quarter
      ended September 30, 2008**





**TABLE
      OF CONTENTS**





Page**PART
                I**FINANCIAL
                INFORMATIONItem
                1.   Condensed Financial Statements:Condensed
                Balance Sheets as of September 30, 2008 and December 31,
                2007
            
            3Condensed
                Statements of Operations for the Three and Nine Month Periods Ended
                September 30, 2008 and 2007
            
            4Condensed
                Statements of Cash Flows for the Nine Month Periods Ended September
                30,
                2008 and 2007
            
            5Notes
                to Condensed Financial Statements
            
            6Item
                2. Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            
            12Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            
            15Item
                4. Controls and Procedures
            
            16**PART
                II**OTHER
                INFORMATIONItem
                1. Legal Proceedings
            
            17Item
                1A. Risk Factors
            
            17Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            18Item
                6. Exhibits
            
            18Signature
            
            19Exhibit
                Index
            
            20Certifications
            
            21


2


**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. CONDENSED FINANCIAL STATEMENTS**





**COSINE
      COMMUNICATIONS, INC.**


**CONDENSED
      BALANCE SHEETS**


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





**September 30,**
              **2008**
            
            **December 31,**
              **2007****1****(Unaudited)**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            5,551
            
            $
            12,709Short-term
                investments
            
            
            17,489
            
            
            10,410Accounts
                receivable - other
            
            
            80
            
            
            73Prepaid
                expenses and other current assets
            
            
            46
            
            
            36Total
                current assets
            
            
            23,166
            
            
            23,228Long
                term deposit
            
            
            3
            
            
            3$
            23,169
            
            $
            23,231LIABILITIES
                AND STOCKHOLDERS' EQUITYCurrent
                liabilities:Accounts
                payable
            
            $
            227
            
            $
            204Accrued
                other liabilities
            
            
            10
            
            
            97Total
                current liabilities
            
            
            237
            
            
            301Stockholders'
                equity:Preferred
                stock, 3,000,000 authorized, none issued and outstanding
            
            
            —
            
            
            —Common
                stock, $.0001 par value, 22,000,000 shares authorized; 10,090,635
                shares
                issued and outstanding at September 30, 2008 and December 31,
                2007
            
            
            1
            
            
            1Additional
                paid-in capital
            
            
            539,051
            
            
            539,026Accumulated
                other comprehensive income (loss)
            
            
            (84
            )
            
            15Accumulated
                deficit
            
            
            (516,036
            )
            
            (516,112
            )Total
                stockholders' equity
            
            
            22,932
            
            
            22,930$
            23,169
            
            $
            23,231





See
      accompanying notes to condensed financial statements.





(1) The
      information in this column was derived from the Company's audited financial
      statements for the year ended December 31, 2007.


3


**COSINE
      COMMUNICATIONS, INC.**


**CONDENSED
      STATEMENTS OF OPERATIONS**


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


**(Unaudited)**





**Three Months Ended**
              **September 30****,**
            
            **Nine Months Ended**
              **September 30****,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Revenue:Product
            
            $
            **—**
            
            $
            **—**
            
            $
            **—**
            
            $
            **—**Service
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**Total
                revenue
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**Cost
                of revenue
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**Gross
                profit (loss)
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**Operating
                expenses:Research
                and development
            
            
            -
            
            
            -
            
            
            -
            
            
            -Sales
                and marketing
            
            
            -
            
            
            -
            
            
            -
            
            
            -General
                and administrative1
            
            
            169
            
            
            175
            
            
            492
            
            
            542Total
                operating expenses
            
            
            169
            
            
            175
            
            
            492
            
            
            542Loss
                from operations
            
            
            (169
            )
            
            (175
            )
            
            (492
            )
            
            (542
            )Interest
                income and other
            
            
            171
            
            
            302
            
            
            568
            
            
            885Income
                before income tax provision
            
            
            2
            
            
            127
            
            
            76
            
            
            343Income
                tax provision
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                income
            
            $
            2
            
            $
            127
            
            $
            76
            
            $
            343Basic
                net income per share
            
            $
            0.00
            
            $
            0.01
            
            $
            0.01
            
            $
            0.03Diluted
                net income per share
            
            $
            0.00
            
            $
            0.01
            
            $
            0.01
            
            $
            0.03Shares
                used in computing per share amounts:Basic
            
            
            10,091
            
            
            10,091
            
            
            10,091
            
            
            10,091Diluted
            
            
            10,093
            
            
            10,114
            
            
            10,093
            
            
            10,118





See
      accompanying notes to condensed financial statements.


________________________________




( 1)  General
      and administrative expenses include non-cash charges related to equity issuances
      of $9 and $25, for the three month and nine month periods ended September 30,
      2008, respectively. General and administrative expenses include non-cash charges
      related to equity issuances of $10 and $29 for the three month and nine month
      periods ended September 30, 2007, respectively.


4


**COSINE
      COMMUNICATIONS, INC.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(In
      thousands)**


**(Unaudited)**





**Nine Months Ended**
              **September 30,****2008**
            
            **2007****Operating
                activities:**Net
                income
            
            $
            76
            
            $
            343Adjustments
                to reconcile net loss to net cash used in operating
                activities:Stock
                compensation expense
            
            
            25
            
            
            29Change
                in operating assets and liabilities:Accounts
                receivable, trade
            
            
            —
            
            
            55Other
                receivables
            
            
            (7
            )
            
            9Prepaid
                expenses and other current assets
            
            
            (10
            )
            
            6Other
                assets
            
            
            —
            
            
            (3
            )Accounts
                payable
            
            
            23
            
            
            (80
            )Accrued
                other liabilities
            
            
            (87
            )
            
            (189
            )Net
                cash provided by operating activities
            
            
            20
            
            
            170**Investing
                activities:**Purchase
                of short-term investments
            
            
            (28,962
            )
            
            (22,236
            )Proceeds
                from sales and maturities of short-term investments
            
            
            21,784
            
            
            23,118Net
                cash provided by (used in) investing activities
            
            
            (7,178
            )
            
            882Net
                increase (decrease) in cash and cash equivalents
            
            
            (7,158
            )
            
            1,052Cash
                and cash equivalents at the beginning of the period
            
            
            12,709
            
            
            5,207Cash
                and cash equivalents at the end of the period
            
            $
            5,551
            
            $
            6,259





See
      accompanying notes to condensed financial statements.


5


**COSINE
      COMMUNICATIONS, INC.**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**





1.
      BASIS
      OF PRESENTATION





***Description
      of Business***





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





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





***Redeployment
      Strategy and Liquidity***





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





The
      accompanying financial statements have been prepared in conformity with U.S.
      generally accepted accounting principles, which contemplate continuation of
      the
      Company as a going concern. However, at September 30, 2008, we have an
      accumulated deficit of $516 million. Our current redeployment of assets strategy
      and the termination of our employees, discontinuance of production activities
      and cessation of our customer support offerings and service capabilities raise
      substantial doubt about our ability to continue as a going concern. The
      financial statements do not include any adjustments to reflect the possible
      future effects relating to the recoverability and classification of the recorded
      asset amounts or amounts and classification of liabilities that might result
      from the outcome of this uncertainty.





***Use
      of Estimates***





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





The
      unaudited condensed financial statements have been prepared by us pursuant
      to
      instructions to Form 10-Q and Article 10 of Regulation S-X and include the
      accounts of CoSine Communications, Inc. ("CoSine" or the "Company"). Certain
      information and footnote disclosures normally included in financial statements
      prepared in accordance with U. S. generally accepted accounting principles
      have
      been condensed or omitted pursuant to the Securities Exchange Commission’s rules
      and regulations. In the opinion of management, all adjustments (consisting
      of
      normal recurring items) necessary for a fair presentation have been included.
      The results of operations for the three and nine month periods ended September
      30, 2008 are not necessarily indicative of the results to be expected for any
      subsequent quarter or for the entire year. The condensed balance sheet at
      December 31, 2007 has been derived from the audited financial statements as
      of
      that date. These unaudited condensed financial statements should be read in
      conjunction with the audited financial statements and the notes included in
      our
      Annual Report filed on Form 10-K for the year ended December 31, 2007.


6





***Stock
      Compensation***





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





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





The
      effect of recording stock-based compensation for the three and nine months
      ended
      September 30, 2008 was $9,000 and $25,000, respectively, which consisted of
      stock based compensation related to employee stock options. The effect of
      recording stock-based compensation for the three and nine months ended September
      30, 2007 was $10,000 and $29,000, respectively, which consisted of stock based
      compensation related to employee stock options. As of September 30, 2008, we
      had
      an unrecorded deferred stock compensation balance related to stock options
      of
      approximately $50,000 before estimated forfeitures. SFAS No. 123 (R) requires
      forfeitures to be estimated at the time of grant and revised if necessary in
      subsequent periods if actual forfeitures differ from those estimates. Based
      on
      our analysis of historical experience and review of current option holders,
      we
      have assumed an annual forfeiture rate of 2.5% for our options. Accordingly,
      as
      of September 30, 2008, we estimated that the stock-based compensation for the
      awards not expected to vest was approximately $1,000 and therefore, the
      unrecorded deferred stock-based compensation balance related to stock options
      was adjusted to approximately $49,000 after estimated forfeitures. This amount
      will be recognized over an estimated weighted average amortization period of
      1.40 years.




During
      the nine months ended September 30, 2008, there were stock option grants for
      8,000 shares, with an exercise price of $2.65 per share, the market price of
      the
      stock at the date of the grant, and there were no options exercised or
      cancelled. During the nine months ended September 30, 2007, there were stock
      option grants for 6,000 shares, with an exercise price of $3.50 per share,
      the
      market price of the stock at the date of the grant, and there were no options
      exercised, cancelled or expired.





**Valuation
      Assumptions**





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





**Three Months Ended**
              **September 30,**
            
            **Nine Months Ended**
              **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Dividend
                yield
            
            
            0.0%
            
            
            0.0%
            
            
            0.0%
            
            
            0.0%Volatility
            
            
            0.36
            
            
            0.40
            
            
            0.36
            
            
            0.40Risk
                free interest rate
            
            
            3.3%
            
            
            4.89%
            
            
            3.3%
            
            
            4.89%Expected
                life
            
            
            6.25
                years
            
            
            6.25
                years
            
            
            6.25
                years
            
            
            6.25
                years





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


7





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





**Shares**
              **Available for**
              **Grant**
            
            **Shares**
            
            **Weighted-**
              **Average**
              **Price Per**
              **Share****Balance as
                of December 31, 2007**
            
            
            2,828
            
            
            153
            
            $
            7.52Granted
            
            
            8
            
            
            8
            
            
            2.65Exercised
            
            
            —
            
            
            —
            
            
            —Canceled
            
            
            —
            
            
            —
            
            
            —**Balance
                as of September 30, 2008**
            
            
            2,820
            
            
            161
            
            $
            7.28





The
      following table summarizes information concerning options outstanding and
      exercisable at September 30, 2008 (in thousands, except per share
      data):





**Options
                Outstanding****Weighted-**
            
            
            
            **Options
                Exercisable****Average**
            
            **Weighted-**
            
            
            
            **Weighted-****Number**
            
            **Remaining**
            
            **Average**
            
            **Number**
            
            **Average****Range
                of**
            
            **Of**
            
            **Contractual**
            
            **Exercise**
            
            **Of**
            
            **Exercise****Exercise
                Prices**
            
            **Shares**
            
            **Life (Years)**
            
            **Price**
            
            **Shares**
            
            **Price**$2.15
            
            
            8
            
            
            6.8
            
            $
            2.15
            
            
            6
            
            $
            2.15$2.40
            
            
            4
            
            
            7.1
            
            
            2.40
            
            
            -
            
            
            -$2.45
            
            
            6
            
            
            7.7
            
            
            2.45
            
            
            -
            
            
            -$2.60
            
            
            100
            
            
            7.0
            
            
            2.60
            
            
            83
            
            
            2.60$2.65
            
            
            8
            
            
            9.6
            
            
            2.65
            
            
            -
            
            
            -$3.50
            
            
            6
            
            
            8.6
            
            
            3.50
            
            
            -
            
            
            -$5.20
            
            
            4
            
            
            4.6
            
            
            5.20
            
            
            4
            
            
            5.20$6.96
            
            
            12
            
            
            4.8
            
            
            6.96
            
            
            12
            
            
            6.96$8.80
            
            
            4
            
            
            3.6
            
            
            8.80
            
            
            4
            
            
            8.80$22.30
            
            
            4
            
            
            2.7
            
            
            22.30
            
            
            4
            
            
            22.30$120.00
            
            
            5
            
            
            1.9
            
            
            120.00
            
            
            5
            
            
            120.00$2.15-120.00
            
            
            161
            
            
            6.65
            
            $
            7.28
            
            
            118
            
            $
            8.94





***Guarantees*** ******





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





Generally,
      a maximum obligation is not explicitly stated. Because the obligated amounts
      associated with this type of agreement are not explicitly stated, the overall
      maximum amount of the obligation cannot be reasonably estimated. Historically,
      we have not been obligated to make payments for these obligations, and no
      liabilities have therefore been recorded for these obligations on the Company’s
      balance sheet as of September 30, 2008.


8




***Income
        Taxes***




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





2.
      COMMITMENTS AND CONTINGENCIES





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





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





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





On
      October 9, 2007, a purported CoSine shareholder filed a complaint for violation
      of Section 16(b) of the Securities Exchange Act of 1934, which prohibits
      short-swing trading, against the Company's IPO underwriters. The complaint,
      Vanessa Simmonds v. The Goldman Sachs Group, et al., Case No. C07-1629, filed
      in
      the District Court for the Western District of Washington, seeks the recovery
      of
      short-swing profits. The Company is named as a nominal defendant. No recovery
      is
      sought from the Company. The plaintiff, Vanessa Simmonds, has filed similar
      lawsuits in the District Court for the Western District of Washington alleging
      short-swing trading in the stock of 54 other companies. On July 25, 2008, a
      majority of the named issuer companies, including CoSine, jointly filed a motion
      to dismiss plaintiff's claims.







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







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





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


9





3.
      BALANCE SHEET DETAILS





***Cash***





At
      September 30, 2008, we had deposits with a financial institution that may exceed
      the amount of insurance provided on such deposits.





***Fair
      Value Measurement***





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





The
      following table summarizes our financial assets measured at fair value on a
      recurring basis in accordance with SFAS No. 157 as of September 30, 2008 (in
      thousands):


**Significant Other****Balance as of**
              
              **Observable Inputs****September 30, 2008**
              
              **(Level 1)**Assets:Cash
                  equivalents:Commercial
                  paper
              
              $
              2,968
              
              $
              2,968Money
                  market funds
              
              
              2,534
              
              
              2,534$
              5,502
              
              $
              5,502Short-term
                  investments:Corporate
                  obligations
              
              $
              5,399
              
              $
              5,399U.S
                  governmental agency notes
              
              
              2,469
              
              
              2,469Money
                  market funds
              
              
              9,621
              
              
              9,621$
              17,489
              
              $
              17,489




Our
      financial assets are valued using market prices on active markets (level 1).
      Level 1 instrument valuations are obtained from real-time quotes for
      transactions in active exchange markets involving identical assets. At September
      30, 2008, we did not have any assets with instrument valuations which are not
      obtained from readily-available pricing sources for comparable instruments
      (level 2) or assets without observable market values that would require a high
      level of judgment to determine fair value (level 3).





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





4.
      NET
      INCOME PER COMMON SHARE




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


10


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




**Three Months Ended**
              **September 30,**
            
            **Nine Months Ended**
              **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                income
            
            $
            2
            
            $
            127
            
            $
            76
            
            $
            343Basic
                and diluted:Weighted-average
                shares of common stock outstanding
            
            
            10,091
            
            
            10,091
            
            
            10,091
            
            
            10,091Add:
                effect of dilutive securities – stock options
            
            
            2
            
            
            23
            
            
            2
            
            
            27Weighted-average
                shares used in diluted net income per share
            
            
            10,093
            
            
            10,114
            
            
            10,093
            
            
            10,118Basic
                and diluted net income per share
            
            $
            0.00
            
            $
            0.01
            
            $
            0.01
            
            $
            0.03





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





5.
      COMPREHENSIVE INCOME





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





**Three Months Ended**
              **September 30,**
            
            **Nine Months Ended**
              **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                income
            
            $
            2
            
            $
            127
            
            $
            76
            
            $
            343Other
                comprehensive income (loss):Unrealized
                gains (loss) on investments
            
            
            (87
            )
            
            (2
            )
            
            (99
            )
            
            (2
            )Currency
                translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                other comprehensive income (loss)
            
            
            (87
            )
            
            (2
            )
            
            (99
            )
            
            (2
            )Comprehensive
                income (loss)
            
            $
            (85
            )
            $
            125
            
            $
            (23
            )
            $
            341





6.
      RECENT
      ACCOUNTING PRONOUNCEMENTS





In
      December 2007, the FASB issued Statement of Financial Accounting Standards
      No. 141 (revised 2007), Business Combinations ** (“SFAS 141(R)”).
      SFAS 141(R) changes accounting for acquisitions that close beginning in
      2009. More transactions and events will qualify as business combinations and
      will be accounted for at fair value under the new standard. SFAS 141(R)
      promotes greater use of fair values in financial reporting. Some of the changes
      will introduce more volatility into earnings. SFAS 141(R) is effective for
      fiscal years beginning on or after December 15, 2008. We are currently
      assessing the impact that SFAS 141(R) may have on our financial position,
      results of operations, and cash flows.




In
      December 2007, the FASB issued Statement of Financial Accounting Standards
      No. 160, Noncontrolling Interests in Financial Statements
      (“SFAS 160”), an amendment of ARB No. 51. SFAS 160 will change
      the accounting and reporting for minority interests which will be
      recharacterized as noncontrolling interests and classified as a component of
      equity. SFAS 160 is effective for fiscal years beginning on or after
      December 15, 2008. SFAS 160 requires retroactive adoption of the
      presentation and disclosure requirements for existing minority interests. We
      are
      currently assessing the impact that SFAS 160 may have on our financial
      position, results of operations, and cash flows.




In
      December 2007, the FASB issued EITF Issue 07-1 Accounting for Collaborative
      Arrangements (EITF 07-1). Collaborative arrangements are agreements between
      parties to participate in some type of joint operating activity. The task force
      provided indicators to help identify collaborative arrangements and provides
      for
      reporting of such arrangements on a gross or net basis pursuant to guidance
      in
      existing authoritative literature. The task force also expanded disclosure
      requirements about collaborative arrangements. Conclusions within EITF 07-1
      are
      to be applied retrospectively. We are currently assessing the impact that EITF
      07-1 may have on our financial position, results of operations, and cash
      flows.


11





7.
      TRANSACTIONS WITH RELATED PERSONS





In
      efforts to reduce our operating expenses, on June 15, 2007, the board of
      directors approved an agreement (the “Services Agreement”) with SP Corporate
      Services, LLC (“SP”) pursuant to which SP provides us, on a non-exclusive basis,
      a full range of executive, financial and administrative support services and
      personnel, including the services of a Chief Executive Officer, Chief Financial
      Officer, Secretary, Principal Executive Officer and Principal Accounting
      Officer, maintenance of our corporate office and records, periodic reviews
      of
      transactions in our stock to assist in preservation of our NOLs, and related
      executive, financial, accounting and administrative support services. The
      Service Agreement became effective as of July 1, 2007. Under the Services
      Agreement, we pay SP a monthly fee of $17,000 in exchange for SP's services.
      SP
      is responsible for compensating and providing all applicable employment benefits
      to any SP personnel in connection with providing services under the Services
      Agreement. We reimburse SP for reasonable and necessary business expenses of
      ours incurred by SP, and we are responsible for payment of fees related to
      audit, tax, legal, stock transfer, insurance broker, investment advisor and
      banking services provided to us by third party advisors. The Services Agreement
      has a term of one year and automatically renews for successive one year periods
      unless otherwise terminated by either party. The Services Agreement is also
      terminable by us upon the death of Terry R. Gibson or his resignation as our
      Chief Executive Officer, Chief Financial Officer or Secretary of the Company.
      Under the Services Agreement, SP and its personnel are entitled to the same
      limitations on liability and indemnity rights available under our charter
      documents to any other person performing such services for us. During the nine
      months ended September 30, 2008, we incurred $153,000 for services performed
      by
      SP under the Services Agreement. The Services Agreement was renewed as of July
      1, 2008 for an additional one year term.





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





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





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





In
      addition to historical information, this Quarterly Report on Form 10-Q
      contains forward-looking statements that involve risks and uncertainties that
      could cause our actual results to differ materially. When used in this report,
      the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”
“estimates” and similar expressions are generally intended to identify
      forward-looking statements. You should not place undue reliance on these
      forward-looking statements, which reflect our opinions only as of the date
      of
      this Quarterly Report. We undertake no obligation to publicly release any
      revisions to the forward-looking statements after the date of this document.
      You
      should carefully review the risk factors described in other documents we file
      from time to time with the U.S. Securities and Exchange Commission,
      including our Annual Report on Form 10-K for our fiscal year ended
      December 31, 2007 and our other Quarterly Reports on Form 10-Q filed
      by us in our fiscal year 2008.





**OVERVIEW**





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


12


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




DUE
      TO
      THE ADOPTION OF OUR REDEPLOYMENT STRATEGY, THE INFORMATION APPEARING BELOW,
      WHICH RELATES TO PRIOR PERIODS, MAY NOT BE INDICATIVE OF THE RESULTS THAT MAY
      BE
      EXPECTED FOR ANY SUBSEQUENT PERIODS. THE NINE MONTHS ENDED SEPTEMBER 30, 2008
      PRIMARILY REFLECT, AND FUTURE PERIODS PRIOR TO A REDEPLOYMENT OF OUR ASSETS
      ARE
      EXPECTED TO PRIMARILY REFLECT, GENERAL AND ADMINISTRATIVE EXPENSES AND
      TRANSACTION EXPENSES ASSOCIATED WITH THE CONTINUING ADMINISTRATION OF THE
      COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS.





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





**General**





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




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





**Impact
      of Equity Issuances on Operating Results**





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





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





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


13





**RESULTS
      OF OPERATIONS**





**Revenue**





Effective
      December 31, 2006, we ceased all customer service operations. Accordingly,
      there
      were no revenues recognized for the nine months ended September 30, 2008 and
      2007.




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





During
      the nine months ended September 30, 2008 and 2007, we recorded $25,000 and
      $29,000 respectively, of non-cash charges related to equity issuances. The
      charges relate to the adoption of SFAS No. 123(R).





**Cost
      of Revenue**





There
      was
      no cost of revenue for the nine months ended September 30, 2008 and 2007 as
      we
      closed our customer service business effective December 31, 2006.





**Research
      and Development Expenses**





Research
      and development expenses were nil for the nine months ended September 30, 2008
      and 2007, respectively. We discontinued all research and development in
      connection with our announcement in September 2004 that we were terminating
      all
      employees and discontinuing our products. We do not expect to incur research
      and
      development costs unless and until we acquire new operating businesses.





**Sales
      and Marketing Expenses**





Sales
      and
      marketing expenses were nil for the nine months ended September 30, 2008 and
      2007, respectively. With our announcement in September 2004 that we were
      terminating all employees and were discontinuing our products, we have ceased
      essentially all ongoing sales and marketing efforts. We do not expect to incur
      sales and marketing costs unless and until we acquire new operating businesses.





**General
      and Administrative Expenses**





General
      and administrative expenses were $492,000 and $542,000 for the nine months
      ended
      September 30, 2008 and 2007, respectively. With our announcement in September
      2004 that we were terminating all employees and discontinuing our products,
      our
      general and administrative efforts have been focused on restructuring
      activities, the evaluation of strategic alternatives, as well as the activities
      related to identifying and acquiring profitable business operations. General
      and
      administrative costs for the nine months ended September 30, 2008 and 2007
      consisted of costs of our contractors, legal and accounting services, insurance
      and office expenses. General and administrative expenses should remain at
      approximately the levels reported in the three months ended September 30, 2008
      for the quarter ending December 31, 2008. ****





**Interest
      Income and Other**





For
      the
      nine months ended September 30, 2008 and 2007, interest income and other income
      was $568,000 and $885,000 respectively. The decrease from September 30, 2007
      to
      September 30, 2008 is due primarily to lower interest rates during 2008 as
      compared to 2007.





**Income
      Tax Provision**





Provisions
      for income taxes were nil for the nine months ended September 30, 2008 and
      2007,
      respectively.


14





**LIQUIDITY
      AND CAPITAL RESOURCES**





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





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





**Cash,
      Cash Equivalents and Short-Term Investments**





Cash,
      cash equivalents and short-term investments were $23.0 million and $23.1 million
      at September 30, 2008 and December 31, 2007, respectively.





**Operating
      Activities**




We
      generated $20,000 in cash from operations for the nine months ended September
      30, 2008 as compared to generating $170,000 in cash from operations for the
      nine
      months ended September 30, 2007. The decrease in 2008 is due primarily to a
      decrease in net income in 2008 resulting from lower interest rates, as compared
      to 2007.




**Investing
      Activities**





We
      utilized $7.2 million in cash in the nine months ended September 30, 2008 as
      compared to generating $0.9 million in cash during the nine months ended
      September 30, 2007 due to increased purchases of short-term investments during
      2008. There were no capital expenditures in the nine months ended September
      30,
      2008 or 2007, respectively.





**Financing
      Activities**





There
      were no significant financing activities in the nine months ended September
      30,
      2008 and 2007, respectively.





**OUTLOOK**





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





At
      September 30, 2008, we had $23.0 million in cash and short-term investments.
      We
      believe we possess sufficient liquidity and capital resources to fund our
      operations and working capital requirements for at least the next 12 months.





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





**Interest
      Rate Sensitivity**


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


15





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





A
      sensitivity analysis was performed on our investment portfolio as of September
      30, 2008 based on a modeling technique that measures hypothetical fair market
      value changes that would result from a parallel shift in the yield curve of
      plus
      100 basis points. Based on this analysis, a hypothetical 100 basis point
      increase in interest rates would result in a $67,000 decrease in the fair value
      of our investments in debt securities as of September 30, 2008.





**Exchange
      Rate Sensitivity**





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





**ITEM
      4. CONTROLS AND PROCEDURES**





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




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




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







16


**PART
      II. OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





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





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





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





On
      October 9, 2007, a purported CoSine shareholder filed a complaint for violation
      of Section 16(b) of the Securities Exchange Act of 1934, which prohibits
      short-swing trading, against the Company's IPO underwriters. The complaint,
      Vanessa Simmonds v. The Goldman Sachs Group, et al., Case No. C07-1629, filed
      in
      the District Court for the Western District of Washington, seeks the recovery
      of
      short-swing profits. The Company is named as a nominal defendant. No recovery
      is
      sought from the Company. The plaintiff, Vanessa Simmonds, has filed similar
      lawsuits in the District Court for the Western District of Washington alleging
      short-swing trading in the stock of 54 other companies. On July 25, 2008, a
      majority of the named issuer companies, including CoSine, jointly filed a motion
      to dismiss plaintiff's claims.





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




**ITEM
      1A. RISK FACTORS**





In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part I, Item 1A. “Risk Factors” in
      our Annual Report on Form 10-K for our fiscal year ended December 31,
      2007. The risks discussed in our Annual Report on Form 10-K could
      materially affect our business, financial condition and future results. The
      risks described in our Annual Report on Form 10-K are not the only risks
      facing us. Additional risks and uncertainties not currently known to us or
      that
      we currently deem to be immaterial also may materially and adversely affect
      our
      business, financial condition or operating results.


17





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





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





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





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





**ITEM** **6.** **EXHIBITS**





Exhibit
      Index on page 20.


18


**SIGNATURE**





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





COSINE
                COMMUNICATIONS, INC.By:
            /s/
                Terry R. GibsonTerry
                R. GibsonDated:
                November 6, 2008
            
            Chief
                Executive Officer and Chief Financial Officer(Principal
                Accounting Officer)


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**EXHIBIT
      INDEX**





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


20