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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

OR

For the transition period from ____________ to ____________

Commission File Number 000-28843

TURNSTONE SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

7650 Marathon Drive, Suite A

Livermore, California 94550

(Address of principal executive offices) (Zip Code)

(408) 907-1400

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. x

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x    No ¨

As of June 30, 2003, the aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant (based on the closing price for the common stock on the Nasdaq National Market on such date) was approximately $159,405,524. This amount excludes shares held by us and our directors, executive officers, and holders of five percent or more of our outstanding common stock.

As of February 29, 2004, there were 63,417,130 shares of the Registrant’s common stock outstanding.

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TURNSTONE SYSTEMS, INC.

FORM 10-K

DECEMBER 31, 2003

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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:

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 “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:

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.    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, although currently declining in the aggregate, will continue to be incurred with execution of the plan. These costs will reduce the amount of net assets available for ultimate distribution to stockholders. Although we do not believe that a precise estimate of those expenses can currently be made, we believe that available cash and amounts received from sales of non-cash assets will be adequate to provide for our obligations, liabilities, operating costs and claims, and to make cash distributions to stockholders. If available cash and amounts received from sales of non-cash assets are not adequate to provide for our obligations, liabilities, operating costs and claims, estimated future distributions of cash to our stockholders will be reduced.

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

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

Based on our projections of operating expenses and liquidation costs as of December 31, 2003, we estimate that the amount of liquidating distributions will range from $0.11 to $0.18 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. Although our board has not established a firm timetable for the liquidating distributions, the board intends to, subject to contingencies inherent in winding up our business, make such distributions as promptly as practicable and periodically as we convert our remaining assets to cash. 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.

Since we were de-listed from Nasdaq and closed our stock records on December 4, 2003, our shares have continued to trade in the Over the Counter Market’s “pink sheets”. From time to time, trading volume in our shares has been relatively high, and our shares have traded at prices in excess of the highest price we have estimated for potential liquidation distributions. Traders in our shares are cautioned that our shares are highly

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speculative, and we cannot predict with any accuracy when, or if, additional liquidation distributions will be made.

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

Company History and Fiscal 2003 Developments

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.

On January 9, 2003, we announced that we were exploring various strategic alternatives, including possible merger and asset sale transactions, licensing arrangements and dissolution of the company and distribution of assets to stockholders. We also announced that we had engaged Goldman Sachs & Co. as our financial advisor. While a limited supply of our products remained available for sale, we generally ceased all direct sales efforts related to them, and redirected our operating activities to focus primarily on in-process research and development related to our next generation copper automation products for incumbent local exchange carriers. In connection with those decisions, we reduced headcount by approximately 40%, or 29 employees, in January 2003.

On April 7, 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 $3.6 million from our restricted cash and included prepaid rent through the end of 2003, the remaining facilities commitment under the restructured lease.

On April 24, 2003, we initiated actions to terminate most of our remaining employees except for a limited team of employees that continued to handle matters related to our previously announced exploration of strategic alternatives. These actions were initiated after management and our board of directors, following an extensive consideration of strategic alternatives, 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.

On July 25, 2003, the U.S. District Court for the Northern District of California preliminarily approved a settlement of a class action suit that was brought against us, certain of our officers and directors and our underwriters on behalf of persons who purchased common stock issued pursuant to our secondary stock offering in September 2000. The suit was settled for $7.0 million, of which insurance for our directors and officers paid approximately $6.1 million and we contributed approximately $0.9 million in cash during September 2003. On October 9, 2003, the court granted final approval of the settlement and dismissed all claims against all defendants in the suit without any admission of liability by any party.

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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 special cash distribution was ratified by a majority of the shares present at our Annual Meeting on November 11, 2003. Following the 2003 Annual Meeting, the 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 was paid on November 28, 2003.

Employees

As of February 1, 2004, we employed two full-time employees.

Risk Factors

In addition to other information in this Form 10-K, 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-K, 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 range we have estimated. Any amounts to be distributed to our stockholders may be less than the price or prices at which our common stock has recently traded or may trade in the future.

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

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

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

If we do not settle all of our obligations to creditors and resolve all of our outstanding litigation, we may be prevented from completing our plan of dissolution. Our obligations to creditors include, among other things,

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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 is still subject to a number of conditions, including final court approval. 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. For example, in August 2002 the Official Committee of Unsecured Creditors of Digital Broadband Communications, Inc., one of our former customers that filed for Chapter 11 bankruptcy, filed a complaint in the United States Bankruptcy Court for the District of Delaware, seeking recovery of alleged preferential transfers to us in the aggregate amount of $3,522,714.85. 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.

For further information regarding the Official Committee of Unsecured Creditors of Digital Broadband Communications, Inc. case, see Estimated Litigation Settlement Costs in the “Critical Accounting Estimates” section of our “Management’s Discussion and Analysis of Financial Condition, and Results of Operations.”

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

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

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

Although our board of directors has not established a firm timetable for distributions to our stockholders out of the liquidation, the board of directors intends, subject to contingencies inherent in winding down our business, to make such distributions as promptly as practicable as creditor and litigant claims are paid or settled. However, we are currently unable to predict the precise timing of any such 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

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

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

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

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

If we fail to retain the services of certain key personnel, the plan of dissolution may not succeed.

The success of the plan of dissolution depends in large part upon our ability to retain the services of certain of our current officers. The retention of Eric S. Yeaman, our Chief Executive Officer and Chief Financial Officer, and Albert Y. Liu, our General Counsel and Director of Human Resources, is particularly important under our current circumstances. Failure to retain these personnel could harm the implementation of the plan of dissolution, particularly during the current period while we are trying to resolve outstanding litigation and creditor claims.

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. On December 2, 2003, five directors resigned from the board and two directors were added to the board. 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

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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. 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.    Properties

At December 31, 2003, the lease for our former corporate headquarters facility in Santa Clara, California expired and we vacated the facility. In December 2003, we changed our corporate mailing address and moved our corporate records to a third-party facility in Livermore, California.

On April 7, 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.

Item 3.    Legal Proceedings

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

Shareholder Litigation

Secondary Offering Litigation

On March 28, 2001, the Louisiana School Employees’ Retirement System filed a putative class action lawsuit against us, certain of our current and former officers and directors and the underwriters of our

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September 21, 2001 secondary offering of common stock in the United States District Court for the Northern District of California. The complaint alleged that the defendants issued false and misleading statements in our prospectus issued in connection with the secondary offering. At or about the same time, four other purported class action lawsuits were filed against us and certain of our current and former officers and directors in the United States District Court for the Northern District of California alleging that the defendants made false or misleading statements regarding Turnstone during the class period of June 5, 2000 through January 2, 2001.

All five cases were consolidated before Judge Saundra B. Armstrong on October 26, 2001, and by court order dated December 3, 2001, Radiant Advisors, LLC was designated as lead plaintiff (Plaintiff) and the law firms of Bernstein Litowitz Berger & Grossman LLP and Bernstein Liebhard & Lifshitz, LLP were designated as co-lead counsel for the consolidated actions. Plaintiff filed a consolidated First Amended Complaint (“FAC”) on September 13, 2002. The FAC alleges that we and the other defendants made false and misleading statements in connection with our secondary offering in violation of Sections 11, 12 and 15 of the Securities Act of 1933, and also that we and the other defendants made false and misleading statements during the class period in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. We and the other defendants moved to dismiss the FAC on October 8, 2002. On February 7, 2003, the court issued an order denying in part and granting in part, with leave to amend, our motion to dismiss.

On March 10, 2003, Plaintiff filed a Second Amended Complaint (“SAC”) against us, certain of our current officers and directors, and the underwriters of our September 21, 2000 secondary offering of stock alleging that we and the other defendants made false and misleading statements in connection with our secondary offering in violation of Sections 11, 12 and 15 of the Securities Act of 1933. We filed our answer to the SAC on June 13, 2003. On July 25, 2003, the U.S. District Court for the Northern District of California preliminarily approved a settlement of this class action lawsuit. The suit was settled for $7.0 million, of which insurance for our directors and officers paid approximately $6.1 million and we contributed approximately $0.9 million in cash during September 2003. On October 9, 2003, the court granted final approval of the settlement and dismissed all claims against all defendants in the suit without any admission of liability by any party.

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. Limited discovery is currently underway. A proposal has been made for the settlement and release of claims against the issuer defendants, including Turnstone. The settlement is subject to a number of conditions, including approval of the proposed settling parties and the court. If the settlement does not occur, and litigation against us continues, we believe we have meritorious defenses and intend to defend the case vigorously.

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In Re: Digital Broadband Communications, Inc. Bankruptcy

On August 12, 2002, the Official Committee of Unsecured Creditors of Digital Broadband Communications, Inc., one of our former customers that filed for Chapter 11 bankruptcy on December 27, 2000, filed a complaint in the United States Bankruptcy Court for the District of Delaware, seeking recovery of alleged preferential transfers to us in the aggregate amount of $3,522,714.85. We filed our answer on September 10, 2002. Limited discovery is currently underway. For further information regarding the Official Committee of Unsecured Creditors of Digital Broadband Communications, Inc. case, see Note 10 of our Notes to Consolidated Financial Statements.

Item 4.    Submission of Matters to a Vote of Security Holders

We held our 2003 Annual Meeting of Stockholders in Santa Clara, California on November 11, 2003. Of the 66,463,525 shares outstanding (inclusive of shares held by the company in treasury) as of the record date of September 15, 2003, 63,122,693 shares were present or represented by proxy at the meeting. At the 2003 annual meeting the following actions were voted upon:

Item 4A.    Executive Officers of the Registrant

As of February 1, 2004, our executive officers consist of Albert Y. Liu, our General Counsel and Director of Human Resources, and Eric S. Yeaman, our Chief Executive Officer and Chief Financial Officer. They also serve on our board of directors. For information about our executive officers, please see “Item 10. Directors and Executive Officers of the Registrant.”

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PART II

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters

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.

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. 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 range from $0.11 to $0.18 per common 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 12 of this Annual Report on Form 10-K.

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Item 6.    Selected Consolidated Financial Data

The following selected consolidated financial data (presented in thousands, except per share data) should be read in conjunction with the consolidated financial statements and the notes to the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this report. The consolidated statement of changes in net assets in liquidation data for the period from November 12, 2003 to December 31, 2003, the consolidated statement of operations data for the period from January 1, 2003 to November 11, 2003 and for the years ended December 31, 2002 and 2001, and the consolidated balance sheet data as of December 31, 2002 are derived from our audited consolidated financial statements included herein. The consolidated statement of operations data for the years ended December 31, 2000 and 1999 and the consolidated balance sheet as of December 31, 2001, 2000 and 1999 are derived from our audited consolidated financial statements not included herein.

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Item 7.    Management’s Discussion and Analysis of Financial Condition, and Results of Operations

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.

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.

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Under the plan of dissolution, we will liquidate our assets and make liquidating distributions to stockholders. We have not established a firm timetable for liquidating distributions to stockholders, but we intend, subject to contingencies inherent in winding up our business, to make such liquidating distributions as promptly as practicable and periodically as we convert our remaining assets to cash.

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.

Estimated Litigation Settlement Costs

Under the liquidation basis of accounting, we accrue for estimated litigation settlement costs. Estimated litigation settlement costs, which amounted to $500,000 as of December 31, 2003, represent the estimated future legal fees to be incurred and the estimated settlement amounts to be paid to the Official Committee of Unsecured Creditors of Digital Broadband Communications, Inc., one of our former customers that filed for Chapter 11 bankruptcy on December 27, 2000. The Committee filed a complaint in the United States Bankruptcy Court seeking recovery of alleged preferential transfers to the Company in the aggregate amount of $3,522,715. Our estimate of litigation settlement costs is based on a settlement offer discussed and verbally agreed to by counsel for the Committee and us. The settlement is subject to the execution of a formal settlement agreement by both parties and court approval. The actual amount of litigation settlement cost may vary as the Committee may rescind its offer at any time, in which case, if we are not successful in defending against its claim, the actual litigation settlement costs may exceed our estimate, ranging up to the full claim of $3,522,715, reducing net assets in liquidation. Conversely, our continued defense of the claim may result in a settlement for a lesser amount than our current estimate or a complete release of the claim, increasing net assets in liquidation. We are not aware of, and have not accrued for, any other outstanding litigation against us as of December 31, 2003.

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 compensation and severance for the two remaining employees, board fees, fees of professional service providers and miscellaneous other costs, partially offset by estimated future interest earnings. Such costs were estimated at $810,000 at December 31, 2003. 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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Activities In Liquidation

The following table presents consolidated financial data under the liquidation basis of accounting for the period from November 12, 2003 to December 31, 2003.

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:

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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Results of Operations

The following table sets forth certain statements 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.

Period from January 1, 2003 to November 11, 2003 and Fiscal Years Ended December 31, 2002 and 2001.

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.

Prior to the adoption of the plan, net revenues consisted of product revenue and service revenue. Product revenue for the periods presented consists 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.

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The decrease in product and service revenue for the period from January 1, 2003 to November 11, 2003 as compared to fiscal 2002 was primarily attributable to our January 9, 2003 decision to explore various strategic alternatives and cease the direct sales and marketing efforts related to our products. The decrease in product and service revenue for fiscal 2002 as compared to fiscal 2001 was attributable to reduced demand from competitive local exchange carrier customers, many of which had ceased operations or filed for bankruptcy protection.

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, 47% for the year ended December 31, 2002, and 21% for the year ended December 31, 2001. The following table presents customers contributing greater than 10% of total revenues for the periods presented:

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.

Prior to the adoption of the plan, cost of product revenue included amounts paid to our third party contract manufacturer and related overhead expenses, consisting primarily of salary and other expenses for personnel engaged in procurement, vendor management and quality assurance. Cost of service revenue included costs to maintain our customer support group, consisting primarily of salaries for customer support personnel and costs associated with technical support and training activities.

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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, resulting in a decrease of cost of product revenue as a percentage of product revenue for the period from January 1, 2003 to November 11, 2003 as compared to fiscal 2002. The decrease in cost of product revenue for fiscal 2002 as compared to fiscal 2001 was attributable to reduced sales of products to competitive local exchange carriers.

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. The decrease in cost of service revenue for fiscal 2002 as compared to fiscal 2001 was primarily attributable to headcount reductions in our customer support organization that were made in response to the decreased demand for our product maintenance services.

Write-down of inventory represented a charge to write down the value of finished goods and raw materials inventory on hand to net realizable value. Provision for purchase commitments represented charges to accrue a liability for minimum purchase commitments made for future delivery of raw materials in excess of forecast requirements. Decreases in the net realizable value of our finished goods and raw material inventories, including provisions for purchase commitments, were attributable to decreases in our forecasts of future demand.

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.

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.

The decrease in research and development costs for the period from January 1, 2003 to November 11, 2003 as compared to fiscal 2002 was attributable to our decision to terminate all research and development personnel and discontinue all research and development activities in April 2003. The decrease in research and development costs for fiscal 2002 as compared to fiscal 2001 was primarily attributable to the discontinuation of our research and development operations in New Zealand and overall headcount reductions resulting from our restructuring in September 2001.

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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.

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

The decrease in sales and marketing expenses for the period from January 1, 2003 to November 11, 2003 as compared to fiscal 2002 is due to our decision to terminate all remaining sales and marketing personnel and discontinue sales and marketing activities in April 2003. The decrease in sales and marketing expenses for fiscal 2002 as compared to fiscal 2001 was primarily attributable to a decrease in the number of sales and sales support personnel domestically and internationally from fiscal 2001, and reduced tradeshow and other customer marketing activities.

General and Administrative

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

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

The increase in general and administrative expenses for the period from January 1, 2003 to November 11, 2003 as compared to fiscal 2002 was primarily attributable to employee retention bonuses earned pursuant to employee retention agreements entered into in January 2003, severance payments made to general and administrative personnel terminated during 2003, and financial advisory and legal fees related to the exploration of strategic alternatives. The decrease in general and administrative expenses for fiscal 2002 as compared to fiscal 2001 was primarily due to a decrease in the number of finance and administrative personnel as a result of restructuring programs, and decreased professional fees.

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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, $2.0 million in the year ended December 31, 2002, and $3.9 million for the year ended December 31, 2001.

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 the remaining balance in the accrual for loss on operating lease of $1.3 million, which was recorded as a reduction to operating expenses during fiscal 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, net gains or losses on disposal of property and equipment, and expenses related to our lease financing obligations. We had interest income and other, net of $2.2 million for the period from January 1, 2003 to November 11, 2003, $5.8 million for the year ended December 31, 2002, and $11.4 million for the year ended December 31, 2001. The decreases in interest income and other, net for the period from January 1, 2003 to November 11, 2003 as compared to fiscal 2002, and for fiscal 2002 as compared to fiscal 2001 are primarily due to declining interest rates and lower total cash and investment balances.

Income Tax Expense

Income tax expense of $208,000 in the period from January 1, 2003 to November 11, 2003 and $125,000 for the year ended December 31, 2002 were attributable to state and foreign tax. The decrease to $125,000 in fiscal 2002 from $3.7 million in the comparable period in 2001 was primarily due to a $3.6 million valuation allowance recorded in 2001 for that portion of the deferred tax asset that more likely than not will not be realized.

Liquidity and Capital Resources

As of December 31, 2003, net assets in liquidation totaled $11.2 million, consisting of $12.6 million in cash and cash equivalents, $221,000 of receivables and other current assets, partially offset by $500,000 of estimated litigation settlement costs, $810,000 of estimated costs to be incurred during liquidation, and $297,000 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

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against us in the future. We intend to distribute net assets in liquidation to stockholders as liquidating distributions as promptly as practicable and periodically as we convert our remaining assets to cash. At December 31, 2003, 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, 2003.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

We formerly developed our products in the United States and marketed our products in the United States, Canada, Europe, Asia and Asia Pacific. Substantially all of our sales and expenses were denominated in United States dollars. Foreign currency translation gains and losses are included in interest income and other, net. We did not engage in any foreign exchange hedging activities while an operating business.

Interest Rate Risk

The primary objective of our investment activities is to preserve principal. We attempt to maximize the income we receive from our investments without significantly increasing risk. Some of the securities that we have invested in may be subject to market risk. This means that a change in prevailing interest rates may cause the value of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the value of the investment will probably decline. To mitigate this risk, we maintain our portfolio of cash equivalents and investments in a variety of securities, including money market funds, commercial paper and government and non-government debt securities. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. In addition, we invest in relatively short-term securities.

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The following table presents the amounts of cash equivalents, short-term investments and long-term investments that are subject to market risk by range of expected maturity and weighted-average interest rates as of December 31, 2002. This table does not include money market funds because those funds are subject to minimal market risk. At December 31, 2003, the company held its entire portfolio in money market funds.

Item 8.    Financial Statements and Supplementary Data

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-K.

The following financial statement schedule for the period from January 1, 2003 to November 11, 2003 and for the years ended December 31, 2002 and 2001 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-K:

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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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders

Turnstone Systems, Inc.

We have audited the accompanying consolidated balance sheet of Turnstone Systems, Inc. as of December 31, 2002, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two year period then ended, and the consolidated statements of operations, stockholders’ equity, and cash flows for the period from January 1, 2003 to November 11, 2003. In addition, we have audited the consolidated statement of net assets in liquidation as of December 31, 2003, and the related consolidated statement of changes in net assets in liquidation for the period from November 12, 2003 to December 31, 2003. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 15(a). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepting in the 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.

As described in Note 2 to the consolidated financial statements, the stockholders of Turnstone Systems, Inc. approved a plan of liquidation on November 11, 2003, and the Company commenced liquidation shortly thereafter. As a result, the Company has changed its basis of accounting for the period subsequent to November 11, 2003, from the going-concern basis to a liquidation basis.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Turnstone Systems, Inc. as of December 31, 2002, the results of its operations and its cash flows for each of the years in the two year period then ended and for the period from January 1, 2003 to November 11, 2003, its net assets in liquidation as of December 31, 2003, and the changes in its net assets in liquidation for the period from November 12, 2003 to December 31, 2003, in conformity with accounting principles generally accepted in the United States of America applied on the bases described in the preceding paragraph. 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

February 23, 2004, except as to Note 10.B,
which is as of March 4, 2004

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TURNSTONE SYSTEMS, INC.

CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION

(In thousands)

See accompanying notes to consolidated financial statements.

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TURNSTONE SYSTEMS, INC.

CONSOLIDATED BALANCE SHEET (GOING CONCERN BASIS)

(In thousands, except per share amounts)