##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM
10-Q/A
 (Amendment No. 1)
  þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 24, 2005
 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    493 Nixon Rd.
Cheswick, PA 15024
 412-820-1400
  Yes  þ
    
    No  o
  o þ o
  Yes  o
    

No  þ




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2




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##### 



TOLLGRADE COMMUNICATIONS, INC.
 Quarterly Report on Form 10-Q/A
For the Quarter Ended September 24, 2005
 Table of Contents
 PAGENO.PART 1. FINANCIAL INFORMATION RESTATEDItem 1 Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of September 24, 2005 and December 31, 2004
    
    
    4Condensed Consolidated Statements of Operations for the three month and nine month periods ended September 24, 2005 and September 25, 2004
    
    
    5Condensed Consolidated Statement of Changes in Shareholders Equity for the nine month period ended September 24, 2005
    
    
    6Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 24, 2005 and September 25, 2004
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8Report of Independent Registered Public Accounting Firm
    
    
    18Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    45Item 4 Controls and Procedures
    
    
    46PART II. OTHER INFORMATIONItem 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    48Item 6 Exhibits
    
    
    48SIGNATURES
    
    
    50EXHIBIT INDEX
    
    
    51EX-15EX-31.1EX-31.2EX-32EXHIBIT 15EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  3




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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 per share amounts)
 (Unaudited)
 September 24,
    
    
    December 31,2005
    
    
    2004*Restated  See Note 2ASSETSCurrent assets:Cash and cash equivalents
    
    $
    35,787
    
    
    $
    32,622Short-term investments
    
    
    21,526
    
    
    
    18,537Accounts receivable:Trade, net of allowance for doubtful accounts of $464
in 2005 and $754 in 2004
    
    
    13,299
    
    
    
    10,691Other
    
    
    1,460
    
    
    
    106Inventory
    
    
    10,279
    
    
    
    12,941Prepaid expenses and other current assets
    
    
    957
    
    
    
    2,543Refundable income taxes
    
    
    752
    
    
    
    964Deferred tax assets
    
    
    1,198
    
    
    
    1,143Total current assets
    
    
    85,258
    
    
    
    79,547Property and equipment, net
    
    
    6,799
    
    
    
    7,860Deferred tax assets
    
    
    232
    
    
    
    197Intangibles, net
    
    
    39,888
    
    
    
    40,518Goodwill
    
    
    21,562
    
    
    
    22,220Capitalized software costs, net
    
    
    4,585
    
    
    
    6,453Receivable from officer
    
    
    154
    
    
    
    156Other assets
    
    
    153
    
    
    
    194Total assets
    
    $
    158,631
    
    
    $
    157,145LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    941
    
    
    $
    1,087Accrued warranty
    
    
    2,067
    
    
    
    2,081Accrued expenses
    
    
    1,972
    
    
    
    1,735Accrued salaries and wages
    
    
    444
    
    
    
    718Accrued royalties payable
    
    
    225
    
    
    
    451Income taxes payable
    
    
    179
    
    
    
    169Deferred income
    
    
    2,108
    
    
    
    2,461Total current liabilities
    
    
    7,936
    
    
    
    8,702Deferred tax liabilities
    
    
    2,540
    
    
    
    2,042Total liabilities
    
    
    10,476
    
    
    
    10,744Commitments and contingent liabilities
    
    
    
    
    
    
    Shareholders equity:Preferred stock, $1.00 par value; authorized shares
10,000,000; issued shares, -0- in 2005 and 2004
    
    
    
    
    
    
    Common stock, $.20 par value; authorized shares,
50,000,000; issued shares, 13,631,540 in 2005
and 13,622,940 in 2004
    
    
    2,726
    
    
    
    2,725Additional paid-in capital
    
    
    71,207
    
    
    
    71,135Treasury stock, at cost, 461,800 shares in 2005 and 2004
    
    
    (4,791
    )
    
    
    (4,791
    )Retained earnings
    
    
    79,013
    
    
    
    77,332Total shareholders equity
    
    
    148,155
    
    
    
    146,401Total liabilities and shareholders equity
    
    $
    158,631
    
    
    $
    157,145
 
 *
    
    Amounts derived from audited financial statements presented in the Companys Annual Report on
Form 10-K for the year ended December 31, 2005  4




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TOLLGRADE
COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 For the
    
    
    For theThree Months Ended
    
    
    Nine Months EndedSeptember
    
    
    September
    
    
    September
    
    
    September24, 2005
    
    
    25, 2004
    
    
    24, 2005
    
    
    25, 2004Restated  See Note 2
    
    
    Restated  See Note 2Revenues:Products
    
    $
    13,573
    
    
    $
    10,236
    
    
    $
    38,412
    
    
    $
    36,959Services
    
    
    3,229
    
    
    
    3,402
    
    
    
    9,757
    
    
    
    9,752Total revenues:
    
    
    16,802
    
    
    
    13,638
    
    
    
    48,169
    
    
    
    46,711Cost of product sales:Products
    
    
    5,987
    
    
    
    4,556
    
    
    
    18,210
    
    
    
    16,836Services
    
    
    911
    
    
    
    945
    
    
    
    2,643
    
    
    
    2,803Amortization of intangibles
    
    
    718
    
    
    
    662
    
    
    
    2,147
    
    
    
    1,949Impairment of acquired software
    
    
    424
    
    
    
    
    
    
    
    424
    
    
    
    8,040
    
    
    
    6,163
    
    
    
    23,424
    
    
    
    21,588Gross Profit:
    
    
    8,762
    
    
    
    7,475
    
    
    
    24,745
    
    
    
    25,123Selling and marketing
    
    
    1,918
    
    
    
    2,198
    
    
    
    6,594
    
    
    
    7,053General and administrative
    
    
    1,910
    
    
    
    1,849
    
    
    
    5,640
    
    
    
    5,444Research and development
    
    
    3,465
    
    
    
    3,853
    
    
    
    10,554
    
    
    
    12,160Severance
    
    
    
    
    
    
    269
    
    
    
    775
    
    
    
    269Total operating expenses
    
    
    7,293
    
    
    
    8,169
    
    
    
    23,563
    
    
    
    24,926Income (loss) from operations
    
    
    1,469
    
    
    
    (694
    )
    
    
    1,182
    
    
    
    197Interest and other income, net
    
    
    313
    
    
    
    109
    
    
    
    827
    
    
    
    267Income (loss) before income taxes
    
    
    1,782
    
    
    
    (585
    )
    
    
    2,009
    
    
    
    464Provision (benefit) for income taxes
    
    
    311
    
    
    
    (207
    )
    
    
    328
    
    
    
    130Net income (loss)
    
    $
    1,471
    
    
    $
    (378
    )
    
    $
    1,681
    
    
    $
    334Earnings (loss) per share
information:Weighted average shares of common
stock and equivalents:Basic
    
    
    13,162
    
    
    
    13,148
    
    
    
    13,162
    
    
    
    13,134Diluted
    
    
    13,221
    
    
    
    13,148
    
    
    
    13,202
    
    
    
    13,263Net income (loss) per common and
common equivalent shares:Basic
    
    $
    0.11
    
    
    $
    (0.03
    )
    
    $
    0.13
    
    
    $
    0.03Diluted
    
    $
    0.11
    
    
    $
    (0.03
    )
    
    $
    0.13
    
    
    $
    0.03
  5




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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
 For the Nine Months Ended September 24, 2005
 
 AdditionalPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Treasury
    
    
    RetainedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Earnings
    
    
    Stock
    
    
    Earnings
    
    
    TotalBalance at
December 31, 2004 ,
as originally reported
    
    
    
    
    
    $
    
    
    
    
    13,623
    
    
    $
    2,725
    
    
    $
    71,135
    
    
    $
    (4,791
    )
    
    $
    78,440
    
    
    $
    147,509Restatement 
adjustments (Note 2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,108
    )
    
    
    (1,108
    )Balance at
December 31, 2004 
restated
    
    
    
    
    
    $
    
    
    
    
    13,623
    
    
    $
    2,725
    
    
    $
    71,135
    
    
    $
    (4,791
    )
    
    $
    77,332
    
    
    $
    146,401Exercise of common
stock options
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    1
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    65Tax benefit from
exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,681
    
    
    
    1,681Balance at September
24,
2005  restated
    
    
    
    
    
    $
    
    
    
    
    13,632
    
    
    $
    2,726
    
    
    $
    71,207
    
    
    $
    (4,791
    )
    
    $
    79,013
    
    
    $
    148,155
  6




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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months EndedSeptember
    
    
    September24, 2005
    
    
    25, 2004Restated  See Note 2Cash flows from operating activities:Net income
    
    $
    1,681
    
    
    $
    334Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    4,038
    
    
    
    3,896Tax benefit from exercise of stock options
    
    
    8
    
    
    
    65Deferred income taxes
    
    
    408
    
    
    
    (22
    )Provision for losses on inventory
    
    
    237
    
    
    
    37Impairment of acquired software
    
    
    424
    
    
    
    Provision for allowance for doubtful accounts
    
    
    80
    
    
    
    (51
    )Changes in assets and liabilities:(Increase) decrease in accounts receivable-trade
    
    
    (2,688
    )
    
    
    17(Increase) decrease in accounts receivable-other
    
    
    (875
    )
    
    
    3Decrease (increase) in inventory
    
    
    2,425
    
    
    
    (63
    )Decrease in prepaid expenses and other assets
    
    
    1,629
    
    
    
    74Decrease (increase) in refundable taxes
    
    
    212
    
    
    
    (41
    )Decrease in accounts payable
    
    
    (146
    )
    
    
    (372
    )Decrease in accrued warranty
    
    
    (14
    )
    
    
    (122
    )Increase in accrued expenses and deferred income
    
    
    63
    
    
    
    519Decrease in accrued royalties payable
    
    
    (226
    )
    
    
    (192
    )Decrease in accrued salaries and wages
    
    
    (274
    )
    
    
    (332
    )Increase in income taxes payable
    
    
    10
    
    
    
    51Net cash provided by operating activities
    
    
    6,992
    
    
    
    3,801Cash flows from investing activities:Purchase of short-term investments
    
    
    (15,479
    )
    
    
    (9,291
    )Redemption/maturity of short-term investments
    
    
    12,490
    
    
    
    7,481Capital expenditures, including capitalized software
    
    
    (903
    )
    
    
    (2,040
    )Investments in other assets
    
    
    
    
    
    
    (715
    )Net cash used in investing activities
    
    
    (3,892
    )
    
    
    (4,565
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    65
    
    
    
    270Net cash provided by financing activities
    
    
    65
    
    
    
    270Net increase (decrease) in cash and cash equivalents
    
    
    3,165
    
    
    
    (494
    )Cash and cash equivalents at beginning of period
    
    
    32,622
    
    
    
    31,060Cash and cash equivalents at end of period
    
    $
    35,787
    
    
    $
    30,566
  7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
   RECLASSIFICATIONS
  2. RESTATEMENT
   8




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BALANCE SHEET
 September 24, 2005
    
    
    September 24, 2005
    
    
    December 31, 2004
    
    
    December 31, 2004As Reported
    
    
    As Restated
    
    
    As Reported
    
    
    As RestatedASSETSCurrent assets
    
    $
    85,258
    
    
    $
    85,258
    
    
    $
    79,547
    
    
    $
    79,547Intangible assets
    
    
    45,001
    
    
    
    39,888
    
    
    
    45,108
    
    
    
    40,518Goodwill
    
    
    18,682
    
    
    
    21,562
    
    
    
    19,340
    
    
    
    22,220Other long-term assets
    
    
    11,896
    
    
    
    11,923
    
    
    
    14,839
    
    
    
    14,860Total assets
    
    $
    160,837
    
    
    $
    158,631
    
    
    $
    158,834
    
    
    $
    157,145LIABILITIES AND SHAREHOLDERS EQUITYTotal current liabilities
    
    $
    7,936
    
    
    $
    7,936
    
    
    $
    8,702
    
    
    $
    8,702Deferred tax liabilities
    
    
    3,298
    
    
    
    2,540
    
    
    
    2,623
    
    
    
    2,042Total liabilities
    
    
    11,234
    
    
    
    10,476
    
    
    
    11,325
    
    
    
    10,744Total shareholders equity
    
    
    149,603
    
    
    
    148,155
    
    
    
    147,509
    
    
    
    146,401Total liabilities and shareholders equity
    
    $
    160,837
    
    
    $
    158,631
    
    
    $
    158,834
    
    
    $
    157,145
 Three Months Ended
    
    
    Nine Months EndedSeptember 24, 2005
    
    
    September 24, 2005As Reported
    
    
    As Restated
    
    
    As Reported
    
    
    As RestatedTotal revenues
    
    $
    16,802
    
    
    $
    16,802
    
    
    $
    48,169
    
    
    $
    48,169Cost of salesProducts and Services
    
    
    6,898
    
    
    
    6,898
    
    
    
    20,853
    
    
    
    20,853Amortization
    
    
    543
    
    
    
    718
    
    
    
    1,624
    
    
    
    2,147Impairment of acquired software
    
    
    424
    
    
    
    424
    
    
    
    424
    
    
    
    4247,865
    
    
    
    8,040
    
    
    
    22,901
    
    
    
    23,424Gross profit
    
    
    8,937
    
    
    
    8,762
    
    
    
    25,268
    
    
    
    24,745Total operating expenses
    
    
    7,294
    
    
    
    7,293
    
    
    
    23,563
    
    
    
    23,563Income from operations
    
    
    1,643
    
    
    
    1,469
    
    
    
    1,705
    
    
    
    1,182Total other income
    
    
    313
    
    
    
    313
    
    
    
    827
    
    
    
    827Income before taxes
    
    
    1,956
    
    
    
    1,782
    
    
    
    2,532
    
    
    
    2,009Provision for income taxes
    
    
    372
    
    
    
    311
    
    
    
    511
    
    
    
    328Net income
    
    $
    1,584
    
    
    $
    1,471
    
    
    $
    2,021
    
    
    $
    1,681Weighted average shares of
common stock and equivalents:Basic
    
    
    13,162
    
    
    
    13,162
    
    
    
    13,162
    
    
    
    13,162Diluted
    
    
    13,221
    
    
    
    13,221
    
    
    
    13,202
    
    
    
    13,202Net income per common share:Basic
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.15
    
    
    $
    0.13Diluted
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.15
    
    
    $
    0.13
 9




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Three Months Ended
    
    
    Nine Months EndedSeptember 25, 2004
    
    

September 25, 2004As Reported
    
    
    As Restated
    
    
    As Reported
    
    
    As RestatedTotal revenues
    
    $
    13,638
    
    
    $
    13,638
    
    
    $
    46,711
    
    
    $
    46,711Cost of salesProducts and Services
    
    
    5,501
    
    
    
    5,501
    
    
    
    19,639
    
    
    
    19,639Amortization
    
    
    510
    
    
    
    662
    
    
    
    1,493
    
    
    
    1,9496,011
    
    
    
    6,163
    
    
    
    21,132
    
    
    
    21,588Gross profit
    
    
    7,627
    
    
    
    7,475
    
    
    
    25,579
    
    
    
    25,123Total operating expenses
    
    
    8,169
    
    
    
    8,169
    
    
    
    24,927
    
    
    
    24,926(Loss) income from operations
    
    
    (542
    )
    
    
    (694
    )
    
    
    652
    
    
    
    197Other income
    
    
    109
    
    
    
    109
    
    
    
    267
    
    
    
    267(Loss) income before taxes
    
    
    (433
    )
    
    
    (585
    )
    
    
    919
    
    
    
    464(Benefit) provision for income taxes
    
    
    (159
    )
    
    
    (207
    )
    
    
    248
    
    
    
    130Net (loss) income
    
    $
    (274
    )
    
    $
    (378
    )
    
    $
    671
    
    
    $
    334Weighted average shares of common
stock and equivalents:Basic
    
    
    13,148
    
    
    
    13,148
    
    
    
    13,134
    
    
    
    13,134Diluted
    
    
    13,148
    
    
    
    13,148
    
    
    
    13,263
    
    
    
    13,263Net (loss) income per common share:Basic
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    0.05
    
    
    $
    0.03Diluted
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    0.05
    
    
    $
    0.03
  3. ACCOUNTING FOR STOCK-BASED COMPENSATION
  10




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Three Months Ended
    
    
    Nine Months Ended(In Thousands)
    
    
    (In Thousands)September
    
    
    September
    
    
    September
    
    
    September24, 2005
    
    
    25, 2004
    
    
    24, 2005
    
    
    25, 2004Restated  See Note 2
    
    
    Restated  See Note 2Net income (loss), as restated
    
    $
    1,471
    
    
    $
    (378
    )
    
    $
    1,681
    
    
    $
    334Deduct: Total stock-based
compensation expense based on
the fair value method for all
awards, net of related tax
effects
    
    
    73
    
    
    
    50
    
    
    
    81
    
    
    
    243Pro forma net income (loss)
    
    $
    1,398
    
    
    $
    (428
    )
    
    $
    1,600
    
    
    $
    91Earnings (loss) per share:Basic  as restated
    
    $
    0.11
    
    
    $
    (0.03
    )
    
    $
    0.13
    
    
    $
    0.03Basic  pro forma
    
    $
    0.11
    
    
    $
    (0.03
    )
    
    $
    0.12
    
    
    $
    0.01Diluted  as restated
    
    $
    0.11
    
    
    $
    (0.03
    )
    
    $
    0.13
    
    
    $
    0.03Diluted  pro forma
    
    $
    0.11
    
    
    $
    (0.03
    )
    
    $
    0.12
    
    
    $
    0.01
 4. ACQUISITION
  11




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5. INTANGIBLE ASSETS
  Estimated
    
    September 24, 2005 (Restated)
    
    December 31, 2004 (Restated)Useful Life
    
    
    
    
    
    Accumulated
    
    
    
    
    
    
    
    
    
    Accumulated(In Years)
    
    Gross
    
    Amortization
    
    Net
    
    Gross
    
    Amortization
    
    NetNon-amortized intangible
assets:Cheetah trademark
    
    
    
    
    
    $
    1,000
    
    
    $
    
    
    
    $
    1,000
    
    
    $
    1,000
    
    
    $
    
    
    
    $
    1,000LoopCare trade name
    
    
    
    
    
    
    1,300
    
    
    
    
    
    
    
    1,300
    
    
    
    1,300
    
    
    
    
    
    
    
    1,300LoopCare post warranty
maintenance
service agreements
    
    
    
    
    
    
    32,000
    
    
    
    
    
    
    
    32,000
    
    
    
    32,000
    
    
    
    
    
    
    
    32,000Total Non-amortized
Intangible assets
    
    
    
    
    
    $
    34,300
    
    
    $
    
    
    
    $
    34,300
    
    
    $
    34,300
    
    
    $
    
    
    
    $
    34,300Amortized intangible
assets:Cheetah Maintenance
    
    
    10
    
    
    $
    160
    
    
    $
    36
    
    
    $
    124
    
    
    $
    160
    
    
    $
    21
    
    
    $
    139Exclusivity agreement
    
    
    5
    
    
    
    715
    
    
    
    214
    
    
    
    501
    
    
    
    715
    
    
    
    107
    
    
    
    608Customer Base  Cheetah
    
    
    15
    
    
    
    2,650
    
    
    
    393
    
    
    
    2,257
    
    
    
    2,650
    
    
    
    223
    
    
    
    2,427Base software  LoopCare
    
    
    10
    
    
    
    4,510
    
    
    
    1,804
    
    
    
    2,706
    
    
    
    4,510
    
    
    
    1,466
    
    
    
    3,044Total Amortized
Intangible assets
    
    
    
    
    
    $
    8,035
    
    
    $
    2,447
    
    
    $
    5,588
    
    
    $
    8,035
    
    
    $
    1,817
    
    
    $
    6,218Total Intangible assets
    
    
    
    
    
    $
    42,335
    
    
    $
    2,447
    
    
    $
    39,888
    
    
    $
    42,335
    
    
    $
    1,817
    
    
    $
    40,518Capitalized software:Clear Software Purchase
    
    
    1
    
    
    $
    538
    
    
    $
    516
    
    
    $
    22
    
    
    $
    538
    
    
    $
    11
    
    
    $
    527Proprietary technology
    
    
    10
    
    
    
    1,000
    
    
    
    267
    
    
    
    733
    
    
    
    1,000
    
    
    
    192
    
    
    
    808Base software  Cheetah
    
    
    10
    
    
    
    2,900
    
    
    
    773
    
    
    
    2,127
    
    
    
    2,900
    
    
    
    556
    
    
    
    2,344Developed product software
    
    
    5
    
    
    
    7,664
    
    
    
    5,961
    
    
    
    1,703
    
    
    
    7,591
    
    
    
    4,817
    
    
    
    2,774Total capitalized software
    
    
    
    
    
    $
    12,102
    
    
    $
    7,517
    
    
    $
    4,585
    
    
    $
    12,029
    
    
    $
    5,576
    
    
    $
    6,453Goodwill
    
    
    
    
    
    $
    21,562
    
    
    $
    
    
    
    $
    21,562
    
    
    $
    22,220
    
    
    $
    
    
    
    $
    22,220
  2005 (Remaining 3 months)
    
    $
    6962006
    
    $
    2,4752007
    
    $
    1,3792008
    
    $
    1,3312009
    
    $
    1,175Thereafter
    
    $
    3,117
   12




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6. INVENTORY
  September
    
    
    December24, 2005
    
    
    31, 2004Raw materials
    
    $
    5,848
    
    
    $
    7,631Work in process
    
    
    4,069
    
    
    
    4,442Finished goods
    
    
    2,019
    
    
    
    2,28811,936
    
    
    
    14,361Reserve for slow moving and obsolete inventory
    
    
    (1,657
    )
    
    
    (1,420
    )$
    10,279
    
    
    $
    12,941
 7. SHORT-TERM INVESTMENTS
  13




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September 24, 2005
    
    
    December 31, 2004Carrying
    
    
    
    
    
    
    CarryingAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueFinancial assets:Cash and cash equivalents
    
    $
    35,787
    
    
    $
    35,787
    
    
    $
    32,622
    
    
    $
    32,622Short-term investments
    
    $
    21,526
    
    
    $
    21,527
    
    
    $
    18,537
    
    
    $
    18,538
 8. RETIREMENT EXPENSE
    9. COST ALIGNMENT
  14




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10. PER SHARE INFORMATION
   Three Months Ended
    
    
    Nine Months EndedSeptember
    
    
    September
    
    
    September
    
    
    September24, 2005
    
    
    25, 2004
    
    
    24, 2005
    
    
    25, 2004Restated  See Note 2
    
    
    Restated  See Note 2Net income (loss)
    
    $
    1,471
    
    
    $
    (378
    )
    
    $
    1,681
    
    
    $
    334Common and common
equivalent shares:Weighted average common
shares outstanding
    
    
    13,162
    
    
    
    13,148
    
    
    
    13,162
    
    
    
    13,134Effect of dilutive
securities  stock
options
    
    
    59
    
    
    
    
    
    
    
    40
    
    
    
    12913,221
    
    
    
    13,148
    
    
    
    13,202
    
    
    
    13,263Earnings (loss) per share:Basic
    
    $
    0.11
    
    
    $
    (0.03
    )
    
    $
    0.13
    
    
    $
    0.03Diluted
    
    $
    0.11
    
    
    $
    (0.03
    )
    
    $
    0.13
    
    
    $
    0.03
  11. RECEIVABLE FROM OFFICER
  12. PRODUCT WARRANTY
  15




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Nine Months Ended
    
    
    Year EndedSeptember 24, 2005
    
    
    December 31, 2004Balance at the beginning of the period
    
    $
    2,081
    
    
    $
    2,150Accruals for warranties issued during the period
    
    
    1,042
    
    
    
    1,435Settlements during the period
    
    
    (1,056
    )
    
    
    (1,504
    )Balance at the end of the period
    
    $
    2,067
    
    
    $
    2,081
 13. CONTINGENCIES AND COMMITMENTS
  14. MAJOR CUSTOMERS
  15. INTERNATIONAL SALES
  16. INCOME TAXES
  16




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17. ACCOUNTING PRONOUNCEMENTS
   17




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Report of Independent Registered Public Accounting Firm
       PricewaterhouseCoopers LLP
 
 18




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Restatement
  The following discussion should be read in conjunction with the Condensed Consolidated Financial
Statements and Notes thereto appearing elsewhere in this report.
 CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.
 will, believes, intends, expects, plans, could or may,
  19




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OVERVIEW
 About the Company
     About its customers
  20




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PRODUCTS
 TELECOMMUNICATION TEST SYSTEMS
  DigiTest and LoopCare
   ®
 21




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
    
    the Common Object Request Broker Architecture (CORBA)-based
Application Programming Interface;
    
    Benchmark Data Base;
    
    DSL Testing;
    
    the Advanced Testhead Feature Package;
    
    Batch Testing;
    
    Fax Unalert;
    
    Loop Length Reporting;
    
    Enabling Flow Through by Re-Classification of VER 55-58 Codes;
    
    LoopCare TCP/IP Communications Network; and
    
    Testing Voice Services in a Broadband Passive Optical Network (bPON).
 MCU
  CABLE TESTING PRODUCTS
    22




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SERVICES
  BACKLOG
   OPERATING SEGMENT
  23




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INTERNATIONAL SALES
  APPLICATION OF CRITICAL ACCOUNTING POLICIES
  Revenue Recognition
   24




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Cost of Sales
  25




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Intangible Assets and Goodwill
    Reviews for Impairment:
  26




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Inventory Valuation
   27




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Allowance for Doubtful Accounts
   Income Taxes
  Warranty
   INCOME TAXES
  28




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RESULTS OF OPERATIONS
 THIRD QUARTER OF 2005 COMPARED TO THIRD QUARTER OF 2004
 Revenues
       29




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Gross Profit
  Selling and Marketing Expense
  General and Administrative Expense
  Research and Development Expense
  Interest and Other Income
  Provision (Benefit) for Income Taxes
  30




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Net Income (Loss) and Earnings (Loss) Per Share
  NINE MONTHS ENDED SEPTEMBER 24, 2005 COMPARED TO NINE MONTH ENDED SEPTEMBER 25, 2004
 Revenues
     31




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Gross Profit
  Selling and Marketing Expense
  General and Administrative Expense
  32




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Research and Development Expense
  Retirement Expense
    Interest and Other Income
  33




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Provision for Income Taxes
  Net Income and Earnings Per Share
  CHEETAH ACQUISITION
  LIQUIDITY AND CAPITAL RESOURCES
  34




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RELATED PARTY TRANSACTION
  KEY RATIOS
  ACCOUNTING PRONOUNCEMENTS
  35




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RISK FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS AND FINANCIAL CONDITION
  We depend upon a few major customers for a majority of our revenues, and the loss of any of these
customers, or the substantial reduction in the products that they purchase from us, would
significantly reduce our revenues and net income.
  
    
    the conditions of the telecommunications market and the economy in general;
    
    subscriber line loss and related reduced demand for telecommunications services;
    
    changes or shifts in the technology utilized in the networks;
    
    labor disputes between our customers and their collective bargaining units;
    
    the failure to meet established purchase forecasts and growth projections;
    
    competition among the RBOCs, competitive exchange carriers and wireless
telecommunications and cable providers; and
    
    reorganizations, including management changes, at one or more of our customers
or potential
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customers.
  Our operating results may vary from quarter to quarter, causing our stock price to fluctuate.
  The sales cycle for our software products is long, and the delay or failure to complete one or more
large license transactions in a quarter could cause our operating results to fall below our
expectations.
   37




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We depend on sales of our MCU products for a meaningful portion of our revenues, but this product
is mature and its sales will continue to decline.
   Our Services business is subject to a trend of reduced capital spending by our major customers.
  We recently emphasized our network assurance and testing software solutions and cable status
monitoring products.
   38




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The sale of our products is dependent upon our ability to satisfy the proprietary requirements of
our customers and to respond to rapid technological change, including evolving industry-wide
standards.
   Our customers are subject to an evolving governmental regulatory environment that could
significantly reduce the demand for our products or increase our costs of doing business.
   Our limited ability to protect our proprietary information and technology may adversely affect our
ability to compete.
  39




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Our products could infringe the intellectual property rights of others, and resulting claims
against us could be costly and require us to enter into disadvantageous license or royalty
arrangements.
   Our reliance on third parties to manufacture certain aspects of our products involves risks,
including, delays in product shipments and reduced control over product quality.
  If we are unable to satisfy our customers specific product quality, certification or network
requirements, our business could be disrupted and our financial condition could be harmed.
  40




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We have completed, and may pursue additional acquisitions, which will complicate our management
tasks and could result in substantial expenditures.
  The failure of acquired assets to meet expectations, or a decline on our fair value determined by
market prices of our stock, could indicate impairment of our intangible assets and result in
impairment charges.
   Our future sales in international markets are subject to numerous risks and uncertainties.
 41




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If our accounting controls and procedures are circumvented or otherwise fail to achieve their
intended purposes, our business could be seriously harmed.
  If we ship products that contain defects, the market acceptance of our products and our reputation
will be harmed and our customers could seek to recover their damages from us.
  Our future results are dependent on our ability to establish, maintain and expand our distribution
channels and our existing third-party distributors.
  We face intense competition, which could result in our losing market share or experiencing a
decline in our gross margins.
  42




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We are dependent upon our ability to attract, retain and motivate our key personnel.
  Consolidations in, or a continued slowdown in, the telecommunications industry could harm our
business.
  Our expenses are relatively fixed in the short term, and we may be unable to adjust spending to
compensate for unexpected revenue shortfalls.
  43




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Our restructuring and cost reduction plans may be ineffective or may limit our ability to compete.
  We rely on software that we have licensed from third-party developers to perform key functions in
our products.
  We are affected by a pattern of product price decline in certain markets, which can harm our
business.
  Our common stock price may be extremely volatile.
  44




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
    
    General market and economic conditions;
    
    Changes in the telecommunications industry;
    
    Actual or anticipated variations in operating results;
    
    Announcements of technological innovations, new products or new services by us or by our
competitors or customers;
    
    Changes in financial estimates or recommendations by stock market analysts regarding us or our competitors;
    
    Announcements by us or our competitors of significant acquisitions, strategic partnerships, joint
ventures or capital commitments;
    
    Announcements by our customers regarding end market conditions and the status of existing and future infrastructure
network deployments;
    
    Additions or departures of key personnel; and
    
    Future equity or debt offerings or our announcements of these offerings.
  We may be subject from time to time to legal proceedings, and any adverse determinations in these
proceedings could materially harm our business.
  
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  45




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Item 4. CONTROLS AND PROCEDURES
 (a) Restatement of financial statements and impact on internal control over financial reporting and
disclosure controls and procedures
 Restatement of Financial Statements
    Impact on Internal Control over Financial Reporting and Disclosure Controls and Procedures
   46




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(b) Evaluation of Disclosure Controls and Procedures
   (c) Evaluation of Changes in Internal Control over Financial Reporting
  (d) Remediation of Material Weakness
  1.
    
    Documentation related to the Companys application of
accounting policies for intangible assets is considered in properly
determining and reviewing the estimates and judgments made relating to useful
or indefinite lives assigned to intangible assets acquired in a business
combination. These estimates and judgments include: (a) the determination of
useful lives of software-related intangible assets under SFAS #86, (b) the
critical review of indefinite life assertions and the evaluation of the
pertinent factors in support of such assertions and (c) the critical
evaluation of the views of experts, and underlying assumptions, used in
reaching complex judgments and estimates by management.2.
    
    The Companys existing periodic reviews consider current
events and circumstances to ensure that all available information continues to
support the indefinite life assertions.
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3.
    
    Management reviews of appropriate accounting literature
encompass current guidance regarding the factors pertinent to determining and
reviewing useful or indefinite lives of intangible assets.
  
 PART II. OTHER INFORMATION
 
 Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
  
 Item 6. EXHIBITS
   ExhibitNumber
    
    Description10.1
    
    Lease between Regional Industrial Development Corporation of Southwestern Pennsylvania and
Tollgrade Communications, Inc. dated August 31, 2005, filed as Exhibit 10.1 to the Report on Form
8-K filed with the SEC on September 7, 2005.10.2
    
    Seventh Extension Agreement, dated September 29, 2005, between Tollgrade Communications, Inc.
and Dictaphone Corporation, as Exhibit 10.2 to the Report on 10-Q filed with the SEC on November 3,
200515
    
    Letter re audited interim financial information31.1
    
    Certification of Chief Executive Officer, filed herewith31.2
    
    Certification of Chief Financial Officer, filed herewith32
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18.U.S.C.
Section 350, filed herewith
 
 48




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SIGNATURES
  Tollgrade Communications, Inc.
(Registrant)Dated: March 2, 2006
    /s/ Mark B. PetersonMark B. PetersonChief Executive OfficerDated: March 2, 2006
    /s/ Samuel C. KnochSamuel C. KnochChief Financial Officer and TreasurerDated: March 2, 2006
    /s/ Sean M. ReillySean M. ReillyController 50




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EXHIBIT INDEX
  ExhibitNumber
    
    Description10.1
    
    Lease between Regional Industrial Development Corporation of Southwestern Pennsylvania and
Tollgrade Communications, Inc. dated August 31, 2005, filed as Exhibit 10.1 to the Report on Form
8-K filed with the SEC on September 7, 2005.10.2
    
    Seventh Extension Agreement, dated September 29, 2005, between Tollgrade Communications, Inc.
and Dictaphone Corporation, filed as Exhibit 10.2 to the Report on 10-Q filed with the SEC on
November 3, 200515
    
    Letter re audited interim financial information31.1
    
    Certification of Chief Executive Officer, filed herewith31.2
    
    Certification of Chief Financial Officer, filed herewith32
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18.U.S.C.
Section 350, filed herewith
 51