10-Q

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, 2001

OR

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

For the transition period from ____________ to ____________.

Commission File Number 000-30715

COSINE COMMUNICATIONS, INC.

(Exact name of Registrant as specified in its charter)

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

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

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

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

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

     Exhibit index on page 21.

TABLE OF CONTENTS

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

COSINE COMMUNICATIONS, INC.

FORM 10-Q

Quarter ended June 30, 2001

TABLE OF CONTENTS

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

PAGE 2 OF 23

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

See accompanying notes.

PAGE 3 OF 23

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

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

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

See accompanying notes.

PAGE 4 OF 23

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

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

See accompanying notes.

PAGE 5 OF 23

COSINE COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

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

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

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

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

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

2. CUSTOMER CONCENTRATION

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

3. INVENTORIES

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

PAGE 6 OF 23

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

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

4. NET LOSS PER COMMON SHARE

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

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

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

5. COMPREHENSIVE LOSS

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

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

6. SEGMENT REPORTING

PAGE 7 OF 23

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

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

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

7. SUBSEQUENT EVENT

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

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

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

PAGE 8 OF 23

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

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

OVERVIEW

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

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

RESULTS OF OPERATIONS

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

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

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

REVENUE

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

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

PAGE 9 OF 23

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

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

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

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

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

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

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

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

NON-CASH CHARGES RELATED TO EQUITY ISSUANCES

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

COST OF GOODS SOLD

PAGE 10 OF 23

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

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

GROSS PROFIT (LOSS)

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

RESEARCH AND DEVELOPMENT EXPENSES

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

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

SALES AND MARKETING EXPENSES

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

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

GENERAL AND ADMINISTRATIVE EXPENSES

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

PAGE 11 OF 23

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

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

INTEREST AND OTHER INCOME

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

INTEREST EXPENSE

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

INCOME TAX PROVISION

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

DEEMED DIVIDEND

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

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

OPERATING ACTIVITIES

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

INVESTING ACTIVITIES

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

FINANCING ACTIVITIES

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

OUTLOOK

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

RISK FACTORS

RISKS RELATED TO OUR BUSINESS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• loss of current customers and failure to attract new customers or achieve market acceptance; and

• increased service and warranty costs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

RISKS RELATED TO OUR INDUSTRY

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

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

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

Ongoing power supply problems in California could harm our business.

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

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

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

     We face competition from:

• companies in the network infrastructure market, including Cisco Systems, Lucent Technologies, Nortel Networks, Alcatel, Ericsson and Siemens; and

• companies, including Cisco, that market products for installation on the premises of network service providers’ customers and which offer some services that compete with the services delivered using our IP service delivery platform.

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

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

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

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

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

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

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

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

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

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

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

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

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

• stop selling our products or services that use the challenged intellectual property;

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

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

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

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

     The success of our international operations may be affected by:

• our ability to establish relationships with international distributors who can effectively market and support our products; and

• difficulties inherent in developing versions of our products that comply with local standards or regulatory requirements.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY

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

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

EXCHANGE RATE SENSITIVITY

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

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PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a)	On September 25, 2000, in connection with our initial public offering, a Registration Statement on Form S-1 (File No. 333-35938) was declared effective by the Securities and Exchange Commission, pursuant to which 11,500,000 shares of our common stock were offered and sold for our account at a price of $23 per share, generating gross offering proceeds of $264.5 million. The managing underwriters were Goldman, Sachs & Co., Chase Securities Inc., Robertson Stephens, Inc. and JP Morgan Securities Inc. Our initial public offering closed on September 29, 2000. The net proceeds of the initial public offering were approximately $242.5 million after deducting approximately $18.5 million in underwriting discounts and approximately $3.5 million in other offering expenses.
	We did not pay directly or indirectly any of the underwriting discounts or other related expenses of the initial public offering to any of our directors or officers, any person owning 10% or more of any class of our equity securities, or any of our affiliates.
	We have not yet used all the funds from the initial public offering. We expect to use the net proceeds from the initial public offering for general corporate purposes, including working capital, expansion of our sales and marketing organization and capital expenditures. We may also use a portion of the net proceeds from this offering to acquire or invest in businesses, technologies or products that are complementary to our business. We currently have no commitments or agreements with respect to any acquisitions or investments. We have not determined the amounts we plan to spend on any of the uses described above or the timing of these expenditures. Pending our use of the net proceeds, we intend to invest them in short-term, interest-bearing, investment-grade securities.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

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

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

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

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

     See exhibit index on page 21.

(b) Reports on Form 8-K.

     None.

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SIGNATURE

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

COSINE COMMUNICATIONS, INC.
By:	/s/ Craig B. Collins
	Craig B. Collins Chief Financial Officer and Executive Vice President (Principal Financial and Accounting Officer)

Dated: August 13, 2001

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EXHIBIT INDEX

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

PAGE 21 OF 23

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

* Previously filed.

PAGE 22 OF 23 EX-3.3 3 f74896ex3-3.txt EXHIBIT 3.3 1 EXHIBIT 3.3 FIRST AMENDMENT TO BYLAWS OF COSINE COMMUNICATIONS, INC. A Delaware Corporation THE FOLLOWING AMENDMENT TO THE BYLAWS OF COSINE COMMUNICATIONS, INC., A DELAWARE CORPORATION, WAS ADOPTED BY THE BOARD OF DIRECTORS BY UNANIMOUS WRITTEN CONSENT ON APRIL 30, 2001: 3.2 NUMBER OF DIRECTORS. The authorized number of directors shall be five (5). This number may be changed by a duly adopted resolution of the board of directors. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. Directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. PAGE 23 OF 23 -----END PRIVACY-ENHANCED MESSAGE-----

EX-3.3

   1


                                   EXHIBIT 3.3

                          FIRST AMENDMENT TO BYLAWS OF
                           COSINE COMMUNICATIONS, INC.
                             A Delaware Corporation

THE FOLLOWING AMENDMENT TO THE BYLAWS OF COSINE COMMUNICATIONS, INC., A DELAWARE
CORPORATION, WAS ADOPTED BY THE BOARD OF DIRECTORS BY UNANIMOUS WRITTEN CONSENT
ON APRIL 30, 2001:

        3.2 NUMBER OF DIRECTORS.

            The authorized number of directors shall be five (5). This number
            may be changed by a duly adopted resolution of the board of
            directors.

            No reduction of the authorized number of directors shall have the
            effect of removing any director before that director's term of
            office expires.

            Directors shall be elected at each annual meeting of stockholders to
            hold office until the next annual meeting. Each director, including
            a director elected to fill a vacancy, shall hold office until the
            expiration of the term for which elected and until a successor has
            been elected and qualified.


                                 PAGE 23 OF 23