10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________

FORM 10-Q

________________

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED June 30, 2008

OR

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

For the transition period from ____________ to ____________.

Commission File Number 000-30715

COSINE COMMUNICATIONS, INC.

(Exact name of Registrant as specified in its charter)

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

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

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

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

Large accelerated filer o Accelerated filer o

Non accelerated filer o (Do not check if a smaller reporting company) Small reporting company x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x   No o

There were 10,090,635 shares of the Registrant’s Common Stock, par value $.0001, outstanding on August 8, 2008.

COSINE COMMUNICATIONS, INC.

FORM 10-Q

Quarter ended June 30, 2008

TABLE OF CONTENTS

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

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

COSINE COMMUNICATIONS, INC.

CONDENSED BALANCE SHEETS

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

	June 30, 2008			December 31, 20071
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	9,891		$	12,709
Short-term investments		13,306			10,410
Accounts receivable - other		72			73
Prepaid expenses and other current assets		22			36
Total current assets		23,291			23,228
Long term deposit and other		3			3
	$	23,294		$	23,231
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	268		$	204
Accrued other liabilities		18			97
Total current liabilities		286			301
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 June 30, 2008 and December 31, 2007		1			1
Additional paid-in capital		539,042			539,026
Accumulated other comprehensive income		3			15
Accumulated deficit		(516,038	)		(516,112	)
Total stockholders' equity		23,008			22,930
	$	23,294		$	23,231

See accompanying notes to condensed financial statements.

________________________________

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

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COSINE COMMUNICATIONS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except for per share data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Revenue:
Product	$	—		$	—		$	—		$	—
Service		—			—			—			—
Total revenue		—			—			—			—
Cost of revenue		—			—			—			—
Gross profit (loss)		—			—			—			—
Operating expenses:
Research and development		-			-			-			-
Sales and marketing		-			-			-			-
General and administrative1		145			170			322			367
Total operating expenses		145			170			322			367
Loss from operations		(145	)		(170	)		(322	)		(367	)
Interest income and other		167			292			396			583
Income before income tax provision		22			122			74			216
Income tax provision		-			-			-			-
Net income	$	22		$	122		$	74		$	216
Basic net income per share	$	0.00		$	0.01		$	0.01		$	0.02
Diluted net income per share	$	0.00		$	0.01		$	0.01		$	0.02
Shares used in computing per share amounts:
Basic		10,091			10,091			10,091			10,091
Diluted		10,094			10,122			10,091			10,122

See accompanying notes to condensed financial statements.

⁽¹⁾General and administrative expenses include non-cash charges related to equity issuances of $9 and $16, for the three month and six month periods ended June 30, 2008, respectively. General and administrative expenses include non-cash charges related to equity issuances of $9 and $19 for the three month and six month periods ended June 30, 2007, respectively.

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COSINE COMMUNICATIONS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2008			2007
Operating activities:
Net income		74		$	216
Adjustments to reconcile net loss to net cash used in operating activities:
Stock compensation expense		16			19
Change in operating assets and liabilities:
Accounts receivable, trade		—			55
Other receivables		1			(15	)
Prepaid expenses and other current assets		14			30
Other assets		—			(3	)
Accounts payable		64			(144	)
Accrued other liabilities		(79	)		(147	)
Net cash provided by operating activities		90			11
Investing activities:
Purchase of short-term investments		(19,191	)		(19,721	)
Proceeds from sales and maturities of short-term investments		16,283			19,029
Net cash used in investing activities		(2,908	)		(692	)
Net decrease in cash and cash equivalents		(2,818	)		(681	)
Cash and cash equivalents at the beginning of the period		12,709			5,207
Cash and cash equivalents at the end of the period	$	9,891		$	4,526

See accompanying notes to condensed financial statements.

5

COSINE COMMUNICATIONS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

Description of Business

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

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

Redeployment Strategy and Liquidity

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

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

Use of Estimates

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

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

6

Stock Compensation

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

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

The effect of recording stock-based compensation for the three and six months ended June 30, 2008 was $9,000 and $16,000, respectively, which consisted of stock based compensation related to employee stock options. The effect of recording stock-based compensation for the three and six months ended June 30, 2007 was $9,000 and $19,000, respectively, which consisted of stock based compensation related to employee stock options. As of June 30, 2008 we had an unrecorded deferred stock compensation balance related to stock options of approximately $58,000 before estimated forfeitures. SFAS No. 123 (R) requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Based on our analysis of historical experience and review of current option holders, we have assumed an annual forfeiture rate of 2.5% for our options. Accordingly, as of June 30, 2008, we estimated that the stock-based compensation for the awards not expected to vest was approximately $1,000 and therefore, the unrecorded deferred stock-based compensation balance related to stock options was adjusted to approximately $57,000 after estimated forfeitures. This amount will be recognized over an estimated weighted average amortization period of 1.65 years.

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

Valuation Assumptions

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

	Three Months Ended June 30,		Six Months Ended June 30,
	2008	2007	2008	2007
Dividend yield	0.0%	0.0%	0.0%	0.0%
Volatility	0.36	0.40	0.36	0.40
Risk free interest rate	3.37%	4.89%	3.37%	4.89%
Expected life	6.25 years	6.25 years	6.25 years	6.25 years

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

7

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

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

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

	Options Outstanding
			Weighted-				Options Exercisable
			Average		Weighted-				Weighted-
	Number		Remaining		Average		Number		Average
Range of	Of		Contractual		Exercise		Of		Exercise
Exercise Prices	Shares		Life (Years)		Price		Shares		Price
$2.15		8		7.3	$	2.15		4	$	2.15
$2.40		4		7.6		2.40		-		-
$2.45		6		8.2		2.45		-		-
$2.60		100		7.5		2.60		83		2.60
$2.65		8		9.9		2.65		-		-
$3.50		6		9.1		3.50		-		-
$5.20		4		5.1		5.20		4		5.20
$6.96		12		5.6		6.96		12		6.96
$8.80		4		4.1		8.80		4		8.80
$22.30		4		3.2		22.30		4		22.30
$120.00		5		2.4		120.00		5		120.00
$2.15-120.00		161		7.15	$	7.28		116	$	9.06

Guarantees

We may enter into certain types of contracts that require that we indemnify parties against certain third party claims that may arise. These contracts primarily relate to: (i) certain agreements with our officers, directors 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.

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

Income Taxes

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

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2. COMMITMENTS AND CONTINGENCIES

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

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

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

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

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.

Our unconditional purchase obligations 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 LLP a monthly fee of $17,000 in exchange for SP Corporate Services LLC’s services and personnel. The Services Agreement has a term of one year and automatically renews for successive one year periods unless otherwise terminated by either party.The Services Agreement was renewed as of July 1, 2008 for an additional one year term.

9

3. BALANCE SHEET DETAILS

Cash

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

Fair Value Measurement

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

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

			Significant Other
	Balance as of		Observable Inputs
	June 30, 2008		(Level 1)
Assets:
Cash equivalents:
Commercial paper	$	7,214	$	7,214
Money market funds		2,507		2,507
	$	9,721	$	9,721
Short-term investments:
Corporate obligations	$	4,324	$	4,324
U.S governmental agency notes		963		963
Money market funds		8,019		8,019
	$	13,306	$	13,306
Liabilities:		—		—

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

4. NET INCOME PER COMMON SHARE

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

10

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Net income	$	22	$	122	$	74	$	216
Basic and diluted:
Weighted-average shares of common stock outstanding		10,091		10,091		10,091		10,091
Add: effect of dilutive securities - stock options		3		31		0		31
Weighted-average shares used in diluted net income per share		10,094		10,122		10,091		10,122
Basic and diluted net income (loss) per share	$	0.00	$	0.01	$	0.01	$	0.02

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

5. COMPREHENSIVE INCOME

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Net income	$	22		$	122	$	74		$	216
Other comprehensive income (loss):
Unrealized gains (loss) on investments		(12	)		-		(12	)		-
Currency translation adjustment		-			-		-			-
Total other comprehensive income (loss)		(12	)		-		(12	)		-
Comprehensive income	$	10		$	122	$	62		$	216

6. RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

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7. TRANSACTIONS WITH RELATED PERSONS

In efforts to reduce our operating expenses, on June 15, 2007, the board of directors approved an agreement (the “Services Agreement”) with SP Corporate Services, LLC (“SP”) pursuant to which SP provides us, on a non-exclusive basis, a full range of executive, financial and administrative support services and personnel, including the services of a Chief Executive Officer, Chief Financial Officer, Secretary, Principal Executive Officer and Principal Accounting Officer, maintenance of our corporate office and records, periodic reviews of transactions in our stock to assist in preservation of our NOLs, and related executive, financial, accounting and administrative support services. The Service Agreement became effective as of July 1, 2007. Under the Services Agreement, we pay SP a monthly fee of $17,000 in exchange for SP's services. SP is responsible for compensating and providing all applicable employment benefits to any SP personnel in connection with providing services under the Services Agreement. We reimburse SP for reasonable and necessary business expenses of ours incurred by SP, and we are responsible for payment of fees related to audit, tax, legal, stock transfer, insurance broker, investment advisor and banking services provided to us by third party advisors. The Services Agreement has a term of one year and automatically renews for successive one year periods unless otherwise terminated by either party. The Services Agreement is also terminable by us upon the death of Terry R. Gibson or his resignation as our Chief Executive Officer, Chief Financial Officer or Secretary of the Company. Under the Services Agreement, SP and its personnel are entitled to the same limitations on liability and indemnity rights available under our charter documents to any other person performing such services for us. During the six months ended June 30, 2008, we incurred $102,000 for services performed by SP under the Services Agreement. The Services Agreement was renewed as of July 1, 2008 for an additional one year term.

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

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

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

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

OVERVIEW

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

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

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

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

Impact of Equity Issuances on Operating Results

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

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

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

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RESULTS OF OPERATIONS

Revenue

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

Non-Cash Charges Related to Equity Issuances

During the six months ended June 30, 2008 and 2007, we recorded $16,000 and $19,000 respectively, of non-cash charges related to equity issuances. The charges relate to the adoption of SFAS No. 123(R).

Cost of Revenue

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

Research and Development Expenses

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

Sales and Marketing Expenses

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

General and Administrative Expenses

General and administrative expenses were $322,000 and $367,000 for the six months ended June 30, 2008 and 2007, respectively. With our announcement in September 2004 that we were terminating all employees and discontinuing our products, our general and administrative efforts have been focused on restructuring activities, the evaluation of strategic alternatives, as well as the activities related to identifying and acquiring profitable business operations. General and administrative costs for the six months ended June 30, 2008 and 2007 consisted of costs of our contractors, legal and accounting services, insurance and office expenses. General and administrative expenses should remain at approximately the levels reported in the three months ended June 30, 2008 for the quarter ending September 30, 2008.

Interest Income and Other Income (Expense)

For the six months ended June 30, 2008 and 2007, interest income and other income was $396,000 and $583,000 respectively. The decrease from June 30, 2007 to June 30, 2008 is due to lower interest rates during the first half of 2008 as compared to 2007.

Income Tax Provision

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

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LIQUIDITY AND CAPITAL RESOURCES

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

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

Cash, Cash Equivalents and Short-Term Investments

Cash, cash equivalents and short-term investments were $23.2 million and $23.1 million at June 30, 2008 and December 31, 2007, respectively.

Operating Activities

We generated $90,000 in cash from operations for the six months ended June 30, 2008 as compared to generating $11,000 in cash from operations for the six months ended June 30, 2007. The increase in 2008 is due primarily to a decrease in accounts payable payments compared to 2007.

Investing Activities

We utilized $2.9 million in cash in the six months ended June 30, 2008 as compared to utilizing $0.7million in cash during the six months ended June 30, 2007 due to reduced proceeds from sale and maturities of short term investments. There were no capital expenditures in the six months ended June 30, 2008 or 2007, respectively.

Financing Activities

There were no significant financing activities in the six months ended June 30, 2008 or 2007, respectively.

OUTLOOK

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

At June 30, 2008, we had $23.2 million in cash and short-term investments. We believe we possess sufficient liquidity and capital resources to fund our operations and working capital requirements for at least the next 12 months.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

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

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

A sensitivity analysis was performed on our investment portfolio as of June 30, 2008 based on a modeling technique that measures hypothetical fair market value changes that would result from a parallel shift in the yield curve of plus 100 basis points. Based on this analysis, a hypothetical 100 basis point increase in interest rates would result in a $53,000 decrease in the fair value of our investments in debt securities as of June 30, 2008.

Exchange Rate Sensitivity

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

ITEM 4. CONTROLS AND PROCEDURES

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

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

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

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

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

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

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

ITEM 1A. RISK FACTORS

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

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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 8, 2008, we held our 2008 Annual Meeting of Stockholders at which one proposal was considered. We recommended that the stockholders vote for the proposal. The results of the matter considered and voted upon are as follow:

Proposal 1:	To elect a Board of Directors to hold office until our 2009 Annual Meeting of Stockholders.
	Of the aggregate 9,386,714 shares represented in person or by proxy at the 2008 Annual Meeting of Stockholders, the shares were voted as follows:
	Nominee Donald Green Charles J. Abbe Jack L. Howard Terry R. Gibson	Votes For 8,467,103 8,467,103 8,441,643 8,466,985	Withheld 919,611 919,611 945,071 919,729

ITEM 6. EXHIBITS

Exhibit Index on page 20.

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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.
Date: August 11, 2008	By:	/s/ Terry R. Gibson
		Terry R. Gibson Chief Executive Officer and Chief Financial Officer (Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description
31.1	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 2002
32.1	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

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EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Terry R. Gibson, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of CoSine Communications, Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.  The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

     a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ Terry R. Gibson

Terry R. Gibson

Chief Executive Officer and Chief Financial Officer

August 11, 2008

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Cosine Communications, Inc. (the "Company") on Form 10-Q for the quarterly period ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Terry R. Gibson, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that, to my

knowledge:

 (1)   The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

 (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Terry R. Gibson

Terry R. Gibson

Chief Executive Officer and Chief Financial Officer

August 11, 2008