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, 2010





OR





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





For
the transition period from ____________ to ____________.





Commission
File Number 000-30715





COSINE
COMMUNICATIONS, INC.


(Exact
name of Registrant as specified in its charter)





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





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





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





Indicate
by check mark whether the Registrant has submitted electronically and posted on
its Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the Registrant was
required to submit and post such files).   Yes  ̈  No  ̈





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





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





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


Yes x   No
 ̈





There
were 10,090,635 shares of the Registrant’s Common Stock, par value $.0001,
outstanding on November 4, 2010.





COSINE
COMMUNICATIONS, INC.





FORM
10-Q





Quarter
ended September 30, 2010





TABLE
OF CONTENTS




PagePART
      IFINANCIAL
      INFORMATIONItem
      1. Condensed  Financial Statements (Unaudited):Condensed  Balance
      Sheets as of September 30, 2010 (unaudited) and December 31,
      2009
              3Condensed  Statements
      of Operations for the three and nine month periods
      ended  September, 30, 2010 (unaudited) and 2009
      (unaudited)
              4Condensed  Statements
      of Cash Flows for the nine months ended September 30, 2010 (unaudited) and
      2009 (unaudited)
              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
              16PART
      IIOTHER
      INFORMATIONItem
      1. Legal Proceedings
              16Item
      1A. Risk Factors
              17Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
              17Item
      6. Exhibits
              17Signature
              18Exhibit
      Index
              19Certifications
              20




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,
                            2010
                          
                          
                          December 31,
                            20091(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          21,789
                          
                          
                          $
                          22,564Accounts
      receivable - other
                          
                          
                          3
                          
                          
                          
                          2Prepaid
      expenses and other current assets
                          
                          
                          46
                          
                          
                          
                          28Total
      current assets
                          
                          
                          21,838
                          
                          
                          
                          22,594Long-term
      deposit
                          
                          
                          3
                          
                          
                          
                          3Total
      assets
                          
                          $
                          21,841
                          
                          
                          $
                          22,597LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                          
                          $
                          179
                          
                          
                          $
                          172Accrued
      liabilities
                          
                          
                          10
                          
                          
                          
                          60Total
      current liabilities
                          
                          
                          189
                          
                          
                          
                          232Commitments
      and contingencies (note 2)Stockholders'
      equity:Preferred
      stock, 3,000,000 authorized, none issued and outstanding
                          
                          
                          —
                          
                          
                          
                          —Common
      stock, $.0001 par value, 22,000,000 shares authorized; 10,090,635 shares
      issued and outstanding at September 30, 2010 and December 31,
      2009
                          
                          
                          1
                          
                          
                          
                          1Additional
      paid-in capital
                          
                          
                          539,098
                          
                          
                          
                          539,088Accumulated
      deficit
                          
                          
                          (517,447
                          )
                          
                          
                          (516,724
                          )Total
      stockholders' equity
                          
                          
                          21,652
                          
                          
                          
                          22,365Total
      liabilities and stockholders' equity
                          
                          $
                          21,841
                          
                          
                          $
                          22,597




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, 2009.


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 30,2010
                                      
                                      
                                      2009
                                      
                                      
                                      2010
                                      
                                      
                                      2009Revenue
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —Operating
      expenses:General
      and administrative1
                                      
                                      
                                      231
                                      
                                      
                                      
                                      170
                                      
                                      
                                      
                                      757
                                      
                                      
                                      
                                      583Total
      operating expenses
                                      
                                      
                                      231
                                      
                                      
                                      
                                      170
                                      
                                      
                                      
                                      757
                                      
                                      
                                      
                                      583Loss
      from operations
                                      
                                      
                                      (231
                                      )
                                      
                                      
                                      (170
                                      )
                                      
                                      
                                      (757
                                      )
                                      
                                      
                                      (583
                                      )Other
      Income:Interest
      income and other
                                      
                                      
                                      23
                                      
                                      
                                      
                                      31
                                      
                                      
                                      
                                      36
                                      
                                      
                                      
                                      139Total
      other income
                                      
                                      
                                      23
                                      
                                      
                                      
                                      31
                                      
                                      
                                      
                                      36
                                      
                                      
                                      
                                      139Loss
      before income tax provision
                                      
                                      
                                      (208
                                      )
                                      
                                      
                                      (139
                                      )
                                      
                                      
                                      (721
                                      )
                                      
                                      
                                      (444
                                      )Income
      tax provision
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1
                                      
                                      
                                      
                                      1Net
      loss
                                      
                                      $
                                      (208
                                      )
                                      
                                      $
                                      (139
                                      )
                                      
                                      $
                                      (722
                                      )
                                      
                                      $
                                      (445
                                      )Basic
      net loss per share
                                      
                                      $
                                      (0.02
                                      )
                                      
                                      $
                                      (0.01
                                      )
                                      
                                      $
                                      (0.07
                                      )
                                      
                                      $
                                      (0.04
                                      )Diluted
      net loss per share
                                      
                                      $
                                      (0.02
                                      )
                                      
                                      $
                                      (0.01
                                      )
                                      
                                      $
                                      (0.07
                                      )
                                      
                                      $
                                      (0.04
                                      )Shares
      used in computing per share amounts:Basic
                                      
                                      
                                      10,091
                                      
                                      
                                      
                                      10,091
                                      
                                      
                                      
                                      10,091
                                      
                                      
                                      
                                      10,091Diluted
                                      
                                      
                                      10,091
                                      
                                      
                                      
                                      10,191
                                      
                                      
                                      
                                      10,091
                                      
                                      
                                      
                                      10,091




See
accompanying notes to condensed financial statements.





(1)General and administrative expenses
include $4 and $10 for the three and  nine months
ended  September 30, 2010, respectively for
non-cash  charges related to equity issuances.General and administrative expenses
include $9 and $26  for the three and  nine months ended
September 30, 2009, respectively for non-cash charges related to equity
issuances.


4


COSINE
COMMUNICATIONS, INC.


CONDENSED
STATEMENTS OF CASH FLOWS


(In
thousands)


(Unaudited)





Nine Months Ended
                  September 30,2010
                
                
                2009Operating
      activities:Net
      loss
                
                $
                (722
                )
                
                $
                (445
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Stock-based
      compensation
                
                
                10
                
                
                
                26Change
      in operating assets and liabilities:Accounts
      receivable - other
                
                
                (1
                )
                
                
                96Prepaid
      expenses and other current assets
                
                
                (18
                )
                
                
                (8
                )Accounts
      payable
                
                
                6
                
                
                
                (34
                )Accrued
      liabilities
                
                
                (50
                )
                
                
                (20
                )Net
      cash used in operating activities
                
                
                (775
                )
                
                
                (385
                )Investing
      activities:Proceeds
      from sales and maturities of short-term investments
                
                
                —
                
                
                
                13,909Net
      cash provided by investing activities
                
                
                —
                
                
                
                13,909Net
      increase (decrease) in cash and cash equivalents
                
                
                (775
                )
                
                
                13,524Cash
      and cash equivalents at the beginning of the period
                
                
                22,564
                
                
                
                9,155Cash
      and cash equivalents at the end of the period
                
                $
                21,789
                
                
                $
                22,679




See
accompanying notes to condensed financial statements.


5


COSINE
COMMUNICATIONS, INC.


NOTES
TO CONDENSED FINANCIAL STATEMENTS


(Unaudited)





1. BASIS
OF PRESENTATION





Description
of Business





CoSine
Communications, Inc. ("CoSine" or the "Company," which may be referred to as
"we," "us," or "our") was incorporated in California on April 14, 1997 and in
August 2000 was reincorporated in the State of Delaware. Until the end of fiscal
year 2004, we were a provider of carrier network equipment products and services
offering a portfolio of communications products and services to business and
consumer customers. We formally discontinued our communications platform
products and product operations in fiscal year 2004, sold our patent portfolio
and intellectual property rights in fiscal year 2006 and ceased all our related
customer support services as of December 31, 2006.  We are currently
attempting to redeploy our existing assets by identifying and acquiring, or
investing in, one or more operating businesses with existing or prospective
taxable income, or from which we can realize capital gains, that can be offset
by use of our net operating loss carry-forwards (“NOLs”).  No
assurance can be given that we will find suitable candidates for acquisition or
investment, and if we do, that we will be able to utilize our existing
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 September 30, 2010, we have an
accumulated deficit of $517 million.  As of December 31, 2006, we
ceased our customer service capability.  Based on these items and 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. We
continue to pursue our redeployment strategy, which involves the acquisition of,
or investment in, one or more operating businesses with existing or prospective
taxable income, or from which we can realize capital gains, that can be offset
by use of our NOLs.  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 are not limited
to, fair value measurements, income taxes 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.





Significant
Concentrations





Financial
instruments that potentially subject us to concentrations of credit risk
primarily consist of cash, cash equivalents, and short-term investments. We
mitigate investment risk by investing only in government and high quality
corporate securities and by limiting the amount of exposure to any one
issuer.Deposits
held with financial institutions may exceed the amount of insurance provided on
such deposits.We are
exposed to credit risks in the event of default by these institutions to the
extent of the amount recorded on the balance sheet.  We have not
experienced any material losses on deposits of cash and cash
equivalents.





Guarantees





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




6




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 our balance sheet as of September 30, 2010.





Stock
Compensation





The
effect of recording stock-based compensation for the three and nine months ended
September 30, 2010 was $4,000 and $10,000, respectively, which consisted of
stock based compensation related to employee stock options. For the three and
nine months ended September 30, 2009, stock based compensation related to
employee stock options was $9,000 and $26,000, respectively. As of September 30,
2010, we had an unrecorded deferred stock compensation balance related to stock
options of approximately $29,400 before estimated
forfeitures.  Accounting Standard Codification 718, Compensation –
Stock Compensation (ASC 718) 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 9.9% for our options.  Accordingly, as of September
30, 2010, we estimated that the stock-based compensation for the awards not
expected to vest was approximately $9,500, and therefore, the unrecorded
deferred stock-based compensation balance related to stock options was adjusted
to approximately $19,900 after estimated forfeitures.  This amount
will be recognized over an estimated weighted average amortization period of 2.6
years.





During
the nine months ended September 30, 2010, there were stock option grants for
32,000 shares with an exercise price of $1.81 per share, the price on the date
of the grant.  During the three month period ended September 30, 2010,
stock option grants for 5,000 shares were cancelled.  There were no
stock options exercised or expired.





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





Shares
                  Available for
                  Grant
                
                
                Options
                  Outstanding
                
                
                Weighted-
                  Average
                  Price Per
                  ShareBalance
      as of December 31, 2009
                
                
                2,797
                
                
                
                181
                
                
                $
                6.66Granted
                
                
                (32
                )
                
                
                32
                
                
                
                1.81Exercised
                
                
                —
                
                
                
                —
                
                
                
                —Cancelled
                
                
                5
                
                
                
                (5
                )
                
                
                120.00Balance
      as of September 30, 2010
                
                
                2,770
                
                
                
                208
                
                
                $
                45.16





The
following table summarizes information concerning options outstanding and
exercisable at September 30, 2010 (in thousands, except per share
data):





Options Outstanding
                            
                            
                            Options ExercisableWeighted-Average
                            
                            
                            Weighted-
                            
                            
                            
                            
                            
                            Weighted-Number
                            
                            
                            Remaining
                            
                            
                            Average
                            
                            
                            Number
                            
                            
                            AverageRange of
                            
                            Of
                            
                            
                            Contractual
                            
                            
                            Exercise
                            
                            
                            Of
                            
                            
                            ExerciseExercise Prices
                            
                            Shares
                            
                            
                            Life (Years)
                            
                            
                            Price
                            
                            
                            Shares
                            
                            
                            Price$1.64
      - $1.81
                            
                            
                            52
                            
                            
                            
                            9.2
                            
                            
                            $
                            1.74
                            
                            
                            
                            20
                            
                            
                            $
                            1.74$2.15
      - $2.60
                            
                            
                            118
                            
                            
                            
                            4.9
                            
                            
                            
                            2.56
                            
                            
                            
                            118
                            
                            
                            
                            2.57$2.61
      - $3.50
                            
                            
                            14
                            
                            
                            
                            7.0
                            
                            
                            
                            3.01
                            
                            
                            
                            -
                            
                            
                            
                            -$3.51
      - $5.20
                            
                            
                            4
                            
                            
                            
                            2.4
                            
                            
                            
                            5.20
                            
                            
                            
                            4
                            
                            
                            
                            5.20$5.21
      - $6.96
                            
                            
                            12
                            
                            
                            
                            2.9
                            
                            
                            
                            6.96
                            
                            
                            
                            12
                            
                            
                            
                            6.96$6.97
      - $8.80
                            
                            
                            4
                            
                            
                            
                            1.5
                            
                            
                            
                            8.80
                            
                            
                            
                            4
                            
                            
                            
                            8.80$8.81
      - $22.30
                            
                            
                            4
                            
                            
                            
                            0.6
                            
                            
                            
                            22.30
                            
                            
                            
                            4
                            
                            
                            
                            22.30$1.64
      - $22.30
                            
                            
                            208
                            
                            
                            
                            6.13
                            
                            
                            $
                            3.19
                            
                            
                            
                            162
                            
                            
                            $
                            3.48




7




Income
Taxes





We
account for income taxes using the liability method under which deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. We adopted the
provisions of Accounting Standard Codification No. 740 (ASC 740) on accounting
for uncertain income taxes, on January 1, 2007.  This provision 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 had no impact on the balance sheet or statement of operations. 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 has been coordinated with those actions in
the Southern District of New York before Judge Shira A.
Scheindlin.  Motions to dismiss were granted in part and denied in
part.





The
parties have reached a global settlement of the litigation.  On
October 5, 2009, the Court entered an Opinion and Order granting final approval
of the settlement.  Under the settlement, the insurers will pay the
full amount of settlement share allocated to the Company, and the Company will
bear no financial liability. The Company and other defendants will receive
complete dismissals from the case.  Certain objectors have appealed
the Court’s Order to the Second Circuit Court of Appeals.  The appeal
is still pending.





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, filed similar lawsuits
in the District Court for the Western District of Washington alleging
short-swing trading in the stock of 54 other companies. On July 25, 2008, a
majority of the named issuer companies, including CoSine, jointly filed a motion
to dismiss plaintiff's claims.   On March 12, 2009, the Court
issued an order granting the motion to dismiss and a judgment in the favor of
the moving issuers.  On April 10, 2009, Ms. Simmonds appealed the
order and judgment dismissing her claims to the United States Court of Appeal
for the Ninth Circuit.  Oral argument was heard on October 5, 2010. No
decision has been issued.





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 agreement which became effective as of


July 1,
2007 (the "Services Agreement”).  Under the Services Agreement, we pay SP
Corporate Services, LLC a monthly fee of $17,000 in exchange for SP Corporate
Service LLC’s services, rent and personnel.  The Services Agreement has a
term of one year and automatically renews for successive one year periods unless
otherwise terminated by either party.  The Services Agreement was renewed
as of July 1, 2010 for an additional one year term.





8


3.
BALANCE SHEET DETAILS





Cash


At
September 30, 2010, we had deposits with a financial institution that may exceed
the amount of insurance provided on such deposits.





Fair
Value Measurements





In
January 2010, the Financial Accounting Standards Board (FASB) issued guidance
amending the previous disclosure requirements related to recurring and
nonrecurring fair value measurements. The guidance requires new disclosures on
the transfers of assets and liabilities between Level 1 and Level 2 of the fair
value measurement hierarchy, including the reasons and the timing of the
transfers. Additionally, the guidance requires a roll forward of activities on
purchases, sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value
measurements). The guidance will be applied prospectively to new transfers of
financial assets occurring in fiscal years beginning after November 15, 2009.
The adoption of this amendment required additional disclosure only and therefore
did not have an impact on our financial position, results of operations, or cash
flows.





The
guidance establishes a fair value hierarchy that distinguishes between (1)
market participant assumptions developed based on market data obtained from
independent sources (observable inputs) and (2) an entity’s own assumptions
about market participant assumptions developed based on the best information
available in the circumstances (unobservable inputs).  The fair value
hierarchy consists of three broad levels, which gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3).  The
three levels of the fair value hierarchy under the amendments are described
below:





Level
1:  Quoted prices (unadjusted) in active markets for identical assets or
liabilities.  We used Level 1 assumptions for our cash and cash
equivalents.  The valuations are based on quoted prices that are readily
and regularly available in an active market, and accordingly, a significant
degree of judgment is not required.  As of September 30, 2010 we did
not have any short term investments.





Level
2:   Directly or indirectly observable market based inputs used
in models or other valuation methodologies.  As
of   September 30, 2010 and December 31, 2009, we did not have
any Level 2 financial assets or liabilities.





Level
3:  Unobservable inputs that are supported by little or no market data
and require the use of significant management judgment.  As of September
30, 2010 and December 31, 2009, we did not have any Level 3 financial assets or
liabilities.




The
following table summarizes our financial assets measured at fair value on a
recurring basis in accordance with ASC 820, Fair Value Measurements and
Disclosures, as of September 30, 2010 (in thousands) with comparative balances
as of December 31, 2009:




As
      of September 30, 2010Cost or
                                              Amortized
                                              Cost
                                            
                                            
                                            Unrealized
                                              Gain
                                            
                                            
                                            Unrealized
                                              (Loss)
                                            
                                            
                                            Fair Value
                                            
                                            
                                            Quoted Prices in
                                              Active Markets
                                              for Identical
                                              Assets (Level 1)Assets:Cash
      equivalents:Money
      market funds
                                            
                                            $
                                            21,688
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            21,688
                                            
                                            
                                            $
                                            21,688Short-term
      investments:Commercial  paper
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —Corporate
      obligations
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Total
                                            
                                            $
                                            21,688
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            21,688
                                            
                                            
                                            $
                                            21,688Liabilities
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —




9




As
      of December 31, 2009Cost or
                                              Amortized
                                              Cost
                                            
                                            
                                            Unrealized
                                              Gain
                                            
                                            
                                            Unrealized
                                              (Loss)
                                            
                                            
                                            Fair Value
                                            
                                            
                                            Quoted Prices in
                                              Active Markets
                                              for Identical
                                              Assets (Level 1)Assets:Cash
      equivalents:Money
      market funds
                                            
                                            $
                                            22,518
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            22,518
                                            
                                            
                                            $
                                            22,518Short-term
      investments:Commercial  paper
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —Corporate
      obligations
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Total
                                            
                                            $
                                            22,518
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            22,518
                                            
                                            
                                            $
                                            22,518Liabilities
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —




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





We
manage our investments as a single portfolio of highly marketable securities
that is intended to be available to meet our current cash
requirements.  We have no securities investments as of September 30,
2010 and December 31, 2009.





4. NET
LOSS PER COMMON SHARE





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





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





Three Months Ended
                      September 30,
                    
                    
                    Nine Months Ended
                      September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Numerator:Net
      loss
                    
                    $
                    (208
                    )
                    
                    $
                    (139
                    )
                    
                    $
                    (722
                    )
                    
                    $
                    (445
                    )Denominator:Weighted
      average shares used in basic and diluted netloss
      per share
                    
                    
                    10,091
                    
                    
                    
                    10,091
                    
                    
                    
                    10,091
                    
                    
                    
                    10,091Add:
      effect of dilutive securities – stock options
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0Weighted-average
      shares used in diluted net loss  per share
                    
                    
                    10,091
                    
                    
                    
                    10,091
                    
                    
                    
                    10,091
                    
                    
                    
                    10,091Basic
      net loss per share
                    
                    $
                    (0.02
                    )
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.07
                    )
                    
                    $
                    (0.04
                    )Diluted
      net loss per share
                    
                    $
                    (0.02
                    )
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.07
                    )
                    
                    $
                    (0.04
                    )




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





Options
to purchase 208,000 and 161,000 shares of common stock were outstanding as of
September 30, 2010 and 2009 respectively, and were excluded from the computation
of diluted net earnings per share because such options were
anti-dilutive.





10


5.
COMPREHENSIVE (LOSS) INCOME





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





Three Months Ended
                      September 30,
                    
                    
                    Nine Months Ended
                      September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Net
      (loss)  income
                    
                    $
                    (208
                    )
                    
                    $
                    (139
                    )
                    
                    $
                    (722
                    )
                    
                    $
                    (445
                    )Other
      comprehensive (loss) income:Unrealized
      gains (loss) on investments
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Comprehensive
      (loss) income
                    
                    $
                    (208
                    )
                    
                    $
                    (139
                    )
                    
                    $
                    (722
                    )
                    
                    $
                    (445
                    )





6.  RECENT
ACCOUNTING PRONOUNCEMENTS





In
January 2010, the FASB issued guidance amending the previous disclosure
requirements related to recurring and nonrecurring fair value measurements. The
guidance requires new disclosures on the transfers of assets and liabilities
between Level 1 and Level 2 of the fair value measurement hierarchy, including
the reasons and the timing of the transfers. Additionally, the guidance requires
a roll forward of activities on purchases, sales, issuance, and settlements of
the assets and liabilities measured using significant unobservable inputs (Level
3 fair value measurements). The guidance will be applied prospectively to new
transfers of financial assets occurring in fiscal years beginning after November
15, 2009. The adoption of this amendment required additional disclosure only and
therefore did not have an impact on our financial position, results of
operations, or cash flows.





In
June 2009, we adopted amendments to the accounting standard addressing fair
value of financial instruments in interim reporting periods.  The
amendments provide guidance on the disclosure requirements about fair value of
financial instruments in interim periods.  Such disclosures were
previously required only in annual financial statements.  The adoption
of these amendments did not have an impact on our financial position, results of
operations, or cash flows.





In June 2009, the FASB
issued the consolidation guidance for variable-interest entities to replace the
quantitative-based risks and rewards calculation for determining which
enterprise, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which enterprise has the power to
direct the activities of a variable interest entity that most significantly
impact the entity’s economic performance.  This new standard will be
effective for the Company in the first quarter of fiscal year
2011.  The Company currently has no variable-interest entities but
will assess the potential impact, if any, this new standard may have on its
financial statements when already effective and applicable.





7.  TRANSACTIONS
WITH RELATED PERSONS





In July
2007, we contracted with SP Corporate Services, LLC (“SP”), an entity owned by
an affiliate Steel Partners Holdings L.P., the largest stockholder of CoSine, to
provide management and other administrative services, including the services of
our Chief Executive and Chief Financial Officer.  On approval of the
contract by the independent members of our board of directors, our Chief
Executive Officer, Chief Financial Officer, and Secretary terminated his
employment with us and became a Managing Director of SP Corporate Services LLC,
effective July 1, 2007.  During the three and nine months ended
September 30, 2010, we incurred $51,000 and $153,000 respectively for services
performed by SP under the services agreement.





11


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





In
addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements that involve risks and uncertainties that
could cause our actual results to differ materially. When used in this report,
the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”
“estimates” and similar expressions are generally intended to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which reflect our opinions only as of the date of
this Quarterly Report. We undertake no obligation to publicly release any
revisions to the forward-looking statements after the date of this document. You
should carefully review the risk factors described in other documents we file
from time to time with the U.S. Securities and Exchange Commission,
including our Annual Report on Form 10-K for our fiscal year ended
December 31, 2009 and our other Quarterly Reports on Form 10-Q filed
by us in our fiscal year 2010.





OVERVIEW





Our
current business strategy is to enhance stockholder value by pursuing
opportunities to redeploy our assets through an acquisition of, or investment
in, one or more operating businesses with existing or prospective taxable
income, or from which we can realize capital gains, that can be offset by use of
our net operating loss carry-forwards (“NOLs”).  No assurance can be
given that we will find suitable candidates for acquisition or investment, and
if we do, that we will be able to utilize our existing NOLs.





Until the
end of fiscal year 2004, we were a provider of carrier network equipment
products and services offering a portfolio of communications products and
services to business and consumer customers.  We formally discontinued
our communications platform products and product operations in fiscal year 2004,
sold our patent portfolio and intellectual property rights in fiscal year 2006
and ceased all our related customer support services as of December 31, 2006.





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, 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.





On August
30, 2010, we announced our intent to amend our certificate of incorporation to
effect a 1-for-500 reverse stock split of our common stock followed immediately
by a 500-for-1 forward stock split of our common stock (the “Transaction”).  If
the proposed Transaction is approved by our stockholders and the Transaction is
implemented, we anticipate having fewer than 300 record holders of our common
stock, which would enable us to voluntarily terminate the registration of our
common stock and cease our periodic reporting obligations under the Securities
Exchange Act of 1934, as amended.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





General





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





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





12


Fair
Value Measurements





In
January 2010, the FASB issued guidance amending the previous disclosure
requirements related to recurring and nonrecurring fair value measurements. The
guidance requires new disclosures on the transfers of assets and liabilities
between Level 1 and Level 2 of the fair value measurement hierarchy, including
the reasons and the timing of the transfers. Additionally, the guidance requires
a roll forward of activities on purchases, sales, issuance, and settlements of
the assets and liabilities measured using significant unobservable inputs (Level
3 fair value measurements). The guidance will be applied prospectively to new
transfers of financial assets occurring in fiscal years beginning after November
15, 2009. The adoption of this amendment required additional disclosure only and
therefore did not have an impact on our financial position, results of
operations, or cash flows.





The
guidance establishes a fair value hierarchy that distinguishes between (1)
market participant assumptions developed based on market data obtained from
independent sources (observable inputs) and (2) an entity’s own assumptions
about market participant assumptions developed based on the best information
available in the circumstances (unobservable inputs).  The fair value
hierarchy consists of three broad levels, which gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3).  The
three levels of the fair value hierarchy under the amendments are described
below:





Level 1:  Quoted prices
(unadjusted) in active markets for identical assets or liabilities.  We
used Level 1 assumptions for our cash and cash equivalents and short term
investments, which are traded in an active market.  The valuations are
based on quoted prices that are readily and regularly available in an active
market, and accordingly, a significant degree of judgment is not
required.  As of  September 30, 2010 we did not have any
short term investments.





Level
2:   Directly or indirectly observable market based inputs used
in models or other valuation methodologies.  As
of   September 30, 2010, we did not have any Level 2 financial
assets or liabilities.




Level
3:   Unobservable inputs that are supported  by little
or no market data and require the use of significant management judgment. 
As of September 30, 2010, we did not have any Level 3 financial assets or
liabilities.




Impact
of Equity Issuances on Operating Results





Equity
issuances have 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,
and stock issued in lieu of cash compensation to suppliers.





Income
Taxes





We
account for income taxes using the liability method under which deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. We adopted the
provisions of ASC 740 on accounting for uncertain income taxes, on January 1,
2007.  This provision 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 had no impact on the balance
sheet or statement of operations. 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).





Sources
of Income





Until a redeployment of our assets
occurs, our principal source of income will consist of interest, dividend and
other investment income from cash, cash equivalents and short-term investments,
which is reported as interest income in our statements of
operations.





13


RESULTS
OF OPERATIONS





Revenue





Effective
December 31, 2006, we ceased all customer service operations. Accordingly, there
were no revenues recognized for the three and nine months ended September 30,
2010 and 2009, respectively.





Non-Cash
Charges Related to Equity Issuances





During
the nine months ended September 30, 2010 and 2009, we recorded $10,000 and
$26,000, respectively, of non-cash charges related to equity
issuances.  Such costs were $4,000 and $9,000 for the three month
period ended September 30, 2010 and 2009, respectively.  The charges
relate to the adoption of ASC 740.





General
and Administrative Expenses





General
and administrative expenses were $757,000 and $583,000 for the nine months ended
September 30, 2010 and 2009, respectively.  Such costs were $231,000
and $170,000 for the three months ended September 30, 2010 and 2009
respectively.  The increase is due primarily to increased legal and
consulting costs related to investigating a potential acquisition candidate and
preparing to engage in a transaction enabling us to cease our periodic reporting
obligations under the Securities Exchange Act of 1934, as amended. With our
announcement in September 2004 that we were terminating all employees and
discontinuing our products, our general and administrative efforts have been
focused on activities related to identifying and acquiring profitable business
operations. General and administrative costs for the nine months ended September
30, 2010 and 2009 consisted of costs of 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, 2010 for the quarter ending December 31, 2010.





Interest and Other
Income


For the
nine months ended September 30, 2010 and 2009, interest and other income was
$36,000 and $139,000, respectively.  For the three months ended
September 30, 2010 and 2009, interest and other income was $23,000 and $31,000
respectively.  The decrease from September 30, 2009 to September 30,
2010 is primarily related to the movement of investment cash from short-term
investments to money market funds as well as the decline in interest rates
during the first nine months of 2010 as compared to the first nine months of
2009.





Income
Tax Provision





Provisions
for income taxes were nil for the three months ended September 30, 2010 and
2009, respectively.  For the nine months ended September 30, 2010 and
2009, provisions for income taxes were $1 and $1 respectively.





LIQUIDITY
AND CAPITAL RESOURCES





We have
adopted a strategy of seeking to enhance stockholder value by pursuing
opportunities to redeploy our assets through an acquisition of, or investment
in, one or more operating businesses with existing or prospective taxable
income, or from which we can realize capital gains, 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 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.





14


Cash,
Cash Equivalents and Short-Term Investments





Cash and
cash equivalents were $21.8 million and $22.6 million at September 30, 2010 and
December 31, 2009, respectively.  We do not have any short-term
investments as of September 30, 2010 and December 31, 2009.





Operating
Activities





We used
$775,000 in cash from operations for the nine months ended September 30, 2010 as
compared to using $385,000 in cash for operations for the nine months ended
September 30, 2009.  The increase in cash usage in 2010 is due
primarily to the increased net loss for the nine months ended September 30, 2010
as compared to the net loss for the nine months ended September 30, 2009 as a
result of increased general and administrative costs related to legal and
consulting costs and decreased interest income during 2010 as compared to
2009.





Investing
Activities





We
generated $0 in cash in the nine months ended September 30, 2010 as compared to
generating cash of $13.9 million during the nine months ended September 30, 2009
due to no purchases of short term investments for the nine month period ended
September 30, 2010.  There were no capital expenditures in the nine
months ended September 30, 2010 or 2009, respectively.





Financing
Activities





There
were no significant financing activities in the nine months ended September 30,
2010 or 2009.





Off-Balance
Sheet Arrangements





We
have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future material affect.





OUTLOOK





We
have adopted a strategy of seeking to enhance stockholder value by pursuing
opportunities to redeploy our assets through an acquisition of, or investment
in, one or more operating businesses with existing or prospective taxable
income, or from which we can realize capital gains, that can be offset by use of
our net operating loss carry-forwards (“NOLs”).  No assurance can be
given that we will find suitable candidates for acquisition or investment, and
if we do, that we will be able to utilize our existing NOLs.





At
September 30, 2010, we had $21.8 million in cash and cash equivalents. We
believe we possess sufficient liquidity and capital resources to fund our
operations and working capital requirements for at least the next 12
months.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Interest
Rate Sensitivity





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





Our
general policy is to limit the risk of principal loss and ensure the safety of
invested funds by limiting market and credit risk.  All highly-liquid
investments with a maturity of less than three months at the date of purchase
are considered to be cash equivalents, and all investments with maturities of
three months or greater, if any, 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, 2010 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 $2,200 decrease in the fair
value of our investments as of September 30, 2010.





15





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 which have materially affected, or are
reasonably likely to materially affect our internal controls over financial
reporting.




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





PART
II. OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS





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





The
parties have reached a global settlement of the litigation.  On
October 5, 2009, the Court entered an Opinion and Order granting final approval
of the settlement.  Under the settlement, the insurers will pay the
full amount of settlement share allocated to the Company, and the Company will
bear no financial liability. The Company and other defendants will receive
complete dismissals from the case.  Certain objectors have appealed
the Court’s Order to the Second Circuit Court of Appeals.  The appeal
is still pending.





16


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, filed similar lawsuits
in the District Court for the Western District of Washington alleging
short-swing trading in the stock of 54 other companies. On July 25, 2008, a
majority of the named issuer companies, including CoSine, jointly filed a motion
to dismiss plaintiff's claims.   On March 12, 2009, the Court
issued an order granting the motion to dismiss and a judgment in the favor of
the moving issuers.  On April 10, 2009, Ms. Simmonds appealed the
order and judgment dismissing her claims to the United States Court of Appeal
for the Ninth Circuit.  Oral argument was heard on October 5, 2010. No
decision has been issued.





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





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





ITEM
1A.  RISK FACTORS





In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. “Risk Factors” in
our Annual Report on Form 10-K for our fiscal year ended December 31,
2009. 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.





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 19.




17


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:
      November 4, 2010
              By:
              /s/ Terry R. GibsonTerry
      R. GibsonChief
      Executive Officer and Chief Financial Officer(Principal
      Accounting Officer)


18


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




19