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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-KSB



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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
|- | ----------------------------------------------------------------------------------------------------------

FOR THE TRANSITION PERIOD FROM

TO

COMMISSION FILE NUMBER 000-28843





TURNSTONE SYSTEMS, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 77-0473640                          
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification Number)

7650 Marathon Drive, Suite A

LIVERMORE, CALIFORNIA 94550

(Address of principal executive offices) (Zip
Code)

(408) 907-1400

(Registrants telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

None

SECURITIES REGISTERED
PURSUANT TO SECTION 12(G) OF THE ACT:

Common Stock, $0.001 par value





Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.   ̈

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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.    Yes  x    No   ̈

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

Yes   ̈     No  x

Registrants revenues for
the fiscal year ended December 31, 2007 were $nil.

The aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the average bid and asked prices of the Registrants Common Stock on January 31, 2008 was US$478,993, which excludes 15,517,856 shares of common stock held by Directors, Officers and holders of 5% or more of the
Registrants outstanding Common Stock on that date. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or
policies of the Registrant, or that such person is controlled by or under common control with the Registrant. There is no non-voting common equity of the Registrant.

There were 63,417,130 shares of the Registrants common stock, par value $0.001, outstanding on February 28, 2008.

The following document is incorporated by reference into Part III of this Form 10-KSB: None.

Transitional Small Business Disclosure Format (check one):   Yes   ̈    No  x









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TURNSTONE SYSTEMS, INC.

FORM 10-KSB

DECEMBER 31, 2007

TABLE OF CONTENTS



|           |  |                                                                                                                                         |  |         
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|ITEM       |  |                                                                                                                                         |  | PAGE NO.
|           | 
|PART I     |  |                                                                                                                                        
|           |  |                                                                                                                                        
|1.         |  | Description of Business                                                                                                                 |  | 4       
|2.         |  | Description of Property                                                                                                                 |  | 7       
|3.         |  | Legal Proceedings                                                                                                                       |  | 7       
|4.         |  | Submission of Matters to a Vote of Security Holders                                                                                     |  | 8       
|           | 
|PART II    |  |                                                                                                                                        
|           |  |                                                                                                                                        
|5.         |  | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities                          |  | 9       
|6.         |  | Managements Discussion and Analysis or Plan of Operation                                                                               |  | 9       
|7.         |  | Financial Statements                                                                                                                    |  | 12      
|8.         |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                                                    |  | 19      
|8A(T).     |  | Controls and Procedures                                                                                                                 |  | 19      
|8B.        |  | Other Information                                                                                                                       |  | 20      
|           | 
|PART III   |  |                                                                                                                                        
|           |  |                                                                                                                                        
|9.         |  | Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance With Sections 16(a) of the Exchange Act. |  | 21      
|10.        |  | Executive Compensation                                                                                                                  |  | 22      
|11.        |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                                          |  | 23      
|12.        |  | Certain Relationships and Related Transactions, and Director Independence                                                               |  | 25      
|13.        |  | Exhibits                                                                                                                                |  | 25      
|14.        |  | Principal Accountant Fees and Services                                                                                                  |  | 26      
|           | 
|SIGNATURES |  | 28                                                                                                                                     



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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-KSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent our expectations or beliefs and include, but are not limited to, the following:



| |  |  | any statements regarding the execution, timing and expenses associated with the complete plan of liquidation and dissolution of Turnstone Systems, Inc.;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any statements regarding the disposition of our existing assets;
| | - |  | ----------------------------------------------------------------



| |  |  | any statements regarding the resolution of outstanding creditor claims and the ongoing litigation against us; and
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | any statements regarding liquidating distributions, if any, to our stockholders.
| | - |  | --------------------------------------------------------------------------------

Readers are urged to carefully review and consider the various disclosures we make which attempt to advise them of the factors which affect our business,
including, without limitation, the disclosures made under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations and under the caption Description of Business--Risk Factors
included herein. These important factors, which could cause actual results to differ materially from the forward-looking statements contained herein, include, without limitation:



| |  |  | our ability to accurately estimate the expenses associated with executing our plan of complete liquidation and dissolution;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | successful resolution of our outstanding creditor claims and ongoing litigation; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | our ability to obtain relief from public company reporting from the Securities and Exchange Commission.
| | - |  | -------------------------------------------------------------------------------------------------------

We are under no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to
changes in our expectations.



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PART I



|ITEM 1. | DESCRIPTION OF BUSINESS
|------- | -----------------------

LIQUIDATION, WINDING UP AND DISSOLUTION

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 $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.

We filed our certificate of dissolution with the Secretary of State of the State of
Delaware effective December 4, 2003. During the liquidation period, we converted 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.

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
of $125. The agreements do not provide for minimum retainer payments or termination fees.

As of December 31, 2007, we had one outstanding litigation
matter remaining related to our initial public offering of common stock in 2000. In 2005 the district court had approved a preliminary settlement of the matter that we believe would not have required any cash contribution from us, and therefore
would have allowed us to make a final liquidating distribution at the end of 2006. However, in December 2006 and prior to the proposed settlement being finalized, a federal appeals court decertified the IPO class action at the request of the
defendant underwriters, which resulted in the proposed settlement being stayed until the plaintiffs appeal of such decision is completed. In July 2007, the settlement approval process was officially terminated by the district court. The
plaintiffs may seek certification of narrower classes. In the interim, discovery will proceed in the six focus cases selected by the district court, which does not include the case against us. We are uncertain as to whether a class settlement will
be available in the future and/or whether plaintiffs will litigate against each of the defendant issuers, including us, one by one if a class action cannot be certified. We have determined that it is in the best interest of stockholders for us to
make a final distribution after the final resolution of the initial public offering (IPO) litigation matter.

Based on our projections of
operating expenses and liquidation costs as of December 31, 2007, we estimate that the amount of future liquidating distributions will be approximately $0.016 per common share. The actual amount available for distribution, if any, could be
substantially less if we incur unexpected or greater than expected expenses related to the litigation matters or if we discover additional liabilities or claims or incur unexpected or greater than expected expenses.



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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.

COMPANY INFORMATION

We were formerly a provider of hardware and software products that enabled local exchange carriers to deploy and maintain copper local loop services. Our products included copper loop management and testing systems,
signal splitters and remote line switching and service verification platforms.

We were incorporated in Delaware in January 1998. Our principal executive
offices are located at 7650 Marathon Drive, Suite A, Livermore, California 94550, and our telephone number is (408) 907-1400.

EMPLOYEES

As of December 31, 2007, we had no full-time employees.

RISK
FACTORS

In addition to other information in this Form 10-KSB, 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 amount of liquidating distributions, if any, to our stockholders. As a result of the risk factors set forth
below and elsewhere in this Form 10-KSB, 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 the resolution of the outstanding IPO litigation matter. Other secondary matters that could affect
any future distributions include, among other things, sales of our non-cash assets, claim settlements with creditors, resolution of outstanding litigation matters, and unexpected or greater than expected expenses. Furthermore, we cannot 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 amount 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
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.



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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, contractual obligations to certain of our vendors. Our outstanding litigation consists of the IPO federal securities class action litigation. As part of the wind down
process, we will attempt to settle our obligations with our creditors and resolve all of the outstanding litigation. However, with respect to the IPO federal securities class action litigation, we are uncertain whether a class settlement will be
available in the future and/or whether plaintiffs will litigate against each of the defendant issuers, including us, one by one if a class action cannot be 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.

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 incurred during the wind down process, such as legal, accounting and consulting fees and miscellaneous office 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.

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

We are currently unable to predict the precise timing of any 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 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.



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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 have sought and will continue to attempt to seek relief from the Securities and Exchange Commission from the reporting requirements
under the Exchange Act, but to date we have not been successful in obtaining 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 successful in 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.



|ITEM 2. | DESCRIPTION OF PROPERTY
|------- | -----------------------

We are headquartered at a third-party
facility in Livermore, California.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

We dispute, but cannot assure you that we will
be successful in our defense of, the outstanding lawsuit against us described below. If we are unsuccessful, the lawsuit 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 as well as our secondary offering of stock. The complaint is purportedly brought
on behalf of a class of individuals who purchased common



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stock in our initial public offering and our 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, 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 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 the interim, discovery will proceed in the six focus cases selected by the district court, which does not
include the case against us. We are uncertain as to whether a class settlement will be available in the future and/or whether plaintiffs will litigate against each of the defendant issuers, including us, one by one if a class action cannot be
certified. We have determined that it is in the best interest of stockholders for us 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 us continues, we believe we have meritorious defenses and intend to defend the case vigorously.

In addition, 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
Bank of America Corporation related to our initial public offering of stock, in the United States District Court, Western District of Washington. We are 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 our initial public offering and seeks disgorgement of such profits from them.



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

Not applicable.



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
|------- | ----------------------------------------------------------------------------

| | BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
| | ----------------------------------------------

Our
common stock trades in the Over the Counter Markets pink sheets under the symbol TSTN.PK. The following table sets forth the high and low sale prices per share of our common stock for the fiscal periods listed below as
reported on the pink sheets. Such information reflects interdealer prices, without retail markup, markdown, or commission, and may not represent actual transactions.



|                       |  |                    |      |              |   |               |  |              |      |  |   |     
|---------------------- |  | ------------------ | ---- | ------------ | - | ------------- |  | ------------ | ---- |  | - | ----
|                       |  | THREE MONTHS ENDED
|                       |  | March 31,2007      |      | June 30,2007 |   | Sept. 30,2007 |  | Dec. 31,2007
|Price range per share: |  |                    |      |              |   |               |  |              |      |  |   |     
|High                   |  | $                  | 0.02 |              | $ | 0.01          |  | $            | 0.01 |  | $ | 0.01
|Low                    |  | $                  | 0.01 |              | $ | 0.01          |  | $            | 0.01 |  | $ | 0.01



|                       |  |                    |      |              |   |               |  |              |      |  |   |     
|---------------------- |  | ------------------ | ---- | ------------ | - | ------------- |  | ------------ | ---- |  | - | ----
|                       |  | THREE MONTHS ENDED
|                       |  | March 31,2006      |      | June 30,2006 |   | Sept. 30,2006 |  | Dec. 31,2006
|Price range per share: |  |                    |      |              |   |               |  |              |      |  |   |     
|High                   |  | $                  | 0.02 |              | $ | 0.02          |  | $            | 0.02 |  | $ | 0.02
|Low                    |  | $                  | 0.01 |              | $ | 0.01          |  | $            | 0.01 |  | $ | 0.01

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. All future distributions will be liquidating distributions. The actual amount and timing of
future liquidating distributions, if any, cannot be predicted at this time. At present, we estimate that total future liquidating distributions will be approximately $0.016 per share.

EQUITY COMPENSATION PLANS

The information required by this Item regarding securities reserved for issuance
under equity compensation plans is incorporated by reference to the information set forth in Item 11 of this Annual Report on Form 10-KSB.



|ITEM 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|------- | ---------------------------------------------------------

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 $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.



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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. was required to continue in existence until at least December 4, 2006. During this period, we continued to convert our estimated net assets to cash for future distribution to our
stockholders. We were 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.

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 of $125. The agreements do not provide for minimum retainer payments or termination fees.

As of December 31, 2007, we had one outstanding litigation matter remaining related to our initial public offering of common stock in 2000. In 2005 the district court had approved a preliminary settlement of the
matter that we believe would not have required any cash contribution from us, and therefore would have allowed us to make a final liquidating distribution at the end of 2006. However, in December 2006 and prior to the proposed settlement being
finalized, a federal appeals court decertified the IPO class action at the request of the defendant underwriters, which resulted in the proposed settlement being stayed until the plaintiffs appeal of such decision is completed. In July 2007,
the settlement approval process was officially terminated by the district court. The plaintiffs may seek certification of narrower classes. In the interim, discovery will proceed in the six focus cases selected by the district court, which does not
include the case against us. We are uncertain as to whether a class settlement will be available in the future and/or whether plaintiffs will litigate against each of the defendant issuers, including us, one by one if a class action cannot be
certified. We have determined that it is in the best interest of stockholders for us to make a final distribution after the final resolution of the IPO litigation matter. For a more detailed discussion of this litigation matter, please see the
section entitled IPO Litigation under Item 3  Legal Proceedings.

Based on our projections of operating expenses and
liquidation costs as of December 31, 2007, we estimate that the amount of future liquidating distributions will be approximately $0.016 per common share. The actual amount available for distribution, if any, could be substantially less if we
incur unexpected or greater than expected expenses related to the IPO litigation matter or if we discover additional liabilities or claims or incur unexpected or greater than expected expenses.

Prior to the decision to dissolve Turnstone Systems, Inc., we were a provider of hardware and software products that enabled local exchange carriers to deploy and
maintain copper local loop services. 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 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 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 accounting for estimated costs to be incurred during liquidation have the greatest potential impact on our
financial statements.



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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 $106,000 at December 31, 2007. Our estimates are based on assumptions regarding our ability to settle outstanding obligations to creditors, resolve outstanding
litigation, and the timing of distributions to stockholders. At December 31, 2007, estimated costs to be incurred during liquidation are based on estimated costs for a period of twelve to 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 year ended December 31, 2007, the company increased the fair value of estimated costs to
be incurred in liquidation by $63,000. This increase is primarily attributable to an increase in estimated professional service provider fees, legal fees and consulting fees, partially offset by an increase estimated future interest earnings, due to
delays in resolving outstanding litigation.

ACTIVITIES IN LIQUIDATION

The following table presents financial data under the liquidation basis of accounting (in thousands):



|                                                 |  |                         |       |   |      |   |      
|------------------------------------------------ |  | ----------------------- | ----- | - | ---- | - | -----
|                                                 |  | Year ended December 31,
|                                                 |  | 2007                    |       |   | 2006
|Net assets in liquidation at beginning of period |  | $                       | 1,053 |   |      | $ | 1,038
|Adjust assets and liabilities to fair value      |  |                         | (68   | ) |      |   | 15   
|                                                 |  |                         |       |   |      |   |      
|Net assets in liquidation at end of period       |  | $                       | 985   |   |      | $ | 1,053
|                                                 |  |                         |       |   |      |   |      



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LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2007, net assets in liquidation totaled $985,000, consisting of $1,091,000 in cash and cash equivalents, partially offset by $101,000 of estimated costs to be incurred during liquidation. We expect to use our capital
resources to execute our complete plan of liquidation and dissolution, settle existing claims against the company, including existing litigation and other current liabilities and accrued expenses, and to 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 plan of complete liquidation and dissolution, actual settlement
costs for existing claims against the company vary from estimates, or if there are existing, but unknown claims made against us in the future. At December 31, 2007, our cash and cash equivalents were held primarily in money market funds. We
expect to continue to hold our cash and cash equivalents primarily in money market funds while we execute the plan of dissolution.

We do not have any
long-term debt, lease or purchase obligations at December 31, 2007.



|ITEM 7. | FINANCIAL STATEMENTS
|------- | --------------------

The following financial statements, and the
related notes thereto, of Turnstone Systems, Inc. and subsidiaries, and the Report of Independent Auditors, and unaudited supplemental data are filed as a part of this Form 10-KSB.



|1. | Financial Statements
|-- | --------------------



|                                                                                                  |  |           
|------------------------------------------------------------------------------------------------- |  | ----------
|                                                                                                  |  | PAGENUMBER
|Report of Independent Registered Public Accounting Firm                                           |  | 13        
|Report of Independent Registered Public Accounting Firm                                           |  | 14        
|Statements of Net Assets in Liquidation as of December 31, 2007                                   |  | 15        
|Statements of Changes in Net Assets in Liquidation for the years ended December 31, 2007 and 2006 |  | 16        
|Notes to Financial Statements                                                                     |  | 17        



|2. | Financial Statement Schedule
|-- | ----------------------------

Not applicable.



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Turnstone Systems, Inc.

We have audited the accompanying
statement of net assets in liquidation of Turnstone Systems, Inc. (the Company) as of December 31, 2007, and the related statement of changes in net assets in liquidation for the year then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company was not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that were appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets in liquidation of Turnstone Systems, Inc. as of December 31, 2007 and the changes in its net assets in liquidation for
the year then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Squar, Milner, Peterson,
Miranda & Williamson, LLP.

Newport Beach, California

March 24, 2008



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Turnstone Systems, Inc.

We have audited the accompanying
statement of changes in net assets in liquidation of Turnstone Systems, Inc. for the year ended December 31, 2006. This financial statement is the responsibility of the Companys management. Our responsibility is to express an opinion on
this financial statement based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statement referred to
above presents fairly, in all material respects, the changes in net assets in liquidation of Turnstone Systems, Inc. for the year ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Mountain View, California

March 30, 2007



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##### Table of Contents

TURNSTONE SYSTEMS, INC.

STATEMENT OF NET ASSETS IN LIQUIDATION

(IN THOUSANDS)



|                                                  |  |                  |      
|------------------------------------------------- |  | ---------------- | -----
|                                                  |  | December 31,2007
|Assets                                            |  |                  |      
|Cash and cash equivalents                         |  | $                | 1,091
|                                                  |  |                  |      
|Total assets                                      |  | $                | 1,091
|Liabilities                                       |  |                  |      
|Estimated costs to be incurred during liquidation |  | $                | 106  
|                                                  |  |                  |      
|Total liabilities                                 |  | $                | 106  
|                                                  |  |                  |      
|Net assets in liquidation                         |  | $                | 985  
|                                                  |  |                  |      

See accompanying notes to financial statements.



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##### Table of Contents

TURNSTONE SYSTEMS, INC.

STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION

(IN THOUSANDS)



|                                               |  |                                 |       |   |      |   |      
|---------------------------------------------- |  | ------------------------------- | ----- | - | ---- | - | -----
|                                               |  | For the Years EndedDecember 31,
|                                               |  | 2007                            |       |   | 2006
|Net assets in liquidation at beginning of year |  | $                               | 1,053 |   |      | $ | 1,038
|Adjust assets and liabilities to fair value    |  |                                 | (68   | ) |      |   | 15   
|                                               |  |                                 |       |   |      |   |      
|Net assets in liquidation at end of year       |  | $                               | 985   |   |      | $ | 1,053
|                                               |  |                                 |       |   |      |   |      

See accompanying notes to financial statements



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TURNSTONE SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2007



|1. | Description Of Business
|-- | -----------------------

On August 6, 2003, the Board of Directors of
Turnstone Systems, Inc. (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.

The Company formerly developed and marketed products that enable local exchange carriers to rapidly deploy and efficiently maintain copper local loop services. The
Company commenced the commercial sale of its products in the first quarter of 1999.



|2. | Significant Accounting Policies
|-- | -------------------------------

Basis Of Presentation

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.

Use of 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 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 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.

Concentrations of Credit Risk

The Company currently maintains substantially all of its cash equivalents in money market funds which are not insured by the Federal Deposit Insurance Company.

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 December 31, 2007 consisted primarily of money market funds.

Estimated Costs To Be Incurred During Liquidation

Under the
liquidation basis of accounting, the Company accrues for the remaining costs to be incurred during liquidation, including consulting fees, fees of professional service providers, estimates to resolve outstanding litigation and miscellaneous other
costs, partially offset by estimated future interest earnings. At December 31, 2007, estimated costs to be incurred during liquidation are 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 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 outstanding federal securities class action lawsuit related to its initial public
offering.



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|3. | 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 the interim, discovery will proceed in the six focus cases selected by the district
court, which does not include the case against the Company. The Company is uncertain as to whether a class settlement will be available in the future and/or whether plaintiffs will litigate against each of the defendant issuers, including the
Company, one by one if a class action cannot be certified. 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 December 31, 2007.

In addition, 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 Bank of America Corporation related to our initial public offering of stock, in the United States District Court, Western District of Washington. We are 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 our 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 December 31, 2007.



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|ITEM 8. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

On October 4, 2007, the Board of Directors of the Company unanimously approved the replacement of KPMG LLP (KPMG) with Squar, Milner, Peterson, Miranda and Williamson, LLP (Squar Milner)
as the Companys independent registered public accounting firm, effective immediately.

The audit reports of KPMG on the financial statements of the
Company as of and for the years ended December 31, 2006 and 2005 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.

During the two fiscal years ended December 31, 2006 and 2005 and the subsequent interim period through October 4, 2007, there were no: (1) disagreements
between the Company and KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG would have caused it to make reference
in connection with their opinion to the subject matter of the disagreement, or (2) reportable events.

During the Companys two most recent
fiscal years, the Company has not consulted with Squar Milner regarding (i) either the application of accounting principles to a specified transaction, either contemplated or proposed, or the type of audit opinion that might be rendered on the
Companys financial statements, and no written report or oral advice was provided to the Company that Squar Milner concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial
reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in paragraph 304(a)(1)(iv) of Regulation S-K and the related instructions thereto) or a reportable event (as described in paragraph 304(a)(1)(v) of
Regulation S-K).

ITEM 8A(T).     CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based
on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2007, our disclosure controls and procedures were effective.

Managements Annual Report On Internal Control Over Financial Reporting

Our management is
responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), is a process designed by, or under the supervision of, our
principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:



| |  |  | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of our assets that could have a material
effect on the financial statements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement
preparation and presentation.

Our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2007. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment,
management believes that as of December 31, 2007, our internal control over financial reporting is effective based on those criteria.

This annual report does not include an attestation report of the companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the
companys registered public accounting firm pursuant to temporary rules of the SEC to provide only managements report in this annual report.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting
that occurred during the quarter ended December 31, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



|ITEM 8B. | OTHER INFORMATION
|-------- | -----------------

None.



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PART III



|ITEM 9. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
|------- | -------------------------------------------------------------------------------------------------------------------------------------

Our executive officers and directors and their ages, as of December 31, 2007, are as follows:



|               |  |     |  |                                                              
|-------------- |  | --- |  | -------------------------------------------------------------
|NAME           |  | AGE |  | POSITION(S)                                                  
|Albert Y. Liu  |  | 35  |  | General Counsel, Director of Human Resources and Director    
|Eric S. Yeaman |  | 37  |  | Chief Executive Officer, Chief Financial Officer and Director

ALBERT Y. LIU has been a director of Turnstone Systems since December 2003.
Mr. Liu has served in a consulting capacity overseeing the dissolution and liquidation of Turnstone Systems since June 2004. Mr. Liu joined Turnstone Systems in May 2000 and has served as General Counsel since that time. He has also served
as Director of Human Resources since September 2001. From October 1997 to May 2000, Mr. Liu practiced corporate and securities law at Sullivan & Cromwell, a leading U.S. law firm. Mr. Liu holds a J.D. from The University of
California, Hastings College of the Law, and an A.B. in Political Science and a B.S. in Computer Science from Stanford University.

ERIC S. YEAMAN has been a director of Turnstone Systems since December 2003. Mr. Yeaman has served in a consulting capacity overseeing the dissolution and liquidation of Turnstone Systems since June 2004. Mr. Yeaman
joined Turnstone Systems in January 2000 and has served as the Chief Executive Officer since September 2003 and the Chief Financial Officer since November 2001. From January 2000 to November 2001, he served as Controller. From December 1997 to
January 2000, Mr. Yeaman served as Controller of Atmosphere Networks, Inc., an optical networking equipment manufacturer. From May 1997 to November 1997, Mr. Yeaman served as Controller of Golfweb, an Internet-based provider of
golf-related merchandise. From October 1995 to April 1997, Mr. Yeaman served as accounting manager for Whitetree. Mr. Yeaman holds a B.S. in Business Administration from California Polytechnic State University, San Luis Obispo.

Our directors are not considered independent directors since they serve as our executive officers on a consulting basis to oversee our dissolution.
There are no family relationships between any of our directors or executive officers.



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BOARD OF DIRECTORS

Prior to our 2003 Annual Meeting, our certificate of incorporation divided our board of directors into three classes. Each class consisted of one-third of the total number of directors. All directors in a given class served contemporaneous
three-year terms. At our 2003 Annual Meeting, our stockholders approved the amendment of our certificate of incorporation to eliminate the classification of our board of directors.

During the period from January 1, 2003 to December 2, 2003, our board of directors consisted of six members. On December 2, 2003, all of
the then existing directors except for Mr. John K. Peters resigned from the board and Messrs. Liu and Yeaman, our executive officers, were appointed to the board of directors. In June 2004, Mr. Peters resigned from the board.
Directors are elected for a one-year term so that the term of all directors expires each year. A director serves for the designated term and until his or her respective successor is elected or appointed, or until the director's death, resignation or
removal. Stockholders are not entitled to cumulative voting in the election of directors.

BOARD COMMITTEES AND MEETINGS

During fiscal 2007, our board of directors did not hold any meetings.

We established an audit committee in October 1999. The audit committee reviews our internal accounting procedures and consults with and reviews the services provided by our independent accountants. There is no
specified term for committee members. During fiscal 2004, Mr. Peters served as the sole member of our audit committee until his resignation in June 2004. Since then, our board of directors has acted as the audit committee. Our board of
directors has determined that Mr. Yeaman is an audit committee financial expert. Mr. Yeaman is not an independent director, as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities and Exchange Act.
The audit committee did not meet in fiscal 2007.

LEGAL PROCEEDINGS

Certain of our current and former directors and officers have been named as co-defendants in legal proceedings against us. See Certain Relationships and Related Transactions below for information regarding
these specific legal proceedings and our indemnity obligations.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that our officers and directors and persons who own more than 10% of a
registered class of our equity securities file reports of ownership on Form 3 and changes in ownership on Forms 4 or 5 with the Securities and Exchange Commission. These officers, directors, and 10% stockholders are also required by SEC rules to
furnish us with copies of all Section 16(a) reports they file. Based solely on our review of the copies of forms we have received, or written representations from certain reporting persons, we believe that all of our executive officers and
directors have complied with all applicable filing requirements for the fiscal year ended December 31, 2007.

CODE OF ETHICS

We have adopted a financial code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer and
all of our employees. You may request a free copy of our financial code of ethics, which is one of several policies within our code of business conduct, by sending your request together with a self-addressed, postage-paid, envelope to Turnstone
Systems, Inc., 7650 Marathon Drive, Suite A, Livermore, California 94550.



|ITEM 10. | EXECUTIVE COMPENSATION
|-------- | ----------------------

SUMMARY COMPENSATION TABLE

The following table shows, for the last two fiscal years, compensation earned for services rendered to Turnstone Systems in all capacities by our Chief
Executive Officer, and our other executive officer.



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|                                                        |  |                     |  |        |  |       |  |                      
|------------------------------------------------------- |  | ------------------- |  | ------ |  | ----- |  | ---------------------
|                                                        |  | Annual Compensation
|Name and Principal Positions                            |  | Year                |  | Salary |  | Bonus |  | All OtherCompensation
|Albert Y. Liu                                           |  | 2007                |  |        |  |       |  | 10,563(3)            
|General Counsel and Director of Human Resources (1)     |  | 2006                |  |        |  |       |  | 6,813(3)             
|Eric S. Yeaman                                          |  | 2007                |  |        |  |       |  | 8,000(3)             
|Chief Executive Officer and Chief Financial Officer (2) |  | 2006                |  |        |  |      |  | 5,656 (3)            



|(1) | Mr. Lius full-time employment with Turnstone Systems was terminated in June 2004. Since that time, Mr. Liu has served as a consultant overseeing the dissolution and
liquidation of Turnstone Systems.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Mr. Yeamans employment with Turnstone Systems was terminated in June 2004. Since that time, Mr. Yeaman has served as a consultant overseeing the dissolution and
liquidation of Turnstone Systems.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Consists of payment for the officers consulting services in fiscal 2006 and 2007.
|--- | ----------------------------------------------------------------------------------

OPTION GRANTS IN LAST FISCAL YEAR

We did not grant any stock options to our executives and employees during
the fiscal year ended December 31, 2007. All of our option plans were terminated on December 4, 2003, when our certificate of dissolution became effective with the office of the Secretary of State of the State of Delaware. Therefore, there
are no options outstanding or exercisable as of December 31, 2007.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

As all of our options plans were terminated on December 4, 2003, there were no option exercises in fiscal 2007.

DIRECTOR COMPENSATION

In June 2004, we entered into
consulting agreements with Albert Y. Liu and Eric S. Yeaman to continue ongoing management of our liquidation, including service as our board of directors. Compensation under 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.



|ITEM 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

The following table sets forth certain information with respect to beneficial ownership of our common stock as of December 31, 2007, by:
(i) each person who is known by us to own beneficially more than five percent of our common stock, (ii) each of our named executive officers, (iii) each of our directors, and (iv) all directors and named executive officers as a
group. Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where
applicable.

Beneficial ownership is determined based on the rules of the Securities and Exchange Commission. The column entitled
Number of Shares Beneficially Owned excludes the number of shares of common stock subject to options held by that person that are currently exercisable or that will become exercisable within 60 days after the record date. The number of
shares subject to options that each beneficial owner has the right to acquire within 60 days of the record date is listed separately under the column entitled Number of Shares Underlying Options Beneficially Owned. These shares are not
deemed outstanding for purposes of computing the percentage ownership of any other person. Unless otherwise indicated in the footnotes, these stockholders have sole voting or investment power with respect to all shares, subject to applicable
community property laws. The number and percentage of shares beneficially owned are based on 63,417,130 shares outstanding as of December 31, 2007.



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|                                                                                |  |                                  |  |                                                   |  |                            |  
|------------------------------------------------------------------------------- |  | -------------------------------- |  | ------------------------------------------------- |  | -------------------------- | -
|Beneficial Owner                                                                |  | Number ofSharesBeneficiallyOwned |  | Number ofSharesUnderlyingOptionsBeneficiallyOwned |  | ApproximatePercentageOwned |  
|Benchmark Capital Partners(1)2480 Sand Hill Road, Suite 200Menlo Park, CA 94025 |  | 4,284,892                        |  |                                                  |  | 6.8                        | %
|P. Kingston Duffie                                                              |  | 5,582,260                        |  |                                                  |  | 8.8                        | %
|Richard N. Tinsley                                                              |  | 5,512,980                        |  |                                                  |  | 8.7                        | %
|Albert Y. Liu                                                                   |  | 59,062                           |  |                                                  |  | *                          |  
|Eric S. Yeaman                                                                  |  | 78,662                           |  |                                                  |  | *                          |  
|All directors and named executive officers as a group (2 persons)               |  | 137,724                          |  |                                                  |  | *                          | %



|* | Less than 1%
|- | ------------



|(1) | Includes 3,576,706 shares held by Benchmark Capital Partners II, L.P., 423,482 shares held by Benchmark Founders Fund II, L.P., 224,616 shares held by Benchmark Founders
Fund II-A, L.P. and 60,088 shares held by Benchmark Members Fund, L.P.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

EQUITY COMPENSATION PLAN INFORMATION

In connection with the plan of liquidation and dissolution, we have terminated our stock option and employee stock purchase plans. There are currently no
rights outstanding under any former equity compensation plan, and no shares are reserved for future issuance.



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|ITEM 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------------------------

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. We have been named as defendants in a class action lawsuit generally referred to as IPO Allocation claims relating to our
initial public offering in January 2000. Certain of our current and former officers and directors have been named as co-defendants in this class action lawsuit and we may be required to indemnify these persons in connection with the lawsuit.

During fiscal 2007, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we
were or are to be a party, in which the amount involved in the transaction exceeds $120,000 and in which any director, executive officer or holder of more than 5% of our capital stock had or will have a direct or indirect material interest, other
than compensation arrangements which are otherwise described under Executive Compensation  Employment Agreements and Change in Control Agreements.



|ITEM 13. | EXHIBITS
|-------- | --------



|(a)    1. | FINANCIAL STATEMENTS
|--------- | --------------------

See Item 7 of this Form 10-KSB.



| | 2. | SCHEDULES
| | -- | ---------

Not applicable



| | 3. | EXHIBITS
| | -- | --------

The exhibits listed on the
accompanying index to exhibits immediately following the financial statement schedule are filed as part of, or incorporated by reference into, this Form 10-KSB.



|            |  |                                                                                                                                                                                  
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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                                                                               
|            | 
|21.1        |  | Subsidiaries                                                                                                                                                                     
|            | 
|31.1        |  | Certification by the Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002                                                                        
|            | 
|31.2        |  | Certification by the Chief Financial Officer pursuant to Section 302(a) 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------



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|(3) | Incorporated 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 10.19 of our Current Report on Form 8-K filed on June 28, 2004 with the Securities and Exchange Commission.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | 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.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------

The
following table sets forth the aggregate fees billed to us by KPMG LLP, independent accountants, for professional services rendered for the fiscal years ended December 31, 2007 and December 31, 2006.



|                   |  |             |        |             |   |       
|------------------ |  | ----------- | ------ | ----------- | - | ------
|Fee Category       |  | Fiscal 2007 |        | Fiscal 2006
|Audit Fees         |  | $           | 12,500 |             | $ | 50,000
|Audit-Related Fees |  |             | 5,200  |             |   |      
|Tax Fees           |  |             |       |             |   | 8,000 
|All Other Fees     |  |             |       |             |   |      
|                   |  |             |        |             |   |       
|Total Fees         |  | $           | 17,700 |             | $ | 58,000
|                   |  |             |        |             |   |       

The following table sets forth the aggregate fees billed to us by Squar Milner, independent
accountants, for professional services rendered for the fiscal years ended December 31, 2007 and December 31, 2006.



|                   |  |             |        |             |   |  
|------------------ |  | ----------- | ------ | ----------- | - | -
|Fee Category       |  | Fiscal 2007 |        | Fiscal 2006
|Audit Fees         |  | $           | 28,500 |             | $ | 
|Audit-Related Fees |  |             |       |             |   | 
|Tax Fees           |  |             |       |             |   | 
|All Other Fees     |  |             |       |             |   | 
|                   |  |             |        |             |   |  
|Total Fees         |  | $           | 28,500 |             | $ | 
|                   |  |             |        |             |   |  

Audit Fees. Consists of fees billed for professional services rendered for the audit of our
financial statements and review of the interim financial statements included in our quarterly reports and services that are normally provided by KPMG LLP and Squar Milner in connection with statutory and regulatory filings or engagements, and attest
services, except those not required by statute or regulation.

Audit-Related Fees. Consists of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under Audit Fees. In fiscal 2007, KPMG billed us for services related to assisting a change in auditor.

Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice and tax planning. In fiscal 2006 KPMG
LLP provided U.S. tax compliance and consultation services. In fiscal 2007, Squar Milner provided U.S. tax compliance and consultation services.

All Other Fees. KPMG LLP and Squar Milner did not bill us for any other fees.

The Audit Committee considered and
determined that the provision of the services other than the services described under Audit Fee and Audit-Related Fees is compatible with maintaining the independence of the independent auditors.

POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS



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The Audit Committees policy is to pre-approve all audit and audit-related services provided by the
independent auditors. These services may include audit services, audit-related services, tax services and other services. The independent auditors are required to periodically report to the Audit Committee regarding the extent of services provided
by the independent auditors in accordance with such pre-approval. In fiscal years 2007 and 2006, all fees identified above under the captions Audit Fees, and Tax Fees that were billed by KPMG LLP and Squar Milner were
approved by the Audit Committee in accordance with SEC requirements.



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Form 10-KSB to be signed on its behalf by the undersigned, who is duly authorized, in the City of Santa Clara, State of California on this 26th day of March, 2008.



TURNSTONE SYSTEMS, INC.By:

/s/ Eric S. YeamanEric S. YeamanChief Executive Officer and Chief Financial Officer (Principal Executive, Financial and Accounting Officer)


KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Eric S. Yeaman his true and lawful attorney-in-fact, with the power of substitution for him in any and all capacities, to sign any amendments to this Report on Form 10-KSB, and to file the same, with Exhibits thereto and
other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-KSB has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:



|                                  |  |                                                                       |  |               
|--------------------------------- |  | --------------------------------------------------------------------- |  | --------------
|Signature                         |  | Title                                                                 |  | Date          
|                                  |  |                                                                      
|/s/ Eric S. Yeaman Eric S. Yeaman |  | Chief Executive Officer Officer, Chief Financial Officer and Director |  | March 26, 2008
|                                  |  |                                                                      
|/s/ Albert Y. Liu Albert Y. Liu   |  | General Counsel, Director of Human Resources and Director             |  | March 26, 2008



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INDEX TO 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                                                            
|            | 
|10.19(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                                                                               
|            | 
|21.1        |  | Subsidiaries                                                                                                                                                                     
|            | 
|31.1        |  | Certification by the Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002                                                                        
|            | 
|31.2        |  | Certification by the Chief Financial Officer pursuant to Section 302(a) 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 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 10.19 of our Current Report on Form 8-K filed on June 28, 2004 with the Securities and Exchange Commission.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | 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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------



29