**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**







**FORM
      10-Q**





**(MARK
      ONE)**


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





**FOR
      THE QUARTERLY PERIOD ENDED** **JUNE 30, 2007**





**OR**





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





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




**Commission
      File Number 000-30715**





**COSINE
      COMMUNICATIONS, INC.**


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





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





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





Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x
      No o





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





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





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


Yes
xNo
o





**There
      were 10,090,635 shares of the Registrant’s Common Stock, par value $.0001,
      outstanding on July 31, 2007.**














**COSINE
      COMMUNICATIONS, INC.**





**FORM
      10-Q**





**Quarter
      ended June 30, 2007**





**TABLE
      OF CONTENTS**




**PART
                I**
            
            PageFINANCIAL
                INFORMATIONItem
                1. Condensed Consolidated Financial Statements:Condensed
                Consolidated Balance Sheets as of June 30, 2007 and December 31,
                2006
            
            3Condensed
                Consolidated Statements of Operations for the Three and Six Month
                Periods
                Ended June 30, 2007 and 2006
            
            4Condensed
                Consolidated Statements of Cash Flows for the Six Months Ended June
                30,
                2007 and 2006
            
            5Notes
                to Condensed Consolidated Financial Statements
            
            6Item
                2. Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            
            13Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            
            17Item
                4. Controls and Procedures
            
            18**PART
                II**OTHER
                INFORMATIONItem
                1. Legal Proceedings
            
            19Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            19Item
                4. Submission of Matters to a Vote of Security Holders
            
            20Item
                6. Exhibits
            
            20Signature
            
            20Exhibit
                Index
            
            21Certifications





2


**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





**COSINE
      COMMUNICATIONS, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


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




**June
                30,**
              **2007**
            
            **December
                31,**
              **2006****(Unaudited)**
            
            **(1)**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            4,526
            
            $
            5,207Short-term
                investments
            
            
            18,342
            
            
            17,650Accounts
                receivable:Trade
                (net of allowance for doubtful accounts of nil at June 30, 2007 and
                December 31, 2006)
            
            
            —
            
            
            55Other
            
            
            83
            
            
            68Prepaid
                expenses and other current assets
            
            
            26
            
            
            56Total
                current assets
            
            
            22,977
            
            
            23,036Long-term
                deposit
            
            
            3
            
            
            —$
            22,980
            
            $
            23,036LIABILITIES
                AND STOCKHOLDERS' EQUITYCurrent
                liabilities:Accounts
                payable
            
            $
            176
            
            $
            320Accrued
                other liabilities
            
            
            92
            
            
            239Total
                current liabilities
            
            
            268
            
            
            559Stockholders'
                equity:Preferred
                stock, 3,000,000 authorized, none issued and outstanding
            
            
            —
            
            
            —Common
                stock, $.0001 par value, 22,000,000 shares authorized; 10,090,635
                shares
                issued and outstanding at June 30, 2007 and December 31,
                2006
            
            
            1
            
            
            1Additional
                paid-in capital
            
            
            539,006
            
            
            538,987Accumulated
                other comprehensive income
            
            
            17
            
            
            17Accumulated
                deficit
            
            
            (516,312
            )
            
            (516,528
            )Total
                stockholders' equity
            
            
            22,712
            
            
            22,477$
            22,980
            
            $
            23,036





See
      accompanying notes to condensed consolidated financial statements.





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




3




**COSINE
      COMMUNICATIONS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


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


**(Unaudited)**





**Three
                Months Ended**
              **June
                30****,**
            
            **Six
                Months Ended**
              **June
                30****,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Revenue:Product
            
            $
            **—**
            
            $
            -
            
            $
            **—**
            
            $
            -Service
            
            
            **—**
            
            
            520
            
            
            **—**
            
            
            1,099Total
                revenue
            
            
            **—**
            
            
            520
            
            
            **—**
            
            
            1,099Cost
                of revenue1
            
            
            **—**
            
            
            533
            
            
            **—**
            
            
            1,103Gross
                profit (loss)
            
            
            **—**
            
            
            (13
            )
            
            **—**
            
            
            (4
            )Operating
                expenses:Research
                and development
            
            
            -
            
            
            -
            
            
            -
            
            
            -Sales
                and marketing
            
            
            -
            
            
            -
            
            
            -
            
            
            -General
                and administrative2
            
            
            170
            
            
            234
            
            
            367
            
            
            611Total
                operating expenses
            
            
            170
            
            
            234
            
            
            367
            
            
            611Loss
                from operations
            
            
            (170
            )
            
            (247
            )
            
            (367
            )
            
            (615
            )Interest
                income and other
            
            
            292
            
            
            452
            
            
            583
            
            
            694Income
                before income tax provision
            
            
            122
            
            
            205
            
            
            216
            
            
            79Income
                tax provision
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                income
            
            $
            122
            
            **$**
            205
            
            $
            216
            
            $
            79Basic
                net income per share
            
            $
            0.01
            
            $
            0.02
            
            $
            0.02
            
            $
            0.01Diluted
                net income per share
            
            $
            0.01
            
            $
            0.02
            
            $
            0.02
            
            $
            0.01Shares
                used in computing per share amounts:Basic
            
            
            10,091
            
            
            10,091
            
            
            10,091
            
            
            10,091Diluted
            
            
            10,122
            
            
            10,091
            
            
            10,122
            
            
            10,091




See
      accompanying notes to condensed consolidated financial statements.





1
                Cost
                    of revenue includes non-cash (credits) charges related to equity
                    issuances
                    of $40 for the three months ended June 30, 2006 and $100 for
                    the six
                    months ended June 30, 2006.
 2
                General
                    and administrative expenses include non-cash charges related
                    to equity
                    issuances of $9 and $19, for the three month and six month periods
                    ended
                    June 30, 2007, respectively. General and administrative expenses
                    include
                    non-cash charges related to equity issuances of $15 and $20 for
                    the three
                    month and six month periods ended June 30, 2006,
                    respectively.




4




**COSINE
      COMMUNICATIONS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(In
      thousands)**


**(Unaudited)**





**Six
                Months Ended**
              **June
                30,****2007**
            
            **2006****Operating
                activities:**Net
                income
            
            $
            216
            
            $
            79Adjustments
                to reconcile net income to net cash provided by (used in) operating
                activities:Amortization
                of warrants issued for services
            
            
            **—**
            
            
            100Stock
                compensation expense
            
            
            19
            
            
            21Change
                in operating assets and liabilities:Accounts
                receivable, trade
            
            
            55
            
            
            (111
            )Other
                receivables
            
            
            (15
            )
            
            144Prepaid
                expenses and other current assets
            
            
            30
            
            
            32Other
                assets
            
            
            (3
            )
            
            **—**Accounts
                payable
            
            
            (144
            )
            
            12Accrued
                other liabilities
            
            
            (147
            )
            
            (388
            )Deferred
                revenue
            
            
            —
            
            
            27Net
                cash provided by (used in) operating activities
            
            
            11
            
            
            (84
            )**Investing
                activities:**Purchase
                of short-term investments
            
            
            (19,721
            )
            
            (3,201
            )Proceeds
                from sales and maturities of short-term investments
            
            
            19,029
            
            
            10,048Net
                cash (used in) provided by investing activities
            
            
            (692
            )
            
            6,847Net
                (decrease) increase in cash and cash equivalents
            
            
            (681
            )
            
            6,763Cash
                and cash equivalents at the beginning of the period
            
            
            5,207
            
            
            12,417Cash
                and cash equivalents at the end of the period
            
            $
            4,526
            
            $
            19,180





See
      accompanying notes to condensed consolidated financial statements.





5


**COSINE
      COMMUNICATIONS, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





1.
      BASIS
      OF PRESENTATION





***Description
      of Business***





CoSine
      Communications, Inc. ("CoSine" or the "Company," which may be referred to as
      "we," "us" or "our") was incorporated in California on April 14, 1997 and in
      August 2000 was reincorporated in the State of Delaware. We were a provider
      of
      carrier network equipment products and services until the fourth quarter of
      fiscal year 2004 during which time we discontinued our product lines, took
      actions to lay-off most of our employees, terminated contract manufacturing
      arrangements, contractor and consulting arrangements and various facility
      leases, and sold, scrapped or wrote-off our inventory, property and equipment.
      As a result of these activities, our business consisted primarily of a customer
      support capability for our discontinued products provided by a third party.
      We
      continued such support activities through December 31, 2006, at which time
      we
      ceased all customer support services. In 2006 we sold our patent portfolio
      and
      the intellectual property related to our carrier products and service business.
      We continue to seek to redeploy our existing resources to identify and acquire
      one or more new business operations with existing or prospective taxable
      earnings that can be offset by use of our net operating loss carry-forwards
      ("NOLs").





***Liquidity
      and Redeployment Strategy***





The
      accompanying financial statements have been prepared in conformity with U.S.
      generally accepted accounting principles, which contemplate continuation of
      the
      Company as a going concern. However, at June 30, 2007, we have an accumulated
      deficit of $516 million. As of December 31, 2006, we ceased our customer service
      capability. Our actions in the fourth quarter of fiscal year 2004 to terminate
      most of our employees and discontinue production activities in an effort to
      conserve cash raise substantial doubt about our ability to continue as a going
      concern. The financial statements do not include any adjustments to reflect
      the
      possible future effects relating to the recoverability and classification of
      the
      recorded asset amounts or amounts and classification of liabilities that might
      result from the outcome of this uncertainty.





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





***Basis
      of Consolidation***





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





***Use
      of Estimates***





The
      preparation of consolidated financial statements in conformity with U.S.
      generally accepted accounting principles requires management to make estimates
      and assumptions that affect the amounts reported in the consolidated financial
      statements and the accompanying notes. Actual results could differ from these
      estimates. Estimates are used in accounting for, but not limited to, revenue
      recognition, allowance for doubtful accounts, inventory valuations, long-lived
      asset valuations, accrued liabilities including warranties, and equity
      issuances. Estimates and assumptions are reviewed periodically and the effects
      of revisions are reflected in the consolidated financial statements in the
      period of determination.





The
      unaudited condensed consolidated financial statements have been prepared by
      us
      pursuant to instructions to Form 10-Q and Article 10 of Regulation S-X and
      include the accounts of CoSine Communications, Inc. and its wholly owned
      subsidiaries ("CoSine" or collectively, the "Company"). Certain information
      and
      footnote disclosures normally included in financial statements prepared in
      accordance with U. S. generally accepted accounting principles have been
      condensed or omitted pursuant to the Securities Exchange Commission’s rules and
      regulations. In the opinion of management, all adjustments (consisting of normal
      recurring items) necessary for a fair presentation have been included. The
      results of operations for the three and six month periods ended June 30, 2007
      are not necessarily indicative of the results to be expected for any subsequent
      quarter or for the entire year. The condensed consolidated balance sheet at
      December 31, 2006 has been derived from the audited financial statements as
      of
      that date. These unaudited condensed consolidated financial statements should
      be
      read in conjunction with the audited consolidated financial statements and
      the
      notes included in our Annual Report filed on Form 10-K for the year ended
      December 31, 2006.




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 six month periods
      ended June 30, 2007 was $9,000 and $19,000, respectively, which consisted of
      stock based compensation related to employee stock options. The effect of
      recording stock-based compensation for the three and six month periods ended
      June 30, 2006 was $15,000 and $20,000, respectively, which consisted of stock
      based compensation related to employee stock options. As of June 30, 2007 we
      had
      an unrecorded deferred stock compensation balance related to stock options
      of
      approximately $89,000 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 June 30, 2007, we estimated that the stock-based compensation for the awards
      not expected to vest was approximately $4,000, and therefore, the unrecorded
      deferred stock-based compensation balance related to stock options was adjusted
      to approximately $85,000 after estimated forfeitures. This amount will be
      recognized over an estimated weighted average amortization period of 3 years.




During
      the six months ended June 30, 2007, there were stock option grants for 6,000
      shares, with an exercise price of $3.50 per share, the market price on the
      date
      of grant, and there were no options exercised cancelled or expired. During
      the
      six months ended June 30, 2006, there were stock option grants for 6,000 shares,
      with an exercise price of $2.45 per share, the market price on the date of
      grant, and 6,000 options were cancelled.





****** **Valuation
      Assumptions**





**Three
                Months Ended**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Dividend
                yield
            
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %Volatility
            
            
            0.40
            
            
            0.40
            
            
            0.40
            
            
            0.40Risk
                free interest rate
            
            
            4.89
            %
            
            5.0
            %
            
            4.89
            %
            
            5.0
            %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 employees and
      an
      analysis of the 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, 2006**
            
            
            2,940
            
            
            147
            
            $
            7.69Granted
            
            
            6
            
            
            6
            
            
            3.50Exercised
            
            
            —
            
            
            —
            
            
            —Canceled
            
            
            —
            
            
            —
            
            
            —**Balance
                as of June 30, 2007**
            
            
            2,934
            
            
            153
            
            $
            7.
                52





The
      following table summarizes information concerning options outstanding and
      exercisable at June 30, 2007 (in thousands, except per share data):





**Options
                Outstanding****Weighted-**
            
            
            
            **Options
                Exercisable****Average****Remaining**
            
            **Weighted-**
            
            
            
            **Weighted-****Range
                of**
            
            **Number**
            
            **Contractual**
            
            **Average**
            
            **Number**
            
            **Average****Exercise
                Prices**
            
            **Of
                    Shares**
            
            **Life
                (Years)**
            
            **Exercise
                  Price**
            
            **Of
                    Shares**
            
            **Exercise
                    Price**$2.15-2.60
            
            
            118
            
            
            8.0
            
            $
            2.56
            
            
            81
            
            $
            2.573.50
            
            
            6
            
            
            9.9
            
            
            3.50
            
            
            -
            
            
            -5.20
            
            
            4
            
            
            5.8
            
            
            5.20
            
            
            4
            
            
            5.206.96
            
            
            12
            
            
            6.3
            
            
            6.96
            
            
            11
            
            
            6.968.80
            
            
            4
            
            
            4.8
            
            
            8.80
            
            
            4
            
            
            8.8022.30
            
            
            4
            
            
            3.9
            
            
            22.30
            
            
            4
            
            
            22.30120.00
            
            
            5
            
            
            3.1
            
            
            120.00
            
            
            5
            
            
            120.00$2.15-120.00
            
            
            153
            
            
            7.8
            
            $
            7.52
            
            
            109
            
            $
            9.46





***Guarantees***





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





Generally,
      a maximum obligation is not explicitly stated. Because the obligated amounts
      associated with this type of agreement are not explicitly stated, the overall
      maximum amount of the obligation cannot be reasonably estimated. Historically,
      we have not been obligated to make payments for these obligations, and no
      liabilities have therefore been recorded for these obligations on its
      consolidated balance sheet as of June 30, 2007.




***Income
      Taxes***





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




8




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 indicated that they will seek to amend their allegations
        and
        file amended complaints. It is uncertain whether there will be any revised
        or
        future settlement.
 
 If
        a
        settlement is not consummated, we intend to defend the lawsuit vigorously.
        However, we cannot predict its outcome with certainty. If we are not successful
        in our defense of the lawsuit, we could be forced to make significant payments
        to the plaintiffs and their lawyers, and such payments could have a material
        adverse effect on our business, financial condition and results of operations
        if
        not covered by our insurance carrier.




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





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





3.
      BALANCE SHEET DETAILS





***Cash***





At
      June
      30, 2007, we had deposits with a financial institution that may exceed the
      amount of insurance provided on such deposits.




9




***Accounts
      Receivable***





****** We
      have
      no trade accounts receivable at June 30, 2007. Two customers comprised 94%
      of
      total accounts receivable at December 31, 2006.





***Warranty***





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





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 income per share
      gives effect to the dilutive effect of common stock equivalents consisting
      of
      stock options and warrants (calculated using the treasury stock method).





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




**Three
                Months Ended**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Net
                income
            
            $
            122
            
            $
            205
            
            $
            216
            
            $
            79Basic
                and diluted:Weighted-average
                shares of common stock outstanding
            
            
            10,091
            
            
            10,091
            
            
            10,091
            
            
            10,091Add:
                effect of dilutive securities - stock options
            
            
            31
            
            
            —
            
            
            31
            
            
            —Weighted-average
                shares used in diluted net income per share
            
            
            10,122
            
            
            10,091
            
            
            10,122
            
            
            10,091Basic
                and diluted net income (loss) per share
            
            $
            0.01
            
            $
            0.02
            
            $
            0.02
            
            $
            0.01





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**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,****200****7**
            
            **2006**
            
            **2007**
            
            **2006**Net
                income
            
            $
            122
            
            $
            205
            
            $
            216
            
            $
            79Other
                comprehensive income:Unrealized
                gains on investments
            
            
            -
            
            
            1
            
            
            -
            
            
            6Currency
                translation adjustment
            
            
            -
            
            
            2
            
            
            -
            
            
            14Total
                other comprehensive income
            
            
            -
            
            
            3
            
            
            -
            
            
            20Comprehensive
                income
            
            $
            122
            
            $
            208
            
            $
            216
            
            $
            99




10




6.
      SEGMENT REPORTING




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




We
      had no
      revenues in the three and six month periods ended June 30, 2007. Revenues from
      customers by geographic region for the three and six months ended June 30,
      2006,
      respectively, were as follows, in thousands:





**Three
                Months Ended June 30, 2006**
            
            **Three
                Months Ended June 30, 2006****Region**United
                States
            
            $
            465
            
            $
            1,010Italy
            
            
            -
            
            
            -France
            
            
            48
            
            
            82Korea
            
            
            -
            
            
            -Japan
            
            
            -
            
            
            -Other
                EMEA.
            
            
            7
            
            
            7Other
                Asia/Pacific
            
            
            -
            
            
            -Total
            
            $
            520
            
            $
            1,099





Two
      North
      American customers accounted for 89% and 92% of total revenues, respectively,
      in
      the three months ended June 30, 2006.





7.
      RECENT
      ACCOUNTING PRONOUNCEMENTS





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





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





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




11




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





8.
      SUBSEQUENT EVENT





On
      June
      15, 2007, the Board of Directors of CoSine Communications, Inc. (the “Company”)
      approved the Company’s entering into an agreement, to be effective as of July 1,
      2007 (the “Services Agreement”), with SP Corporate Services, LLC (“SP”) pursuant
      to which SP will provide to the Company, 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 the Company’s corporate office and records, periodic reviews of
      transactions in the Company’s stock to assist in preservation of the Company’s
      net loss carry-forwards under Section 382 of the Internal Revenue Code, and
      related executive, financial, accounting and administrative support services.
      Under the Services Agreement, the Company will pay SP a monthly fee of $17,000
      in exchange for the services. SP will be responsible for compensating and
      providing all applicable employment benefits to any SP personnel in connection
      with providing services under the Services Agreement. The Company shall
      reimburse SP for reasonable and necessary business expenses of the Company
      incurred by SP, and the Company will be responsible payment of fees related
      to
      audit, tax, legal, stock transfer, insurance broker, investment advisor and
      banking services provided to the Company by third party advisors. The Services
      Agreement has a term of one year and shall automatically renew for successive
      one year periods unless terminated, on any anniversary date of the Services
      Agreement, by either party upon not less than 30 days prior written notice
      to
      the other. The Services Agreement is also terminable by the Company upon 30
      days
      prior written notice received by SP within 60 days following the death of Terry
      R. Gibson or his resignation as Chief Executive Officer, Chief Financial Officer
      or Secretary of the Company. Under the Services Agreement, SP and its personnel
      will be entitled to the same limitations on liability and indemnity rights
      available under the Company’s charter documents to any other person performing
      such services for the Company. During fiscal year 2007 to date, the Company
      has
      incurred approximately $24,500 per month in performing itself the services
      which
      are to be performed by SP under the Services Agreement.





SP
      is
      affiliated with Steel Partners II, L.P., the Company’s largest stockholder, by
      virtue of SP’s President, Warren Lichtenstein, serving as the sole executive
      officer and managing member of Steel Partners, L.L.C., 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, the Company’s current Chief
      Executive Officer, Chief Financial Officer, Secretary, Principal Executive
      Officer and Principal Accounting Officer, will terminate his employment with
      the
      Company, effective June 30, 2007. Under the Services Agreement, Mr. Gibson
      will
      continue to serve, at the pleasure of the Board of Directors of the Company
      but
      as an employee of SP, as the Company’s Chief Executive Officer, Chief Financial
      Officer, Secretary, Principal Executive Officer and Principal Accounting
      Officer. SP will be responsible for compensating Mr. Gibson, including providing
      him with all applicable employment benefits to which he may be entitled, for
      his
      serving as Chief Executive Officer, Chief Financial Officer, Secretary,
      Principal Executive Officer and Principal Accounting Officer of the Company
      and
      for any other services he may provide to the Company under the Services
      Agreement. As a director and officer of the Company and as provided in the
      Services Agreement, Mr. Gibson will continue to be entitled to the same
      limitations on liability and indemnity rights available under the Company’s
      charter documents to any other person performing such services for the
      Company.





12




**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. We use words such as
      "anticipate," "believe," "plan," "expect," "future," "intend" and similar
      expressions to identify 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 the forward-looking
      statements. Factors that might cause such a difference include, but are not
      limited to, failure to achieve revenue growth and profitability, our ability
      to
      identify and acquire new business operations, the time and costs required to
      identify and acquire new business operations, management and board interest
      in
      and distraction due to identifying and acquiring new business operations, and
      the reactions, either positive or negative, of investors and others to our
      strategic direction and to any specific business opportunity selected by us,
      all
      as are discussed in more detail in the section entitled "Risk Factors" contained
      in our Annual Report on Form 10-K for the year ended December 31, 2006. 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. Readers should carefully review the risk factors
      described in other documents that we file from time to time with the Securities
      and Exchange Commission.





**OVERVIEW**





Until
      December 31, 2006, our business consisted primarily of a customer support
      capability provided by a third party for our discontinued products. We continued
      such support activities through December 31, 2006, at which time we ceased
      all
      customer support services. In 2006, we sold our patent portfolio and the
      intellectual property related to our carrier products and service business.
      We
      continue to seek to redeploy our existing resources to identify and acquire
      one
      or more new business operations with existing or prospective taxable earnings
      that can be offset by use of our net operating loss carry-forwards ("NOLs").




DUE
      TO
      THE ADOPTION OF OUR REDEPLOYMENT STRATEGY, THE INFORMATION APPEARING BELOW,
      WHICH RELATES TO PRIOR PERIODS, MAY NOT BE INDICATIVE OF THE RESULTS THAT MAY
      BE
      EXPECTED FOR ANY SUBSEQUENT PERIODS. THE SIX MONTH PERIOD ENDED JUNE 30, 2007
      PRIMARILY REFLECTS, AND FUTURE PERIODS PRIOR TO A REDEPLOYMENT OF OUR ASSETS
      ARE
      EXPECTED TO PRIMARILY REFLECT, GENERAL AND ADMINISTRATIVE EXPENSES AND
      TRANSACTION EXPENSES ASSOCIATED WITH THE CONTINUING ADMINISTRATION OF THE
      COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS.





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





**General**





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





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




13






**Revenue
      Recognition**





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





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





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





Through
      December 31, 2006, our revenue consisted primarily of customer service revenue.
      We recorded revenue as earned for customer service revenue, once we satisfied
      ourselves that collection was probable. If we could satisfy ourselves that
      collection was probable, we deferred revenue recognition until we collected
      payment.





**Allowance
      for Doubtful Accounts**





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





**Warranties**





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





We
      ceased
      offering warranty on product or service sales in 2004 and all warranty
      obligations expired prior to December 31, 2006.





**Impact
      of Equity Issuances on Operating Results**





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





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





Some
      of
      the stock options granted to our employees prior to our IPO in September 2000
      had resulted in deferred compensation as a result of stock options having an
      exercise price below their estimated fair value. Deferred compensation is
      presented as a reduction to stockholders’ equity on the consolidated balance
      sheet and is then amortized using an accelerated method over the vesting period
      of the applicable options. When an employee terminates, an expense credit is
      recorded for any amortization that has been previously recorded as an expense
      in
      excess of vesting.




14




In
      the
      second quarter of 2004, we issued to a reseller a warrant to acquire 254,489
      shares of our common stock at an exercise price of $4.65 per share. The warrant
      had a two-year term beginning May 28, 2004 and vested ratably over the term.
      If
      during the two-year term (1) any person or entity had acquired a greater than
      50% interest in us or the ownership or control of more than 50% of our voting
      stock or (2) we had sold substantially all of our intellectual property assets,
      the warrant would have become exercisable. Even if the reseller had not
      immediately exercised the warrant upon the occurrence of such an event that
      made
      the warrant exercisable (a “trigger event”), the reseller would have been
      entitled to securities, cash and property to which it would have been entitled
      to upon the consummation of the trigger event, less the aggregate price
      applicable to the warrant. We calculated the fair value of the warrant to be
      approximately $487,000 using the Black-Scholes option pricing model, using
      a
      volatility factor of .97, a risk-free interest rate of 2.5%, and an expected
      life of two years. The fair value of the warrant has been amortized over the
      two-year expected life of the warrant. The warrant was fully amortized at
      December 31, 2006. The warrants have expired and were not exercised. During
      the
      three month and six month periods ended June 30, 2006 we amortized $40,000
      and
      $100,000, respectively, to cost of revenue.





**RESULTS
      OF OPERATIONS**




**Revenue**





Effective
      December 31, 2006, we have ceased all customer service operations and,
      accordingly, there were no revenues recognized for the three and six month
      periods ended June 30, 2007. Revenues for the three and six month periods ended
      June 30, 2006 were $520,000 and $1,099,000, respectively, all of which was
      earned from service contracts.





Revenues
      by geographic region for the three and six month periods ended June 30, 2006
      were as follows, in thousands:


**Three
                Months Ended June 30, 2006**
            
            **Three
                Months Ended June 30, 2006****Region**United
                States
            
            $
            465
            
            $
            1,010Italy
            
            
            —
            
            
            —France
            
            
            48
            
            
            82Korea
            
            
            —
            
            
            —Japan
            
            
            —
            
            
            —Other
                EMEA.
            
            
            7
            
            
            7Other
                Asia/Pacific
            
            
            —
            
            
            —Total
            
            $
            520
            
            $
            1,099




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





During
      the three and six month periods ended June 30, 2007, we recorded $9,000 and
      $19,000, respectively, of non-cash charges related to equity issuances. During
      the three and six month periods ended June 30, 2006, we recorded $55,000 and
      $158,000, respectively, of non-cash charges related to equity issuances. The
      charges in 2007 are due to the adoption of SFAS No. 123(R). The charges in
      2006
      relate to stock option expense as well as the amortization of a stock purchase
      warrant granted to a reseller.





**Cost
      of Revenue**





**** There
      was
      no cost of revenue for the three and six month periods ended June 30, 2007
      as we
      closed our customer service business effective December 31, 2006. **** For
      the
      three and six month periods ended June 30, 2006, cost of revenue was $533,000
      and $1,103,000, respectively, which represented costs of our third party support
      contract as well as amortization of a warrant granted to a sales
      representative.




15




**Gross
      Profit**





For
      the
      three and six month periods ended June 30, 2006, gross profit (loss) was
      ($13,000) and ($4,000), respectively. Our gross profit was adversely affected
      by
      the declining volume of our service contract sales and the costs we incurred
      with our third party contractor.





**Research
      and Development Expenses**





Research
      and development expenses were nil for the three and six month periods ended
      June
      30, 2007 and 2006, respectively. We discontinued all research and development
      in
      connection with our announcement in September 2004 that we were laying off
      all
      employees and discontinuing our products. We do not expect to incur research
      and
      development costs unless and until we acquire new operating businesses.





**Sales
      and Marketing Expenses**





Sales
      and
      marketing expenses were nil for the three and six month periods ended June
      30,
      2007 and 2006, respectively. With our announcement in September 2004 that we
      were laying off all employees and were discontinuing our products, we have
      ceased essentially all ongoing sales and marketing efforts. We do not expect
      to
      incur sales and marketing costs unless and until we acquire new operating
      businesses.





**General
      and Administrative Expenses**





General
      and administrative expenses were $170,000 and $367,000 for the three and six
      month periods ended June 30, 2007 as compared to $234,000 and $611,000 for
      the
      three and six month periods ended June 30, 2006, respectively. With our
      announcement in September 2004 that we were laying off all employees and
      discontinuing our products, our general and administrative efforts have been
      focused on restructuring activities, the evaluation of strategic alternatives,
      as well as the activities related to identifying and acquiring profitable
      business operations. General and administrative costs for the three and six
      month periods ended June 30, 2007 and 2006 consisted of costs of our employee,
      contractors, legal and accounting services, insurance and office expenses.
      General and administrative expenses should remain at approximately the levels
      reported in the three months ended June 30, 2007 for the quarter ending
      September 30, 2007.





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





For
      the
      three month and six month periods ended June 30, 2007, interest income and
      other
      income was $292,000 and $583,000, respectively, as compared to $452,000 and
      694,000 for the three month and six month periods ended June 30, 2006. The
      decrease from 2006 to 2007 is due primarily to the one-time sale of patents
      in
      the prior year.





**Income
      Tax Provision**





Provisions
      for income taxes were nil for the three and six month periods ended June 30,
      2007 and 2006, respectively. Our tax expense for fiscal 2007 will continue
      to
      depend on the amount and mix of income derived from sources subject to corporate
      income taxes of foreign taxing jurisdictions.





**LIQUIDITY
      AND CAPITAL RESOURCES**




Through
      December 31, 2006, our current business consisted primarily of a customer
      support capability for our discontinued products provided by a third party.
      In
      June 2006, we sold the rights to our patent portfolio for cash consideration
      of
      $180,000 and in November 2006 we sold the rights to our intellectual property
      for $80,000. We ceased customer support activities effective December 31, 2006.
      We have adopted a strategy of seeking to enhance stockholder value by pursuing
      opportunities to redeploy our assets through an acquisition of one or more
      operating business with existing or prospective taxable earnings that can be
      offset by use of our net operating loss carry-forwards. We believe that we
      possess sufficient liquidity and capital resources to fund our operations and
      working capital requirements for at least the next 12 months. However, our
      restructuring activities and our new redeployment of assets strategy raise
      substantial doubt as to our ability to continue as a going concern.




16




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




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





Cash,
      cash equivalents and short-term investments were $22.9 million at June 30,
      2007
      and December 31, 2006, respectively.





**Operating
      Activities**




We
      generated $11,000 in cash for operations for the six months ended June 30,
      2007
      as compared to a usage of $84,000 in cash for operations for the six months
      ended June 30, 2006. The improvement in 2007 is due to the increase in net
      income in the six months ended June 30, 2007 as compared to the prior year
      period, as well as lower payments for short term liabilities in 2007 as compared
      to 2006.




**Investing
      Activities**





**** Investing
      activities used $692,000 in cash for the six months ended June 30, 2007 as
      compared to $6.8 million in cash provided by investing activities in the six
      months ended June 30, 2006. There were no capital expenditures in the six months
      ended June 30, 2007 or 2006, respectively.





**Financing
      Activities**





There
      were no significant financing activities in the six months ended June 30, 2007
      or 2006, 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, while continuing to support our existing
      customers and continuing to offer our intellectual property for license or
      sale.
      Our redeployment strategy will involve the acquisition of one or more operating
      businesses with existing or prospective taxable earnings that can be offset
      by
      use of our net operating loss carry-forwards (“NOLs”). As of this date, no
      candidate has been identified, and no assurance can be given that we will find
      suitable candidates, and if we do, that we will be able to utilize our existing
      NOLs.





At
      June
      30, 2007, we had $22.9 million in cash and short-term investments. We believe
      we
      possess sufficient liquidity and capital resources to fund our operations and
      working capital requirements for at least the next 12 months.





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





**Interest
      Rate Sensitivity**





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




17




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





A
      sensitivity analysis was performed on our investment portfolio as of June 30,
      2007 based on a modeling technique that measures hypothetical fair market value
      changes that would result from a parallel shift in the yield curve of plus
      100
      basis points. Based on this analysis, a hypothetical 100 basis point increase
      in
      interest rates would result in a $61,000 decrease in the fair value of our
      investments in debt securities as of June 30, 2007.





**Exchange
      Rate Sensitivity**





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





**ITEM
      4. CONTROLS AND PROCEDURES**





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





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




Prior
      to
      the issuance of our consolidated financial statements, we completed the needed
      analyses and our management review such that we can certify that the information
      contained in our consolidated financial statements for the year ended December
      31, 2006 and the three and six month periods ended June 30, 2007 and 2006,
      respectively, fairly presents, in all material respects, our financial condition
      and results of operations.





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




18




**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 indicated that they will seek to amend their allegations and
      file amended complaints. It is uncertain whether there will be any revised
      or
      future settlement.





If
      a
      settlement is not consummated, we intend to defend the lawsuit vigorously.
      However, we cannot predict its outcome with certainty. If we are not successful
      in our defense of this lawsuit, we could be forced to make significant payments
      to the plaintiffs and their lawyers, and such payments could have a material
      adverse effect on our business, financial condition and results of operations
      if
      not covered by our insurance carrier.





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





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





**ITEM
      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.




19




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
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





On
      May
      10, 2007, we held our 2007 Annual Meeting of Stockholders at which one proposal
      was considered. We recommended that the stockholders vote for the proposal.
      The
      results of the matter considered and voted upon are as follow:




Proposal
                1:
            To elect
              a
              Board of Directors to hold office until our 2008 Annual Meeting of 
              Stockholders.Of
                the aggregate 7,425,450 shares were represented in person or by proxy
                at
                the Annual, the shares were voted as
                follows:


Nominee
            
            
            
            Votes
                For
            
            WithheldDonald
                Green
            
            
            
            
            6,516,089
            
            
            909,361Charles
                J. Abbe
            
            
            
            
            6,516,089
            
            
            909,361Jack
                L. Howard
            
            
            
            
            6,489,387
            
            
            936,063Terry
                R. Gibson
            
            
            
            
            6,514,214
            
            
            911,236




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





An
      index
      of exhibits filed as part of this Report is on page 28.




**SIGNATURE**





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




COSINE
                COMMUNICATIONS, INC.Dated:
                July 26, 2007
            By:
            /s/
              Terry R. GibsonTerry
              R. Gibson
              Chief
                Executive Officer and Chief Financial
                Officer


20




**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




21