UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~FORM~~Form 10-Q

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

xFor ~~Quarterly Report Pursuant to Section 13 or 15(d) of~~ the ~~Securities~~quarterly ~~Exchange~~period ~~Act~~ended ofMarch 31, ~~1934~~2009.

~~For~~¨ ~~the~~TRANSITION ~~fiscal~~REPORT ~~quarter~~PURSUANT ~~ended~~TO ~~June~~SECTION ~~30,~~13 ~~2004~~OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

ORFor the transition period from to

¨Commission ~~Transition~~file ~~Report~~number: ~~Pursuant~~000-28843 ~~to Section 13 or 15(d) of the Securities Exchange Act of 1934~~

Commission file No. 000-28843

Turnstone Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware


Delaware		77-0473640
*(State or other jurisdiction of* *incorporation or organization)*		*(IRS Employer* *Identification No.)*

548 Market Street #26575 San Francisco, California		94104
*(Address of principal executive offices)*		*(Zip Code)*

(State or other jurisdiction of incorporation or organization)

77-0473640

(I.R.S. Employer Identification No.)

7650 MARATHON DRIVE, SUITE A, LIVERMORE, CALIFORNIA 94550

(Address of principal executive offices)

(408) 907-1400

(~~Issuer~~Registrant’s telephone number including area code)

Indicate by check mark whether the registrant ~~issuer~~ (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 ~~issuer~~registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ~~YES~~Yes x NONo ¨

Indicate by check mark whether the ~~Registrant~~registrant ishas ansubmitted ~~accelerated~~electronically ~~filer~~and ~~(as~~posted ~~defined~~on inits corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule ~~12b~~405 of Regulation S-2T (§232.405 of this chapter) during the ~~Exchange~~preceding 12 months (or for such shorter period that the registrant was required to submit and post such ~~Act~~files). ~~YES~~Yes x¨ NONo ¨

AsIndicate ofby ~~July~~check ~~31,~~mark ~~2004,~~whether the ~~Issuer~~registrant ~~had~~is 63a large accelerated filer,~~417,130~~ ~~shares~~an ofaccelerated ~~its~~filer, ~~Common~~a ~~Stock~~non-accelerated filer, ~~par~~ ~~value~~or $a smaller reporting company.~~001~~ ~~per~~See ~~share~~definitions of “accelerated filer,” ~~issued~~“large accelerated filer” and ~~outstanding~~“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company þ

(Do not check if a smaller

reporting company)

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

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 63,417,130 as of April 30, 2009.

TURNSTONE SYSTEMS, INC.

TABLE OF CONTENTS

		Page No.
PART I: FINANCIAL INFORMATION		3
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 1.	Financial Statements (Unaudited)
	Condensed Statements of Net Assets in Liquidation as of March 31, 2009 (Unaudited) and December 31, 2008	3
	Condensed Consolidated Statements of Net Assets in Liquidation as of June 30, 2004 and December 31, 2003	3
	Unaudited Condensed Statements of Changes in Net Assets in Liquidation for the Three Months Ended March 31, 2009 and 2008	4
	Condensed Consolidated Statement of Changes in Net Assets in Liquidation for the Three and Six Months Ended June 30, 2004	4
	Notes to Unaudited Condensed Financial Statements	5
	Condensed Consolidated Statement of Operations for the Three and Six Months Ended June 30, 2003	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7
	Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2003	6
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	9
	Notes to Condensed Consolidated Financial Statements	7
Item 4T.	Controls and Procedures	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
PART II: OTHER INFORMATION		9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 1.	Legal Proceedings	9
Item 4.	Controls and Procedures	24
Item 1A.	Risk Factors	9
PART II.	OTHER INFORMATION
Item 6.	Exhibits	12
Item 1.	Legal Proceedings	25
Signatures		13
Item 2.	Changes in Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 5.	Other Information	26
Item 6.	Exhibits and Reports on Form 8-K	27
Signatures		29
Certifications

EXHIBIT 31.1

EXHIBIT 31.2

EXHIBIT 32.1

PART I: FINANCIAL INFORMATION

Item 1.

Financial Statements

TURNSTONE SYSTEMS, INC.

CONDENSED ~~CONSOLIDATED~~ STATEMENTS OF NET ASSETS IN LIQUIDATION

(IN THOUSANDS)

(UNAUDITED)


	March 31, 2009 (Unaudited)		December 31, 2008
Assets
Cash and cash equivalents	$	987	$	1,019

Total assets		987		1,019
Liabilities
Estimated costs to be incurred during liquidation		83		106

Total liabilities		83		106

Net assets in liquidation	$	904	$	913

	June 30,2004		December 31, 2003
Assets
Cash and cash equivalents	$	11,956	$	12,601
Receivables and other current assets		94		221
Total assets	$	12,050	$	12,822
Liabilities
Distribution payable to stockholders	$	10,781	$	—
Estimated litigation settlement costs		—		500
Estimated costs to be incurred during liquidation		309		810
Other current liabilities and accrued expenses		50		297
Total liabilities	$	11,140	$	1,607
Net assets in liquidation	$	910	$	11,215

The accompanying notes are an integral part of these unaudited condensed financial statements.

See accompanying notes to condensed consolidated financial statements.

TURNSTONE SYSTEMS, INC.

UNAUDITED CONDENSED ~~CONSOLIDATED~~ ~~STATEMENT~~STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION

(IN THOUSANDS)

(UNAUDITED)


	Three Months Ended March 31,
	2009			2008
Net assets in liquidation at beginning of period	$	913		$	985
Adjust assets and liabilities to fair value		(9	)		(6	)

Net assets in liquidation at end of period	$	904		$	979

	Three months ended June 30, 2004			Six monthsendedJune 30, 2004
Net assets in liquidation at beginning of period	$	11,571		$	11,215
Adjust assets and liabilities to fair value		120			201
Estimated proceeds from licensing of intellectual property		—			275
Declared but unpaid distributions to stockholders		(10,781	)		(10,781	)
Net assets in liquidation at June 30, 2004	$	910		$	910

The accompanying notes are an integral part of these unaudited condensed financial statements.

See accompanying notes to condensed consolidated financial statements.

TURNSTONE SYSTEMS, INC.

~~CONDENSED CONSOLIDATED~~NOTES ~~STATEMENT~~TO OFUNAUDITED ~~OPERATIONS~~CONDENSED FINANCIAL STATEMENTS

~~(IN~~1. ~~THOUSANDS,~~Description ~~EXCEPT~~Of ~~PER SHARE AMOUNTS)~~ Business

On August 6, 2003, the Board of Directors of Turnstone Systems, Inc. (~~UNAUDITED~~the “Company”) approved, subject to the approval by stockholders, a plan to liquidate and dissolve the Company (the “Plan”). The Plan was approved by a majority of the Company’s stockholders on November 11, 2003. The key features of the Plan are (1) file a Certificate of Dissolution with the Secretary of State of the State of Delaware; (2) cease conducting normal business operations, except as may be required to wind up the Company’s business affairs; (3) attempt to convert all of the Company’s remaining assets into cash or cash equivalents in an orderly fashion; (4) pay or attempt to adequately provide for the payment of all of the Company’s known obligations and liabilities; and (5) distribute pro rata in one or more liquidating distributions all of the Company’s remaining assets to its stockholders as of the applicable record date.

	Three months ended June 30, 2003			Six months endedJune 30, 2003
Revenues:
Product revenue	$	274		$	542
Service revenue		22			144
Total net revenues		296			686
Cost of revenues:
Cost of product revenue		1			3
Total cost of revenues		1			3
Gross profit		295			683
Operating expenses:
Research and development (exclusive of non-cash compensation expense of $11 and $65 for the three and six months ended June 30, 2003, respectively)		1,370			5,733
Sales and marketing (exclusive of non-cash compensation expense of $3 and $19 for the three and six months ended June 30, 2003, respectively)		343			1,562
General and administrative (exclusive of non-cash compensation expense of $32 and $86 for the three and six months ended June 30, 2003, respectively)		2,331			4,068
Amortization of deferred stock compensation		46			170
Lease termination penalty, net		11,377			11,377
Reversal of provision for loss on operating lease		(1,276	)		(1,276	)
Asset impairment charge		655			655
Total operating expenses		14,846			22,289
Operating loss		(14,551	)		(21,606	)
Other income (expense)
Litigation settlement		(920	)		(920	)
Interest income and other, net		569			1,582
Total other income (expense)		(351	)		662
Loss before income tax		(14,902	)		(20,944	)
Income tax expense		155			180
Net loss	$	(15,057	)	$	(21,124	)
Basic and diluted net loss per share of common stock	$	(.24	)	$	(.34	)
Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share		62,968			62,838

The Company formerly developed and marketed products that enable local exchange carriers to rapidly deploy and efficiently maintain copper local loop services.

~~See~~2. ~~accompanying~~Basis ~~notes to~~of ~~condensed consolidated financial statements.~~ Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited interim financial statements, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, and other adjustments related to our liquidation, considered necessary for a fair presentation.

The accompanying condensed statement of net assets as of December 31, 2008, which has been derived from audited financial statements, and the unaudited interim condensed financial statements of the Company, which include the activities for the three month periods ended March 31, 2009 and 2008 and the related footnote information have been prepared on a basis substantially consistent with and should be read in conjunction with the Company’s audited financial statements as of December 31, 2008 contained in the Company’s annual report on Form 10-K, as filed with the SEC (the “Annual Report”).

3.	Summary of Significant Accounting Policies

As a result of the stockholders’ approval of the Plan and the imminent nature of the liquidation, the Company adopted the liquidation basis of accounting effective November 11, 2003.

This basis of accounting is considered appropriate when, among other things, liquidation of a company is probable and the net realizable value of assets is reasonably determinable. Under this basis of accounting, assets are valued at their estimated net realizable values and liabilities are stated at their estimated settlement amounts.

Use of Estimates and Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported results of operations during the reporting periods. The liquidation basis of accounting requires us to make assumptions, judgments and estimates that can have a significant impact on our reported net assets in liquidation. We base our assumptions, judgments and estimates on the most recent information available and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates involved in the accounting for the estimated costs to be incurred during liquidation have the greatest potential impact on our financial statements, so we consider estimates associated with these obligations to be critical to our financial statements. We discuss below the critical accounting estimates associated with these policies.

~~TURNSTONE~~Concentrations ~~SYSTEMS,~~of ~~INC.~~Credit Risk

~~CONDENSED~~The ~~CONSOLIDATED~~financial ~~STATEMENT~~instrument OFthat ~~CASH~~potentially ~~FLOWS~~exposes the Company to a concentration of credit risk principally consists of cash. At March 31, 2009, cash equivalents consisted primarily of money market funds which invest exclusively in short-term United States Government obligations, including securities issued or guaranteed by the United States Government, its agencies, authorities, instrumentalities or sponsored entities, and United States Treasury securities and related repurchase agreements. Money market funds are not insured or guaranteed by the Federal Deposit Insurance Corporation.

~~(IN~~Cash ~~THOUSANDS)~~and Cash Equivalents

~~(UNAUDITED)~~The Company considers all highly liquid investments purchased with an original maturity of less than three months at the date of purchase to be cash equivalents. Cash equivalents at March 31, 2009 and December 31, 2008 consisted primarily of money market funds.

	Six monthsended June 30, 2003
Operating activities
Net loss	$	(21,124	)
Adjustments to reconcile net loss to net cash used in operating activities:
Asset impairment charge		655
Depreciation		418
Stock compensation expense		187
Provision for doubtful accounts and sales returns		(3	)
Loss on disposal of property and equipment		31
Effect of changes in foreign currency		(14	)
Changes in assets and liabilities:
Accounts receivable		(1	)
Prepaid expenses and other assets		(1,164	)
Accounts payable		(372	)
Accrued compensation and benefits		(149	)
Other current liabilities and accrued expenses		(904	)
Other long-term liabilities		(675	)
Deferred revenue		(140	)
Net cash used in operating activities		(23,255	)
Investing activities
Proceeds from disposal of property and equipment		18
Purchases of available-for-sale investments		(1,250	)
Proceeds from sales and maturities of available-for-sale investments		109,078
Decrease in restricted cash		3,639
Net cash provided by investing activities		111,485
Financing activities
Net proceeds from issuance of common stock		608
Purchases of treasury stock		(734	)
Net cash used in financing activities		(126	)
Effect of exchange rate changes on cash and cash equivalents		11
Net increase (decrease) in cash and cash equivalents		88,115
Cash and cash equivalents at beginning of period		103,358
Cash and cash equivalents at end of period	$	191,473
Supplemental disclosures of cash flow information:
Cash paid for income tax	$	98
Deferred stock compensation	$	(214	)

Estimated Costs To Be Incurred During Liquidation

~~See~~Under ~~accompanying~~the ~~notes~~liquidation basis of accounting, the Company accrues for the remaining costs to ~~condensed~~be incurred during liquidation, ~~consolidated~~including ~~financial~~consulting ~~statements~~fees, fees of professional service providers, estimates to resolve outstanding litigation and miscellaneous other costs, partially offset by estimated future interest earnings. At March 31, 2009 and December 31, 2008, estimated costs to be incurred during liquidation is based on estimated costs for a period of twelve to eighteen months.

The actual amount available for the final distribution, if any, could be substantially less if the Company cannot successfully or timely resolve the outstanding federal securities class action lawsuit related to its initial public offering, or discovers additional liabilities or claims or incurs unexpected or greater than expected expenses. The timing of any final distribution will depend primarily on if and when the Company can successfully resolve the IPO litigation matter disclosed below.

4.	Commitments and Contingencies

IPO Litigation

On November 9, 2001, Arthur Mendoza filed a securities class action lawsuit in the United States District Court for the Southern District of New York alleging claims against the Company, certain of its current and former officers and directors, and the underwriters of the Company’s initial public offering of stock as well as the Company’s secondary offering of stock. The complaint is purportedly brought on behalf of a class of individuals who purchased common stock in the Company’s initial public offering and secondary stock offering between January 31 and December 6, 2000. The complaint alleges generally that the prospectuses under which such securities were sold contained false and misleading statements with respect to discounts and commissions received by the underwriters. The case has been coordinated for pre-trial purposes with over 300 cases raising the same or similar issues and also currently pending in the Southern District of New York. On April 18, 2002, Michael Szymanowski was appointed lead plaintiff in the action. On April 22, 2002, an amended complaint was filed. On July 1, 2002, the underwriter defendants filed an omnibus motion to dismiss. On July 15, 2002, the Company, collectively with the other issuer defendants, also filed an omnibus motion to dismiss. The lead plaintiff filed an opposition to the underwriters’ motion to dismiss on August 15, 2002 and to the issuers’ motion to dismiss on August 27, 2002. The underwriters’ reply to the opposition was filed on September 13, 2002, and the Company’s reply to the opposition was filed on September 27, 2002. On February 19, 2003, the district court issued an order denying the motions to dismiss with respect to substantially all of the plaintiffs’ claims, including those against us. In February 2005, the district court granted preliminary approval for a proposed settlement and release of claims against the issuer defendants, including Turnstone. In April, June and October 2006, the district court judge met with the issuer defendants and their insurance companies to review the fairness of the proposed settlement. In December 2006, as a result of an appeal by the underwriter defendants, the second circuit court of appeals issued a decision to decertify the class action. In July 2007, the settlement approval process was officially terminated by the district court. The plaintiffs may seek certification of narrower classes. In February 2009, the parties recently reached a proposed global settlement of the litigation and have so advised the district court. Under the settlement, which remains subject to court approval, the insurers would pay the full amount of settlement share allocated to the Company, and the Company would bear no financial liability. The Company, as well as the officer and director defendants who were previously dismissed from the action pursuant to

~~TURNSTONE~~tolling ~~SYSTEMS~~agreements, ~~INC~~would receive complete dismissals from the case. It is uncertain whether the settlement will receive final court approval. If no settlement is reached, the plaintiffs may litigate against each of the defendant issuers, including the Company, one by one, beginning with the six focus cases selected by the district court, which does not include the case against the Company. The Company has determined that it is in the best interest of stockholders for the Company to make a final distribution after the final resolution of the IPO litigation matter. Plaintiffs in this class action lawsuit have claimed damages in the hundreds of millions of dollars. If the settlement does not occur, and litigation against the Company continues, the Company believes it has meritorious defenses and intends to defend the case vigorously. The Company does not estimate that there will be future costs associated with this case and has not included costs associated with this case in estimated litigation settlement costs at March 31, 2009.

~~NOTES~~In TOaddition, on October 3, 2007, Vanessa Simmonds filed a complaint for recovery of short-swing profits under Section 16(b) of the Securities Exchange Act of 1934 against The Goldman Sachs Group, Inc. and ~~CONDENSED~~Bank ~~CONSOLIDATED~~of ~~FINANCIAL~~America ~~STATEMENTS~~Corporation related to the Company’s initial public offering of stock, in the United States District Court, Western District of Washington. The Company is named as a nominal defendant in the action. The complaint alleges that Goldman Sachs and Bank of America illegally profited from transactions related to the allocation and sale of shares offered in the Company’s initial public offering and seeks disgorgement of such profits from them. The Company does not estimate that there will be future costs associated with this case and has not included costs associated with this case in estimated litigation settlement costs at March 31, 2009

~~(UNAUDITED)~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

1In addition to the other information in this report, certain statements in the following Management’s Discussion and Analysis or Plan of Operation (MD&A) are forward looking statements within the meaning of the safe harbor created by the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). When used in this report, the words “expects,” “anticipates,” “estimates,” and similar expressions are intended to identify forward looking statements. Statements reflecting our expectations, beliefs, intentions and strategies regarding our liquidation and dissolution, including, without limitation, statements regarding the execution, timing and expenses associated with our complete plan of liquidation and dissolution, disposition of our existing assets, the resolution of outstanding creditor claims and the ongoing litigation against us, and liquidating distributions, if any, to our stockholders, constitute forward-looking statements within the meaning of the PSLRA. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements contained herein. Such risks and uncertainties are set forth below under the sections entitled “Overview” and “Risk Factors,” on pages 7 to 8, and 9 to 11of this document, respectively. The ~~Company~~following discussion should be read in conjunction with the Condensed Financial Statements and ~~Recent~~notes ~~Developments~~thereto included elsewhere in this report.

On August 6, 2003, our board of directors approved, subject to stockholder approval at our 2003 Annual Meeting of Stockholders, the liquidation and dissolution of Turnstone Systems, Inc. pursuant to a plan of complete liquidation and dissolution. The holders of a majority of our outstanding shares approved the plan of complete liquidation and dissolution on November 11, 2003. The key features of the plan are (1) file a certificate of dissolution with the Secretary of State of the State of Delaware; (2) cease conducting normal business operations, except as may be required to wind up our business affairs; (3) attempt to convert all of our remaining assets into cash or cash equivalents in an orderly fashion; (4) pay or attempt to adequately provide for the payment of all of our known obligations and liabilities; and (5) distribute pro rata in one or more liquidating distributions all of our remaining assets to our stockholders as of the applicable record date.

In connection with the adoption of the plan and the anticipated liquidation, we adopted the liquidation basis of accounting effective November 11, 2003, whereby assets are valued at their estimated net realizable cash values and liabilities are stated at their estimated settlement amounts. Uncertainties as to the precise net value of our non-cash assets, and the ultimate amount of our liabilities make it impracticable to predict the aggregate net value that may ultimately be distributable to stockholders. Claims, liabilities and future expenses for operations, although currently declining, will continue to be incurred with execution of the plan. These costs will reduce the amount of net assets available for ultimate distribution to stockholders. Although we do not believe that a precise estimate of those expenses can currently be made, we believe that available cash and cash equivalents and amounts received from sales of non-cash assets will be adequate to provide for our obligations, liabilities, operating costs and claims, and to make cash distributions to stockholders. If available cash and amounts received from sales of non-cash assets are not adequate to provide for our obligations, liabilities, operating costs and claims, estimated future distributions of cash to our stockholders will be reduced.

We filed our certificate of dissolution with the Secretary of State of the State of Delaware effective December 4, 2003. Pursuant to Delaware law, Turnstone Systems, Inc. will continue in existence until at least December 4, 2006. During this period, we will continue to convert our estimated net assets to cash for future distribution to our stockholders. We are not permitted to continue our business as a going concern.

At the close of business on December 4, 2003, we closed our stock transfer books, discontinued recording transfers of our common

stock, and our common stock was de-listed from the Nasdaq National Market. Any future distributions we make will be made solely to the stockholders of record as of the close of business on December 4, 2003. We intend, in the future, to seek relief from the Securities and Exchange Commission from the reporting requirements under the Exchange Act.

Since we were de-listed from Nasdaq and closed our stock records on December 4, 2003, our shares have continued to trade in the Over the Counter Market’s “pink sheets”. From time to time, trading volume in our shares has been relatively high, and our shares have traded at prices in excess of the highest price we have estimated for potential liquidation distributions. Traders in our shares are cautioned that our shares are highly speculative, and we cannot predict with any accuracy when, or if, additional liquidation distributions will be made.

In June 2004, our board of directors approved a liquidating cash distribution of approximately $10.8 million, or $0.17 per common share, to our stockholders of record as of December 4, 2003. The distribution was completed on July 8, 2004. At the end of June 2004, we also terminated the employment of Albert Y. Liu, General Counsel & Director of Human Resources, and Eric S. Yeaman, Chief Executive Officer and Chief Financial Officer, our two remaining employees, and concurrently entered into consulting agreements with each of them to continue ongoing management of our liquidation. Compensation under these consulting agreements is based on actual hours of service at a fixed hourly rate. The agreements do not provide for minimum retainer payments or termination fees.

We may at some point determine that the continued liquidation of Turnstone may be more efficiently handled by retaining a third party liquidator to manage the liquidation process. In particular, we may determine to do so at such time as our outstanding litigation and other significant creditor claims have been resolved. We cannot predict when or if these matters will be resolved, or when or if we will engage a third party liquidator.

2. Summary of Significant Accounting Policies

Basis Of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited interim financial statements, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation.

These financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2003 and footnotes thereto, included in the Company’s Annual Report on Form 10-K.

The condensed consolidated financial statements for the three and six months ended June 30, 2003 were prepared on the going concern basis of accounting, which contemplates realization of assets and satisfaction of liabilities in the normal course of business. As a result of the stockholders’ approval of the Plan and the imminent nature of the liquidation, the Company adopted the liquidation basis of accounting effective November 11, 2003. This basis of accounting is considered appropriate when, among other things, liquidation of a company is probable and the net realizable value of assets are reasonably determinable. Under this basis of accounting, assets are valued at their estimated net realizable values and liabilities are stated at their estimated settlement amounts.

The conversion from the going concern to liquidation basis of accounting required management to make significant estimates and judgments. In order to record assets at estimated net realizable value and liabilities at estimated settlement amounts under the liquidation basis of accounting, the Company recorded the following adjustments to record its assets and liabilities to fair value as of November 11, 2003, the date of adoption of the liquidation basis of accounting:

	(In thousands)
Adjust assets and liabilities to fair value:
Prepaid insurance expenses	$	(2,421	)
Prepaid rent expenses		(272	)
All other, net		(4	)
Total adjustments of assets and liabilities to fair value	$	(2,697	)
Accrued estimated net costs during liquidation:
Costs to be incurred during liquidation period		(1,063	)
Future interest income		189
Total estimated net costs during liquidation	$	(874	)
Accrued estimated litigation settlement costs	$	(500	)
Total adjustments	$	(4,070	)

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of less than three months at the date of purchase to be cash equivalents. Cash equivalents at June 30, 2004 and December 31, 2003 consisted primarily of money market funds.

Stock-Based Compensation

The Company accounted for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Beginning in fiscal 2003, the Company adopted the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment to SFAS No. 123, Accounting for Stock-Based Compensation. Compensation expense on fixed stock options was based on the difference, if any, on the date of the grant, between the fair value of the Company’s stock and the exercise price of the option. The Company accounted for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation (in thousands, except per share amounts):

	Three MonthsEnded June 30, 2003			Six MonthsEndedJune 30, 2003
Net loss – as reported	$	(15,057	)	$	(21,124	)
Add: Stock-based employee compensation expense included in the reported net loss, net of related tax effects		46			187
Add: Stock-based employee compensation recovery using the fair value based method, net of related tax effects		4,222			10,554
Pro forma net loss	$	(10,789	)	$	(10,383	)
Basic net loss per share
As reported	$	(0.24	)	$	(0.34	)
Pro forma	$	(0.17	)	$	(0.17	)
Diluted net loss per share
As reported	$	(0.24	)	$	(0.34	)
Pro forma	$	(0.17	)	$	(0.17	)

During the three and six months ended June 30, 2003, adjustments to eliminate compensation cost previously recognized for options that were forfeited due to employee terminations exceeded compensation cost during that same period, resulting in a net recovery of stock-based compensation expense.

3. Net Loss Per Share

Basic net loss per share was computed using the weighted-average number of outstanding shares of common stock excluding the weighted-average number of shares of restricted stock subject to repurchase. Diluted net loss per share was computed using the

weighted-average number of shares of common stock outstanding and, when dilutive, shares of restricted common stock subject to repurchase, potential shares of common stock from options and warrants using the treasury stock method and from convertible securities using the “as-if converted basis”.

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

	Three Months Ended June 30, 2003			Six Months Ended June 30, 2003
Net loss	$	(15,057	)	$	(21,124	)
Basic and diluted:
Weighted average shares of common stock outstanding		62,984			62,871
Less: Weighted average shares subject to repurchase		(16	)		(33	)
Weighted average shares used in computing basic and diluted net loss per common share		62,968			62,838
Basic and diluted net loss per common share	$	(.24	)	$	(.34	)

Options to purchase 5,141,000 shares of common stock and 12,000 shares of common stock subject to repurchase have been excluded from the computation of diluted net loss per share as of June 30, 2003, as their effect would have been antidilutive.

There were no stock options outstanding or exercisable at June 30, 2004 since the Company had terminated its options plans, de-listed its stock and closed its transfer books.

4. Comprehensive Loss

The components of comprehensive loss are as follows (in thousands):

	Three Months Ended June 30, 2003			Six Months Ended June 30, 2003
Net loss	$	(15,057	)	$	(21,124	)
Change in net unrealized gain on available-for-sale investments, net		(19	)		(424	)
Total comprehensive loss	$	(15,076	)	$	(21,548	)

5. Segment Information

SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information, establishes standards for the manner in which public companies report information about operating segments, products and services, geographic areas and major customers in annual and interim financial statements. The method of determining what information to report is based on the way

that management organizes the operating segments within the enterprise for making operating decisions and assessing financial performance.

The Company’s chief operating decision maker is considered to be the Company’s Chief Executive Officer (CEO). Prior to the adoption of the Complete Plan of Liquidation and Dissolution on November 11, 2003, the Company’s operations comprised one product line. The CEO reviewed financial information on a single entity level basis for purposes of making operating decisions and assessing financial performance. The entity level financial information was the same as the information presented in the accompanying condensed consolidated statement of operations. Accordingly, the Company determined that it was engaged in a single operating segment.

For the three and six months ended June 30, 2003, approximately 92.8% and 62.4%, respectively, of revenues were derived from sales to customers located outside the United States. Product revenues for the three and six months ended June 30, 2003 were derived from sales of loop management products. Service revenues for the three and six months ended June 30, 2003 were derived primarily from the Company’s maintenance programs for loop management products.

6. Restructuring and Related Costs

In January 2003, the company reduced its headcount by approximately 40%, or 29 employees, and incurred related severance costs of $367,000, which were included in operating expenses for the three months ended March 31, 2003.

In January 2003, in an effort to retain key employees, the Company entered into agreements with its officers and employees which entitle such officers and employees to receive certain retention bonus payments upon the completion of providing employment services to the Company for a specified period of time. The Company recorded retention bonuses of $816,000 to operating expenses in the three months ended March 31, 2003.

During the three months ended June 30, 2003, the Company terminated 39 employees, leaving only a limited number of personnel to continue to handle matters related to its previously announced exploration of strategic alternatives. Associated with these actions, the company recorded severance-related charges of approximately $434,000 for the three months ended June 30, 2003. Additionally, pursuant to retention agreements entered into with the affected employees in January 2003, the company made retention bonus payments to them of approximately $790,000 during the three months ended June 30, 2003.

In October 2003, the retention agreements for the Company’s two remaining employees expired and the Company paid the earned retention bonuses to these employees. Concurrently, the Company entered into an employment agreement with the two remaining employees which provides that in the event the Company terminates the employees without cause, the employees will be entitled to

receive a severance payment equal to six months annual base salary. In June 2004, the Company terminated the employment of the two remaining employees and paid them the severance obligations under their employment agreements, which totaled $165,000.

7. Other Guarantees

Indemnification Agreements

The Company and the underwriters of its September 2000 secondary stock offering previously entered into an underwriting agreement, whereby each party agreed, under certain specific circumstances applicable to such party, to indemnify and reimburse the other party for litigation costs and expenses related to claims arising out of the secondary offering. During the second fiscal quarter of 2003, the Company received a request for reimbursement of approximately $250,000 in legal fees purportedly incurred by those underwriters in connection with their defense of a class action lawsuit filed against the Company, certain of its current officers and directors, and those underwriters which alleged that the defendants made false and misleading statements in violation of the Securities Act of 1933 as part of the September 2000 secondary stock offering. In February 2004, in exchange for the Company’s payment of $150,000 of legal fees incurred by the underwriters, the Company and the underwriters agreed to mutually release each other from any further indemnification and reimbursement obligations related to the secondary offering class action lawsuit.

In addition to the indemnification provisions contained in our certificate of incorporation and bylaws, we have entered into separate indemnification agreements with each of our directors. These agreements require us, among other things, to indemnify such director against expenses (including attorneys’ fees), judgments, fines and settlements paid by such individual in connection with any action, suit or proceeding arising out of such individual’s status or service as our director or officer (other than such liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest) and to advance expenses incurred by such individual in connection with any proceeding against such individual with respect to which such individual may be entitled to indemnification by us. In September 2003, we purchased a six-year directors and officers run-off insurance policy.

8. Litigation

A. IPO Litigation

initial public offering and secondary stock offering between January 31 and December 6, 2000. The complaint alleges generally that the prospectuses under which such securities were sold contained false and misleading statements with respect to discounts and commissions received by the underwriters. The case has been coordinated for pre-trial purposes with over 300 cases raising the same or similar issues and also currently pending in the Southern District of New York. On April 18, 2002, Michael Szymanowski was appointed lead plaintiff in the action. On April 22, 2002, an amended complaint was filed. On July 1, 2002, the underwriter defendants filed an omnibus motion to dismiss. On July 15, 2002, the Company, collectively with the other issuer defendants, also filed an omnibus motion to dismiss. The lead plaintiff filed an opposition to the underwriters’ motion to dismiss on August 15, 2002 and to the issuers’ motion to dismiss on August 27, 2002. The underwriters’ reply to the opposition was filed on September 13, 2002, and the Company’s reply to the opposition was filed on September 27, 2002. On February 19, 2003, the court issued an order denying the motions to dismiss with respect to substantially all of the plaintiffs’ claims, including those against us. A proposal has been made for the settlement and release of claims against the issuer defendants, including Turnstone. The settlement is subject to a number of conditions, including approval of the proposed settling parties and the court. The underwriter defendants have opposed both the certification of a settlement class action and judicial approval of the settlement. If the settlement does not occur, and litigation against the Company continues, the Company believes it has meritorious defenses and intends to defend the case vigorously. The Company does not estimate that there will be future costs associated with this case and has not included costs associated with this case in estimated litigation settlement costs at June 30, 2004.

B. In Re: Digital Broadband Communications, Inc. Bankruptcy

On August 12, 2002, the Official Committee of Unsecured Creditors of Digital Broadband Communications, Inc., one of our former customers that filed for Chapter 11 bankruptcy on December 27, 2000, filed a complaint in the United States Bankruptcy Court for the District of Delaware, seeking recovery of alleged preferential transfers to us in the aggregate amount of $3,522,714.85. Upon adoption of the liquidation basis of accounting, we accrued estimated litigation settlement costs of $500,000 related to this case. The estimate of litigation settlement costs was based on a settlement offer discussed and verbally agreed on March 4, 2004 by counsel for the Committee and the Company. The parties executed a formal stipulation of settlement in April 2004. In June 2004, the United States Bankruptcy Court, District of Delaware, approved the stipulation of settlement. Pursuant to the terms of the settlement, the Company paid the Committee $500,000 in June 2004. The Company does not estimate that there will be future costs associated with this case and has not included costs associated with this case in estimated litigation costs at June 30, 2004.

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

In addition to the other information in this report, certain statements in the following Management’s Discussion and Analysis of Financial Condition and Results of Operation (MD&A) are forward looking statements within the meaning of the safe harbor created by the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). When used in this report, the words “expects,” “anticipates,” “estimates,” and similar expressions are intended to identify forward looking statements. Statements reflecting our expectations, beliefs, intentions and strategies regarding our liquidation and dissolution, including, without limitation, statements regarding the execution, timing and expenses associated with our complete plan of liquidation and dissolution, disposition of our existing assets, the resolution of outstanding creditor claims and the ongoing litigation against us, and liquidating distributions, if any, to our stockholders, constitute forward-looking statements within the meaning of the PSLRA. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements contained herein. Such risks and uncertainties are set forth below under the sections entitled “Overview” and “Risk Factors,” on pp. 15 to 16, and 20 to 24, of this document, respectively. The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this report.

OVERVIEW

On August 6, 2003, our board of directors approved, subject to stockholder ratification at our 2003 Annual Meeting of Stockholders, a special cash distribution to stockholders of $2.77 per common share or such lesser amount as the board of directors might later determine to be appropriate. The board of directors also approved, subject to stockholder approval at our 2003 Annual Meeting of Stockholders, the liquidation and dissolution of Turnstone Systems, Inc. pursuant to a plan of complete liquidation and dissolution.

The special cash distribution was ratified by a majority of the shares present at the Annual Meeting on November 11, 2003. Following the Annual Meeting, our board of directors approved a special distribution of $2.77 per common share payable on November 28, 2003 to our stockholders of record as of November 21, 2003. The special cash distribution to stockholders, ~~totaling~~totalling $175.7 million, was paid on November 28, 2003.

On November 11, 2003, the holders of a majority of our outstanding shares approved the plan of dissolution. The key features of the plan are (1) file a certificate of dissolution with the Secretary of State of the State of Delaware; (2) cease conducting normal business operations, except as may be required to wind up our business affairs; (3) attempt to convert all of our remaining assets into cash or cash equivalents in an orderly fashion; (4) pay or attempt to adequately provide for the payment of all of our known obligations and liabilities; and (5) distribute pro rata in one or more liquidating distributions all of our remaining assets to our stockholders as of the applicable record date.

15We filed our certificate of dissolution with the Secretary of State of the State of Delaware effective December 4, 2003. During the liquidation period, we will continue to convert our estimated net assets to cash for future distribution to our stockholders. We are not permitted to continue our business as a going concern.

At the close of business on December 4, 2003, we closed our stock transfer books, discontinued recording transfers of our common stock, and our common stock was de-listed from the Nasdaq National Market. Any future distributions we make will be made solely to our stockholders of record as of the close of business on December 4, 2003.

~~Under the~~In ~~plan~~June 2004, our board of ~~dissolution,~~directors weapproved ~~will~~a ~~liquidate~~liquidating ~~our~~cash ~~assets~~distribution ~~and~~of ~~make~~approximately ~~liquidating~~$10.8 ~~distributions~~million, or $0.17 per common share, to our stockholders of record as of December 4, 2003. WeThe ~~have~~distribution ~~not~~was ~~established~~completed aon ~~firm~~July 8, ~~timetable~~2004. ~~for~~At ~~liquidating~~the ~~distributions~~end toof ~~stockholders~~June 2004, ~~but~~ we ~~intend~~also terminated the employment of Albert Y. Liu, ~~subject~~General toCounsel & ~~contingencies~~Director ~~inherent~~of inHuman Resources, and Eric S. Yeaman, Chief Executive ~~winding~~Officer upand Chief Financial Officer, our ~~business~~two remaining employees, toand ~~make~~concurrently ~~such~~entered ~~liquidating~~into ~~distributions~~consulting asagreements ~~promptly~~with aseach ~~practicable~~of ~~and~~them ~~periodically~~to ascontinue weongoing ~~convert~~management of our ~~remaining~~liquidation. ~~assets~~Compensation tounder ~~cash~~these consulting agreements is based on actual hours of service at a fixed hourly rate of $125. The agreements do not provide for minimum retainer payments or termination fees.

InAs of March 31, ~~2004~~2009, we ~~licensed~~had ~~our~~one ~~Onyx~~outstanding ~~software~~litigation ~~source~~matter ~~code~~remaining related to our initial public offering of common stock in 2000. In 2005 the district court had approved a ~~third~~preliminary ~~party~~settlement ~~for~~of ~~$275~~the matter that we believe would not have required any cash contribution from us,~~000~~ ~~pursuant~~and therefore would have allowed us to make a ~~non-exclusive,~~final ~~perpetual~~liquidating ~~software~~distribution ~~license~~at ~~agreement~~the end of 2006. ~~Under~~However, in December 2006 and prior to the ~~terms~~proposed settlement being finalized, a federal appeals court decertified the IPO class action at the request of the ~~agreement~~defendant underwriters, wewhich ~~received~~resulted ~~$69~~in the proposed settlement being stayed until the plaintiff’s appeal of such decision is completed. In July 2007,~~000~~ ~~upon~~the ~~execution~~settlement approval process was officially terminated by the district court. The plaintiffs may seek certification of narrower classes. In the ~~agreement~~interim, discovery is proceeding in ~~March~~the ~~2004.~~six Wefocus ~~received~~cases selected by the ~~remaining~~district ~~$206~~court,~~000~~ inwhich ~~April~~does ~~2004~~not include the case against us. We ~~intend~~are uncertain as to ~~continue~~whether toa ~~try~~class tosettlement ~~monetize~~will ~~our~~be ~~assets~~available ~~through~~in ~~direct~~the ~~sales~~future and/or ~~licensing~~whether ~~arrangements~~plaintiffs will litigate against each of the defendant issuers, ~~but~~including ~~we cannot~~us, ~~assure~~one ~~you~~by ~~that~~one weif ~~would~~a class action cannot be ~~successful~~certified. We have determined that it is in ~~consummating~~the ~~other~~best ~~transactions~~interest of stockholders for us to make a final distribution after the final resolution of the IPO litigation matter.

InBased ~~June~~on ~~2004,~~ our ~~board~~ projections of ~~directors~~operating ~~approved~~expenses aand ~~liquidating~~liquidation ~~cash~~costs ~~distribution of approximately $10.8 million, or $0.17 per common share, to our stockholders of record~~ as of ~~December 4~~March 31, ~~2003. The distribution was completed in July 2004. At the end of June 2004~~2009, we ~~also~~estimate ~~terminated~~that the ~~employment~~amount of ~~Albert~~future Y.liquidating ~~Liu,~~distributions ~~General~~will ~~Counsel~~be &approximately ~~Director~~$0.014 ofper ~~Human~~common ~~Resources, and Eric S~~share. ~~Yeaman,~~The ~~Chief~~actual ~~Executive~~amount ~~Officer~~available ~~and~~for ~~Chief Financial Officer~~distribution, ~~our~~if ~~two remaining employees~~any, ~~and~~could ~~concurrently~~be ~~entered~~substantially ~~into~~less ~~consulting~~if ~~agreements~~we ~~with~~cannot ~~each~~successfully ofor ~~them~~timely toresolve ~~continue~~the ~~ongoing~~IPO ~~management~~litigation ofmatter, ~~our~~discover ~~liquidation.~~additional ~~Compensation~~liabilities ~~under~~or ~~these~~claims ~~consulting~~or ~~agreements~~incur isunexpected ~~based~~or ongreater ~~actual~~than ~~hours~~expected ~~of service at a fixed hourly rate~~expenses. ~~The agreements do not provide for minimum retainer payments or termination fees.~~

~~Prior~~We tomay ~~the~~at ~~decision~~some ~~to dissolve~~point ~~Turnstone~~determine ~~Systems,~~that ~~Inc.,~~the wecontinued ~~were~~liquidation ~~a provider~~ of ~~hardware~~Turnstone ~~and~~may ~~software~~be ~~products~~more ~~that~~efficiently ~~enabled~~handled ~~local~~by ~~exchange~~retaining ~~carriers~~a tothird ~~deploy~~party ~~and~~liquidator ~~maintain~~to ~~copper~~manage ~~local~~the ~~loop~~liquidation ~~services~~process. ~~Our products included copper loop management and testing systems, signal splitters and remote line switching and service verification platforms.~~

CRITICAL ACCOUNTING ESTIMATES

In connection with the adoption of the ~~plan~~ plan of dissolution and the anticipated liquidation, we adopted the liquidation basis of accounting effective November 11, 2003, whereby assets are valued at their estimated net realizable cash values and liabilities are stated at their estimated settlement amounts. The preparation of condensed financial statements using the liquidation basis of accounting requires us to make assumptions, judgments and estimates that can have a significant impact on our reported net assets in liquidation. We base our assumptions, judgments and estimates on the most recent information available and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved in the accounting for estimated costs to be incurred during liquidation have the greatest potential impact on our condensed financial statements.

their estimated settlement amounts. The preparation of consolidated financial statements using the liquidation basis of accounting requires us to make assumptions, judgments and estimates that can have a significant impact on our reported net assets in liquidation. We base our assumptions, judgments and estimates on the most recent information available and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved in the accounting for estimated costs to be incurred during liquidation have the greatest potential impact on our consolidated financial statements, so we consider these estimates to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies.

Estimated Costs to be Incurred During Liquidation

Under the liquidation basis of accounting, we accrue for the remaining costs to be incurred during liquidation, including consulting fees, fees of professional service providers and miscellaneous other costs, partially offset by estimated future interest earnings. Such costs were estimated at $~~309~~83,000 at ~~June 30~~March 31, ~~2004~~2009. Our estimates are based on assumptions regarding our ability to resolve the IPO litigation matter, settle outstanding obligations to creditors, ~~resolve~~and ~~outstanding~~the ~~litigation,~~timing ~~successfully~~of ~~petition~~distributions ~~the~~to ~~Securities~~stockholders. ~~and~~At ~~Exchange~~March 31, ~~Commission~~2009, ~~for~~estimated ~~relief~~costs ~~from~~to ~~public~~be ~~company~~incurred ~~reporting~~during ~~requirements,~~liquidation ~~and~~is ~~the~~based ~~timing~~on ofestimated ~~distributions~~costs for a period of twelve to ~~stockholders~~eighteen months. If there are delays, or we are not successful, in achieving these objectives, actual costs incurred during liquidation may increase, reducing net assets available in liquidation. During the three ended March 31, 2009, the company increased the fair value of estimated costs to be incurred in liquidation by $9,000. The increase in fair value of estimated costs to be incurred in liquidation is primarily attributable to estimated decreases in yields on cash and cash equivalents during the liquidation.

~~LIQUIDITY~~8 ~~AND CAPITAL RESOURCES~~

Our primary objectives are to liquidate our assets in the shortest time period possible while realizing the maximum values for such assets. The actual nature, amount and timing of all future distributions will be determined by the Board in its sole discretion, and will depend in part upon our ability to convert certain remaining assets into cash and settle certain obligations. At June 30, 2004, we had net assets in liquidation of $910,000 or $.014 per common share.

As of June 30, 2004, our total assets were $12,050,000, consisting of $11,956,000 of cash and cash equivalents and $94,000 of receivables and other current assets. The following table summarizes the activity related to receivables and other current assets for the six months ended June 30, 2004 (in thousands):

	Assetsheld forsale			Securitydeposits			Tax refunds		Total
Balance at December 31, 2003	$	46		$	175		$	—	$	221
Cash proceeds		(17	)		(175	)		—		(192	)
Balance at March 31, 2004		29			—			—		29
Change in estimated fair value		—			—			82		82
Cash proceeds		(17	)		—			—		(17	)
Balance at June 30, 2004	$	12		$	—		$	82	$	94

AtLIQUIDITY ~~June~~AND ~~30,~~CAPITAL ~~2004,~~RESOURCES our liabilities consisted of $10,781,000 of distributions payable to stockholders, $309,000 of estimated costs to be incurred during liquidation, and $50,000 of other current liabilities and accrued expenses. Distributions payable to stockholders is related to a liquidating distribution to stockholders approved by the Board of Directors in June 2004 and paid on July 8, 2004.

~~Estimated~~As ~~costs~~of toMarch 31, be2009, ~~incurred~~net ~~during~~ assets in liquidation ~~decreased~~totaled to$904,000, consisting of $~~309~~987,000 atin ~~June~~cash 30and cash equivalents, ~~2004~~partially ~~from~~offset by $~~810~~83,000 atof ~~December~~estimated ~~31,~~costs ~~2004~~to be incurred during liquidation. ~~This~~We ~~decrease~~expect isto ~~attributable~~use our capital resources to ~~net~~execute ~~cash~~our ~~payments~~complete plan of ~~approximately~~liquidation ~~$404~~and dissolution,~~000~~ ~~related~~settle toexisting ~~wages,~~claims ~~severance~~against ~~costs~~the company, ~~accounting~~including existing litigation and ~~legal~~other ~~fees~~current liabilities and accrued expenses, and ~~other~~to ~~costs~~make liquidating distributions to stockholders. Capital resources available for liquidating distributions to stockholders may vary if we incur greater than estimated operating expenses associated with executing the ~~liquidation~~plan of complete liquidation and dissolution, actual settlement costs for the ~~Company~~IPO litigation matter and any other existing claims against the company vary from estimates, or if there are existing, but unknown claims made against us in the future. At March 31, 2009, our cash and tocash aequivalents ~~decrease~~were held primarily in ~~estimated~~money ~~costs~~market funds. We expect to becontinue ~~incurred~~to ~~during~~hold ~~liquidation~~our cash and cash equivalents primarily in money market funds while we execute the plan of ~~$97,000~~dissolution.

~~Other~~Item ~~current liabilities and accrued expenses decreased to $50,000 at June 30, 2004 from $297,000 at December 31, 2003~~3. ~~This~~Quantitative ~~decrease is primarily attributable to cash payments of approximately $225,000 to settle other current liabilities~~ and ~~accrued~~Qualitative ~~expenses,~~Disclosures ~~and~~About anMarket ~~adjustment of $22,000 to decrease other current liabilities and accrued expenses to fair value.~~ Risk

OnNot ~~November 28, 2003, we paid $175,665,000, or $2~~applicable.77 ~~per common share, to stockholders as a return-of-capital distribution. On July 8, 2004, we paid $10,781,000, or $0.17 per common share, to stockholders as a liquidating cash distribution.~~

~~THREE~~Item ~~AND~~4T. ~~SIX~~Controls ~~MONTHS~~and ~~ENDED JUNE 30, 2003~~ Procedures

~~NET~~Evaluation ~~REVENUES~~of Disclosure Controls and Procedures

InAs ~~connection~~of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the ~~adoption~~participation of management, including our Chief Executive Officer and Chief Financial Officer, of the ~~plan~~effectiveness of ~~dissolution~~the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, weas ~~will~~amended ~~not~~(the ~~generate~~“Exchange ~~revenues~~Act”)). ~~from~~Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our ~~products~~disclosure controls orand ~~services~~procedures were effective to ensure that information required to be disclosed in the ~~future.~~reports Wethat ~~have~~we ~~ceased~~file ~~all~~or ~~sales~~submit under the Exchange Act is (i) recorded, processed, summarized and ~~marketing~~reported ~~efforts~~within ~~related~~the time periods specified in the applicable rules and forms, and (ii) accumulated and communicated to our ~~products~~management, including our Chief Executive Officer and ~~have no~~Chief ~~supply~~Financial ofOfficer, ~~product~~to ~~available~~allow ~~for~~timely ~~sale~~decisions regarding required disclosure.

~~Net~~Changes ~~revenues~~in ~~for~~Internal ~~the~~Controls three and six months ended June 30, 2003 consisted of product revenue and service revenue. Product revenue for the three and six months ended June 30, 2003 of $274,000 and $542,000, respectively, consisted primarily of sales of our CX100 loop management products and, to a lesser extent, our MX500 Copper CrossConnect® and SX Smart Splitter® products and our Crossworks™ and ONYX automation software licenses. Service revenue for the three and six months ended June 30, 2003 of $22,000 and $144,000, respectively, was derived primarily from our product maintenance programs.

~~For~~During the ~~three~~most ~~months~~recent ~~ended~~fiscal ~~June 30~~quarter, there ~~2003,~~has ~~one~~been ~~customer~~no ~~contributed~~change ~~92%~~in ofour ~~total~~internal ~~revenues.~~control ~~For the~~over ~~six~~financial ~~months~~reporting ~~ended~~(as ~~June~~defined ~~30,~~in ~~2003,~~Rule 13a-15(f) ~~one~~under ~~customer~~the ~~contributed~~Exchange ~~greater~~Act) ~~than~~that ~~10%~~has ofmaterially ~~total revenues~~affected, ~~for~~or ais ~~total~~reasonably oflikely ~~60%.~~to ~~Revenue~~materially ~~from international customers during the three and six months ended June 30~~affect, ~~2003~~our ~~totaled~~internal ~~92.8~~control ~~and~~over ~~62.4%, respectively, of~~financial ~~our net revenues~~reporting.

18PART II: OTHER INFORMATION

~~Table~~Item of1. ~~Contents~~Legal Proceedings

~~COST~~The information OFset ~~REVENUES~~forth under Note 4 of the Notes to Unaudited Condensed Financial Statements, included in Part I, Item 1 of this report, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see the section entitled “Risk Factors” in Item 1A of this report.

InItem ~~connection with the adoption of our plan of dissolution, we will not generate revenues from our products and services in the future, and, therefore, will not incur cost of revenues in the future~~1A. Risk Factors

~~During~~In addition to other information in this Form 10-Q, the ~~three~~following risk factors should be carefully considered in evaluating us and ~~six~~our ~~months~~liquidation ~~ended~~and ~~June~~dissolution ~~30,~~because such factors may have a significant impact on the execution of our plan of dissolution and ~~2003,~~the wetiming ~~utilized~~and ~~written-down~~amount ~~inventory~~of liquidating distributions, if any, to ~~fulfill~~our ~~demand~~stockholders. As a result of the risk factors set forth below and elsewhere in this Form 10-Q, ~~resulting~~and the risks discussed in ~~minimal~~our ~~cost~~other ofSecurities ~~product~~and ~~revenue~~Exchange Commission filings, actual results could differ materially from those projected in any forward-looking statements.

RESEARCH AND DEVELOPMENT

We will not incur research and development expenses in the future. Research and development expenses of $1.4 million and $5.7 million for the three and six months ended June 30, 2003, respectively, consisted primarily of salaries and related personnel expenses, retention bonuses, fees paid to consultants and outside service providers, and material costs related to the design, development, testing and enhancement of our products.

SALES AND MARKETING

We will not incur sales and marketing expenses in the future. Sales and marketing expenses of $343,000 and $1.6 million for the three and six months ended June 30, 2003, respectively, consisted primarily of salaries, retention bonuses, and related expenses for personnel engaged in marketing and sales activities.

GENERAL AND ADMINISTRATIVE

In connection with the adoption of the liquidation basis of accounting on November 11, 2003, we accrued estimated costs to be incurred during liquidation. Included in estimated costs to be incurred during liquidation are future expenditures that, prior to the adoption of the liquidation basis of accounting, would have been included in general and administrative expenses in future periods. As such, no general and administrative expenses will be incurred in future periods. Future adjustments in estimated costs to be incurred in liquidation will be reflected as changes in net assets in liquidation.

General and administrative expenses of $2.3 million and $4.1 million for the three and six months ended June 30, 2003, respectively, consisted primarily of salaries, retention bonuses and related expenses for executive, finance and administrative personnel, financial advisory fees, legal fees, and other general corporate expenses.

AMORTIZATION OF DEFERRED STOCK COMPENSATION

In connection with the adoption of the liquidation basis of accounting, deferred stock compensation was written down to its net realizable value of zero. There will be no deferred stock compensation in future periods. We amortized deferred stock compensation of approximately $46,000 and $170,000 in the three and six months ended June 30, 2003, respectively.

OTHER INCOME (EXPENSE)

Other income (expense) included the litigation settlement expense and interest income and other, net consisting primarily of income from our cash investments, and to a lesser extent the net gain or loss from foreign currency translation gains and losses, and net gains or losses on disposal of property and equipment. Total other income (expense) of $351,000 for the three months ended June 30, 2003 was attributable to the litigation settlement expense of $920,000 for the class action lawsuit, partially offset by interest income and other, net of $569,000.

Total other income (expense) of $662,000 for the six months ended June 30, 2003 was attributable to interest income and other, net of $1.6 million offset by the litigation settlement expense of $920,000 for the class action lawsuit.

INCOME TAX EXPENSE

Income tax expense of $155,000 and $180,000 for the three and six months ended June 30, 2003 consisted primarily of state income taxes.

RISK FACTORS

In addition to other information in this Form 10-Q, the following risk factors should be carefully considered in evaluating us and our liquidation and dissolution because such factors may have a significant impact on the execution of our plan of dissolution and the timing and mount of liquidating distributions, if any, to our stockholders. As a result of the risk factors set forth below and elsewhere in this Form 10-Q, and the risks discussed in our other Securities and Exchange Commission Filings, actual results could differ materially from those projected in any forward-looking statements.

We cannot assure you of the exact amount or timing of any future distribution to our stockholders under the plan of dissolution.

The liquidation and dissolution process is subject to numerous uncertainties and may not result in any remaining capital for future distribution to our stockholders. The precise nature, amount and timing of any future distribution to our stockholders will primarily depend on and could be delayed by, ~~among other things, sales of our non-cash assets, claim settlements with creditors,~~ the resolution of the outstanding IPO litigation ~~matters, and unexpected or greater than expected expenses~~matter. ~~Furthermore,~~Other wesecondary ~~cannot~~matters ~~provide any assurances~~ that ~~we will actually make additional distributions. The estimates we have provided are based on currently available information, and actual payments, if any, could be substantially less than~~ ~~the range we have estimated. Any amounts to be distributed to our stockholders may be less than the price or prices at which our common stock has recently traded or may trade in the future.~~

~~Our~~9 ~~common stock is continuing to trade even though we are in the process of liquidation and liquidating distributions, if any, may be below any trading price.~~

~~only~~ could ~~value~~affect ~~associated~~any ~~with~~future ~~our~~distributions ~~shares~~include, isamong ~~the~~other ~~right~~things, tosales ~~receive~~of ~~further~~our ~~distributions~~non-cash asassets, ~~part~~claim settlements with creditors, resolution of ~~the~~outstanding litigation ~~liquidation~~matters, ~~process~~and unexpected or greater than expected expenses. ~~Because~~ ofFurthermore, ~~the~~we ~~difficulty~~cannot inprovide ~~estimating~~any ~~the~~assurances ~~amount~~that ~~and~~we ~~timing~~will ofactually ~~the~~make ~~liquidating~~additional distributions,. ~~and~~The ~~due~~estimates towe ~~the~~have ~~other~~provided ~~risk~~are ~~factors~~based ~~discussed~~on ~~herein~~currently available information, ~~our~~and actual ~~common~~payments, ~~stock~~if ~~may~~any, could be ~~subject~~substantially less than the amount we have estimated. Any amounts to ~~significant~~be ~~volatility~~distributed ~~and~~to our stockholders may ~~trade~~be ~~above~~less than the ~~amount~~price ofor ~~any liquidating~~prices ~~distribution~~at ~~that~~which isour ~~made.~~common stock has recently traded or may trade in the future.

Our common stock is continuing to trade even though we are in the process of liquidation and liquidating distributions, if any, may be below any trading price.

Until December 4, 2003, when our certificate of dissolution became effective and we voluntarily de-listed our common stock and closed our transfer books, our common stock was traded on the Nasdaq National Market under the symbol “TSTN.” Since the de-listing, our common stock has been trading in the Over the Counter Market’s “pink sheets” under the symbol “TSTN.PK.” It has been trading under “due-bill” contractual obligations between the seller and purchaser of the stock, who negotiate and rely on themselves with respect to the allocation of stockholder proceeds arising from ownership of the shares. No assignments or transfers of our common stock were recorded or will be recorded after December 4, 2003. Trading in our stock is highly speculative and the market for our stock is highly illiquid. The only value associated with our shares is the right to receive further distributions as part of the liquidation process. Because of the difficulty in estimating the amount and timing of the liquidating distributions, and due to the other risk factors discussed herein, our common stock may be subject to significant volatility and may trade above the amount of any liquidating distribution that is made.

We may not be able to settle all of our obligations to creditors and resolve all of our outstanding litigation.

If we do not settle all of our obligations to creditors and resolve all of our outstanding litigation, we may be prevented from completing our plan of dissolution. Our obligations to creditors may include, among other things, ~~long-term~~ contractual obligations to certain ~~customers, including certain product warranties, and contractual obligations to certain~~ of our vendors. Our outstanding litigation ~~includes~~consists of the IPO federal securities class action litigation ~~and litigation arising out of our ordinary course of business~~. As part of the wind down process, we will attempt to settle our obligations with our creditors and resolve all of the outstanding litigation. ~~In particular~~However, wewith ~~have~~respect ~~reached~~to ~~a tentative settlement of~~ the IPO federal securities class action ~~lawsuit~~litigation, ~~related~~we toare ~~our~~uncertain ~~initial~~whether ~~public~~a ~~offering~~class ~~that~~settlement ~~we believe~~ will ~~not~~be ~~require~~available ~~any~~in ~~contribution~~the ~~from~~future ~~us.~~and/or ~~The~~whether ~~proposed~~plaintiffs ~~settlement~~will islitigate ~~still~~against ~~subject~~each toof athe ~~number~~defendant ~~of conditions~~issuers, including ~~final~~us, ~~court approval.~~one ~~The~~by ~~underwriter~~one ~~defendants~~if ~~have opposed both the certification of~~ a ~~settlement~~ class action ~~and~~cannot ~~judicial~~be ~~approval of the settlement~~certified. Plaintiffs in the class action lawsuit have claimed damages in the hundreds of millions of dollars. Our inability to reach settlement with our creditors and resolve outstanding litigation could delay or even prevent us from completing the plan of dissolution. Moreover, amounts required to settle our obligations to creditors and resolve any outstanding litigation will reduce the amount of remaining capital available for future distribution to stockholders.

Some of our customers have filed or may file for bankruptcy protection, and as a result, we may be required to return some or all of the payments we received from them as part of the bankruptcy proceedings.

Because of their inability to obtain additional financing or generate sufficient revenues to fund their operations, a number of our customers that previously purchased loop management products from us have filed or may file for bankruptcy protection. The bankruptcy court may require us, or we may agree as part of a settlement, to return some or all of the payments we have received or will receive in the future from such customers prior to their initiation of bankruptcy proceedings, which would negatively affect our financial results.

We will continue to incur claims, liabilities and expenses that will reduce the amount available for distribution out of the liquidation to stockholders.

Claims, liabilities and expenses ~~from~~incurred ~~operations,~~during ~~such~~the aswind ~~operating~~down ~~costs~~process, ~~directors’~~such ~~and~~as ~~officers’ insurance, payroll and local taxes,~~ legal, accounting and consulting fees and miscellaneous office expenses, will ~~continue to be incurred as we wind down. These expenses will~~ reduce the amount of assets available for future distribution out of the liquidation to stockholders. If available cash and amounts received on the sale of non-cash assets are not adequate to provide for our obligations, liabilities, expenses and claims, we may not be able to distribute out of the liquidation meaningful cash, or any cash at all, to our stockholders.

our obligations, liabilities, expenses and claims, we may not be able to distribute out of the liquidation meaningful cash, or any cash at all, to our stockholders.

Distribution of assets out of the liquidation, if any, to our stockholders could be delayed.

~~Although~~We our board of directors has not established a firm timetable for distributions to our stockholders out of the liquidation, the board of directors intends, subject to contingencies inherent in winding down our business, to make such distributions as promptly as practicable as creditor and litigant claims are ~~paid or settled. However, we are~~ currently unable to predict the precise timing of any ~~such~~liquidating distributions. The timing of such distributions will depend on and could be delayed by, among other things, the resolution of the outstanding IPO litigation matter, the timing of sales of our non-cash assets, claim settlements with creditors and the settlement of any other outstanding litigation matters. Additionally, a creditor could seek an injunction against the making of such distributions to our stockholders on the ground that the amounts to be distributed were needed to provide for the payment of our liabilities and expenses. Any action of this type could delay or substantially diminish the amount available for such distribution to our stockholders.

If we fail to create an adequate contingency reserve for payment of our expenses and liabilities, each stockholder could be held liable for payment to our creditors of his or her pro rata share of amounts owed to creditors in excess of the contingency reserve, up to the amount actually distributed to such stockholder.

We filed our certificate of dissolution with the Secretary of State of the State of Delaware effective December 4, 2003. Pursuant to the Delaware General Corporation Law, we will continue to exist for three years after the certificate of dissolution is filed or for such longer period as the Delaware Court of Chancery shall direct, for the purpose of prosecuting and defending suits against us and enabling us gradually to close our business, to dispose of our property, to discharge our liabilities and to distribute to our stockholders any remaining assets. Under the Delaware General Corporation Law, in the event we fail to create during this three-year period an adequate contingency reserve for payment of our expenses and liabilities, each stockholder could be held liable for payment to our creditors of such stockholder’s pro rata share of amounts owed to creditors in excess of the contingency reserve, up to the amount actually distributed to such stockholder.

Although the liability of any stockholder is limited to the amounts previously received by such stockholder from us (and from any liquidating trust or trusts) in the dissolution, this means that a stockholder could be required to return all distributions previously made to such stockholder and receive nothing from us under the plan of dissolution. Moreover, in the event a stockholder has paid taxes on amounts previously received, a repayment of all or a portion of such amount could result in a stockholder incurring a net tax cost if the stockholder’s repayment of an amount previously distributed does not cause a commensurate reduction in taxes payable. While we will ~~endeavor~~endeavour to make adequate reserves for all known, contingent, and unknown liabilities, there is no guarantee that the reserves established by us will be adequate to cover all such expenses and liabilities.

We will continue to incur the expenses of complying with public company reporting requirements.

We have an obligation to continue to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, referred to as the “Exchange Act,” even though compliance with such reporting requirements is economically burdensome. We ~~intend~~have sought and will continue to attempt to seek relief from the Securities and Exchange Commission from the reporting requirements under the Exchange Act, atbut ~~such~~to ~~time~~date inwe ~~the~~have ~~future~~not asbeen ~~active~~successful ~~trading~~ in ~~our~~obtaining ~~shares has ceased~~relief. We anticipate that, if such relief were granted, we would continue to file current reports on Form 8-K to disclose material events relating to our liquidation and dissolution along with any other reports that the Securities and Exchange Commission might require. However, the Securities and Exchange Commission may not grant any such relief, and we do not anticipate we will be ~~able~~successful toin ~~request~~obtaining relief while active trading of our shares is continuing.

Our board of directors may at any time turn management of the liquidation of Turnstone Systems over to a third party, and some or all of our directors may resign from our board at that time.

Our board of directors may at any time turn our management over to a third party to complete the liquidation of our remaining assets and distribute the available proceeds to our stockholders, and some or all of our directors may resign from our board at that time. Our board of directors currently consists of Eric S. Yeaman, our Chief Executive Officer and Chief Financial Officer, and Albert Y. Liu, our General Counsel and Director of Human Resources, who are overseeing our liquidation on a consulting basis. If management is turned over to a third party and all of our directors resign from our board, the third party would have sole control over the liquidation process, including the sale or distribution of any remaining assets.

If we are deemed to be an investment company, we may be subject to substantial regulation that would cause us to incur additional expenses and reduce the amount of assets available for distribution.

If we invest our cash and/or cash equivalents in investment securities, we may be subject to regulation under the Investment Company Act of 1940. If we are deemed to be an investment company under the Investment Company Act because of our investment securities holdings, we must register as an investment company under the Investment Company Act. As a registered investment company, we would be subject to the further regulatory oversight of the Division of Investment Management of the Securities and Exchange Commission, and our activities would be subject to substantial regulation under the Investment Company Act. Compliance with these regulations would cause us to incur additional expenses, which would reduce the amount of assets available for distribution to our stockholders. To avoid these compliance costs, we intend to invest our cash proceeds in money market funds and government securities, which are exempt from the Investment Company Act but which currently provide a very modest return.

2311

~~Because~~Item ~~our products have been deployed in complex environments, they may have errors or defects that are found only after they have been fully deployed, which could result in liability claims against us~~6. Exhibits

Because our products are designed to provide critical services in large and complex networks, if errors, defects or failures are discovered in our products, we may be exposed to significant legal claims. Any claims, with or without merit, could increase our expenses and reduce assets available for distribution in liquidation. Although we maintain product liability insurance covering some damages arising from implementation and use of our products, our insurance may not fully cover claims brought against us. Liability claims could require us to spend significant time and money in litigation or to pay significant damages.


EXHIBIT NO.		DESCRIPTION

3.1(1)		Amended and Restated Certificate of Incorporation of Turnstone Systems

3.2(2)		Amended and Restated Bylaws of Turnstone Systems

4.1(3)		Form of Common Stock certificate

10.1(3)		Form of Indemnification Agreement entered into by Turnstone Systems with each of its directors and executive officers

10.19(4)		Consulting Agreement, dated as of July 1, 2004, between Turnstone Systems, Inc. and Albert Y. Liu

10.20(5)		Consulting Agreement, dated as of July 1, 2004, between Turnstone Systems, Inc. and Eric S. Yeaman

31.1		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer

32.1		Section 1350 Certification of Principal Executive Officer and Principal Financial Officer

Our products incorporate numerous component parts designed and manufactured by third parties. We cannot assure you that these third-party parts are free of defects or errors. Given the complex nature of our products and our dependence on a large number of highly intricate third-party component parts, our products may contain defects or errors not detectable during our quality assurance and testing procedures. Any such defects or errors could result in legal claims against us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

At June 30, 2004 and December 31, 2003, we held our entire portfolio in money market funds, which are not subject to market risk.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Our significant personnel reductions during 2003 have affected the overall control environment. As of July 1, 2004, we had no remaining employees. Eric S. Yeaman, a consultant, is the Chief Executive Officer and Chief Financial Officer. However, management does not believe that these personnel reductions have had a significant impact on the effectiveness of the design and operation of the Company’s disclosure controls and procedures.

Changes in Internal Controls Over Financial Reporting

There has been no change in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We dispute, but cannot assure you that we will be successful in our defense of, the outstanding lawsuits against us described below. If we are unsuccessful, these lawsuits could have a material adverse effect on our financial condition and on the amount of assets available for distribution to stockholders. Even if we are successful in defending against these claims, the litigation could result in substantial costs.

IPO Litigation

On November 9, 2001, Arthur Mendoza filed a securities class action lawsuit in the United States District Court for the Southern District of New York alleging claims against us, certain of our current and former officers and directors, and the underwriters of our initial public offering of stock. The complaint is purportedly brought on behalf of a class of individuals who purchased common stock in the initial public offering between January 31 and December 6, 2000. The complaint alleges generally that the prospectus under which such securities were sold contained false and misleading statements with respect to discounts and commissions received by the underwriters. The case has been coordinated for pre-trial purposes with over 300 cases raising the same or similar issues and also currently pending in the Southern District of New York. On April 18, 2002, Michael Szymanowski was appointed lead plaintiff in the action. On April 22, 2002, an amended complaint was filed. On July 1, 2002, the underwriter defendants filed an omnibus motion to dismiss. On July 15, 2002, we, collectively with the other issuer defendants, also filed an omnibus motion to dismiss. The lead plaintiff filed an opposition to the underwriters’ motion to dismiss on August 15, 2002 and to the issuers’ motion to dismiss on August 27, 2002. The underwriters’ reply to the opposition was filed on September 13, 2002, and our reply to the opposition was filed on September 27, 2002. On February 19, 2003, the court issued an order denying the motions to dismiss with respect to substantially all of the plaintiffs’ claims, including those against us. A proposal has been made for the settlement and release of claims against the issuer defendants, including Turnstone. The settlement is subject to a number of conditions, including approval of the proposed settling parties and the court. The underwriter defendants have opposed both the certification of a settlement class action and judicial approval of the settlement. If the settlement does not occur, and litigation against us continues, we believe we have meritorious defenses and intend to defend the case vigorously. We did not estimate that there will be future costs associated with this case and have not included costs associated with this case in estimated litigation settlement costs at June 30, 2004.

In Re: Digital Broadband Communications, Inc. Bankruptcy

In March 2004, we and counsel for the Committee discussed and verbally agreed on a settlement proposal pursuant to which we would make a payment of $500,000 to the Committee in exchange for a mutual release of all claims related to this matter. The parties executed a formal stipulation of settlement in April 2004. In June 2004, the United States Bankruptcy Court, District of Delaware, approved the stipulation of settlement. Pursuant to the terms of the settlement, we paid the Committee $500,000 in June 2004.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Use of Proceeds

On February 1, 2000, we completed our initial public offering and on September 26, 2000, we completed our secondary offering, which resulted in total net proceeds of approximately $257.6 million. To date, we have used a portion of the net proceeds from our offerings to fund general business operations. Amounts not used to fund operations have been invested in money market funds, certificates of deposit, and other investment grade securities.

In November 2003, we made a special cash distribution to stockholders totaling $175.7 million. In December 2003, we filed our certificate of dissolution with the Secretary of State of the State of Delaware. In July 2004, we made a liquidating cash distribution to stockholders totaling $10.8 million. Pursuant to our plan of dissolution, we anticipate that we will distribute all of our remaining assets, including any remaining net proceeds from our offerings, to our stockholders.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

EXHIBIT NO.		DESCRIPTION
3.1(1)		Amended and Restated Certificate of Incorporation of Turnstone Systems
3.2(2)		Amended and Restated Bylaws of Turnstone Systems
4.1(3)		Form of Common Stock certificate
10.1(3)		Form of Indemnification Agreement entered into by Turnstone Systems with each of its directors and executive officers
10.14(4)		Consulting Agreement, dated as of May 12, 2003, between Turnstone Systems, Inc. and P. Kingston Duffie
10.15(5)		Consulting Agreement, dated as of July 31, 2003, between Turnstone Systems, Inc. and Carl Hubbard
10.16(6)		Consulting Agreement, dated as of August 31, 2003, between Turnstone Systems, Inc. and Richard N. Tinsley
10.17(7)		Executive Employment Agreement, dated as of October 10, 2003, between Turnstone Systems, Inc. and Albert Y. Liu
10.18(8)		Executive Employment Agreement, dated as of October 10, 2003, between Turnstone Systems, Inc. and Eric S. Yeaman
10.19(9)		Consulting Agreement, dated as of July 1, 2004, between Turnstone Systems, Inc. and Albert Y. Liu
10.20(10)		Consulting Agreement, dated as of July 1, 2004, between Turnstone Systems, Inc. and Eric S. Yeaman
31.1		Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
31.2		Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.1		Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)	Incorporated herein by reference to Exhibit 3.1 of our Annual Report on Form 10-K filed on March 10, 2004 with the Securities and Exchange Commission.

(2)	Incorporated herein by reference to Exhibit 3.2 of our Annual Report on Form 10-K filed on March 10, 2004 with the Securities and Exchange Commission.

(3) Incorporated ~~herein~~ by reference herein to the Registration Statement on Form S-1 and all amendments thereto filed on November 22, 1999 with the Securities and Exchange Commission (No. 333-45130).

(4) Incorporated herein by reference to Exhibit 10.1419 of our ~~Quarterly~~Current Report on Form 108-QK filed on ~~May~~June 1528, ~~2003~~2004 with the Securities and Exchange Commission.

(5) Incorporated herein by reference to Exhibit 10.1520 of our ~~Quarterly~~Current Report on Form 108-QK filed on ~~August~~June 1128, ~~2003~~2004 with the Securities and Exchange Commission.

~~(6)~~12 ~~Incorporated herein by reference to Exhibit 10.16 of our Current Report on Form 8-K filed on September 2, 2003 with the Securities and Exchange Commission.~~

(7) Incorporated herein by reference to Exhibit 10.17 of our Current Report on Form 8-K filed on October 10, 2003 with the Securities and Exchange Commission.

(8) Incorporated herein by reference to Exhibit 10.18 of our Current Report on Form 8-K filed on October 10, 2003 with the Securities and Exchange Commission.

(9) Incorporated herein by reference to Exhibit 10.19 of our Current Report on Form 8-K filed on June 28, 2004 with the Securities and Exchange Commission.

(10) Incorporated herein by reference to Exhibit 10.20 of our Current Report on Form 8-K filed on June 28, 2004 with the Securities and Exchange Commission.

(b) Reports on Form 8-K

None.

SIGNATURES

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

	TURNSTONE SYSTEMS, INC.
Date: August 9, 2004	By:	/s/ Eric S. Yeaman
		Eric S. Yeaman
		Chief Executive Officer and Chief Financial Officer
		(Principal Executive, Financial and Accounting Officer)

TURNSTONE SYSTEMS, INC.

Registrant

/s/ ERIC S. YEAMAN

Eric S. Yeaman

Chief Financial Officer

(Principal Financial and Accounting Officer)

29Date: May 13, 2009

~~EXHIBIT~~Exhibit ~~INDEX~~Index

EXHIBIT NO.		DESCRIPTION
3.1(1)		Amended and Restated Certificate of Incorporation of Turnstone Systems
3.2(2)		Amended and Restated Bylaws of Turnstone Systems
4.1(3)		Form of Common Stock certificate
10.1(3)		Form of Indemnification Agreement entered into by Turnstone Systems with each of its directors and executive officers
10.14(4)		Consulting Agreement, dated as of May 12, 2003, between Turnstone Systems, Inc. and P. Kingston Duffie
10.19(4)		Consulting Agreement, dated as of July 1, 2004, between Turnstone Systems, Inc. and Albert Y. Liu
10.15(5)		Consulting Agreement, dated as of July 31, 2003, between Turnstone Systems, Inc. and Carl Hubbard
10.20(5)		Consulting Agreement, dated as of July 1, 2004, between Turnstone Systems, Inc. and Eric S. Yeaman
10.16(6)		Consulting Agreement, dated as of August 31, 2003, between Turnstone Systems, Inc. and Richard N. Tinsley
31.1		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
10.17(7)		Executive Employment Agreement, dated as of October 10, 2003, between Turnstone Systems, Inc. and Albert Y. Liu
31.2		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
10.18(8)		Executive Employment Agreement, dated as of October 10, 2003, between Turnstone Systems, Inc. and Eric S. Yeaman
32.1		Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
10.19(9)		Consulting Agreement, dated as of July 1, 2004, between Turnstone Systems, Inc. and Albert Y. Liu
10.20(10)		Consulting Agreement, dated as of July 1, 2004, between Turnstone Systems, Inc. and Eric S. Yeaman
31.1		Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
31.2		Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.1		Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)	Incorporated herein by reference to Exhibit 3.1 of our Annual Report on Form 10-K filed on March 10, 2004 with the Securities and Exchange Commission.

(2)	Incorporated herein by reference to Exhibit 3.2 of our Annual Report on Form 10-K filed on March 10, 2004 with the Securities and Exchange Commission.

(4) Incorporated herein by reference to Exhibit 10.1419 of our ~~Quarterly~~Current Report on Form 108-QK filed on ~~May~~June 1528, ~~2003~~2004 with the Securities and Exchange Commission.

(5) Incorporated herein by reference to Exhibit 10.1520 of our ~~Quarterly~~Current Report on Form 108-QK filed on ~~August~~June 1128, ~~2003~~2004 with the Securities and Exchange Commission.

~~(6)~~14 ~~Incorporated herein by reference to Exhibit 10.16 of our Current Report on Form 8-K filed on September 2, 2003 with the Securities and Exchange Commission.~~

(7) Incorporated herein by reference to Exhibit 10.17 of our Current Report on Form 8-K filed on October 10, 2003 with the Securities and Exchange Commission.

(8) Incorporated herein by reference to Exhibit 10.18 of our Current Report on Form 8-K filed on October 10, 2003 with the Securities and Exchange Commission.

(9) Incorporated herein by reference to Exhibit 10.19 of our Current Report on Form 8-K filed on June 28, 2004 with the Securities and Exchange Commission.

(10) Incorporated herein by reference to Exhibit 10.20 of our Current Report on Form 8-K filed on June 28, 2004 with the Securities and Exchange Commission.

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