UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________

FORM 10-Q

________________

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED September 30, 2010

¨	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 ¨

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

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

	Large accelerated filer ¨	Accelerated filer ¨

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

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

Yes x No ¨

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

COSINE COMMUNICATIONS, INC.

FORM 10-Q

Quarter ended September 30, 2010

TABLE OF CONTENTS

	Page
PART I
FINANCIAL INFORMATION

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

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

COSINE COMMUNICATIONS, INC.

CONDENSED BALANCE SHEETS

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

	September 30, 2010			December 31, 20091
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	21,789		$	22,564
Accounts receivable - other		3			2
Prepaid expenses and other current assets		46			28
Total current assets		21,838			22,594
Long-term deposit		3			3
Total assets	$	21,841		$	22,597

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	179		$	172
Accrued liabilities		10			60
Total current liabilities		189			232

Commitments and contingencies (note 2)

Stockholders' equity:
Preferred stock, 3,000,000 authorized, none issued and outstanding		—			—
Common stock, $.0001 par value, 22,000,000 shares authorized; 10,090,635 shares issued and outstanding at September 30, 2010 and December 31, 2009		1			1
Additional paid-in capital		539,098			539,088
Accumulated deficit		(517,447	)		(516,724	)
Total stockholders' equity		21,652			22,365
Total liabilities and stockholders' equity	$	21,841		$	22,597

See accompanying notes to condensed financial statements.

(1)The information in this column was derived from the Company's audited financial statements for the year ended December 31, 2009.

COSINE COMMUNICATIONS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except for per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Revenue	$	—		$	—		$	—		$	—

Operating expenses:
General and administrative1		231			170			757			583
Total operating expenses		231			170			757			583

Loss from operations		(231	)		(170	)		(757	)		(583	)

Other Income:
Interest income and other		23			31			36			139
Total other income		23			31			36			139

Loss before income tax provision		(208	)		(139	)		(721	)		(444	)

Income tax provision		—			—			1			1

Net loss	$	(208	)	$	(139	)	$	(722	)	$	(445	)

Basic net loss per share	$	(0.02	)	$	(0.01	)	$	(0.07	)	$	(0.04	)

Diluted net loss per share	$	(0.02	)	$	(0.01	)	$	(0.07	)	$	(0.04	)

Shares used in computing per share amounts:

Basic		10,091			10,091			10,091			10,091

Diluted		10,091			10,191			10,091			10,091

See accompanying notes to condensed financial statements.

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

COSINE COMMUNICATIONS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2010			2009
Operating activities:
Net loss	$	(722	)	$	(445	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		10			26
Change in operating assets and liabilities:
Accounts receivable - other		(1	)		96
Prepaid expenses and other current assets		(18	)		(8	)
Accounts payable		6			(34	)
Accrued liabilities		(50	)		(20	)
Net cash used in operating activities		(775	)		(385	)

Investing activities:
Proceeds from sales and maturities of short-term investments		—			13,909
Net cash provided by investing activities		—			13,909

Net increase (decrease) in cash and cash equivalents		(775	)		13,524
Cash and cash equivalents at the beginning of the period		22,564			9,155
Cash and cash equivalents at the end of the period	$	21,789		$	22,679

See accompanying notes to condensed financial statements.

COSINE COMMUNICATIONS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

Description of Business

CoSine Communications, Inc. ("CoSine" or the "Company," which may be referred to as "we," "us," or "our") was incorporated in California on April 14, 1997 and in August 2000 was reincorporated in the State of Delaware. Until the end of fiscal year 2004, we were a provider of carrier network equipment products and services offering a portfolio of communications products and services to business and consumer customers. We formally discontinued our communications platform products and product operations in fiscal year 2004, sold our patent portfolio and intellectual property rights in fiscal year 2006 and ceased all our related customer support services as of December 31, 2006. We are currently attempting to redeploy our existing assets by identifying and acquiring, or investing in, one or more operating businesses with existing or prospective taxable income, or from which we can realize capital gains, that can be offset by use of our net operating loss carry-forwards (“NOLs”). No assurance can be given that we will find suitable candidates for acquisition or investment, and if we do, that we will be able to utilize our existing NOLs.

Liquidity and Redeployment Strategy

The accompanying financial statements have been prepared in conformity with U.S. generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, at September 30, 2010, we have an accumulated deficit of $517 million. As of December 31, 2006, we ceased our customer service capability. Based on these items and our actions in the fourth quarter of fiscal year 2004 to terminate most of our employees and discontinue production activities in an effort to conserve cash raise substantial doubt about our ability to continue as a going concern. We continue to pursue our redeployment strategy, which involves the acquisition of, or investment in, one or more operating businesses with existing or prospective taxable income, or from which we can realize capital gains, that can be offset by use of our NOLs. The financial statements do not include any adjustments to reflect the possible future effects relating to the recoverability and classification of the recorded asset amounts or amounts and classification of liabilities that might result from the outcome of this uncertainty.

Use of Estimates

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

Significant Concentrations

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

Guarantees

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 our balance sheet as of September 30, 2010.

Stock Compensation

The effect of recording stock-based compensation for the three and nine months ended September 30, 2010 was $4,000 and $10,000, respectively, which consisted of stock based compensation related to employee stock options. For the three and nine months ended September 30, 2009, stock based compensation related to employee stock options was $9,000 and $26,000, respectively. As of September 30, 2010, we had an unrecorded deferred stock compensation balance related to stock options of approximately $29,400 before estimated forfeitures. Accounting Standard Codification 718, Compensation – Stock Compensation (ASC 718) requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Based on our analysis of historical experience and review of current option holders, we have assumed an annual forfeiture rate of 9.9% for our options. Accordingly, as of September 30, 2010, we estimated that the stock-based compensation for the awards not expected to vest was approximately $9,500, and therefore, the unrecorded deferred stock-based compensation balance related to stock options was adjusted to approximately $19,900 after estimated forfeitures. This amount will be recognized over an estimated weighted average amortization period of 2.6 years.

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

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

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

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

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

Income Taxes

We account for income taxes using the liability method under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. We adopted the provisions of Accounting Standard Codification No. 740 (ASC 740) on accounting for uncertain income taxes, on January 1, 2007. This provision clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in our financial statements. The interpretation also provides guidance for the measurement and classification of tax positions, interest and penalties, and requires additional disclosure on an annual basis. The cumulative effect of the change had no impact on the balance sheet or statement of operations. Following implementation, the ongoing recognition of changes in measurement of uncertain tax positions will be reflected as a component of income tax expense. Interest and penalties incurred associated with unresolved income tax positions will continue to be included in other income (expense).

2. COMMITMENTS AND CONTINGENCIES

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

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

On October 9, 2007, a purported CoSine shareholder filed a complaint for violation of Section 16(b) of the Securities Exchange Act of 1934, which prohibits short-swing trading, against the Company's IPO underwriters. The complaint, Vanessa Simmonds v. The Goldman Sachs Group, et al., Case No. C07-1629, filed in the District Court for the Western District of Washington, seeks the recovery of short-swing profits. The Company is named as a nominal defendant. No recovery is sought from the Company. The plaintiff, Vanessa Simmonds, filed similar lawsuits in the District Court for the Western District of Washington alleging short-swing trading in the stock of 54 other companies. On July 25, 2008, a majority of the named issuer companies, including CoSine, jointly filed a motion to dismiss plaintiff's claims. On March 12, 2009, the Court issued an order granting the motion to dismiss and a judgment in the favor of the moving issuers. On April 10, 2009, Ms. Simmonds appealed the order and judgment dismissing her claims to the United States Court of Appeal for the Ninth Circuit. Oral argument was heard on October 5, 2010. No decision has been issued.

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

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

We also have unconditional purchase obligations that relate to executive, financial and administrative support services and personnel provided by SP Corporate Services, LLC under an agreement which became effective as of

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

3. BALANCE SHEET DETAILS

Cash

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

Fair Value Measurements

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

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

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

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

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

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

	As of September 30, 2010
	Cost or Amortized Cost		Unrealized Gain		Unrealized (Loss)		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets:
Cash equivalents:
Money market funds	$	21,688	$	—	$	—	$	21,688	$	21,688

Short-term investments:
Commercial paper	$	—	$	—	$	—	$	—	$	—
Corporate obligations		—		—		—		—		—

Total	$	21,688	$	—	$	—	$	21,688	$	21,688
Liabilities	$	—	$	—	$	—	$	—	$	—

	As of December 31, 2009
	Cost or Amortized Cost		Unrealized Gain		Unrealized (Loss)		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets:
Cash equivalents:
Money market funds	$	22,518	$	—	$	—	$	22,518	$	22,518

Short-term investments:
Commercial paper	$	—	$	—	$	—	$	—	$	—
Corporate obligations		—		—		—		—		—

Total	$	22,518	$	—	$	—	$	22,518	$	22,518
Liabilities	$	—	$	—	$	—	$	—	$	—

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

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

4. NET LOSS PER COMMON SHARE

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

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

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

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

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

5. COMPREHENSIVE (LOSS) INCOME

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Net (loss) income	$	(208	)	$	(139	)	$	(722	)	$	(445	)
Other comprehensive (loss) income:
Unrealized gains (loss) on investments		—			—			—			—
Comprehensive (loss) income	$	(208	)	$	(139	)	$	(722	)	$	(445	)

6. RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

7. TRANSACTIONS WITH RELATED PERSONS

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

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS

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

OVERVIEW

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

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

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

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

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

Fair Value Measurements

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

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

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

Impact of Equity Issuances on Operating Results

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

Income Taxes

We account for income taxes using the liability method under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. We adopted the provisions of ASC 740 on accounting for uncertain income taxes, on January 1, 2007. This provision clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in our financial statements. The Interpretation also provides guidance for the measurement and classification of tax positions, interest and penalties, and requires additional disclosure on an annual basis. The cumulative effect of the change had no impact on the balance sheet or statement of operations. Following implementation, the ongoing recognition of changes in measurement of uncertain tax positions will be reflected as a component of income tax expense. Interest and penalties incurred associated with unresolved income tax positions will continue to be included in other income (expense).

Sources of Income

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

RESULTS OF OPERATIONS

Revenue

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

Non-Cash Charges Related to Equity Issuances

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

General and Administrative Expenses

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

Interest and Other Income

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

Income Tax Provision

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

Cash, Cash Equivalents and Short-Term Investments

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

Operating Activities

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

Investing Activities

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

Financing Activities

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

Off-Balance Sheet Arrangements

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

OUTLOOK

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

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

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

A sensitivity analysis was performed on our investment portfolio as of September 30, 2010 based on a modeling technique that measures hypothetical fair market value changes that would result from a parallel shift in the yield curve of plus 100 basis points. Based on this analysis, a hypothetical 100 basis point increase in interest rates would result in a $2,200 decrease in the fair value of our investments as of September 30, 2010.

Exchange Rate Sensitivity

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

ITEM 4. CONTROLS AND PROCEDURES

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

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

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2009. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.

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

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

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

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

ITEM 6. EXHIBITS

Exhibit Index on page 19.

SIGNATURE

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

	COSINE COMMUNICATIONS, INC.

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

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

COSINE COMMUNICATIONS INC 10-Q