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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

OR



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

FOR THE TRANSITION PERIOD FROM  TO

COMMISSION FILE NUMBER 000-28843



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TURNSTONE SYSTEMS, INC.

(Exact name of registrant as specified 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

(Registrants telephone number, including area code)



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

None

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

Common Stock, $0.001 par value



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

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

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

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

Registrants revenues for the fiscal year ended December 31, 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 June 30, 2005 was US$574,791. 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, 2006.

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

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



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TURNSTONE SYSTEMS, INC.

FORM 10-KSB

DECEMBER 31, 2005

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 Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities    |  | 9       
|6.         |  | Managements Discussion and Analysis or Plan of Operation                                                         |  | 9       
|7.         |  | Financial Statements                                                                                              |  | 12      
|8.         |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                              |  | 18      
|8A.        |  | Controls and Procedures                                                                                           |  | 18      
|8B.        |  | Other Information                                                                                                 |  | 18      
|          
|PART III  
|           |  |                                                                                                                  
|9.         |  | Directors, Executive Officers, Promoters and Control Persons; Compliance With Sections 16(a) of the Exchange Act. |  | 19      
|10.        |  | Executive Compensation                                                                                            |  | 20      
|11.        |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                    |  | 22      
|12.        |  | Certain Relationships and Related Transactions                                                                    |  | 23      
|13.        |  | Exhibits                                                                                                          |  | 23      
|14.        |  | Principal Accountant Fees and Services                                                                            |  | 24      
|           | 
|SIGNATURES |  | 25                                                                                                               



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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, 2005, we estimate that the amount of future liquidating distributions will be approximately $0.016 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, 2006, 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 may include, among other things, long-term contractual obligations to certain customers, including certain product warranties, and contractual obligations to certain of our vendors. Our outstanding
litigation includes 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.

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

Claims, liabilities and expenses incurred during the wind down process, such as legal, accounting and consulting fees and miscellaneous
office expenses, will reduce the amount of assets available for future distribution out of the liquidation to stockholders. If available cash and amounts received on the sale of non-cash assets are not adequate to provide for our obligations,
liabilities, expenses and claims, we may not be able to distribute out of the liquidation meaningful cash, or any cash at all, to our stockholders.

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

We are currently unable to
predict the precise timing of any liquidating distributions. The timing of such distributions will depend on and could be delayed by, among other things, the 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 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



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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.

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.



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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.

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 court has scheduled a fairness hearing in April 2006 to determine whether the proposed settlement is fair to the class members. In addition, 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

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



|                       |  |                    |      |               |   |                |  |               |      |  |   |     
|---------------------- |  | ------------------ | ---- | ------------- | - | -------------- |  | ------------- | ---- |  | - | ----
|                       |  | THREE MONTHS ENDED
|                       |  | March 31, 2005     |      | June 30, 2005 |   | Sept. 30, 2005 |  | Dec. 31, 2005
|Price range per share: |  |                    |      |               |   |                |  |               |      |  |   |     
|High                   |  | $                  | 0.02 |               | $ | 0.01           |  | $             | 0.02 |  | $ | 0.01
|Low                    |  | $                  | 0.01 |               | $ | 0.01           |  | $             | 0.01 |  | $ | 0.01
|                       | 
|                       |  | 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

In June 2004, our board of directors approved a liquidating cash distribution of approximately
$10.8 million, or $0.17 per common share, to our stockholders of record as of December 4, 2003. The distribution was completed on July 8, 2004. All future distributions will be liquidating distributions. The actual amount and timing of
future liquidating distributions, if any, cannot be predicted at this time. At present, we estimate that total future liquidating distributions will be approximately $0.016 per share.

EQUITY COMPENSATION PLANS

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

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

OVERVIEW

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

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

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



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We filed our certificate of dissolution with the Secretary of State of the State of Delaware effective December 4,
2003. Pursuant to Delaware law, Turnstone Systems, Inc. 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, 2005, we estimate that the amount of future liquidating distributions will be approximately $.016 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 accounting for estimated costs to be incurred during liquidation have the greatest potential impact on our consolidated
financial statements.

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 remaining costs were estimated at $106,000 at December 31, 2005. 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.



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##### Table of Contents

ACTIVITIES IN LIQUIDATION

The following table presents consolidated financial data under the liquidation basis of accounting for the years ended December 31, 2005 and 2004 (in thousands):



|                                                 |  |                         |       |      |   |         |  
|------------------------------------------------ |  | ----------------------- | ----- | ---- | - | ------- | -
|                                                 |  | Year ended December 31, |      
|                                                 |  | 2005                    |       | 2004 |  
|Net assets in liquidation at beginning of period |  | $                       | 917   |      | $ | 11,215  |  
|Proceeds from licensing of intellectual property |  |                         | 45    |      |   | 275     |  
|Adjust assets and liabilities to fair value      |  |                         | 76    |      |   | 208     |  
|Distributions to stockholders                    |  |                         |      |      |   | (10,781 | )
|                                                 |  |                         |       |      |   |         |  
|Net assets in liquidation at end of period       |  | $                       | 1,038 |      | $ | 917     |  
|                                                 |  |                         |       |      |   |         |  



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##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2005, net assets in liquidation totaled $1,038,000, consisting of $1,144,000 in cash and cash equivalents partially offset by $106,000 of
estimated costs to be incurred during liquidation. We expect to use our capital resources to execute our complete plan of liquidation and dissolution, settle existing claims against the company, including existing litigation and other current
liabilities and accrued expenses, and to make liquidating distributions to stockholders. Capital resources available for liquidating distributions to stockholders may vary if we incur greater than estimated operating expenses associated with
executing the plan of complete liquidation and dissolution, actual settlement costs for existing claims against the company vary from estimates, or if there are existing, but unknown claims made against us in the future. At December 31, 2005,
our cash and cash equivalents were held primarily in money market funds. We expect to continue to hold our cash and cash equivalents primarily in money market funds while we execute the plan of dissolution.

We do not have any long-term debt, lease or purchase obligations at December 31, 2005.

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                                                        |  | 13         
|Consolidated Statements of Net Assets in Liquidation as of December 31, 2005                                   |  | 14         
|Consolidated Statements of Changes in Net Assets in Liquidation for the years ended December 31, 2005 and 2004 |  | 15         
|Notes to Consolidated Financial Statements                                                                     |  | 16         
|Supplementary Data (Unaudited)                                                                                 |  | 33         



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

Not applicable.



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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, 2005, the related consolidated statements of changes in net
assets in liquidation for each of the years in the two-year period ended December 31, 2005. These consolidated financial statements 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, 2005 and the results of their operations and their cash flows for each of
the years in the two-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Mountain View, California

March 31, 2006



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##### Table of Contents

TURNSTONE SYSTEMS, INC.

CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION

(IN THOUSANDS)



|                                                  |  |                  |      
|------------------------------------------------- |  | ---------------- | -----
|                                                  |  | December 31,2005
|Assets                                            |  |                  |      
|Cash and cash equivalents                         |  | $                | 1,144
|                                                  |  |                  |      
|Total assets                                      |  | $                | 1,144
|                                                  | 
|Liabilities                                       |  |                  |      
|Estimated costs to be incurred during liquidation |  | $                | 106  
|                                                  |  |                  |      
|Total liabilities                                 |  | $                | 106  
|                                                  |  |                  |      
|Net assets in liquidation                         |  | $                | 1,038
|                                                  |  |                  |      

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 Years EndedDecember 31, |      
|                                                 |  | 2005                            |       | 2004 |  
|Net assets in liquidation at beginning of period |  | $                               | 917   |      | $ | 11,215  |  
|Proceeds from licensing of intellectual property |  |                                 | 45    |      |   | 275     |  
|Adjust assets and liabilities to fair value      |  |                                 | 76    |      |   | 208     |  
|Distributions to stockholders                    |  |                                 |      |      |   | (10,781 | )
|                                                 |  |                                 |       |      |   |         |  
|Net assets in liquidation at end of period       |  | $                               | 1,038 |      | $ | 917     |  
|                                                 |  |                                 |       |      |   |         |  

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

As a result of the stockholders approval of the Plan and the imminent nature of the liquidation, the Company adopted the liquidation basis of accounting effective November 11, 2003. This basis of accounting is considered
appropriate when, among other things, liquidation of a company is probable and the net realizable value of assets are reasonably determinable. Under this basis of accounting, assets are valued at their estimated net realizable values and liabilities
are stated at their estimated settlement amounts.

Use of Estimates

The preparation of 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, 2005 consisted primarily of money market funds.

3. 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 opposition was filed on September 27, 2002. On February 19, 2003, the court issued an



16



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##### Table of Contents

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 court has scheduled a fairness hearing in April 2006 to determine whether
the proposed settlement is fair to the class members. In addition, 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, 2005.



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##### Table of Contents

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, 2005, 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.

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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##### Table of Contents

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, 2006, are as follows:



|               |  |     |  |                                                              
|-------------- |  | --- |  | -------------------------------------------------------------
|NAME           |  | AGE |  | POSITION(S)                                                  
|Albert Y. Liu  |  | 33  |  | General Counsel, Director of Human Resources and Director    
|Eric S. Yeaman |  | 36  |  | 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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##### Table of Contents

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 2005, our board of directors did not hold any meetings.

We established an audit committee in October 1999. The audit committee reviews our internal accounting procedures and consults with and reviews the
services provided by our independent accountants. There is no specified term for committee members. During fiscal 2004, Mr. Peters served as the sole member of our audit committee until his resignation in June 2004. Since then, our board of
directors has acted as the audit committee. Our board of directors has determined that Mr. Yeaman is an audit committee financial expert. Mr. Yeaman is not an independent director, as that term is used in Item 7(d)(3)(iv)
of Schedule 14A under the Securities and Exchange Act. The audit committee did not meet in fiscal 2005.

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, 2005.

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 10 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.

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.



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##### Table of Contents

|                                                                    |  |                     |  |                              |  |                       |  |                        |  |                              |  |                    |          
|------------------------------------------------------------------- |  | ------------------- |  | ---------------------------- |  | --------------------- |  | ---------------------- |  | ---------------------------- |  | ------------------ | ---------
|                                                                    |  | Annual Compensation |  | Long-TermCompensation Awards |  | All OtherCompensation | 
|Name and Principal Positions                                        |  | Year                |  | Salary                       |  | Bonus                 |  | Restricted Stock Award |  | Securities Underlying Option | 
|Albert Y. LiuGeneral Counsel andDirector of Human Resources(1)      |  | 200520042003        |  | 82,500165,006                |  |                       |  |                      |  |                            |  | 8,71985,5639,038   | (3)(4)(5)
|                                                                    |  |                     |  |                              |  |                      
|Eric S. YeamanChief Executive Officer andChief Financial Officer(2) |  | 200520042003        |  | 82,500165,006                |  | 124,385              |  | 11,645                |  |                            |  | 13,46989,00018,432 | (3)(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) | Consists of payment for the officers consulting services in fiscal 2005.
|--- | -------------------------------------------------------------------------

|(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, 2005. 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, 2005.

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 2005.

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.

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



21



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##### Table of Contents

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, 2006, by: (i) each person who is known by us to own beneficially more than five percent of our common stock,
(ii) each of our named executive officers, (iii) each of our directors, and (iv) all directors and named executive officers as a group. Except as indicated in the footnotes to this table, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable.

Beneficial ownership is determined based on the rules of the Securities and Exchange Commission. The column entitled Number of Shares Beneficially Owned excludes the number of shares of common stock
subject to options held by that person that are currently exercisable or that will become exercisable within 60 days after the record date. The number of shares subject to options that each beneficial owner has the right to acquire within 60 days of
the record date is listed separately under the column entitled Number of Shares Underlying Options Beneficially Owned. These shares are not deemed outstanding for purposes of computing the percentage ownership of any other person. Unless
otherwise indicated in the footnotes, these stockholders have sole voting or investment power with respect to all shares, subject to applicable community property laws. The number and percentage of shares beneficially owned are based on 63,417,130
shares outstanding as of February 1, 2006.



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

---

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

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

EQUITY COMPENSATION PLAN
INFORMATION

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



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##### Table of Contents

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 2005, 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, 2005 and December 31, 2004.



|                   |  |             |        |             |   |       
|------------------ |  | ----------- | ------ | ----------- | - | ------
|Fee Category       |  | Fiscal 2005 |        | Fiscal 2004
|Audit Fees         |  | $           | 50,000 |             | $ | 85,000
|Audit-Related Fees |  |             |       |             |   |      
|Tax Fees           |  |             | 8,000  |             |   | 10,000
|All Other Fees     |  |             |       |             |   |      
|                   |  |             |        |             |   |       
|Total Fees         |  | $           | 58,000 |             | $ | 95,000
|                   |  |             |        |             |   |       

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 2005 or 2004.

Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice and tax planning. In fiscal 2005 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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##### Table of Contents

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 31st day of March, 2006.



TURNSTONE SYSTEMS, INC.By:

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


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

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



|                                  |  |                                                                       |  |               
|--------------------------------- |  | --------------------------------------------------------------------- |  | --------------
|Signature                         |  | Title                                                                 |  | Date          
|/s/ Eric S. Yeaman Eric S.
Yeaman |  | Chief Executive Officer Officer, Chief Financial Officer and Director |  | March 31, 2006
|                                  |  |                                                                      
|/s/ Albert Y. Liu Albert Y.
Liu   |  | General Counsel, Director of Human Resources and Director             |  | March 31, 2006



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##### Table of Contents

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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