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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-KSB



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



FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004



OR



| ̈ | TRANSITION REPORT UNDER 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



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TURNSTONE SYSTEMS, INC.

(Name of small business issuer in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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

(Issuers telephone number, including area code)



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SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:



None



SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:



Common Stock, $0.001 par value



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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.    x



Registrants revenues for
the fiscal year ended December 31, 2004 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 February 28, 2005 was US$646,640. 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, 2005.



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



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TURNSTONE SYSTEMS, INC.

FORM 10-KSB

DECEMBER 31, 2004



TABLE OF
CONTENTS



|           |  |                                                                                                                             |  |         
|---------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | --------
|ITEM       |  |                                                                                                                             |  | PAGE NO.
|           |  | PART I                                                                                                                      |  |         
|1.         |  | Description of Business                                                                                                     |  | 4       
|2.         |  | Description of Property                                                                                                     |  | 8       
|3.         |  | Legal Proceedings                                                                                                           |  | 8       
|4.         |  | Submission of Matters to a Vote of Security Holders                                                                         |  | 8       
|           |  |                                                                                                                            
|           |  | PART II                                                                                                                     |  |         
|           |  |                                                                                                                            
|5.         |  | Market for Registrants 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                                                                                                        |  | 16      
|8.         |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                                        |  | 33      
|8A.        |  | Controls and Procedures                                                                                                     |  | 33      
|8B.        |  | Other Information                                                                                                           |  | 34      
|           |  |                                                                                                                            
|           |  | PART III                                                                                                                    |  |         
|           |  |                                                                                                                            
|9.         |  | Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act             |  | 35      
|10.        |  | Executive Compensation                                                                                                      |  | 37      
|11.        |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                              |  | 38      
|12.        |  | Certain Relationships and Related Transactions                                                                              |  | 39      
|13.        |  | Exhibits                                                                                                                    |  | 39      
|14.        |  | Principal Accountant Fees and Services                                                                                      |  | 40      
|           | 
|SIGNATURES |  | 41                                                                                                                         



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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 sell our existing assets;
| | - |  | ----------------------------------------



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



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



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



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



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



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



Based on our projections of operating expenses and
liquidation costs as of December 31, 2004, we estimate that the amount of future liquidating distributions will be approximately $0.01 per common share. The actual amount available for distribution, if



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any, could be substantially less if we discover additional liabilities or claims or incur unexpected or greater than expected expenses. Subject to the
provisions of Delaware law, we expect to conclude the liquidation prior to the third anniversary of the filing of our Certificate of Dissolution with the State of Delaware by a final liquidating distribution.



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. All of our public filings with the Securities and Exchange Commission are accessible from our
corporate website at www.turnstone.com. Information contained on the website is not a part of this annual report.



EMPLOYEES



As of February 1, 2005, 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 depend on and could be delayed by, 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 include, among other things, long-term contractual obligations to certain customers, including certain product
warranties, and contractual obligations to certain of our vendors. Our outstanding litigation includes federal securities class action litigation and litigation arising out of our ordinary course of business. As part of the wind down process, we
will attempt to settle our obligations with our creditors and resolve all of the outstanding litigation. In particular, we have reached a tentative settlement of the federal securities class action lawsuit related to our initial public offering that
we believe will not require any contribution from us. The proposed settlement has received preliminary court approval but is still subject to a number of conditions, including final court approval. The underwriter defendants have opposed both the
certification of a settlement class action and judicial approval of the settlement. Plaintiffs in the class action lawsuit have claimed damages in the hundreds of millions of dollars. Our inability to reach settlement with our creditors and resolve
outstanding litigation could delay or even prevent us from completing the plan of dissolution. Moreover, amounts required to settle our obligations to creditors and resolve any outstanding litigation will reduce the amount of remaining capital
available for future distribution to stockholders.



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



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



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



Claims, liabilities and expenses 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 liqudating distributions. The timing of such distributions will depend on and could be delayed by, among other things, the timing of sales of our non-cash assets, claim
settlements with creditors and the settlement of any 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



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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.



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.



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



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



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



ITEM 2. DESCRIPTION OF PROPERTY



We are headquartered
at a third-party facility in Livermore, California. In December 2003, the lease related to our previous headquarter facility located in Santa Clara, California terminated and we changed our mailing address and moved our corporate records to the
third-party facility.



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 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 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 court granted preliminary approval for a proposed settlement and release of claims against the issuer defendants, including Turnstone. The
settlement is still subject to a number of conditions, including final court approval. 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.



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



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. 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 Nasdaq National Market prior to December 4, 2003 and on the pink sheets
after that date. Such information reflects interdealer prices, without retail markup, markdown, or commission, and may not represent actual transactions.



|                       |  |                    |      |               |   |               |  |              |      |  |   |     
|---------------------- |  | ------------------ | ---- | ------------- | - | ------------- |  | ------------ | ---- |  | - | ----
|                       |  | THREE MONTHS ENDED
|                       |  | March 31,2004      |      | June 30, 2004 |   | Sept. 30,2004 |  | Dec. 31,2004
|Price range per share: |  |                    |      |               |   |               |  |              |      |  |   |     
|High                   |  | $                  | 0.25 |               | $ | 0.17          |  | $            | 0.18 |  | $ | 0.01
|Low                    |  | $                  | 0.12 |               | $ | 0.12          |  | $            | 0.01 |  | $ | 0.01



|                       |  |                    |      |               |   |               |  |              |      |  |   |     
|---------------------- |  | ------------------ | ---- | ------------- | - | ------------- |  | ------------ | ---- |  | - | ----
|                       |  | THREE MONTHS ENDED
|                       |  | March 31,2003      |      | June 30, 2003 |   | Sept. 30,2003 |  | Dec. 31,2003
|Price range per share: |  |                    |      |               |   |               |  |              |      |  |   |     
|High                   |  | $                  | 3.05 |               | $ | 3.00          |  | $            | 2.90 |  | $ | 2.92
|Low                    |  | $                  | 2.23 |               | $ | 2.08          |  | $            | 2.49 |  | $ | 0.11



As of December 4,
2003, our common stock was held by 247 stockholders of record. We have paid no dividends on our common stock since inception. On November 28, 2003, we made a non-dividend cash distribution of approximately $175.7 million, or $2.77 per common share,
to our stockholders of record as of November 21, 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. 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 $0.01 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



The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Selected Consolidated Financial Data and our consolidated financial
statements and related notes appearing elsewhere in this report.



OVERVIEW



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



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



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



At the close of business on December 4, 2003, we closed our stock transfer books,
discontinued recording transfers of our common stock, and our common stock was de-listed from the Nasdaq National Market. Any future distributions we make will be made solely to 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. The agreements do not provide for minimum retainer payments or termination fees.



Based on our projections of operating expenses and liquidation costs as of December 31, 2004,
we estimate that the amount of future liquidating distributions will be approximately $.01 per common share. The actual amount available for distribution, if any, could be substantially less if we discover additional liabilities or claims or incur
unexpected or greater than expected expenses. Subject to the provisions of Delaware law, we expect to conclude the liquidation prior to the third anniversary of the filing of our Certificate of Dissolution with the State of Delaware by a final
liquidating distribution.



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



10



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##### Table of Contents

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
for Eric S. Yeaman and Albert Y. Liu, fees of professional service providers and miscellaneous other costs, partially offset by estimated future interest earnings. Such costs were estimated at $220,000 at December 31, 2004. Our estimates are based
on assumptions regarding our ability to settle outstanding obligations to creditors, resolve outstanding litigation, successfully petition the Securities and Exchange Commission for relief from public company reporting requirements, and the timing
of distributions to stockholders. 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.



ACTIVITIES IN LIQUIDATION



The following table presents consolidated financial data under the liquidation basis of accounting for the year ended December 31, 2004 and
the period from November 12, 2003 to December 31, 2003 (in thousands):



|                                                 |  |                              |         |   |                                                            |   |        |  
|------------------------------------------------ |  | ---------------------------- | ------- | - | ---------------------------------------------------------- | - | ------ | -
|                                                 |  | Year ended December 31, 2004 |         |   | For the period from November 12, 2003 to December 31, 2003 |  
|Net assets in liquidation at beginning of period |  | $                            | 11,215  |   |                                                            | $ | 11,216 |  
|Proceeds from licensing of intellectual property |  |                              | 275     |   |                                                            |   |       |  
|Adjust assets and liabilities to fair value      |  |                              | 208     |   |                                                            |   |       |  
|Cash received from issuance of common stock      |  |                              |        |   |                                                            |   | 137    |  
|Distributions to stockholders                    |  |                              | (10,781 | ) |                                                            |   | (138   | )
|                                                 |  |                              |         |   |                                                            |   |        |  
|Net assets in liquidation at end of period       |  | $                            | 917     |   |                                                            | $ | 11,215 |  
|                                                 |  |                              |         |   |                                                            |   |        |  



In order to record assets at estimated
net realizable value and liabilities at estimated settlement amounts under liquidation basis accounting, we recorded the following adjustments to record assets and liabilities to fair value as of November 11, 2003, the date of adoption of the
liquidation basis of accounting (in thousands):



|                                                          |  |   |        |  
|--------------------------------------------------------- |  | - | ------ | -
|Adjust assets and liabilities to fair value:              |  |   |        |  
|Prepaid insurance expenses                                |  | $ | (2,421 | )
|Prepaid rent expenses                                     |  |   | (272   | )
|All other, net                                            |  |   | (4     | )
|                                                          |  |   |        |  
|Total adjustments of assets and liabilities to fair value |  | $ | (2,697 | )
|                                                          | 
|Accrued estimated net costs during liquidation:           |  |   |        |  
|Costs to be incurred during liquidation period            |  |   | (1,063 | )
|Future interest income                                    |  |   | 189    |  
|                                                          |  |   |        |  
|Total estimated net costs during liquidation              |  | $ | (874   | )
|                                                          | 
|Accrued estimated litigation settlement costs             |  | $ | (500   | )
|                                                          |  |   |        |  
|Total adjustments                                         |  | $ | (4,071 | )
|                                                          |  |   |        |  



On November 11, 2003, our board of
directors approved a special distribution of $2.77 per common share, payable on November 28, 2003 to stockholders of record on November 21, 2003. A distribution payable in the amount of $175.5 million was recorded as a liability on November 11,
2003, prior to the adoption of the liquidation basis of accounting. During the period from November 12, 2003 to November 21, 2003, 49,998 additional shares of common stock were issued pursuant to an exercise of stock options under our 2000 stock
option plan for net proceeds of $137,000. Associated with this issuance of additional shares, we recorded a distribution payable in the amount of $138,000. The distribution payable of $175.7 million was paid on November 28, 2003.



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##### Table of Contents

RESULTS OF OPERATIONS



The following table sets forth certain statement of operations data as a percentage of net revenues for the periods indicated. The data has been derived from the
consolidated financial statements contained in this report. This information should be read in conjunction with these consolidated financial statements.



|                                                                                |  |                                                         |   
|------------------------------------------------------------------------------- |  | ------------------------------------------------------- | --
|                                                                                |  | For the period from January 1,2003 to November 11, 2003 |   
|Net revenues                                                                    |  | 100.0                                                   | % 
|Cost of revenues:                                                               |  |                                                         |   
|Cost of product revenue                                                         |  | 1.4                                                     |   
|Total cost of revenues                                                          |  | 1.4                                                     |   
|                                                                                |  |                                                         |   
|Gross profit                                                                    |  | 98.6                                                    |   
|                                                                                | 
|Operating expenses:                                                             |  |                                                         |   
|Research and development (exclusive of non-cash compensation expense of $65)    |  | 774.7                                                   |   
|                                                                                | 
|Sales and marketing (exclusive of non-cash compensation expense of $19)         |  | 211.1                                                   |   
|                                                                                | 
|General and administrative (exclusive of non-cash compensation expense of $108) |  | 843.4                                                   |   
|Amortization of deferred stock compensation                                     |  | 25.9                                                    |   
|                                                                                | 
|Lease termination penalty                                                       |  | 1,537.4                                                 |   
|Recovery of loss on operating lease                                             |  | (172.4                                                  | ) 
|Asset impairment charge                                                         |  | 88.5                                                    |   
|                                                                                |  |                                                         |   
|Total operating expenses                                                        |  | 3,308.6                                                 |   
|Operating loss                                                                  |  | (3,210.0                                                | ) 
|Other income (expense):                                                         |  |                                                         |   
|Litigation settlement                                                           |  | (121.2                                                  | ) 
|Interest income and other, net                                                  |  | 301.3                                                   |   
|                                                                                |  |                                                         |   
|Total other income                                                              |  | 180.1                                                   |   
|Loss before income tax expense                                                  |  | (3029.9                                                 | ) 
|Income tax expense                                                              |  | 28.1                                                    |   
|                                                                                |  |                                                         |   
|Net loss                                                                        |  | (3,058.0                                                | )%



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##### Table of Contents

PERIOD FROM JANUARY 1, 2003 TO NOVEMBER 11, 2003



NET REVENUES



In connection with the adoption of the plan of dissolution, we will not generate revenues from our products or services in the future. We have ceased all sales and
marketing efforts related to our products, and have no supply of product available for sale.



|                             |  |                                                       |      |  
|---------------------------- |  | ----------------------------------------------------- | ---- | -
|                             |  | For the periodfrom January 1,2003 toNovember 11, 2003 |     
|                             |  | ($ in thousands)                                      |     
|Product revenue              |  | $                                                     | 586  |  
|Percentage of total revenues |  |                                                       | 79.2 | %
|Service revenue              |  | $                                                     | 154  |  
|Percentage of total revenues |  |                                                       | 20.8 | %
|                             |  |                                                       |      |  
|Total revenues               |  | $                                                     | 740  |  
|                             |  |                                                       |      |  



During the period from January 1, 2003
to November 11, 2003, net revenues consisted of product revenue and service revenue. Product revenue for the period presented consisted primarily of sales of our CX100 loop management products and, to a lesser extent, our MX500 Copper
CrossConnect® and SX Smart Splitter® products and our Crossworks and ONYX automation software licenses. Service revenue was derived primarily from our product maintenance programs.



Revenue from customers located outside the United States of America totaled 64% of our net
revenues for the period from January 1, 2003 to November 11, 2003. One customer, Ericsson, represented greater than 10% of our total revnenues for the period from January 1, 2003 to November 11, 2003, for a total of 55%.



COST OF REVENUES



In connection with the adoption of our plan of dissolution, we will not generate revenues from our products or services in the future, and,
therefore, will not incur cost of revenues in the future.



|                             |  |                                                        |     |  
|---------------------------- |  | ------------------------------------------------------ | --- | -
|                             |  | For the period fromJanuary 1, 2003 toNovember 11, 2003 |    
|                             |  | ($ in thousands)                                       |    
|Cost of product revenue      |  | $                                                      | 10  |  
|Percentage of total revenues |  |                                                        | 1.4 | %
|                             |  |                                                        |     |  
|Total cost of revenues       |  | $                                                      | 10  |  
|                             |  |                                                        |     |  



During the period from January 1, 2003
to November 11, 2003, we utilized written-down inventory to fulfill customer demand, incurring only minimal rework costs related to our product revenue.



Cost of service revenue for the period January 1, 2003 to November 11, 2003 was zero due to our decision to terminate all remaining customer support personnel in January
2003.



RESEARCH AND DEVELOPMENT



In April 2003, after extensive consideration of strategic alternatives, we concluded that
maintaining our research and development efforts related to next-generation copper automation products for incumbent local carriers was not necessary for any of the strategic alternatives under consideration at that time, and that the on-going
expenditures related to continuing such efforts could potentially decrease total stockholder value. As such, we terminated all remaining research and development personnel and discontinued all research and development activities in April 2003. We
will not incur research and development expenses in the future.



|                                                                        |  |                                                        |       |  
|----------------------------------------------------------------------- |  | ------------------------------------------------------ | ----- | -
|                                                                        |  | For the period fromJanuary 1, 2003 toNovember 11, 2003 |      
|                                                                        |  | ($ in thousands)                                       |      
|Research and development expenses, net of non-cash compensation expense |  | $                                                      | 5,733 |  
|Percentage of total revenues                                            |  |                                                        | 774.7 | %



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##### Table of Contents

Research and development expenses consisted primarily of salaries and related personnel expenses, fees paid to
consultants and outside service providers, and material costs related to the design, development, testing and enhancement of our products.



SALES AND MARKETING



In April 2003, we terminated all remaining sales and marketing personnel and discontinued all sales and marketing activities. We will not incur sales and marketing expenses in the future.



|                                                                   |  |                                                        |       |  
|------------------------------------------------------------------ |  | ------------------------------------------------------ | ----- | -
|                                                                   |  | For the period fromJanuary 1, 2003 toNovember 11, 2003 |      
|                                                                   |  | ($ in thousands)                                       |      
|Sales and marketing expenses, net of non-cash compensation expense |  | $                                                      | 1,562 |  
|Percentage of total revenues                                       |  |                                                        | 211.1 | %



Sales and marketing expenses consisted
primarily of salaries, commissions and related expenses for personnel engaged in marketing, sales and customer support functions.



GENERAL AND ADMINISTRATIVE



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



|                                                                          |  |                                                        |       |  
|------------------------------------------------------------------------- |  | ------------------------------------------------------ | ----- | -
|                                                                          |  | For the period fromJanuary 1, 2003 toNovember 11, 2003 |      
|                                                                          |  | ($ in thousands)                                       |      
|General and administrative expenses, net of non-cash compensation expense |  | $                                                      | 6,241 |  
|Percentage of total revenues                                              |  |                                                        | 843.4 | %



General and administrative expenses
consisted primarily of salaries and related expenses for executive, finance and administrative personnel, professional fees and other general corporate expenses.



AMORTIZATION OF DEFERRED STOCK COMPENSATION



In connection with the adoption of the liquidation basis of accounting, deferred stock compensation was written down to its net realizable value of zero. We amortized
deferred stock compensation of approximately $192,000 in the period from January 1, 2003 to November 11, 2003.



PROVISION FOR LOSS ON OPERATING LEASE



During
fiscal 2001, we recorded a $2.7 million provision for estimated losses, net of estimated sub-lease income, on our headquarters facility operating lease, which had an original expiration date in June 2010. The provision relates to the portion of our
headquarters facility that we intended to sublease at prevailing market rates, which were less than the rates that we were obligated to pay under the lease.



In April 2003, we entered into an agreement to restructure our lease agreement for our headquarters facility in Santa Clara, California. The previous lease covered
approximately 62,500 square feet of facilities and expired in June 2010, and we had remaining rent obligations of approximately $32.0 million. The restructuring, effective May 1, 2003, reduced our facilities commitment to approximately 31,000 square
feet and shortened the lease term to the end of 2003. Pursuant to the agreement, in April 2003, we made a lump sum cash payment of approximately $14.2 million, which included prepaid rent through December 2003, the remaining facilities commitment
under the restructured lease. In connection with the lease restructuring agreement, we recorded a reversal of



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##### Table of Contents

the remaining balance in the accrual for loss on operating lease of $1.3 million, which was recorded as a reduction to operating expenses the period from
January 1, 2003 to November 11, 2003.



INTEREST INCOME AND OTHER, NET



Interest income and other, net consisted primarily of income from our cash
investments, and to a lesser extent the net gain or loss from foreign currency translation gains and losses and net losses on disposal of property and equipment. We had interest income and other, net of $2.2 million for the period from January 1,
2003 to November 11, 2003.



INCOME TAX EXPENSE



Income tax expense of $208,000 in the period from January 1, 2003 to November 11, 2003 was
attributable to state and foreign tax.



LIQUIDITY AND CAPITAL RESOURCES



As of December 31, 2004, net assets in liquidation totaled $917,000,
consisting of $1.2 million in cash and cash equivalents partially offset by $220,000 of estimated costs to be incurred during liquidation, and $20,000 of other current liabilities and accrued expenses. 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, 2004, 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.



During the period from January 1, 2003 to November 11, 2003, we used $27.6 million in operating activities, primarily due to our net loss of $22.7 million, an increase in prepaid expenses and other current assets of
$2.1 million related primarily to a prepayment of premiums for a six-year run-off policy for directors and officers insurance coverage, decreases in other accrued liabilities of $1.4 million, other long-term liabilities of $1.6 million, and accounts
payable of $505,000, partially offset by non-cash charges. Non-cash charges consisted primarily of $655,000 of asset impairment charges and depreciation and amortization of $417,000.



Net cash provided by investing activities for the period from January 1, 2003 to November 11, 2003 was $111.8 million, primarily due to
proceeds from sales and maturities of available-for-sale investments of $109.1 million, the release of $3.6 million of restricted cash in connection with the lease restructuring agreements in April 2003, net of purchases of available-for-sale
investments in the amount of $1.3 million.



Net cash provided by financing
activities for the period from January 1, 2003 to November 11, 2003 was $728,000, primarily due to proceeds from stock option exercises, partially offset by treasury stock purchases totaling $734,000. Our stock repurchase program was terminated on
August 13, 2003.



We do not have any long-term debt, lease or purchase
obligations at December 31, 2004.



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##### Table of Contents

ITEM 7. FINANCIAL STATEMENTS



The following
consolidated 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
|-- | --------------------



|                                                                                                                                                                |  |            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------
|                                                                                                                                                                |  | PAGE NUMBER
|Report of Independent Registered Public Accounting Firm                                                                                                         |  | 17         
|Consolidated Statements of Net Assets in Liquidation as of December 31, 2004                                                                                    |  | 18         
|Consolidated Statements of Changes in Net Assets in Liquidation for the year ended December 31, 2004 and the period from November 12, 2003 to December 31, 2003 |  | 19         
|Consolidated Statement of Operations for the period from January 1, 2003 to November 11, 2003                                                                   |  | 20         
|Consolidated Statement of Stockholders Equity for the period from January 1, 2003 to November 11, 2003                                                         |  | 21         
|Consolidated Statement of Cash Flows for the period from January 1, 2003 to November 11, 2003                                                                   |  | 22         
|Notes to Consolidated Financial Statements                                                                                                                      |  | 23         
|Supplementary Data (Unaudited)                                                                                                                                  |  | 33         



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



The following financial statement schedule for the period from January 1, 2003 to November 11, 2003 should be read in conjunction with the consolidated
financial statements of Turnstone Systems, Inc. and subsidiaries filed as part of this Annual Report on Form 10-KSB:



| |  |  | Schedule II  Valuation and Qualifying Accounts
| | - |  | -----------------------------------------------



Schedules other than that listed above have been omitted since they are either not required, not applicable, or because the information required is
included in the consolidated financial statements of the notes thereto.



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

Turnstone Systems, Inc.



We have audited the accompanying consolidated statement of net assets in liquidation of Turnstone Systems, Inc. (and
subsidiaries) as of December 31, 2004, the related consolidated statements of changes in net assets in liquidation for the year ended December 31, 2004 and the period from November 12, 2003 to December 31, 2003, and for the related consolidated
statements of operations, stockholders equity and cash flows for the period from January 1, 2003 to November 11, 2003. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial
statement schedule II. These consolidated financial statements and related schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and related schedule
based on our audits.



We conducted our audits 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 audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Turnstone
Systems, Inc. (and subsidiaries) as of December 31, 2004 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.



/s/    KPMG LLP



Mountain View, California

April 14, 2005



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##### Table of Contents

TURNSTONE SYSTEMS, INC.



CONSOLIDATED
STATEMENT OF NET ASSETS IN LIQUIDATION

(IN THOUSANDS)



|                                                  |  |                  |      
|------------------------------------------------- |  | ---------------- | -----
|                                                  |  | December 31,2004
|Assets                                            |  |                  |      
|Cash and cash equivalents                         |  | $                | 1,157
|                                                  |  |                  |      
|Total assets                                      |  | $                | 1,157
|                                                  | 
|Liabilities                                       |  |                  |      
|Estimated costs to be incurred during liquidation |  | $                | 220  
|Other current liabilities and accrued expenses    |  |                  | 20   
|                                                  |  |                  |      
|Total liabilities                                 |  | $                | 240  
|                                                  |  |                  |      
|Net assets in liquidation                         |  | $                | 917  
|                                                  |  |                  |      



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

TURNSTONE SYSTEMS, INC.



CONSOLIDATED
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION

(IN THOUSANDS)



|                                                 |  |                                     |         |   |                                                          |   |        |  
|------------------------------------------------ |  | ----------------------------------- | ------- | - | -------------------------------------------------------- | - | ------ | -
|                                                 |  | For the year endedDecember 31, 2004 |         |   | For the period fromNovember 12, 2003to December 31, 2003 |  
|Net assets in liquidation at beginning of period |  | $                                   | 11,215  |   |                                                          | $ | 11,216 |  
|Proceeds from licensing of intellectual property |  |                                     | 275     |   |                                                          |   | 137    |  
|Adjust assets and liabilities to fair value      |  |                                     | 208     |   |                                                          |   |        |  
|Distributions to stockholders                    |  |                                     | (10,781 | ) |                                                          |   | (138   | )
|                                                 |  |                                     |         |   |                                                          |   |        |  
|Net assets in liquidation at end of period       |  | $                                   | 917     |   |                                                          | $ | 11,215 |  
|                                                 |  |                                     |         |   |                                                          |   |        |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

TURNSTONE SYSTEMS, INC.



CONSOLIDATED
STATEMENTS OF OPERATIONS (GOING CONCERN BASIS)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)



|                                                                                                           |  |                                                     |         |  
|---------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------- | ------- | -
|                                                                                                           |  | For theperiod fromJanuary 1,2003 ToNovember 11,2003 |        
|Net revenues:                                                                                              |  |                                                     |         |  
|Product revenue                                                                                            |  | $                                                   | 586     |  
|Service revenue                                                                                            |  |                                                     | 154     |  
|                                                                                                           |  |                                                     |         |  
|Total net revenues                                                                                         |  |                                                     | 740     |  
|                                                                                                           | 
|Cost of revenues:                                                                                          |  |                                                     |         |  
|Cost of product revenue                                                                                    |  |                                                     | 10      |  
|Cost of service revenue                                                                                    |  |                                                     |        |  
|Write-down of inventory                                                                                    |  |                                                     |        |  
|Provision for purchase commitments                                                                         |  |                                                     |        |  
|                                                                                                           |  |                                                     |         |  
|Total cost of revenues                                                                                     |  |                                                     | 10      |  
|                                                                                                           | 
|Gross profit                                                                                               |  |                                                     | 730     |  
|                                                                                                           | 
|Operating expenses:                                                                                        |  |                                                     |         |  
|Research and development (exclusive of non-cash compensation expense of $65)                               |  |                                                     | 5,733   |  
|Sales and marketing (exclusive of non-cash compensation expense of $19)                                    |  |                                                     | 1,562   |  
|General and administrative (exclusive of non-cash compensation expense of $108)                            |  |                                                     | 6,241   |  
|Amortization and write-off of goodwill and intangible assets                                               |  |                                                     |        |  
|Amortization of deferred stock compensation                                                                |  |                                                     | 192     |  
|Lease termination penalty, net                                                                             |  |                                                     | 11,377  |  
|Provision for (recovery of) loss on operating lease                                                        |  |                                                     | (1,276  | )
|Asset impairment charge                                                                                    |  |                                                     | 655     |  
|                                                                                                           |  |                                                     |         |  
|Total operating expenses                                                                                   |  |                                                     | 24,484  |  
|                                                                                                           |  |                                                     |         |  
|Operating loss                                                                                             |  |                                                     | (23,754 | )
|Other income:                                                                                              |  |                                                     |         |  
|Litigation settlement cost                                                                                 |  |                                                     | (897    | )
|Interest income and other, net                                                                             |  |                                                     | 2,230   |  
|                                                                                                           |  |                                                     |         |  
|Total other income                                                                                         |  |                                                     | 1,333   |  
|                                                                                                           |  |                                                     |         |  
|Loss before income tax                                                                                     |  |                                                     | (22,421 | )
|                                                                                                           | 
|Income tax expense                                                                                         |  |                                                     | 208     |  
|                                                                                                           |  |                                                     |         |  
|Net loss                                                                                                   |  | $                                                   | (22,629 | )
|                                                                                                           |  |                                                     |         |  
|Basic and diluted net loss per share of common stock                                                       |  | $                                                   | (0.36   | )
|                                                                                                           |  |                                                     |         |  
|Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share |  |                                                     | 62,943  |  
|                                                                                                           |  |                                                     |         |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

TURNSTONE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(GOING CONCERN BASIS)

(IN THOUSANDS)



|                                                                              |  |                            |  |              |   |                |        |   |                          |   |        |                           |        |  |                                     |         |   |                                      |   |          |                          |  |   |      |   |  |   |      |   |  |   |          |   |  |   |          |  
|----------------------------------------------------------------------------- |  | -------------------------- |  | ------------ | - | -------------- | ------ | - | ------------------------ | - | ------ | ------------------------- | ------ |  | ----------------------------------- | ------- | - | ------------------------------------ | - | -------- | ------------------------ |  | - | ---- | - |  | - | ---- | - |  | - | -------- | - |  | - | -------- | -
|                                                                              |  | ConvertiblePreferred Stock |  | Common Stock |   | Treasury Stock |        |   | AdditionalPaid-InCapital |   |        | DeferredStockCompensation |        |  | AccumulatedOtherComprehensiveIncome |         |   | RetainedEarnings(AccumulatedDeficit) |   |          | TotalStockholdersEquity | 
|                                                                              |  | Shares                     |  | Amount       |   | Shares         |        |   | Amount                   |   | Shares |                           | Amount |  |                                     |         |   |                                      |  
|Balance at January 1, 2003                                                    |  |                           |  | $            |  |                | 65,884 |   |                          | $ | 66     |                           | 3,128  |  | $                                   | (9,896  | ) |                                      | $ | 311,498  |                          |  | $ | (425 | ) |  | $ | 424  |   |  | $ | (88,720  | ) |  | $ | 212,947  |  
|Issuance of common stock pursuant to stock plans to employees and consultants |  |                           |  |              |  |                | 928    |   |                          |   | 1      |                           |       |  |                                     |        |   |                                      |   | 1,466    |                          |  |   |     |   |  |   |     |   |  |   |         |   |  |   | 1,467    |  
|Repurchases and retirement of common stock                                    |  |                           |  |              |  |                | (24    | ) |                          |   |       |                           |       |  |                                     |        |   |                                      |   | (5       | )                        |  |   |     |   |  |   |     |   |  |   |         |   |  |   | (5       | )
|Deferred stock compensation                                                   |  |                           |  |              |  |                |       |   |                          |   |       |                           |       |  |                                     |        |   |                                      |   | (220     | )                        |  |   | 220  |   |  |   |     |   |  |   |         |   |  |   |         |  
|Amortization of deferred stock compensation                                   |  |                           |  |              |  |                |       |   |                          |   |       |                           |       |  |                                     |        |   |                                      |   |         |                          |  |   | 192  |   |  |   |     |   |  |   |         |   |  |   | 192      |  
|Purchases of treasury stock                                                   |  |                           |  |              |  |                |       |   |                          |   |       |                           | 293    |  |                                     | (734    | ) |                                      |   |         |                          |  |   |     |   |  |   |     |   |  |   |         |   |  |   | (734     | )
|Declared distributions to stockholders                                        |  |                           |  |              |  |                |       |   |                          |   |       |                           |       |  |                                     |        |   |                                      |   | (175,527 | )                        |  |   |     |   |  |   |     |   |  |   |         |   |  |   | (175,527 | )
|Comprehensive loss:                                                           |  |                            |  |              |   |                |        |   |                          |   |        |                           |        |  |                                     |         |   |                                      |   |          |                          |  |   |      |   |  |   |      |   |  |   |          |   |  |   |          |  
|Change in unrealized gain on available-for-sale securities                    |  |                           |  |              |  |                |       |   |                          |   |       |                           |       |  |                                     |        |   |                                      |   |         |                          |  |   |     |   |  |   | (424 | ) |  |   |         |   |  |   | (424     | )
|Net loss                                                                      |  |                           |  |              |  |                |       |   |                          |   |       |                           |       |  |                                     |        |   |                                      |   |         |                          |  |   |     |   |  |   |     |   |  |   | (22,629  | ) |  |   | (22,629  | )
|                                                                              |  |                            |  |              |   |                |        |   |                          |   |        |                           |        |  |                                     |         |   |                                      |   |          |                          |  |   |      |   |  |   |      |   |  |   |          |   |  |   |          |  
|Total comprehensive loss                                                      |  |                           |  |              |  |                |       |   |                          |   |       |                           |       |  |                                     |        |   |                                      |   |         |                          |  |   |     |   |  |   |     |   |  |   |         |   |  | $ | (23,053  | )
|                                                                              |  |                            |  |              |   |                |        |   |                          |   |        |                           |        |  |                                     |         |   |                                      |   |          |                          |  |   |      |   |  |   |      |   |  |   |          |   |  |   |          |  
|Balance at November 11, 2003                                                  |  |                           |  | $            |  |                | 66,788 |   |                          | $ | 67     |                           | 3,421  |  | $                                   | (10,630 | ) |                                      | $ | 137,212  |                          |  | $ | (13  | ) |  | $ |     |   |  | $ | (111,349 | ) |  | $ | 15,287   |  
|                                                                              |  |                            |  |              |   |                |        |   |                          |   |        |                           |        |  |                                     |         |   |                                      |   |          |                          |  |   |      |   |  |   |      |   |  |   |          |   |  |   |          |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

TURNSTONE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (GOING CONCERN BASIS)

(IN THOUSANDS)



|                                                                            |  |                                                     |          |  
|--------------------------------------------------------------------------- |  | --------------------------------------------------- | -------- | -
|                                                                            |  | For theperiod fromJanuary 1,2003 ToNovember 11,2003 |         
|Operating activities                                                        |  |                                                     |          |  
|                                                                            | 
|Net loss                                                                    |  | $                                                   | (22,629  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                                     |          |  
|Asset impairment charge                                                     |  |                                                     | 655      |  
|Depreciation and amortization                                               |  |                                                     | 417      |  
|Stock compensation expense                                                  |  |                                                     | 192      |  
|Common stock issued for services                                            |  |                                                     | 17       |  
|Provision for doubtful accounts and sales returns                           |  |                                                     | (5       | )
|Loss on disposal of property and equipment                                  |  |                                                     | 31       |  
|Effect of changes in foreign currency                                       |  |                                                     | (53      | )
|Changes in operating assets and liabilities:                                |  |                                                     |          |  
|Accounts receivable                                                         |  |                                                     | 319      |  
|Income tax receivable                                                       |  |                                                     | (12      | )
|Prepaid expenses and other current assets                                   |  |                                                     | (2,073   | )
|Accounts payable                                                            |  |                                                     | (505     | )
|Accrued compensation and benefits                                           |  |                                                     | (781     | )
|Other accrued liabilities                                                   |  |                                                     | (1,409   | )
|Other long-term liabilities                                                 |  |                                                     | (1,576   | )
|Deferred revenue                                                            |  |                                                     | (151     | )
|                                                                            |  |                                                     |          |  
|Net cash used in operating activities                                       |  |                                                     | (27,563  | )
|                                                                            | 
|Investing activities                                                        |  |                                                     |          |  
|Proceeds from disposal of property and equipment                            |  |                                                     | 321      |  
|Purchases of available-for-sale investments, net                            |  |                                                     | (1,250   | )
|Proceeds from sales and maturities of available-for-sale investments        |  |                                                     | 109,078  |  
|Decrease in restricted cash                                                 |  |                                                     | 3,639    |  
|                                                                            |  |                                                     |          |  
|Net cash provided by investing activities                                   |  |                                                     | 111,788  |  
|                                                                            | 
|Financing activities                                                        |  |                                                     |          |  
|Net proceeds from issuance of common stock                                  |  |                                                     | 1,462    |  
|Purchases of treasury stock                                                 |  |                                                     | (734     | )
|                                                                            |  |                                                     |          |  
|Net cash provided by financing activities                                   |  |                                                     | 728      |  
|                                                                            | 
|Effect of exchange rate changes on cash and cash equivalents                |  |                                                     | 8        |  
|                                                                            |  |                                                     |          |  
|Net increase in cash and cash equivalents                                   |  |                                                     | 84,961   |  
|Cash and cash equivalents at beginning of period                            |  |                                                     | 103,358  |  
|                                                                            |  |                                                     |          |  
|Cash and cash equivalents at end of period                                  |  | $                                                   | 188,319  |  
|                                                                            |  |                                                     |          |  
|Supplemental disclosures of cash flow information:                          |  |                                                     |          |  
|Cash paid for income tax                                                    |  | $                                                   | 254      |  
|                                                                            |  |                                                     |          |  
|Noncash investing and financing activities:                                 |  |                                                     |          |  
|Distributions to stockholders declared but not paid                         |  | $                                                   | (175,527 | )
|Change in unrealized gain on available-for-sale securities                  |  | $                                                   | (424     | )
|Deferred stock compensation                                                 |  | $                                                   | (220     | )



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

TURNSTONE SYSTEMS, INC.



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



The consolidated financial statements for the period January 1, 2003 to
November 11, 2003 were prepared on the going concern basis of accounting, which contemplates realization of assets and satisfaction of liabilities in the normal course of business. As a result of the stockholders approval of the Plan and the
imminent nature of the liquidation, the Company adopted the liquidation basis of accounting effective November 11, 2003. This basis of accounting is considered appropriate when, among other things, liquidation of a company is probable and the net
realizable value of assets are reasonably determinable. Under this basis of accounting, assets are valued at their estimated net realizable values and liabilities are stated at their estimated settlement amounts.



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



|                                                          |  |                |        |  
|--------------------------------------------------------- |  | -------------- | ------ | -
|                                                          |  | (In thousands) |       
|Adjust assets and liabilities to fair value:              |  |                |        |  
|Prepaid insurance expenses                                |  | $              | (2,421 | )
|Prepaid rent expenses                                     |  |                | (272   | )
|All other, net                                            |  |                | (4     | )
|                                                          |  |                |        |  
|Total adjustments of assets and liabilities to fair value |  | $              | (2,697 | )
|                                                          | 
|Accrued estimated net costs during liquidation:           |  |                |        |  
|Costs to be incurred during liquidation period            |  |                | (1,063 | )
|Future interest income                                    |  |                | 189    |  
|                                                          |  |                |        |  
|Total estimated net costs during liquidation              |  | $              | (874   | )
|                                                          | 
|Accrued estimated litigation settlement costs             |  | $              | (500   | )
|                                                          |  |                |        |  
|Total adjustments                                         |  | $              | (4,071 | )
|                                                          |  |                |        |  



Basis of Consolidation



The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries located in Australia, Brazil, France, Germany, Hong Kong, New Zealand, Singapore, and the United Kingdom. All significant intercompany accounts and transactions have been eliminated in consolidation.



23



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##### Table of Contents

Foreign Currency Translation



The functional currency of the Companys subsidiaries is the U.S. dollar. The financial statements of the subsidiaries are remeasured
into U.S. dollars for the purpose of consolidation using the historical exchange rates in effect at the date of the transactions. Remeasurement and foreign currency translation gains and losses are included in interest income and other, net and have
not been material for all periods presented.



Use of Estimates



The preparation of consolidated 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 period. Actual results could differ from those estimates.



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, 2004 consisted primarily of money market funds.



Foreign Currency Risk



The Company developed its products in the United States and marketed its products in the United States, Canada, Europe, Asia and Asia
Pacific. Substantially all revenues and expenses are denominated in United States dollars. The Company currently conducts only minimal transactions in any foreign currencies and, therefore, does not engage in any foreign exchange hedging activities.



Revenue Recognition



Prior to approval of the Plan, the Company recognized revenues from product sales based upon
shipment of products pursuant to customer purchase orders, assuming that the price to the customer was fixed or determinable and that collectibility of the resulting receivable was reasonably assured. When the arrangement with the customer included
future obligations for which fair value did not exist or was subject to obtaining customer acceptance, revenues were recognized when those obligations were met or customer acceptance was received. When an arrangement with the customer included
obligations to deliver unspecified additional products in the future, revenues were recognized ratably over the obligation period. When collectibility of the resulting receivable was not reasonably assured based on the Companys assessment of
the customers financial condition, revenues were recognized upon customer payment. The Company generally did not allow for product returns, however the Company maintained a reserve for estimated potential returns based on a historical minimal
level of returns. Revenues from services and support provided under the Companys maintenance programs were deferred based upon the fair value of the program and recognized on a straight-line basis over the period of the contract. Revenues from
consulting and training were deferred based on the fair value of the services, and recognized when such services were completed.



Revenues from transactions involving the Companys software application products were recognized provided that a purchase order had been received, the software and
related documentation had been shipped, collection of the resulting receivable was deemed probable, and the fee was fixed or determinable.



Research and Development Costs



Costs incurred in the research and development of new products and an enhancement to existing products were expensed as incurred until the product was completed, tested
and was ready for commercial manufacturing. Hardware and software development projects were completed concurrent with the establishment of commercial manufacturing and, accordingly, no costs were capitalized.



Advertising Costs



The Company expensed advertising costs as incurred.



Stock-Based Compensation



The Company accounted for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Beginning in fiscal 2003, the Company adopted the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure,an amendment to SFAS No. 123, Accounting for Stock-Based Compensation. Compensation expense on fixed stock options was based on the difference, if any, on the date of the grant, between the fair value of the Companys
stock and the exercise price of the option. The Company accounted for equity



24



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##### Table of Contents

instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation:



|                                                                                                                           |  |                                                     |         |  
|-------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------- | ------- | -
|                                                                                                                           |  | For theperiod fromJanuary 1,2003 toNovember 11,2003 |        
|Net loss  as reported                                                                                                     |  | $                                                   | (22,629 | )
|Add: Stock-based employee compensation expense included in the reported net loss, net of related tax effects               |  |                                                     | 192     |  
|Deduct: Stock-based employee compensation recovery (expense) using the fair value based method, net of related tax effects |  |                                                     | 13,390  |  
|                                                                                                                           |  |                                                     |         |  
|Pro forma net loss                                                                                                         |  | $                                                   | (9,047  | )
|                                                                                                                           |  |                                                     |         |  
|Basic and diluted net loss per share                                                                                       |  |                                                     |         |  
|As reported                                                                                                                |  | $                                                   | (0.36   | )
|                                                                                                                           |  |                                                     |         |  
|Pro forma                                                                                                                  |  | $                                                   | (0.14   | )
|                                                                                                                           |  |                                                     |         |  



No options were granted under employee
stock option plans during the period from January 1, 2003 to November 11, 2003. The fair value of purchase rights granted under the employee stock purchase plan is estimated on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:



|                        |  |                                                     |  
|----------------------- |  | --------------------------------------------------- | -
|                        |  | For theperiod fromJanuary 1,2003 toNovember 11,2003 |  
|Dividend yield          |  | None                                                |  
|Risk-free interest rate |  | 1.49                                                | %
|Expected volatility     |  | 1.07                                                |  
|Expected life           |  | 6 months                                            |  



The weighted-average per share fair
value of the purchase rights granted under the employee stock purchase plan during 2003 was $1.29.



Net Loss Per Share



Basic and diluted
net loss per share have been computed in accordance with SFAS No. 128, Earnings Per Share. Basic net loss per share is computed using the weighted-average number of outstanding shares of common stock excluding the weighted-average number of
shares of restricted stock subject to repurchase. Diluted net loss per share is computed using the weighted-average number of shares of common stock outstanding and, when dilutive, shares of restricted common stock subject to repurchase, potential
shares of common stock from options and warrants using the treasury-stock method, and from convertible securities using the as-if converted basis.



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



|                                                                                |  |                                                     |         |  
|------------------------------------------------------------------------------- |  | --------------------------------------------------- | ------- | -
|                                                                                |  | For theperiod fromJanuary 1,2003 toNovember 11,2003 |        
|Net loss                                                                        |  | $                                                   | (22,629 | )
|                                                                                |  |                                                     |         |  
|Basic and diluted:                                                              |  |                                                     |         |  
|Weighted-average shares of common stock outstanding                             |  |                                                     | 62,963  |  
|Less: Weighted-average shares subject to repurchase                             |  |                                                     | (20     | )
|                                                                                |  |                                                     |         |  
|Weighted-average shares used in computing basic and diluted net loss per shares |  |                                                     | 62,943  |  
|                                                                                |  |                                                     |         |  
|Basic and diluted net loss per share                                            |  | $                                                   | (0.36   | )
|                                                                                |  |                                                     |         |  



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##### Table of Contents

Potential shares of common stock, which have been excluded from the determination of net earnings per share for the
period from January 1, 2003 to November 11, 2003 consisted of 2,051,000 shares issuable under stock options.



Income Taxes



Prior to adoption of the
liquidation basis of accounting, income taxes were computed using an asset and liability approach, which required the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax
consequences of events that had been recognized in the Companys consolidated financial statements or tax returns. The measurement of current and deferred tax assets and liabilities were based on provisions of the enacted tax law; the effects
of future changes in tax laws or rates were not anticipated. The measurement of deferred tax assets was reduced, if necessary, by the amount of any tax benefits that, based on available evidence, were not expected to be realized.



3. Restructuring and Related Costs



During 2003, in connection with its decision to evaluate strategic alternatives and,
ultimately, the Companys adoption of the Plan, the company terminated a total of 73 employees during 2003. Severance and related costs associated with these headcount reductions totaling $948,000 is included in operating expenses for the
period from January 1, 2003 to November 11, 2003.



In January 2003, in an
effort to retain key employees, the Company entered into agreements with its officers and certain employees which entitled such officers and employees to receive certain retention bonus payments upon the completion of providing employment services
to the Company for a specified period of time. Retention bonuses of $1.4 million were earned and paid during the period from January 1, 2003 to November 11, 2003. In October, the retention agreements for the Companys two remaining employees
expired and the Company paid the earned retention bonuses to these employees.



Restructuring and related charges consisted of the following (in thousands):



|                                |  |                          |      |   |                |   |        |                                   |  |   |                              |   |       |   |   |  |   |        |  
|------------------------------- |  | ------------------------ | ---- | - | -------------- | - | ------ | --------------------------------- |  | - | ---------------------------- | - | ----- | - | - |  | - | ------ | -
|                                |  | Severanceandrelatedcosts |      |   | Retentionbonus |   |        | Impairmentof propertyandequipment |  |   | Impairmentofintangibleassets |   | Total |  
|Balance at January 1, 2003      |  | $                        |     |   |                | $ |       |                                   |  | $ |                             |   |       | $ |  |  | $ |       |  
|Restructuring costs during 2003 |  |                          | 948  |   |                |   | 1,430  |                                   |  |   | 655                          |   |       |   |  |  |   | 3,033  |  
|Non-cash charges                |  |                          |     |   |                |   |       |                                   |  |   | (655                         | ) |       |   |  |  |   | (655   | )
|Cash payments                   |  |                          | (948 | ) |                |   | (1,430 | )                                 |  |   |                             |   |       |   |  |  |   | (2,378 | )
|                                |  |                          |      |   |                |   |        |                                   |  |   |                              |   |       |   |   |  |   |        |  
|Balance at November 11, 2003    |  | $                        |     |   |                | $ |       |                                   |  | $ |                             |   |       | $ |  |  | $ |       |  
|                                |  |                          |      |   |                |   |        |                                   |  |   |                              |   |       |   |   |  |   |        |  



There were no restructuring related
activities during the year ended December 31, 2004 or for the period from November 12, 2003 to December 31, 2003.



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##### Table of Contents

6. Income Taxes



The provision (benefit) for income taxes is based upon loss before income taxes as follows (in thousands):



|         |  |                                                      |         |  
|-------- |  | ---------------------------------------------------- | ------- | -
|         |  | For the periodfrom January 1,2003 toNovember 11,2003 |        
|Domestic |  | $                                                    | (22,421 | )
|Foreign  |  |                                                      |        |  
|         |  |                                                      |         |  
|         |  | $                                                    | (22,421 | )
|         |  |                                                      |         |  



Income taxes were comprised of the
following (in thousands):



|                           |  |                                                     |    
|-------------------------- |  | --------------------------------------------------- | ---
|                           |  | For the periodfrom January 1,2003 toNovember 112003
|Current:                   |  |                                                     |    
|Federal                    |  | $                                                   |   
|State                      |  |                                                     | 208
|Foreign                    |  |                                                     |   
|                           |  |                                                     |    
|Total current tax expense  |  |                                                     | 208
|Deferred:                  |  |                                                     |    
|Federal                    |  |                                                     |   
|                           |  |                                                     |    
|Total deferred tax expense |  |                                                     |   
|Total income tax expense   |  | $                                                   | 208
|                           |  |                                                     |    



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The 2002 and 2001 income tax expense differed from the amounts computed by applying the U.S federal income tax rate of
34% to pretax income as a result of the following (in thousands):



|                                                 |  |                                                      |        |  
|------------------------------------------------ |  | ---------------------------------------------------- | ------ | -
|                                                 |  | For the periodfrom January 1,2003 toNovember 11,2003 |       
|Federal recovery at statutory rate               |  | $                                                    | (7,623 | )
|State taxes, net of federal income tax benefit   |  |                                                      | 208    |  
|Permanent differences relating to stock exercise |  |                                                      | 65     |  
|Net operating losses and credits not benefited   |  |                                                      | 7,554  |  
|Other differences                                |  |                                                      | 4      |  
|                                                 |  |                                                      |        |  
|Total income tax expense                         |  | $                                                    | 208    |  
|                                                 |  |                                                      |        |  



The tax effects of temporary
differences that give rise to significant portions of deferred tax assets are as follows (in thousands):



|                                                  |  |                       |         |  
|------------------------------------------------- |  | --------------------- | ------- | -
|                                                  |  | As ofDecember 31,2003 |        
|Deferred tax assets:                              |  |                       |         |  
|Estimated litigation settlement costs             |  | $                     | 340     |  
|Estimated costs to be incurred during liquidation |  |                       | 275     |  
|Other accruals and reserves                       |  |                       | 101     |  
|Goodwill, foreign branch                          |  |                       | 2,380   |  
|Net operating loss carryforwards                  |  |                       | 39,499  |  
|Credit carryforwards                              |  |                       | 8,682   |  
|                                                  |  |                       |         |  
|Total gross deferred tax assets                   |  |                       | 51,277  |  
|Valuation allowance                               |  |                       | (51,277 | )
|                                                  |  |                       |         |  
|Total deferred tax assets                         |  | $                     |        |  
|                                                  |  |                       |         |  



The ultimate realization of deferred
tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers projected future taxable income and tax planning strategies in making this assessment.
Based on the Companys adoption of a plan of complete liquidation and dissolution in November 2003, it believes it is more likely than not that it will not realize the benefits of these deductions and accordingly, a full valuation allowance has
been established against the net deferred tax assets. The total valuation allowance increased by $3,708,000 for the period from January 1, 2003 to November 11, 2003.



As of December 31, 2004, the Company has reported net operating loss carryforwards of approximately $110,200,000 and $51,300,000 for federal
and California income tax purposes, respectively. The federal net operating loss carryforwards expire in various tax years through 2023 and California net operating loss carryforwards expire in various tax years through 2013. In addition, the
Company has research and development credits of approximately $5,900,000 for federal purposes and $4,100,000 for state purposes. The federal R&D credits will expire in various tax years through 2022, and the California R&D credits can be
carried forward indefinitely. Also, the Company has $115,000 of manufacturers investment tax credit carryforward for California purposes, which will expire beginning in 2011.



Federal and California tax laws impose substantial restrictions on the utilization of net operating loss in the event of an ownership
change for tax purpose, as defined in Section 382 of the Internal Revenue Code. The Company has not yet determined if an ownership change has occurred. If such ownership change has occurred, utilization of the net operating losses will be
subject to an annual limitation in future years.



8. Leases



During fiscal 2001, the Company recorded a $2.7 million provision for estimated losses on an
operating lease. The provision related to the portion of the Companys leased headquarters facility that it intended to sublease at prevailing market rates, which were less than the rates that the Company was obligated to pay under a
contractual lease commitment. The decision to sublease a portion of the Companys facilities was made as a result of reductions in operations and workforce during 2001, which resulted in excess



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facilities. In April 2003, the Company entered into an agreement, effective May 1, 2003, that restructured the operating lease associated with its
headquarters facility that previously expired June 2010. Pursuant to the agreement, the Company made a payment of $14.2 million, which included prepayment of rent through December 31, 2003, for approximately 31,000 square feet of the headquarters
facility and a charge to terminate the remainder of the original lease commitment. A lease termination penalty of $11.4 million is included in operating expenses for the period from January 1, 2003 to November 11, 2003. Additionally, the remaining
balance in the accrual for loss on operating leases as of the effective date of the lease restructuring of $1.3 million was record as a reduction to operating expenses in the period from January 1, 2003 to November 11, 2003. As of December 31, 2004,
the Company has no future facilities lease commitments.



9. Warranty
Obligations and Other Guarantees



Warranty Obligations



For products sold on or after May 1, 2003, the Company provided no warranty coverage. For
products sold prior to May 1, 2003, the Company provided limited warranties on certain of its products for periods of up to one year. The Company recognized warranty reserves when products were shipped based upon an estimate of total warranty costs,
and such reserves were included in accrued liabilities. The estimate of such costs was based upon historical and anticipated requirements. A reconciliation of the changes in accrued warranty for the period from January 1, 2003 to November 11, 2003
follows (in thousands):



|                 |  |                                       |    |                                   |   |                         |  |                                  |   |                                       |   |    |  |   |  
|---------------- |  | ------------------------------------- | -- | --------------------------------- | - | ----------------------- |  | -------------------------------- | - | ------------------------------------- | - | -- |  | - | -
|                 |  | AccruedWarranty asof December 31,2002 |    | Paymentsmade underwarrantyprogram |   | Productwarrantiesissued |  | Deductions forchange inestimates |   | AccruedWarranty asof November 11,2003
|Warranty accrual |  | $                                     | 11 |                                   | $ |                        |  | $                                |  |                                       | $ | 11 |  | $ | 



There have been no changes in accrued
warranty during the year ended December 31, 2004.



Indemnification
Agreements



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



10. Litigation



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



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opposition was filed on September 27, 2002. On February 19, 2003, the court issued an order denying the motions to dismiss with respect to substantially all
of the plaintiffs claims, including those against us. In February 2005, the court granted preliminary approval for a proposed settlement and release of claims against the issuer defendants, including Turnstone. The settlement is still subject
to a number of conditions, including final court approval. 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, 2003.



11. Segment Information



In accordance with the requirements of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, the Company has determined that it did not have separately reportable operating segments, and operated in one principal business segment across domestic and international markets.



Information regarding geographic areas for the period from January 1, 2003 to November 11,
2003 is as follows (in thousands):



|                   |  |                                                        |    
|------------------ |  | ------------------------------------------------------ | ---
|                   |  | For the period fromJanuary 1, 2003 toNovember 11, 2003
|Revenues:          |  |                                                        |    
|United States      |  | $                                                      | 267
|International      |  |                                                        | 473
|                   |  |                                                        |    
|Total              |  | $                                                      | 740
|                   |  |                                                        |    
|Long-lived assets: |  |                                                        |    
|United States      |  | $                                                      |   
|International      |  |                                                        |   
|                   |  |                                                        |    
|Total              |  | $                                                      |   
|                   |  |                                                        |    



Revenues are attributed to countries
based on the location of the customers.



11. Stockholders Equity



1998 and 2000 Stock Plans



In January 1998, the 1998 Stock Plan was adopted by the Board and subsequently received
stockholder approval. Upon completion of the Companys initial public offering, the 1998 Stock Plan was terminated, no further option grants were made under the 1998 Stock Plan, and all shares reserved but not yet issued under the 1998 Stock
Plan were made available for grant under the 2000 Stock Plan. The 1998 Stock Plan permitted the Company to grant employees, outside directors, and consultants qualified stock options, nonstatutory stock options, or stock purchase rights to purchase
shares of the Companys common stock. Options generally vested 25% with respect to the number granted upon the first anniversary date of the option grant and the remainder vested in equal monthly installments over the 36 months thereafter.
Options were exercisable immediately. Shares issued upon exercise of non-vested stock options were subject to the Companys right to repurchase at the original exercise price. The Companys repurchase right lapsed in accordance with the
vesting schedule for the stock options. At December 31, 2003, no shares resulting from the early exercise of options were subject to repurchase.



The 2000 Stock Plan was adopted by the Board of Directors in November 1999 and became effective in February 2000. The 2000 Stock Plan provided for the grant of incentive
stock options, nonstatutory stock options, and stock purchase rights to employees, directors and consultants. The plan also provided for nondiscretionary grants of nonstatutory options to outside directors. A total of 10,575,752 shares of common
stock were reserved for issuance under the 2000 Stock Plan, including 575,752 shares available for grant under the 1998 Stock Plan that were transferred to the 2000 Stock Plan. In January 2001, the Board of Directors authorized an amendment to
increase the number of shares of common stock reserved for issuance under the 2000 Stock Plan from 10,575,752 shares to 14,513,105 shares. Options granted under the 2000 Stock Plan were exercisable upon vesting. Options granted under the 2000 Stock
Plan generally vested 25% with respect to the number granted upon the first anniversary date of the option grant and the remainder vested in equal monthly installments over the 36 months thereafter.



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The 2000 Stock Plan was terminated by the Board of Directors on December 4, 2003, when the Company filed its Certificate
of Dissolution with the office of the Secretary of State of the State of Delaware, de-listed its stock from NASDAQ and closed its transfer books.



2000 Nonstatutory Stock Plan



The 2000 Nonstatutory Stock Plan was adopted by the Board of Directors in August 2000. The 2000 Nonstatutory Stock Plan provided for the grant of nonstatutory stock
options and stock purchase rights to employees and consultants. Options granted under the 2000 Nonstatutory Stock Plan generally vested 25% with respect to the number granted upon the first anniversary date of the option grant and the remainder
vested in equal monthly installments over the 36 months thereafter. A total of 4,000,000 shares of common stock had been reserved for issuance under the 2000 Nonstatutory Stock Plan.



The 2000 Nonstatutory Stock Plan was terminated by the Board of Directors on December 4, 2003 when the Company filed its Certificate of
Dissolution with the office of the Secretary of State of the State of Delaware, de-listed its stock from NASDAQ and closed its transfer books. As a result, all of the 15,796,000 remaining outstanding options under the 1998 and 2000 Stock Plans and
the 2000 Nonstatutory Stock Plan were cancelled.



A summary of the status of
the Companys Stock Plans is as follows (in thousands, except for per share data):



|                                 |  |                          |   |  |                     |   |  |                               |       |                                      | 
|-------------------------------- |  | ------------------------ | - |  | ------------------- | - |  | ----------------------------- | ----- | ------------------------------------ | 
|                                 |  |                          |   |  | Outstanding Options
|                                 |  | SharesAvailableFor Grant |   |  | Number ofShares     |   |  | Weighted-AverageExercisePrice |       | Weighted-AverageGrant DateFair Value
|Balances as of January 1, 2003   |  | 9,649                    |   |  | 10,237              |   |  |                               | 10.23 |                                      | 
|Exercised                        |  |                         |   |  | (970                | ) |  |                               | 1.62  |                                      | 
|Canceled                         |  | 6,147                    |   |  | (9,267              | ) |  | $                             | 11.14 |                                      | 
|Plan termination                 |  | (15,796                  | ) |  |                    |   |  |                               |       |                                      | 
|                                 |  |                          |   |  |                     |   |  |                               |       |                                      | 
|Balances as of December 31, 2003 |  |                         |   |  |                    |   |  |                               |       |                                      | 
|                                 |  |                          |   |  |                     |   |  |                               |       |                                      | 



There were no stock options
outstanding or exercisable at December 31, 2004 since the Company had terminated its options plans, de-listed its stock and closed its transfer books.



The Company used the intrinsic-value method to account for its stock-based compensation arrangements for employees whereby compensation cost was recognized to the extent
the fair value of the underlying common stock exceeded the exercise price of the stock options at the date of grant. A net reduction of $220,000 in 2003 and $90,000 in 2002 has been recorded for deferred stock compensation due to the cancellations
of options upon employee terminations for which deferred stock compensation was recorded for the excess of the fair value of the common stock underlying the options at the grant date, over the exercise price of options.



These amounts were amortized on an accelerated basis over the vesting period, generally four
years, consistent with the method described in FASB Interpretation No. 28. Amortization of deferred compensation was $ 192,000 for the period from January 1, 2003 to November 11, 2003. There were no options granted in 2004.



2000 Employee Stock Purchase Plan



The 2000 Employee Stock Purchase Plan was adopted by the Board of Directors in November 1999
and became effective in February 2000. A total of 1,000,000 shares of common stock had been reserved for issuance, with an annual increase for subsequent years. In January 2001, the Board of Directors approved an amendment to the Purchase Plan to
increase the number of shares available for issuance thereunder from 1,000,000 shares to 2,500,000 shares. A total of 8,000 shares were issued pursuant to the 2000 Employee Stock Purchase Plan in 2003. The weighted-average purchase price per share
under the Purchase Plan during 2003 was $2.13. The 2000 Employee Stock Purchase Plan provided eligible employees the opportunity to purchase common stock, subject to certain restrictions, through payroll deductions. The purchase price per share was
85% of the fair market value of the common stock on the first day of the applicable offering period or the last day of the applicable purchase period, whichever was lower. The 2000 Employee Stock Purchase Plan was terminated on May 1, 2003.



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Common Stock Repurchase Program



On October 3, 2001, the Board of Directors authorized a stock repurchase program of up to $15 million over the proceeding twelve-month
period. During October 2002, the Board of Directors extended the stock repurchase program authorized in October 2001 for an additional twelve-month period. The stock repurchase program was terminated on August 13, 2003. Under the program, the
Company repurchased 293,000 shares for an aggregate amount of $734,000 in 2003, 1,929,000 shares an aggregate amount of $6.3 million in 2002, and 1,199,000 shares for an aggregate amount of $3.6 million in 2001.



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SUPPLEMENTARY DATA



QUARTERLY RESULTS
OF OPERATIONS

(UNAUDITED)



|                                                    |  |                                         |        |   |                                                     |   |         |               |  |   |        |   |  |   |      |  
|--------------------------------------------------- |  | --------------------------------------- | ------ | - | --------------------------------------------------- | - | ------- | ------------- |  | - | ------ | - |  | - | ---- | -
|                                                    |  | QUARTER ENDED                           |        |   | For theperiod fromOctober 1,2003 toNovember 11,2003 |  
|                                                    |  | March 31,2003                           |        |   | June 30,2003                                        |   |         | Sept. 30,2003 |  |  
|                                                    |  | (in thousands, except per shareamounts) |        |   |                                                     |  
|Consolidated Statement of Operations Data:          |  |                                         |        |   |                                                     |   |         |               |  |   |        |   |  |   |      |  
|Net revenues                                        |  | $                                       | 390    |   |                                                     | $ | 296     |               |  | $ | 52     |   |  | $ | 2    |  
|Cost of revenues                                    |  |                                         | 2      |   |                                                     |   | 1       |               |  |   | 17     |   |  |   | (10  | )
|                                                    |  |                                         |        |   |                                                     |   |         |               |  |   |        |   |  |   |      |  
|Gross profit                                        |  |                                         | 388    |   |                                                     |   | 295     |               |  |   | 35     |   |  |   | 12   |  
|Operating expenses:                                 |  |                                         |        |   |                                                     |   |         |               |  |   |        |   |  |   |      |  
|Research and development                            |  |                                         | 4,363  |   |                                                     |   | 1,370   |               |  |   |       |   |  |   |     |  
|Sales and marketing                                 |  |                                         | 1,219  |   |                                                     |   | 343     |               |  |   |       |   |  |   |     |  
|General and administrative                          |  |                                         | 1,737  |   |                                                     |   | 2,331   |               |  |   | 1,849  |   |  |   | 324  |  
|Amortization of deferred stock compensation         |  |                                         | 124    |   |                                                     |   | 46      |               |  |   | 22     |   |  |   |     |  
|Lease termination penalty, net                      |  |                                         |       |   |                                                     |   | 11,377  |               |  |   |       |   |  |   |     |  
|Provision for (recovery of) loss on operating lease |  |                                         |       |   |                                                     |   | (1,276  | )             |  |   |       |   |  |   |     |  
|Asset impairment charge                             |  |                                         |       |   |                                                     |   | 655     |               |  |   |       |   |  |   |     |  
|                                                    |  |                                         |        |   |                                                     |   |         |               |  |   |        |   |  |   |      |  
|Total operating expenses                            |  |                                         | 7,443  |   |                                                     |   | 14,846  |               |  |   | 1,871  |   |  |   | 324  |  
|                                                    |  |                                         |        |   |                                                     |   |         |               |  |   |        |   |  |   |      |  
|Operating loss                                      |  |                                         | (7,055 | ) |                                                     |   | (14,551 | )             |  |   | (1,836 | ) |  |   | (312 | )
|Litigation settlement                               |  |                                         |       |   |                                                     |   | (920    | )             |  |   |       |   |  |   | 23   |  
|Interest income and other, net                      |  |                                         | 1,013  |   |                                                     |   | 569     |               |  |   | 463    |   |  |   | 185  |  
|Income tax expense (recovery)                       |  |                                         | 25     |   |                                                     |   | 155     |               |  |   | 29     |   |  |   | (1   | )
|                                                    |  |                                         |        |   |                                                     |   |         |               |  |   |        |   |  |   |      |  
|Net loss                                            |  | $                                       | (6,067 | ) |                                                     | $ | (15,057 | )             |  | $ | (1,402 | ) |  | $ | (103 | )
|                                                    |  |                                         |        |   |                                                     |   |         |               |  |   |        |   |  |   |      |  
|Basic net loss per share                            |  | $                                       | (0.10  | ) |                                                     | $ | (0.24   | )             |  | $ | (0.02  | ) |  | $ | 0.00 |  
|                                                    |  |                                         |        |   |                                                     |   |         |               |  |   |        |   |  |   |      |  
|Diluted net loss per share                          |  | $                                       | (0.10  | ) |                                                     | $ | (0.24   | )             |  | $ | (0.02  | ) |  | $ | 0.00 |  
|                                                    |  |                                         |        |   |                                                     |   |         |               |  |   |        |   |  |   |      |  



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



Not applicable.



ITEM 8A. CONTROLS AND PROCEDURES



Evaluation of
Disclosure Controls and Procedures



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



Our significant personnel reductions during 2003 have affected the overall control environment. As of December 31, 2004, there are no employees of the company. One
consultant, Eric S. Yeaman, is the Chief Executive Officer and Chief Financial Officer. However, management does not believe that these personnel reductions have had a significant impact on the effectiveness of the design and operation of the
Companys disclosure controls and procedures.



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Changes in Internal Controls Over Financial Reporting



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



ITEM 8B. OTHER INFORMATION



None.



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PART III



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



Our executive officers and directors and their ages, as of February 1, 2005, are as follows:



|               |  |     |  |                                                              
|-------------- |  | --- |  | -------------------------------------------------------------
|NAME           |  | AGE |  | POSITION(S)                                                  
|Albert Y. Liu  |  | 32  |  | General Counsel, Director of Human Resources and
Director    
|Eric S. Yeaman |  | 34  |  | 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.



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 2004, our board of directors held three 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 met two times in fiscal 2004.



During the 2004 fiscal year, each current board member attended at least 75% of the aggregate of the meetings of the board and of the committees on which he served and held during the period for which he was a board
or committee member, respectively.



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, 2004.



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. This financial code of ethics, which is one of several policies within our code of business conduct, is posted on our website at http://www.turnstone.com.



We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a
provision of this code of ethics by posting such information on our website at the address specified above.



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ITEM 10. EXECUTIVE COMPENSATION



SUMMARY COMPENSATION
TABLE



The following table shows, for the last three fiscal
years, compensation earned for services rendered to Turnstone Systems in all capacities by our Chief Executive Officer, and our other executive officer who was employed by us during fiscal year 2004.



|                                                                      |  |                     |  |                              |  |                       |  |                      |     |  |                            |  |               |       
|--------------------------------------------------------------------- |  | ------------------- |  | ---------------------------- |  | --------------------- |  | -------------------- | --- |  | -------------------------- |  | ------------- | ------
|                                                                      |  | Annual Compensation |  | Long-TermCompensation Awards |  | All OtherCompensation | 
|Name and Principal Positions                                          |  | Year                |  | Salary                       |  | Bonus                 |  | RestrictedStockAward |     |  | SecuritiesUnderlyingOption | 
|Albert Y. Liu General Counsel and Director of Human Resources(1)      |  | 200420032002        |  | 82,500165,006165,006         |  | 124,38555,048        |  |                   |     |  | 200,000                  |  | 85,56319,038 | (4)(5)
|Eric S. Yeaman Chief Executive Officer and Chief Financial Officer(2) |  | 200420032002        |  | 82,500165,006165,006         |  | 124,38553,360        |  | 11,64553,987        | (3) |  | 100,000                  |  | 89,00018,432 | (4)(5)

---

|(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) | In September 2001, Mr. Yeaman purchased 25,000 shares of our common stock at a purchase price of $0.001 per share under a restricted stock purchase agreement. The agreement
contained vesting provisions that give Turnstone Systems the option to repurchase unvested shares at the original purchase price if his service to Turnstone Systems is terminated. 13/18 of the shares vest and are no longer subject to repurchase as
of October 2002, and 1/18 of the remaining shares will vest each month thereafter. At December 31, 2002 and based upon the fair market value of our common stock at that time, the shares were valued at $67,500. Turnstone Systems has never declared or
paid cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Consists of payment for severance upon termination and payment for the officers consulting services after his termination of employment in June 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Consists of payment for accrued and unused vacation benefits.
|--- | -------------------------------------------------------------



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, 2004. 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, 2004.



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 2004.



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



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EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS



In October 2003, we entered into an employment agreement with each of Messrs. Liu and Yeaman. The employment agreement provided that in the
event we terminate the officers employment without cause, the officer will be entitled to receive a severance payment equal to six months of his annual base salary. At the end of June 2004, we terminated the employment of Messrs. Liu and
Yeaman, 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 $125.00.
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 February 1, 2005, 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.



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 February 1, 2005. The number of shares subject to options that each beneficial owner has the right to acquire within 60 days of the February 1, 2005 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 February 1, 2005.



|                                                                                |  |                                  |  |                                                   |  |                            |  
|------------------------------------------------------------------------------- |  | -------------------------------- |  | ------------------------------------------------- |  | -------------------------- | -
|Beneficial Owner(1)                                                             |  | Number ofSharesBeneficiallyOwned |  | Number ofSharesUnderlyingOptionsBeneficiallyOwned |  | ApproximatePercentageOwned |  
|Benchmark Capital Partners(2)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) | Unless otherwise noted, the address of each listed stockholder is that of our principal executive offices: 7650 Marathon Drive, Suite A, Livermore, CA 94550.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | 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



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 2004, 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 $60,000 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, LIST AND REPORT ON FORM 8-K



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



See Item 7 of this Form 10-KSB.



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



The following financial statement schedule of Turnstone Systems, Inc. for the period from January 1, 2003 to November 11, 2003 is filed as part of this Report and should be read in conjunction with the consolidated
financial statements.



Schedule II
Valuation and Qualifying Accounts



All other schedules are
omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.



| | 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                                                                                                                                                                     
|            | 
|23.1        |  | Consent of KPMG LLP                                                                                                                                                              
|            | 
|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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------



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|(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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------



|(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, 2004 and December 31, 2003.



|                   |  |             |        |             |   |        
|------------------ |  | ----------- | ------ | ----------- | - | -------
|Fee Category       |  | Fiscal 2004 |        | Fiscal 2003
|Audit Fees         |  | $           | 85,000 |             | $ | 130,000
|Audit-Related Fees |  |             |       |             |   |       
|Tax Fees           |  |             | 10,000 |             |   | 34,600 
|All Other Fees     |  |             |       |             |   |       
|                   |  |             |        |             |   |        
|Total Fees         |  | $           | 95,000 |             | $ | 164,600
|                   |  |             |        |             |   |        



Audit Fees.
Consists of fees billed for professional services rendered for the audit of our consolidated financial statements and review of the interim consolidated financial statements included in our quarterly reports and services that are normally provided
by KPMG LLP 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 consolidated financial statements and are not reported under Audit Fees. KPMG did not bill us for any such services in fiscal 2004 or 2003.



Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice and tax planning. In
fiscal 2004 and fiscal 2003 KPMG LLP provided U.S. tax compliance and consultation services.



All Other Fees. KPMG LLP 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



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.



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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 14th day of April, 2005.



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. YeamanEric S. Yeaman |  | Chief Executive Officer Officer, Chief Financial Officer and Director |  | April 14, 2005
|                                 |  |                                                                      
|/s/ Albert Y. LiuAlbert Y. Liu   |  | General Counsel, Director of Human Resources and Director             |  | April 14, 2005



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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                                                                                                                                                                     
|            | 
|23.1        |  | Consent of Independent Registered Public Accounting Firm                                                                                                                         
|            | 
|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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------



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SCHEDULE II



VALUATION AND QUALIFYING ACCOUNTS

FOR THE
PERIOD JANUARY 1, 2003 TO NOVEMBER 11, 2003

(In thousands)



|                                 |  |                              |   |                               |   |    |               |  |                        |   |  |   |  
|-------------------------------- |  | ---------------------------- | - | ----------------------------- | - | -- | ------------- |  | ---------------------- | - |  | - | -
|Description                      |  | Balance atBeginningof Period |   | AdditionsCharged toOperations |   |    | (Charge-offs) |  | Balance atEnd ofPeriod
|Allowance for doubtful accounts: |  |                              |   |                               |   |    |               |  |                        |   |  |   |  
|2003                             |  | $                            | 5 |                               | $ | (5 | )             |  | $                      |  |  | $ | 



43