##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2010
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number: 000-27312
 TOLLGRADE COMMUNICATIONS, INC.
  Pennsylvania
    
    25-1537134(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 493 Nixon Rd.
Cheswick, PA 15024
 412-820-1400
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ




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##### 



TOLLGRADE COMMUNICATIONS, INC.
 Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2010  Table of Contents
 Page No.PART I. FINANCIAL INFORMATIONItem 1 Condensed Consolidated Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of June 30, 2010 and
December 31, 2009
    
    
    3Condensed Consolidated Statements of Operations for the three and
six month periods ended June 30, 2010 and June 27, 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the six month
periods ended June 30, 2010 and June 27, 2009
    
    
    5Condensed Consolidated Statements of Changes in Shareholders
Equity for the six month period ended June 30, 2010
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    13Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4 Controls and Procedures
    
    
    25PART II. OTHER INFORMATIONItem 1A Risk Factors
    
    
    25Item 6 Exhibits
    
    
    26SIGNATURES
    
    
    27EXHIBIT INDEX
    
    
    28EX-10.2EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS  (In thousands, except par value) (Unaudited)
 June 30, 2010
    
    
    December 31, 2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    64,147
    
    
    $
    66,046Short-term investments
    
    
    3
    
    
    
    3Trade accounts receivable, net of allowance for doubtful accounts of $1,403 and $1,496 in 2010 and 2009
    
    
    10,860
    
    
    
    6,998Other receivables
    
    
    189
    
    
    
    1,007Inventories, net
    
    
    1,567
    
    
    
    2,119Prepaid expenses and deposits
    
    
    794
    
    
    
    759Deferred and refundable income taxes
    
    
    629
    
    
    
    196Total current assets
    
    
    78,189
    
    
    
    77,128Property and equipment, net
    
    
    2,574
    
    
    
    3,101Intangibles, net
    
    
    6,041
    
    
    
    7,110Deferred tax assets
    
    
    107
    
    
    
    119Other assets
    
    
    143
    
    
    
    229Total assets
    
    $
    87,054
    
    
    $
    87,687LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,506
    
    
    $
    927Accrued warranty
    
    
    565
    
    
    
    504Accrued expenses
    
    
    1,519
    
    
    
    2,456Accrued salaries and wages
    
    
    839
    
    
    
    1,190Income taxes payable
    
    
    251
    
    
    
    393Deferred revenue
    
    
    2,907
    
    
    
    2,463Total current liabilities
    
    
    7,587
    
    
    
    7,933Pension Obligation
    
    
    897
    
    
    
    983Other tax liabilities
    
    
    724
    
    
    
    738Deferred tax liabilities
    
    
    251
    
    
    
    290Total liabilities
    
    
    9,459
    
    
    
    9,944Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common
stock, $0.20 par value; 50,000 authorized shares, issued shares, 13,871 in 2010 and 13,788 in 2009
    
    
    2,774
    
    
    
    2,746Additional paid-in capital
    
    
    75,756
    
    
    
    75,244Treasury stock, at cost, 1,162 shares in 2010 and 1,151 in 2009
    
    
    (8,632
    )
    
    
    (8,563
    )Retained earnings
    
    
    9,107
    
    
    
    9,543Accumulated other comprehensive loss
    
    
    (1,410
    )
    
    
    (1,227
    )Total shareholders equity
    
    
    77,595
    
    
    
    77,743Total liabilities and shareholders equity
    
    $
    87,054
    
    
    $
    87,687
  3




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##### Table of Contents



TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share data) (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 27,
    
    
    June 30,
    
    
    June 27,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue:Products
    
    $
    4,936
    
    
    $
    4,141
    
    
    $
    9,158
    
    
    $
    9,970Services
    
    
    6,564
    
    
    
    6,502
    
    
    
    13,509
    
    
    
    10,990Total Revenue
    
    
    11,500
    
    
    
    10,643
    
    
    
    22,667
    
    
    
    20,960Cost of sales:Products
    
    
    2,273
    
    
    
    2,769
    
    
    
    4,087
    
    
    
    5,554Services
    
    
    1,863
    
    
    
    1,935
    
    
    
    3,856
    
    
    
    3,359Amortization
    
    
    389
    
    
    
    649
    
    
    
    789
    
    
    
    1,290Severance
    
    
    (51
    )
    
    
    93
    
    
    
    417
    
    
    
    276Total cost of sales
    
    
    4,474
    
    
    
    5,446
    
    
    
    9,149
    
    
    
    10,479Gross profit
    
    
    7,026
    
    
    
    5,197
    
    
    
    13,518
    
    
    
    10,481Operating expenses:Selling and marketing
    
    
    1,273
    
    
    
    1,628
    
    
    
    3,336
    
    
    
    3,283General and administrative
    
    
    1,954
    
    
    
    2,839
    
    
    
    4,172
    
    
    
    5,414Research and development
    
    
    1,680
    
    
    
    2,405
    
    
    
    4,040
    
    
    
    4,441Severance
    
    
    627
    
    
    
    3
    
    
    
    1,885
    
    
    
    66Total operating expenses
    
    
    5,534
    
    
    
    6,875
    
    
    
    13,433
    
    
    
    13,204Income/(Loss) from operations
    
    
    1,492
    
    
    
    (1,678
    )
    
    
    85
    
    
    
    (2,723
    )Other (expense)/ income
    
    
    (315
    )
    
    
    391
    
    
    
    (724
    )
    
    
    509Income(Loss) before income taxes
    
    
    1,177
    
    
    
    (1,287
    )
    
    
    (639
    )
    
    
    (2,214
    )(Benefit) provision for income taxes
    
    
    (50
    )
    
    
    198
    
    
    
    (203
    )
    
    
    295Income(Loss) from continuing operations
    
    
    1,227
    
    
    
    (1,485
    )
    
    
    (436
    )
    
    
    (2,509
    )Loss from discontinued operations
    
    
    0
    
    
    
    (24
    )
    
    
    
    
    
    
    (223
    )Net Income(Loss)
    
    $
    1,227
    
    
    ($
    1,509
    )
    
    ($
    436
    )
    
    ($
    2,732
    )Per share information:Weighted average shares of common stock and equivalents:Basic
    
    
    12,649
    
    
    
    12,681
    
    
    
    12,652
    
    
    
    12,680Diluted
    
    
    12,815
    
    
    
    12,681
    
    
    
    12,652
    
    
    
    12,680Net Income(loss) per common and common equivalent shares:Basic
    
    $
    0.10
    
    
    ($
    0.12
    )
    
    ($
    0.03
    )
    
    ($
    0.22
    )Diluted
    
    $
    0.10
    
    
    ($
    0.12
    )
    
    ($
    0.03
    )
    
    ($
    0.22
    )Income(Loss)
per common and common equivalent shares from continuing operations:Basic
    
    $
    0.10
    
    
    ($
    0.12
    )
    
    ($
    0.03
    )
    
    ($
    0.20
    )Diluted
    
    $
    0.10
    
    
    ($
    0.12
    )
    
    ($
    0.03
    )
    
    ($
    0.20
    )Income(loss)
per common and common equivalent shares from discontinued operations:Basic
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    ($
    0.02
    )Diluted
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    ($
    0.02
    )
  4




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##### Table of Contents



TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands) (Unaudited)
 June 30, 2010
    
    
    June 27, 2009Cash flows from operating activities:Net loss
    
    ($
    436
    )
    
    ($
    2,732
    )Adjustments to reconcile net loss to net cash provided by operating activitiesLoss from discontinued operations
    
    
    
    
    
    
    223Amortization expense
    
    
    789
    
    
    
    1,290Depreciation expense
    
    
    610
    
    
    
    560Stock-based compensation expense
    
    
    519
    
    
    
    545Deferred income taxes
    
    
    (683
    )
    
    
    180Provision for losses on inventory
    
    
    (279
    )
    
    
    226Provision for allowance for doubtful accounts
    
    
    (92
    )
    
    
    66Changes in assets and liabilities:Accounts receivable-trade
    
    
    (4,075
    )
    
    
    (1,049
    )Other receivable
    
    
    882
    
    
    
    307Inventories
    
    
    831
    
    
    
    1,197Prepaid expenses, deposits and other assets
    
    
    37
    
    
    
    388Accounts payable
    
    
    634
    
    
    
    561Accrued warranty
    
    
    101
    
    
    
    (274
    )Accrued expenses
    
    
    (177
    )
    
    
    (496
    )Accrued royalties payable
    
    
    68
    
    
    
    (230
    )Income taxes payable
    
    
    (549
    )
    
    
    (19
    )Net cash provided by operating activities of discontinued operations
    
    
    
    
    
    
    12Net cash (used in)/provided by operating activities
    
    
    (1,820
    )
    
    
    755Cash flows from investing activities:Proceeds on sale of cable product line
    
    
    
    
    
    
    3,012Proceeds from note receivable
    
    
    106
    
    
    
    17Redemption/maturity of short term investments
    
    
    
    
    
    
    2,220Purchase of assets
    
    
    
    
    
    
    (300
    )Purchase of property and equipment
    
    
    (165
    )
    
    
    (399
    )Net cash used in investing activities of discontinued operations
    
    
    
    
    
    
    (57
    )Net cash (used in)/provided by investing activities
    
    
    (59
    )
    
    
    4,493Cash flows from financing activities:Exercise of common stock options
    
    
    44
    
    
    
    Repurchase of treasury stock
    
    
    (69
    )
    
    
    Net cash used in financing activities
    
    
    (25
    )
    
    
    Net increase in cash and cash equivalents
    
    
    (1,904
    )
    
    
    5,248Effect of exchange rate changes on cash and cash equivalents
    
    
    5
    
    
    
    494Cash and cash equivalents, beginning of period
    
    
    66,046
    
    
    
    57,976Cash and cash equivalents, end of period
    
    $
    64,147
    
    
    $
    63,718Supplemental disclosure of cash flow information:Cash paid during the period for income taxes
    
    
    892
    
    
    
    285
  5




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Tollgrade Communications, Inc. and Subsidiaries
 
 Consolidated Statements of Changes in Shareholders Equity


In thousands (Unaudited)
 Common Stock
    
    
    
    
    
    
    Treasury StockAccumulatedAdditional
    
    
    
    
    
    
    
    
    
    OtherPaid-In
    
    
    
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Shares
    
    
    Amount
    
    
    Earnings
    
    
    Loss
    
    
    TotalBalance atDecember 31, 2009
    
    
    13,788
    
    
    $
    2,746
    
    
    $
    75,244
    
    
    
    1,151
    
    
    
    ($8,563
    )
    
    $
    9,543
    
    
    
    ($1,227
    )
    
    $
    77,743Exercise of
common stock options
    
    
    13
    
    
    
    2
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44Purchase of
treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    (69
    )
    
    
    
    
    
    
    
    
    
    
    (69
    )Compensation
expense for options and restricted stock, net
    
    
    70
    
    
    
    26
    
    
    
    470
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    496Foreign
currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (183
    )
    
    
    (183
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (436
    )
    
    
    
    
    
    
    (436
    )Balance at June 30, 2010
    
    
    13,871
    
    
    $
    2,774
    
    
    $
    75,756
    
    
    
    1,162
    
    
    
    ($8,632
    )
    
    $
    9,107
    
    
    
    ($1,410
    )
    
    $
    77,595
  6




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##### Table of Contents



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
 1. BASIS OF PRESENTATION
  RECENTLY ISSUED ACCOUNTING GUIDANCE
  2. FAIR VALUE MEASUREMENTS
  
    
    Level 1  Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities;
    
    Level 2  Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly, including quoted prices for
similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted prices that
are observable for the asset or liability (e.g., interest rates); and inputs that
are derived principally from or corroborated by observable market data by correlation or
other means; and
    
    Level 3  Inputs that are both significant to the fair value measurement and
unobservable.
 7




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##### Table of Contents



3. STOCK-BASED COMPENSATION
   Stock-Based Compensation Expense
   8




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##### Table of Contents



Number of
    
    
    Range of Option
    
    Weighted AverageShares
    
    
    Prices
    
    Exercise PriceOutstanding, December 31, 2009
    
    
    1,684,795
    
    
    $3.27 -       $159.19
    
    $
    27.29Granted
    
    
    477,500
    
    
    $6.43 -       $6.48
    
    $
    6.48Exercised
    
    
    (13,167
    )
    
    $3.40
    
    
    3.40Cancelled/Forfeited/Expired
    
    
    (539,173
    )
    
    $6.09 -       $43.91
    
    
    25.71Outstanding, June 30, 2010
    
    
    1,609,955
    
    
    $3.27        $159.19
    
    $
    12.45
 4. SEVERANCE
     9




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5. INTANGIBLE ASSETS
  June 30, 2010ImpairmentsAccumulated
    
    
    During theUseful Life
    
    
    
    
    
    
    Amortization and
    
    
    ReportingAmortizing Intangible Assets:
    
    (Years)
    
    
    Gross
    
    
    Impairments
    
    
    Period
    
    
    NetPost warranty service agreements
    
    
    6-15
    
    
    $
    37,300
    
    
    $
    32,582
    
    
    $
    
    
    
    $
    4,718Technology
    
    
    2-10
    
    
    
    13,974
    
    
    
    12,969
    
    
    
    
    
    
    $
    1,005Customer relationships
    
    
    5-15
    
    
    
    883
    
    
    
    637
    
    
    
    
    
    
    $
    246Tradenames and other
    
    
    1-10
    
    
    
    571
    
    
    
    499
    
    
    
    
    
    
    $
    72Total Intangible Assets
    
    
    
    
    
    $
    52,728
    
    
    $
    46,687
    
    
    $
    0
    
    
    $
    6,041
 December 31, 2009ImpairmentsAccumulated
    
    
    During theUseful Life
    
    
    
    
    
    
    Amortization and
    
    
    ReportingAmortizing Intangible Assets:
    
    (Years)
    
    
    Gross
    
    
    Impairments
    
    
    Period
    
    
    NetPost warranty service agreements
    
    
    6-15
    
    
    $
    37,779
    
    
    $
    5,438
    
    
    $
    26,960
    
    
    $
    5,381Technology
    
    
    2-10
    
    
    
    14,000
    
    
    
    12,488
    
    
    
    191
    
    
    
    1,321Customer relationships
    
    
    5-15
    
    
    
    927
    
    
    
    613
    
    
    
    
    
    
    
    314Tradenames and other
    
    
    1-10
    
    
    
    537
    
    
    
    443
    
    
    
    
    
    
    
    94Total Intangible Assets
    
    
    
    
    
    $
    53,243
    
    
    $
    18,982
    
    
    $
    27,151
    
    
    $
    7,110
   Impairments
 Long-Lived Assets
   10




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##### Table of Contents



6. INVENTORIES
  June 30, 2010
    
    
    December 31, 2009Raw materials
    
    $
    3,428
    
    
    $
    3,584Work in process
    
    
    676
    
    
    
    830Finished goods
    
    
    1,925
    
    
    
    2,352Total Gross Inventory
    
    
    6,029
    
    
    
    6,766Reserves for slow moving and obsolete inventory
    
    
    (4,462
    )
    
    
    (4,647
    )Net Inventory
    
    $
    1,567
    
    
    $
    2,119
 7. PRODUCT WARRANTY
  June 30, 2010
    
    
    December 31, 2009Balance at the beginning of the period
    
    $
    504
    
    
    $
    926Accruals for warranties issued during the period
    
    
    234
    
    
    
    894Settlements during the period
    
    
    (173
    )
    
    
    (1,316
    )Balance at the end of the period
    
    $
    565
    
    
    $
    504
 8. PER SHARE INFORMATION
   11




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9. REVENUE CONCENTRATION, MAJOR CUSTOMERS
  Three Months Ended
    
    
    Six Months EndedJune 30, 2010
    
    
    June 30, 2009
    
    
    June 30, 2010
    
    
    June 30, 2009Test Products
    
    $
    3,606
    
    
    
    31
    %
    
    $
    3,359
    
    
    
    32
    %
    
    $
    6,036
    
    
    
    26
    %
    
    $
    6,914
    
    
    
    33
    %MCU
    
    
    1,330
    
    
    
    12
    %
    
    
    782
    
    
    
    7
    %
    
    
    3,122
    
    
    
    14
    %
    
    
    3,056
    
    
    
    15
    %Services
    
    
    6,564
    
    
    
    57
    %
    
    
    6,502
    
    
    
    61
    %
    
    
    13,509
    
    
    
    60
    %
    
    
    10,990
    
    
    
    52
    %Total
    
    $
    11,500
    
    
    
    100
    %
    
    $
    10,643
    
    
    
    100
    %
    
    $
    22,667
    
    
    
    100
    %
    
    $
    20,960
    
    
    
    100
    %
   Three Months Ended
    
    
    Six Months EndedJune 30, 2010
    
    
    June 30, 2009
    
    
    June 30, 2010
    
    
    June 30, 2009Customer A
    
    $
    2,317
    
    
    
    20
    %
    
    $
    2,086
    
    
    
    20
    %
    
    $
    5,147
    
    
    
    23
    %
    
    $
    5,155
    
    
    
    25
    %Customer B
    
    
    1,806
    
    
    
    16
    %
    
    
    1,558
    
    
    
    15
    %
    
    
    3,558
    
    
    
    16
    %
    
    
    
    
    
    
    Customer C
    
    
    
    
    
    
    
    
    
    
    1,330
    
    
    
    13
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,123
    
    
    
    
    
    
    $
    4,974
    
    
    
    
    
    
    $
    8,705
    
    
    
    
    
    
    $
    5,155
  Three Months Ended
    
    
    Six Months EndedJune 30, 2010
    
    
    June 27, 2009
    
    
    June 30, 2010
    
    
    June 27, 2009RegionEurope/Africa
    
    $
    4,151
    
    
    
    36
    %
    
    $
    2,494
    
    
    
    23
    %
    
    $
    7,606
    
    
    
    33
    %
    
    $
    4,563
    
    
    
    22
    %Americas
    
    
    412
    
    
    
    4
    %
    
    
    938
    
    
    
    9
    %
    
    
    647
    
    
    
    3
    %
    
    
    1,704
    
    
    
    8
    %Asia
    
    
    347
    
    
    
    3
    %
    
    
    332
    
    
    
    3
    %
    
    
    359
    
    
    
    2
    %
    
    
    499
    
    
    
    2
    %Total International
    
    
    4,910
    
    
    
    43
    %
    
    
    3,764
    
    
    
    35
    %
    
    
    8,612
    
    
    
    38
    %
    
    
    6,766
    
    
    
    32
    %Total Domestic
    
    
    6,590
    
    
    
    57
    %
    
    
    6,879
    
    
    
    65
    %
    
    
    14,055
    
    
    
    62
    %
    
    
    14,194
    
    
    
    68
    %Total Revenue
    
    $
    11,500
    
    
    
    100
    %
    
    $
    10,643
    
    
    
    100
    %
    
    $
    22,667
    
    
    
    100
    %
    
    $
    20,960
    
    
    
    100
    %
 10. COMPREHENSIVE INCOME
 Three Months Ended
    
    
    Six Months EndedJune 30, 2010
    
    
    June 27, 2009
    
    
    June 30, 2010
    
    
    June 27, 2009Net Income/(Loss)
    
    $
    1,227
    
    
    ($
    1,509
    )
    
    ($
    436
    )
    
    ($
    2,732
    )Foreign currency translation
    
    
    (52
    )
    
    
    937
    
    
    
    (183
    )
    
    
    620Comprehensive Income/(Loss)
    
    $
    1,175
    
    
    ($
    572
    )
    
    ($
    619
    )
    
    ($
    2,112
    )
 12




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##### Table of Contents



Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 The following discussion should be read in conjunction with the Unaudited Condensed Consolidated
Financial Statements and Notes thereto appearing elsewhere in this report. Additionally, when used
in this form 10-Q unless the context requires otherwise, the terms we, our, and us refer to
Tollgrade Communications, Inc.
 CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.
   Cable Product Line
  Overview
    13




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##### Table of Contents




    
    We reviewed our organic growth initiatives and as a result have reduced a number of our
internal initiatives, while sharpening our focus on near-term opportunities with the best
prospects for revenue and profitability. We reduced capital investment in areas involving
higher risk prior to any realized returns. As a result, early in the second quarter of
2010, we discontinued two yet to be announced projects, one of which was still in its early
research stage and the other of which was in the initial stages of development.
    
    We will continue to fully support our broad product portfolio, including hardware,
software and services offerings targeted at the telecommunications market, while ensuring
that our existing and new customers receive the highest level of service. We will also
continue to support growth initiatives in our telecommunications product lines, including
customer-driven expansion of our hardware and software offerings.
    
    We will continue to support our LightHouse power utility product offering. We completed
an expanded trial of this product with a major U.S. power utility customer in late June
2010 and expect to receive the customers decision regarding deployment or further trial
expansion during the third quarter 2010. We also have a trial underway for this product
offering with a large Canadian utility customer.
    
    We will continue to pursue opportunities to expand our professional services and managed
service offerings. We have taken steps to forge or strengthen relationships with global
network equipment manufacturers, as well as direct relationships with service providers, to
offer new service capabilities. Our goal is to increase our penetration in the services
market and in our telecommunications accounts.
    
    We anticipate that the reduction in our workforce along with the attrition of an
additional seven employees over the first half of  2010 should
generate annualized savings in excess
of $6.2 million in  salary and benefits costs.
  Products
  14




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##### Table of Contents



Electric Utility Monitoring Products
   Services and Managed Services
   Our Customers
  Three Months Ended
    
    
    Six Months EndedJune 30, 2010
    
    
    June 27, 2009
    
    
    June 30, 2010
    
    
    June 27, 2009Large Domestic Carriers
    
    $
    4,327
    
    
    
    38
    %
    
    $
    3,948
    
    
    
    37
    %
    
    $
    8,862
    
    
    
    39
    %
    
    $
    9,293
    
    
    
    44
    %European Telcos
    
    $
    2,294
    
    
    
    20
    %
    
    $
    2,201
    
    
    
    21
    %
    
    $
    4,264
    
    
    
    19
    %
    
    $
    4,784
    
    
    
    23
    %
 15




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##### Table of Contents



Backlog
  RESULTS OF OPERATIONS
 THREE MONTHS ENDED JUNE 30, 2010 COMPARED TO THREE MONTHS ENDED JUNE 27, 2009
 Revenue
 June 30, 2010
    
    
    June 27, 2009
    
    
    Change
    
    
    %System Test Products
    
    $
    3,606
    
    
    $
    3,359
    
    
    $
    247
    
    
    
    7
    %MCU
    
    
    1,330
    
    
    
    782
    
    
    
    548
    
    
    
    70
    %Total Products
    
    
    4,936
    
    
    
    4,141
    
    
    
    795
    
    
    
    19
    %Services
    
    
    6,564
    
    
    
    6,502
    
    
    
    62
    
    
    
    1
    %Total Revenues
    
    $
    11,500
    
    
    $
    10,643
    
    
    $
    857
    
    
    
    8
    %
   Gross Profit
  16




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##### Table of Contents



Selling and Marketing Expenses
 June 30, 2010
    
    
    June 27, 2009
    
    
    Change
    
    
    %Employee Costs
    
    $
    956
    
    
    $
    1,165
    
    
    ($
    209
    )
    
    
    -18
    %Travel Expenses
    
    
    92
    
    
    
    199
    
    
    
    (107
    )
    
    
    -54
    %Consulting Expenses
    
    
    90
    
    
    
    92
    
    
    
    (2
    )
    
    
    -2
    %Other Expenses
    
    
    135
    
    
    
    172
    
    
    
    (37
    )
    
    
    -22
    %Total
    
    $
    1,273
    
    
    $
    1,628
    
    
    ($
    355
    )
    
    
    -22
    %
  General and Administrative Expenses
 June 30, 2010
    
    
    June 27, 2009
    
    
    Change
    
    
    %Employee Costs
    
    $
    817
    
    
    $
    1,047
    
    
    ($
    230
    )
    
    
    -22
    %Legal & Professional Fees
    
    
    621
    
    
    
    1,287
    
    
    
    (666
    )
    
    
    -52
    %General Insurance Expense
    
    
    92
    
    
    
    171
    
    
    
    (79
    )
    
    
    -46
    %Other Expense
    
    
    424
    
    
    
    334
    
    
    
    90
    
    
    
    27
    %Total
    
    $
    1,954
    
    
    $
    2,839
    
    
    ($
    885
    )
    
    
    -31
    %
  17




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##### Table of Contents



Research and Development Expenses
 June 30, 2010
    
    
    June 27, 2009
    
    
    Change
    
    
    %Employee Costs
    
    $
    1,527
    
    
    $
    2,045
    
    
    ($
    518
    )
    
    
    -25
    %Professional Fees
    
    
    106
    
    
    
    129
    
    
    
    (23
    )
    
    
    -18
    %Depreciation
    
    
    145
    
    
    
    157
    
    
    
    (12
    )
    
    
    -8
    %Cost of sales allocation
    
    
    (377
    )
    
    
    (250
    )
    
    
    (127
    )
    
    
    51
    %Other
    
    
    279
    
    
    
    324
    
    
    
    (45
    )
    
    
    -14
    %Total
    
    $
    1,680
    
    
    $
    2,405
    
    
    ($
    725
    )
    
    
    -30
    %
  Severance Expenses
   Other (Expense)/Income
  18




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Income Taxes
   Loss from Continuing Operations and Loss Per Share from Continuing Operations
  SIX MONTHS ENDED JUNE 30, 2010 COMPARED TO SIX MONTHS ENDED JUNE 27, 2009
 Revenue
 June 30, 2010
    
    
    June 27, 2009
    
    
    Change
    
    
    %System Test Products
    
    $
    6052
    
    
    $
    6,914
    
    
    ($
    862
    )
    
    
    -12
    %MCU
    
    
    3106
    
    
    
    3,056
    
    
    $
    50
    
    
    
    2
    %Total Products
    
    
    9,158
    
    
    
    9,970
    
    
    ($
    812
    )
    
    
    -8
    %Services
    
    
    13,509
    
    
    
    10,990
    
    
    $
    2,519
    
    
    
    23
    %Total Revenues
    
    $
    22,667
    
    
    $
    20,960
    
    
    $
    1,707
    
    
    
    8
    %
   19




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##### Table of Contents



Gross Profit
  Selling and Marketing Expenses
 June 30, 2010
    
    
    June 27, 2009
    
    
    Change
    
    
    %Employee Costs
    
    $
    2,459
    
    
    $
    2,312
    
    
    $
    147
    
    
    
    6
    %Travel Expenses
    
    
    299
    
    
    
    370
    
    
    
    (71
    )
    
    
    -19
    %Consulting
    
    
    227
    
    
    
    204
    
    
    
    23
    
    
    
    11
    %Other
    
    
    351
    
    
    
    397
    
    
    
    (46
    )
    
    
    -12
    %Total
    
    $
    3,336
    
    
    $
    3,283
    
    
    $
    53
    
    
    
    2
    %
  General and Administrative Expenses
 June 30, 2010
    
    
    June 27, 2009
    
    
    Change
    
    
    %Employee Costs
    
    $
    2,146
    
    
    $
    2,191
    
    
    ($
    45
    )
    
    
    -2
    %Legal & Professional Fees
    
    
    930
    
    
    
    2,086
    
    
    
    (1,156
    )
    
    
    -55
    %General Insurance
    
    
    181
    
    
    
    341
    
    
    
    (160
    )
    
    
    -47
    %Other
    
    
    915
    
    
    
    796
    
    
    
    119
    
    
    
    15
    %Total
    
    $
    4,172
    
    
    $
    5,414
    
    
    ($
    1,242
    )
    
    
    -23
    %
 20




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##### Table of Contents



Research and Development Expenses
 June 30, 2010
    
    
    June 27, 2009
    
    
    Change
    
    
    %Employee Costs
    
    $
    3,415
    
    
    $
    4,038
    
    
    ($
    623)
    
    
    
    -15
    %Professional Fees
    
    
    462
    
    
    
    279
    
    
    
    183
    
    
    
    66
    %Depreciation
    
    
    288
    
    
    
    347
    
    
    
    (59)
    
    
    
    -17
    %Facilities
    
    
    318
    
    
    
    210
    
    
    
    108
    
    
    
    51
    %Cost of sales allocation
    
    
    (706
    )
    
    
    (863
    )
    
    
    157
    
    
    
    -18
    %Other
    
    
    263
    
    
    
    430
    
    
    
    (167
    )
    
    
    -39
    %Total
    
    $
    4,040
    
    
    $
    4,441
    
    
    ($
    401
    )
    
    
    -9
    %
  Severance Expenses
  21




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Other (Expense)/Income
   Income Taxes
   Loss from Continuing Operations and Loss Per Share from Continuing Operations
  22




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LIQUIDITY AND CAPITAL RESOURCES
      COMMITMENTS AND CONTRACTUAL OBLIGATIONS
  23




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##### Table of Contents



Less than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    yearsOperating Lease Obligations
    
    
    1,355
    
    
    $
    441
    
    
    $
    889
    
    
    $
    25
    
    
    $
    0Severance Obligation
    
    
    300
    
    
    
    300
    
    
    
    0
    
    
    
    0
    
    
    
    0Uncertain Tax Obligations
    
    
    414
    
    
    
    0
    
    
    
    414
    
    
    
    0
    
    
    
    0Pension Obligations
    
    
    897
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    897Total
    
    $
    2,966
    
    
    $
    741
    
    
    $
    1,303
    
    
    $
    25
    
    
    $
    897
   Application of Critical Accounting Policies
   24




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##### Table of Contents



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 Item 4. CONTROLS AND PROCEDURES
   
 PART II. OTHER INFORMATION
 
 Item 1A.
    
    RISK FACTORS
  Reduction in Workforce
  25




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##### Table of Contents



Item 6. EXHIBITS
 (a)
    
    Exhibits:
  ExhibitNumber
    
    Description10.1
    
    Summary of commission compensation program for Robert H. King
adopted April 27, 2010, incorporated by reference to the Companys
Report on Form 8-K filed on April 30, 201010.2
    
    Separation and Mutual Release Agreement, dated June 18, 2010,
between Tollgrade Communications, Inc. and Joseph A. Ferrara,
filed herewith31.1
    
    Certification of Chief Executive Officer, filed herewith.31.2
    
    Certification of Chief Financial Officer, filed herewith.32
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18.U.S.C. Section 350, filed herewith.
 ®  ®  ®  ®  ®
 26




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##### Table of Contents



SIGNATURES
  Tollgrade Communications, Inc.(Registrant)Dated: August
3, 2010
    
    /s/ Edward H. Kennedy

Edward H. KennedyChief Executive Officer and PresidentDated: August
3, 2010
    
    /s/ Michael D. Bornak

Michael D. BornakChief Financial Officer and Treasurer
 27




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    Summary of commission compensation program for Robert H. King
adopted April 27, 2010, incorporated by reference to the Companys
Report on Form 8-K filed on April 30, 201010.2
    
    Separation and Mutual Release Agreement, dated June 18, 2010,
between Tollgrade Communications, Inc. and Joseph A. Ferrara,
filed herewith31.1
    
    Certification of Chief Executive Officer, filed herewith.31.2
    
    Certification of Chief Financial Officer, filed herewith.32
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18.U.S.C. Section 350, filed herewith.
 28